If I had a dollar for every 5 minute expert in the business media calling for a V-shaped recovery, like occurred after the SARS outbreak 17 years ago, I would be rich even before I took it and added to my growing portfolio of shorts…
The reference to my short portfolio is not made flippantly, I assure the reader. I have used shorts – specifically Put Options – previously as a hedging strategy, or insurance policy, and in my opinion this is extremely necessary at the current juncture. I have a fairly dire view of the consequences of this outbreak, and I am somewhat disillusioned by the inability or unwillingness of analysts to articulate this reality to their audiences.
Perhaps they just do not understand – perhaps they do not have the capacity other than to mentally cut and paste what happened on a superficially similar event in the past into their play books. About the best that I have heard is a reference to China being far more important to the Global economy and to the way contemporary businesses function, i.e. the global supply chains, thereby amplifying the risks to the many exposed businesses and to the Global economy.
This is only the tip of the iceberg, unfortunately, to borrow the metaphor du jour in use by the WHO. I can assure the reader that this event is unlike SARS in 2003 because the virus is all the more serious to humanity. Barring a miracle of nature, i.e. a surprising attenuation to lower virulence by the virus, or a highly unlikely rapid cure being developed, this virus will be with us for much longer than SARS was and its direct consequences on people will be far more serious (i.e. will produce greaters numbers of mortalities) which will necessitate prolonged biosecurity measures.
These were the clear conclusions of my very first statements about the outbreak, and the information arising out of Japan, South Korea, the middle-east, and now Italy, is providing insights into that reality which are only just beginning to be widely appreciated, if not necessarily by market participants.
Next I will explain why just considering the secondary effects via the China channel, which are significant and were discussed in the previous post “Politics Vs Society in the Coronavirus Outbreak“, is missing the point.
So why is COVID-19 so much more serious than SARS – was not the latter more virulent?
Yes, SARS was more virulent than COVID-19 producing a mortality rate of around 10% compared to a preliminary figure of around 2% for COVID-19. Nonetheless, a 2% mortality rate is serious in a population and the most severe acute pandemic in modern history was due to the Spanish Flu at the conclusion of World War I and it had a mortality rate of around 2%.
The issue comes down to transmissibility and the likely spread of the virus. The Spanish Flu was our most serious acute pandemic of the previous century not just because it killed 2% of people who contracted the infection, but because a lot of people became infected. Many believe that it occurring at the completion of WWI was a contributing factor to its severity. The world was less connected then, with rapid international travel not yet possible, but the Great War brought together many peoples from disparate geographies who returned home after the war thereby enabling its widespread dispersal. Moreover, the people carrying the flu were stressed by the conditions under which they had lived for the previous few years and were more susceptible to all sorts of infections. Because of the co-occurence of the flu with WWI it is difficult to pinpoint the exact number of mortalities due to the virus, but credible estimates are as high as 50,000,000 (in a global population that was around one quarter of what it is now).
So clearly a virus producing a mortality rate of 2% can be serious, and the question is whether COVID-19 is more likely to behave like the Spanish Flu or like SARS in 2003, especially in the context of our contemporary knowledge on infectious disease and spread.
Unfortunately, it was clear early on – as I stated in my initial report “Social Cohesion: The Best Vaccine Against Crises” – that the characteristics of how COVID-19 was spreading and ultimately causing fatality in some cases was indicative of a virus that was going to be extremely challenging to contain.
Firstly from earliest reports of the outbreak it was made clear that asymptomatic transmission was highly likely. This was unlike in the SARS epidemic where transmission was far more likely by symptomatic cases, including the so-called “super-spreaders” who infected large numbers of people. The significance of this is that biosecurity measures – either systemic and imposed by authorities, be they national, local or otherwise, or self-imposed quarantine – will be far less effective because it is impossible for even the infected individual to know that they are spreading the virus let alone those made responsible to detect infected individuals. The only way to detect infections thus would be to test each individual, and of course on flights and in many other contexts that is entirely impractical. Moreover, testing would still not be 100% effective due to the certainty that there would be some false negative results.
Secondly, the data suggested that there was a reasonably prolonged incubation period, meaning that the lag between infection and being obviously unwell created an extended period when asymptomatic transmission was occurring.
Finally, the cases that are now being detected in developed countries, which at this stage have the capacity to carry out full traceback and follow up on those who came into contact with infected individuals, already shows that the few number of cases studied have a high involvement of what was considered “super-spreader” events almost exclusively by asymptomatic carriers. One of the first cases in Europe involved a UK citizen who contracted the infection at a conference in Singapore after which he visited a ski resort in France, where he infected individuals from France, Spain and the UK. When he was informed that a colleague at the conference was infected he was tested, and he is now free of infection having never shown any symptoms.
These factors contribute to why SARS only infected around 8,000 people, and even though it killed 10% of those cases, so it produced 800 fatalities, with modern knowledge and skill at infectious disease containment it was brought under control within around 6 months and it never really got a foothold outside of Asia.
At the time of writing confirmed COVID-19 cases had reached 78,811 with cases in 28 countries and causing 2,462 deaths.
Already it is clear that COVID-19 is spreading outside of Asia including the middle-East and in Italy where the number of confirmed cases has tripled in recent days.
At this past weekend (21-22 February) it was clear that US disease specialists are increasingly prepared to state their concerns in the American press, including in the Washing Post, “Coronavirus Edges Closer to Pandemic Status“, containing these statements:
If we went across the whole world and had a magic ball and were able to detect everyone who’s positive, we’d see it in lots of countries… It’s never clear until it’s happening
Michael Mina, an infectious disease specialist at the Harvard T.H. Chan School of Public Health
I think we should assume that this virus is very soon going to be spreading in communities here, if it isn’t already, and despite aggressive actions, we should be putting more efforts to mitigate impacts… That means protecting people who are most likely to develop severe illness and die.
Jennifer Nuzzo, an epidemiologist and senior scholar at the Johns Hopkins Center for Health Security
Note the schools to which these experts are associated – not exactly establishments known for hyperbole!
So let me repeat myself once more – if you hear a fool who tries to downplay this outbreak on the basis that it produces a mortality rate of “only” 2%, or if they try to suggest that it will all be over “within this quarter, or perhaps early in the next – as it was for SARS” then you can safely disregard all that they have said (and make a mental note to never take notice of that analyst again for they either speak before they have sufficient knowledge to do so, or they are biased towards always playing down risks to ensure fund flows are maintained from which they obtain their “rents”).
The consequence to national and global populations of people should be clear to all readers. As the human cost of the pandemic becomes increasingly clear Governments will be forced to attempt to minimise those impacts in ways that I spelt out in my Coronavirus Outbreak update on 11 February, and these are increasingly in use in Japan, South Korea and Italy, which include school closures, discouraging/banning public gatherings, workplace closures, public transport curtailment, and/or further border restrictions. Besides the human costs, the direct impacts on national economies are obvious.
Next I will discuss what are my views on the economic impacts of the COVID-19 outbreak globally and in my home country of Australia.
If the reader considered me pessimistic above, then I am about to get down right depressing (pun intended).
For the last decade I have marvelled at how we have gotten so desensitised to extraordinary measures that Central Banks have taken to revive economies after the Great Recession or Global Financial Crisis (being an Australian I will use the “GFC” from hereon).
While many suggest that the echoes of the GFC still affect animal spirits amongst the general populations, I would suggest that the echoes of The Great Depression are having a far greater impact on monetary policy decisions. I believe that all central bankers are petrified of what occurred in the mid 1930s when the recovery was choked off sending most economies into the grips of The Great Depression. Consequently, they have over-egged asset markets, sending sharemarkets to record highs built on nothing more than a belief that the central bankers are omnipotent and consequently it is a gamed market where it is impossible to lose.
Well, until now it probably has been as it became clear that the Paul Volcker era essentially marked the high point for central bank independence from political interference, and everyone knows what all politicians prefer from their asset markets. President Trump is far from unique in that regard.
Of course we in Australia have been more concerned about our casino-fied residential property markets, but the Australian stock exchange has done some catching up in recent years.
The point is this – there is not a great deal of legitimate price signalling going on in our markets with prices paid having been separated from fundamentals some time ago.
There has been much talk about central bankers having depleted – I would say wasted – their ammunition which would necessitate even more creative measures in any future economic downturn.
However, I would hope that a reasonable person having read the analysis above on COVID-19 would realise that this is no garden variety economic issue. This is undoubtedly a Black Swan event of nature’s making. This is a very, very big problem in a marketised world where everybody has been prepared to play the game of pretending that the central bankers are Gods while the profits and capital gains flow in.
All of that is going to be reversed, and because the natural event is characterised by exponential spread, this is going to happen a lot quicker than anybody can imagine.
Now I have no doubt that national teams have been active in the market over the last few weeks, whether they be sovereign wealth funds of various descriptions (in Australia ours is the Future Fund), or whether they just be major financial institutions told to carry out their social license to operate by being “constructive” in this time of need.
It is this reality that complicates timing for any shorting activities that an investor might undertake. (For disclosure reasons I will state now that I am short FMG, QAN, CWN, MQG and CBA.)
However, before long that sense of holding up the market will be overtaken by self-interest and a desire to protect wealth and business will win out.
I understand that a financial panic on top of a growing panic about an increasingly obvious pandemic will be devastating.
I know that. And for that reason I do understand why Governments, even though they always prefer to egg on markets, will be right in trying to prevent it from happening. However, that propensity to always seek higher asset prices has led to great vulnerability in Global markets, and I think that the consequences of that are about to be revealed.
Next I will discuss the specific case of my own country, Australia.
The Imperial College has produced some more nice research which it released 21 February, with case data up to 17 February, comparing the number of cases detected amongst air travellers relative to the monthly volume of passengers received from Wuhan by various countries. It revealed that Singapore, Finland, Nepal, Belgium, Sweden, India, Sri Lanka and Canada had relatively high rates of detected cases amongst those who travelled on flights relative to other countries receiving flights from Wuhan. To save countries which did not fit into this group embarrassment they were not named in their graphics, but it was simple to work out which dots represented Australia. Whilst Australia was not amongst the worst at detecting infections, the study suggests that we have been about as successful as Japan at detecting infections amongst airplane travellers and that if we had detected infections at about the same rate of the more successful countries then we would have detected around 50% more infections. Of course, this is only a relative measure and even those countries detecting cases at the highest rate undoubtedly would have missed some cases.
So just like the American experts are warning that COVID-19 is likely already spreading within the US, so to in Australia as I pointed out in my report of late last week “Politics Vs Society in the Coronavirus Outbreak“.
In my report I discussed how the continual obsession by our politicians and central bankers with maintaining very high house prices, and thus personal debt levels, had left the nation incredibly vulnerable.
Consequently, as the impacts of this pandemic are increasingly felt, first via the indirect “China Channel”, and then directly within our nation, I expect to see unprecedented actions by our central bank. Quantitative easing will be here quicker than anybody ever thought was likely, especially from where we were sitting just a month or two back.
As I said in that 11 February update, Governments likely will seek to stimulate economies with fiscal spending also. However, the problem will be that most of the spending in the playbook will run counter to good policy to restrict the spread and the impact of the pandemic. There is not a lot of point to giving cash handouts to consumers when you do not want them to go out to the shopping centres in large numbers. Constructing an effective fiscal stimulus will prove challenging.
So if this will not be a “V-shaped” recovery, then what is likely?
To understand the ongoing impacts on people and thus on the economy we need to go back to the virus. Without the rapid emergence of an effective therapeutic treatment for COVID-19, amongst already developed treatments or those in the very late stages of development, the pandemic is likely to progress until either it spreads so widely that the majority of people have become infected or an effective vaccine is developed, produced and delivered en masse. This may take several years, so it is possible – probably even likely – that we will be living with this pandemic for a prolonged period.
If we are really unlucky, as some have suggested, it is even possible that the virus may develop the influenza characteristic of mutating sufficiently within a year so that immunity from prior infection does not make the person refractory or immune to infection when exposed the following year.
All in all, this is a very serious problem and we are in a wait and see pattern. However, it is clear that things are going to get far more serious over the short to medium term before things get better.
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© Copyright Brett Edgerton 2020
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