How to think about Trump’s coronavirus speech and likely outcomes

Last night’s coronavirus speech by US President Trump was poorly received by markets. US equity markets were jittery after closing in bear market territory. So, people were looking for concrete stimulus measures to have reason to buy shares and not rush to safety. They were to be disappointed; As Bloomberg News put it, “Trump’s Error-Laden ‘Foreign Virus’ Speech Spooks Investors”

Immediately after the speech, all equity indices and index futures around the world went into freefall, with the Nasdaq futures limit down at one point. As I write this, markets in Europe are all down 5% or more, with US futures market showing 5% losses expected at the open.

What Trump is doing with the coronavirus response

How should we contextualize this – both in terms of markets and in terms of likely outcomes? I have some thoughts on that spurred by the useful analysis of Bloomberg’s Lorcan Roche Kelly. Here’s what he wrote on Twitter before the speech.

The one thing Trump has been flagging as his administration’s big victory has been the early travel restrictions from areas hit in China. So I guess he’s going to double down on that and hit Europe.

Not sure markets will view that as “stimulus”

— Lorcan Roche Kelly (@LorcanRK) March 12, 2020

That explains everything. Trump’s strategy in dealing with the virus is intricately aligned both with his ‘America First’ world view and his deep-seated need to protect himself. By casting the epidemic as something that has been imported from abroad, he believes he can simultaneously shelter himself from any blame for negative outcomes and be seen as acting aggressively to protect American lives.

First, when we look back at Trump’s speech, the most eye-catching point he made was the total ban for 30 days of flights from Europe except for the UK. That’s because this was an aggressive policy response and a total surprise to everyone listening including the Europeans, who were not forewarned.

For Trump, this solves a number of problems. In his mind, it shifts the blame for anything that happens in the United States to Europe, where news flow makes the pandemic seems more advanced than in the US. Further, in his mind, it also makes him look decisive because the policy was so aggressive. And, as it was done without notice and coordination with the Europeans, it reinforces the unilateral nature of his Presidency – and in his mind at least, that an ‘America First’ presidency will always put American interests first.

How will this go down with Americans though?

I watched the Ingraham Angle on Fox News after the speech. And Laura Ingraham was 100% behind the President. The view she promoted to viewers was the one I summarized above – that the President was decisive and pro-active, with any complaints almost certainly political (and consequently unpatriotic).

Only time will tell whether this framing takes hold in pro-Trump areas of the country as the days and weeks go by. But right now, that’s the message Trump and his surrogates are pushing.

Outcomes

In terms of likely outcomes, this is a disaster though.

It’s abundantly clear that the coronavirus has spread widely throughout the United States via community contact. Revealingly, just after the President spoke, the NBA was forced to halt all games when one player – who has not had contact with coronavirus hot zones abroad – tested positive for the disease. That is testament to the fact that any- and everyone is at risk of contracting the virus and transmitting it to others, including the most vulnerable like the elderly and those with compromised immune systems.

The President’s speech makes plain that he will thwart any attempts within the federal government to contain the virus in ways that would cast doubt on the effectiveness of prior and existing response efforts. All future federal government efforts to contain the virus must reinforce the simple concept that Trump has been early, decisive, and aggressive in responding to this epidemic; and that’s Trump’s first priority – not protecting American lives.

And so, we should expect infection rates to mushroom as the role of lockdown and quarantine approaches falls onto state and local governments. A state and local government approach to the virus is bound to be porous as citizens move freely between jurisdictions, increasing the opportunity for viral spread through community contact. And that means we have to envision worst case outcomes, both in terms of the human cost and economic outcomes.

My View

We are a week or two away from the wholesale shutdown of business and school activities throughout the United States. And as the viral case numbers escalate, panic will set in because of the delay in lockdown measures at the Federal level. This will cause untold economic disruption in the US.

At the same time, we should expect the panic in financial markets to continue, and potentially escalate. We are already in bear market territory for equities now. Individual retail investors will begin to throw in the towel soon, with the epidemic raging in the background. And the wholesale flight to safety will be on, with the probability of a liquidity crisis and deep financial crisis rising as a result.

Right now, the senior Chinese medical advisor is saying he expects the pandemic to last until June. And I am hearing economists now cutting their estimates for Q2 in the US to a contraction of nearly 1% annualized. So, in theory, as a result of, as yet unannounced, stimulus we could be out of this after June with a U-shaped rebound beginning in the third quarter. We would avoid recession.

But how likely is that? It’s certainly not a base case. I think its a best-case outcome. The base case is a recession, with a growing chance that financial crisis adds to its severity.