A Failure Of Epic Proportions
Investors are suddenly confronted with a rapidly changing investment landscape as a result of the coronavirus pandemic. The more immediate of these is an economy which is placed in a self-induced coma in order to create the social distancing necessary to mitigate the pandemic.
But the pandemic is not easing, it’s accelerating, and this despite the example of successful containment in parts of Asia and having months to prepare.
This failure has made much bigger measures necessary, and investors have to navigate a complex landscape with downgrades, possible credit crunches, much-reduced earnings visibility, demand falling off a cliff, unheard-of public spending and multiple monetary bazookas.
That is difficult enough, but even when the pandemic will finally come under control, the failure to deal more effectively with it will likely produce a host of other possible changes which could alter the institutional makeup of capitalism.
First we briefly show why certain Asian countries have dealt with the pandemic much better than most Western countries, then we’ll survey some of these short-term and longer-term consequences.
Not rocket science
Controlling the coronavirus outbreak isn’t rocket science, a number of countries in Asia, most notably China, South Korea, Taiwan, Singapore, Hong Kong and Japan have shown us that a combination of fast and decisive action can limit or even control an outbreak.
Despite being warned early January and thus having had months to prepare and having examples of successful measures in these Asian countries., few if any Western democracies have achieved this. This is a failure of epic proportions, the consequences of which are liable to be felt everywhere years after the virus outbreak has petered out.
It looks like a combination of complacency and/or a misplaced preoccupation with the economy and/or civil liberties has kept Western countries from the decisive action that has helped a number of Asian countries.
What worked in Asia
Here are the components of what worked in Asia:
- Mobilization of the population for social distancing
- Mass testing and mass surveillance, tracking and isolation
- Rigorous lockdown when outbreaks couldn’t be prevented
This isn’t rocket science, when you are dealing with something that is growing at an exponential rate, speed is the most important component. Nipping outbreaks in the bud is simply much cheaper in terms of lost lives and cost to the economy.
We give you one example, from an article by Tomas Pueyo that really is required reading (Medium, our emphasis):
In this theoretical model that resembles loosely Hubei, waiting one more day creates 40% more cases! So, maybe, if the Hubei authorities had declared the lockdown on 1/22 instead of 1/23, they might have reduced the number of cases by a staggering 20k.
And remember, these are just cases. Mortality would be much higher, because not only would there be directly 40% more deaths. There would also be a much higher collapse of the healthcare system, leading to a mortality rate up to 10x higher as we saw before. So a one-day difference in social distancing measures can end exploding the number of deaths in your community by multiplying more cases and higher fatality rate.
But this refers to a situation when there already is an outbreak and a rigorous lock-down is necessary. Some countries, by acting fast, have managed to basically prevent an outbreak to get sufficiently large that such a rigorous lock-down becomes necessary.
By acting fast, testing as many people as possible, isolating positive cases, tracking all their contracts, and keeping all of them isolated have been successful in places like Singapore, Taiwan and Hong Kong, despite having ample contacts with China.
This even worked in South Korea, despite having super spreaders in the form of members of a religious sect who initially weren’t too willing to supply authorities with membership lists.
Mobilizing the population is also essential, inculcating the need for self-isolation in case of symptoms, social distancing, and cooperation with public measures.
China, as the first country to suffer an outbreak, was caught flat-footed and made some terrible mistakes on a local level when doctors signaled the first signs of an outbreak, there is no doubt about that.
So they had a big outbreak in Wuhan and had to resort to more stringent measures than just testing, identifying and isolating, they brought in the lock-down.
But that lock-down was rigorous and combined with electronic and mass surveillance measures (giving people QR codes which they have to present when they move about, tracking movements and contacts, and the like).
And the Chinese example shows that, while it is much preferred to nip any outbreak in the bud, it is possible to get on top of a sizable outbreak once one already happened.
Western countries had months to prepare and learn from these experiences. There is, as of yet, little if any sign they did.
The Western reaction
Contrast this with the Western reaction, which is basically a disaster that is now unfolding before our eyes. There was widespread complacency, which lost valuable time.
This is all the more inexcusable because we had more time to prepare than the successful countries in Asia. We are not aware of any Western country that has been successful at the rapid testing, identification and isolation approach that can keep an outbreak, warranting more serious measures, from happening in the first place.
In most Western countries, there are now such serious outbreaks, most notably Italy, but also Spain, France, Germany, Switzerland, the UK, Netherlands, the US, etc.
There are outbreaks in each of these countries that warrant a China-style rigorous lock-down, but most countries have taken half-measures.
We single out the failure in the US, not because it’s necessarily the worst, but because it has been so public. For instance, they were weeks, even months late with measures that are in the guidelines set out in a 2016 National Security Council (NSC) memo, according to Politico.
We won’t go into all of the budget and agency cuts and unheeded warnings, most of these are listed in this depressing article from Foreign Policy.
We’re sure other Western countries also had failures, although we’re not aware of any having dismantled a significant part of their institutional defenses.
What has been a unique feature of the US (only shared by Brazil, as far as we can tell) is more than two months of belittlement of the crisis from the top, despite having been given the early warnings by intelligence reports from early January onward and this lasted until a week ago.
As time is the critical element in the response, this has simply been inexcusable and many people will pay with their lives for that. From the FT:
The present US trajectory is actually the worst out there, but this is at least in part a result of increased availability of testing making a dent in the backlog of cases.
The Western neglect seems to be a combination of dangerous complacency, political calculation, misguided attempts to save the economy or one of its expressions, the stock market, a concern for civil liberties or simply authorities dithering before the unprecedented stringent measures that were necessary, with different emphasis in different countries.
Despite having two months to prepare and with the help of examples of successful limitation of outbreaks or containment of existing ones from a number of Asian countries, Western governments have failed miserably.
When time was of the essence, they dithered, only belatedly prodded into escalating half measures by rapidly unfolding events on the ground. In some countries, action was even hampered by cutbacks and false optimism.
This lack of sense of urgency, decisive action, dithering, preparedness and the false optimism will have huge economic and political costs and consequences.
- Virus becoming a permanent fixture
- Unraveling globalization
- Large supply shock and an even larger demand shock
- Wave of credit downgrades and financial stress
- Mass experiment in MMT
- Institutional make-up of capitalism
First, without mass testing, isolating and tracing contacts or mass lock-down, it’s difficult to imagine the virus won’t become a more permanent fixture. This was always more likely as there are a host of countries that are less endowed to contain the virus, and on a world scale the system to contain it is only as strong as the weakest link.
One should realize two things:
- On a global scale, the pandemic is accelerating, not slowing.
- At least 42% of S&P 500 sales come from abroad
On the first, from the Johns Hopkins University website:
A more permanent virus will basically function as a supply shock as it will increase the cost of business. Companies will be forced into a raft of precautionary, testing and cleaning measures (the latter alone will be nearly a billion a year), temporary shut-downs of facilities in case of infections (these are already happening, for instance at no less than 13 Amazon facilities), international supply-chains will be disrupted, conferences and trade shows will be cancelled, etc.
Some sectors of the economy which rely on mass gatherings are likely to experience a more permanent headwind until a vaccine is developed.
Economically, we’ll experience a huge demand shock causing a very steep fall in production and employment. The massive $2T stimulus isn’t really a stimulus, it’s a necessary relief.
Unless the pandemic is largely gone, most people will not go out and spend, the economy is basically in a self-induced coma.
Given the amount of credit and leverage in the financial system, central banks will be required to backstop basically everything, or at least try to, which is what they are doing. As we argued in a previous article, it remains to be seen how successful the Fed will be.
With employment, spending, GDP and tax receipt plunging off a cliff, public spending will have to go through the roof. Countries like Denmark and the UK seem to have grasped this, basically unleashing bazookas of unheard-of proportions.
Denmark is going to pay 75% of salaries for companies to keep workers on that would otherwise be laid off, a bill which could amount to 13% of GDP in three months. The UK is doing something similar, the US looks like passing a $2T stimulus bill.
This will be a mass experiment in MMT, the modern monetary theory that argues that the limits on monetary financing public expenditures are much larger than what conventional theory assumes. We’ll find out pretty soon.
Voters may arrive at the conclusion that the present economic arrangements didn’t really serve them very well, and this could lead to a rise in demand for a much bigger safety net, including stuff like universal healthcare coverage and addressing some of the more blatant dysfunctionalities in the US healthcare system.
Demand could be rising to make some of the emergency measures that are now being made (sick pay, parental care, etc.) more permanent fixtures of US capitalism.
The bailout of industry is likely to come with strings attached on CEO pay and share buybacks or even equity stakes, which could be a prelude to eliminate some of the more excessive characteristics of shareholder capitalism.
On the other hand, voters might at some point realize the epic failure in the West and demand a stronger state, which could move more countries towards authoritarianism.
These changes are by no means mutually exclusive; what seems certain is that the landscape investors have to navigate post-coronavirus crisis will experience more enduring changes and will be more complex.
The health and economic crisis is unfolding at unprecedented speed in front of our eyes. Experience in Asia has shown that much of this was preventable, but few Western democracies were up to the task.
While the immediate concentration is on stemming the outbreak and trying to salvage as much of the economy as possible, this crisis is likely to reverberate and produce more fundamental changes to our economic and political institutions.
What seems fairly certain to us is that there will be a bigger role for the state, either in its capacity to act, or in the role it plays in the economy as a basic protector, or perhaps both. We think it’s also likely that shareholder capitalism comes under increasing scrutiny.
When the dust finally settles, investors might have to navigate quite a different landscape, with many of the main institutional characteristics of shareholder capitalism in flux.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.