The coronavirus pandemic is worsening
As this is a finance site, I have tended to steer clear of writing about what’s happening with the novel coronavirus. But, that’s hard to do since it is the single most important factor in all of our lives. So, I’m going to give you an update on how I’m thinking about it.
A Credit Writedowns History of Covid-19
First though, if I am going to tell you what I am thinking about Covid-19 right now, I think it’s only fair to put my previous commentary under the microscope. So I’m going to do a quick retrospective here.
I use my blog site for my archives because it makes these kinds of searches easier. And here’s what I found:
Jan 31: Overkill on recession worries
- Quote: “So I continue to be cautiously optimistic about the US economy. I think the coronavirus is a serious event risk. But I don’t think it is yet to the point where we have to worry about recession.”
- Takeaway: This is me still in economic rebound mode. In my defense, the recession-dating committee pinned the peak of the cycle at February. So, I was right but not concerned enough.
Feb 3: More on the coronavirus, tail risk and policy error
- Quote: “it’s now much more clear that the coronavirus is a serious event risk and that financial conditions are tightening very quickly. The Federal Reserve needs to take these signals seriously to prevent worst-case outcomes, that include recession and crisis.”
- Takeaway: That escalated quickly.
Feb 21: The coronavirus is crushing supply chains and is a major threat to the global economy
- Quote: “Again, this is a complete Black Swan event and we are still getting to grips with how severe the economic impact will be. So, I don’t want to be alarmist. But… a recession is now a reasonable possibility for 2020.”
- Takeaway: Recession was only a possibility. And I was only thinking of supply chains.
Mar 24: The premature lifting of lockdown
- Quote: “I think my prediction about backside policy responses yesterday makes sense. We will see lockdowns lifted prematurely and then we’ll have to live with the consequences of that decision, now and next year as well, when the virus may re-emerge.”
- Takeaway: This is the key prediction. And unfortunately it is proving correct. It is a large part of what I want to discuss.
Apr 27: Bullish thoughts about Europe’s recovery
- Quote: “The United States is both a laggard and a worst case for Covid-19 infections… So, we should expect the US to either risk a second wave of infections or be forced to wait another few weeks before rules start relaxing. The biggest favourable contrast for Europe to the US in restarting the economy is the lack of economic disruption because of the social safety net…I actually expect Europe to outperform the US over the short- to medium term as it exits lockdown in better shape.”
- Takeaway: I was dead wrong about Europe outperforming, at least in the short-term. The US market outperformed despite my prediction of a second wave. But that’s because the second wave in the US is just forming. Let’s see how this pans out over time. More below
Jun 16: The recession is over
- Quote: “I would reiterate my longstanding position that economic risks are skewed to the downside. I recognize that the re-opening numbers have been good, better than expected. But I told you in late April already that re-opening was bullish. I am looking forward to September and October now. And all I see is downside risk for the economy and for markets.”
- Takeaway: Re-opening has been bullish as expected. It means the recession is over in my book. But the downside risks are major. When they materialize, I expect the re-opening rally to come under major assault. I believe that, by September and October, many of the downside risks will have been mitigated or will have materialized and we can judge then. A large second and third wave are major risks.
To sum up here, I recognized the risks the virus posed early. But, in real time as the recession unfolded, I saw merely a risk of recession and my focus was on supply chains. It was only later, as the pandemic and lockdowns took hold that it became clear this was a major global event without precedent.
For almost three months, my major worry has been that the US would release the lockdown early and unprepared, resulting in a major second wave. And I continue to worry about a third wave when people move indoors in the Fall and Winter.
The virus: where are we now?
CBS News is reporting that the WHO says we have just had the biggest one-day rise in coronavirus cases to date.
Late Sunday, the World Health Organization reported the largest single-day increase in coronavirus cases by its count, more than 183,000 new cases in the prior 24 hours. Brazil tallied 54,771 and the U.S. was next at 36,617, the U.N. health agency said. India reported more than 15,400. More than two-thirds of the new deaths were reported in the Americas.
Experts say rising case counts reflect multiple factors including more testing and spreading infections.
In the United States, experts say the resurgence in infections isn’t a so-called “second wave” but a continuation of the first wave of outbreaks as the number of cases plateaus.
Here’s what I think has happened. The virus left China and infected people via global travel routes, meaning it hit areas closest to the epicentre in Wuhan and most integrated into global travel first. That wave devastated Europe and many major US cities, Seattle and New York first, and then late cities like Washington DC.
But the virus was still spreading in an uncontrolled way elsewhere, particularly in middle income countries with poor healthcare infrastructure like India or poor response protocols like Brazil. So despite the lockdown release in the West, the case counts have accelerated.
Regarding the US, they can call it a continuation of the first wave. That’s just semantics. But I believe we are seeing a second wave in the United States right now due to a lack of post-lockdown preparedness in so-called Red States. Many so-called Blue States got hit hard in the first wave and got religion about preparedness and social distancing. The Red States were spared by the first wave because those are areas that are generally less cosmopolitan. Think of New York as akin to Italy and Tulsa as more akin to Brazil or India.
And so, my expectation is that we will see an absolutely terrifying increase in coronavirus cases in the US going forward. If this is the outcome, that brings up two questions:
- Have we learned to fight the virus or are enough younger, healthier people getting infected so that death counts won’t explode in the US?
- I have said lockdowns won’t happen again because of the economic impact. But what will the policy response actually be if we see healthcare systems overwhelmed?
These things take time to play out. It will be weeks and months before we know the answers. But we can try and anticipate. I believe death counts will rise in the US second wave, though, hopefully not to the levels of early in the pandemic. And because of policy fatigue, the US will not lockdown, nor will it add massive policy stimulus to fight the economic chill from the virus. The result will be a slump in consumption and a renewed Red State recession irrespective of the lockdown policies there.
That’s my baseline. And as I wrote in late April, I think the European markets will outperform as a result.
What’s happening in Europe?
So, the obvious question now goes to how the Europeans are dealing with the post-lockdown second wave. For me, it begins with the example of Gütersloh, a city in the same state where my daughter lives, about two hours to the north of her apartment. As we have learned previously in cases in the US and Canada, a meatpacking coronavirus super-spreader outbreak has formed.
Out of a total of 6193 workers at the Tönnies meatpacker plant in Gütersloh, 1331 have tested positive for coronavirus (link here in German). This caused the R-factor in Germany to jump to 1.7 last week, well above the 1.0 number necessary to keep uncontrolled viral spread from occurring. So, this is worrying.
At the same time, the Germans are taking serious measures to isolate and quarantine, and to get to the systemic issues involved, unlike the US where President Trump invoked the Defense Production Act in April to keep meatpacking plants open. One of the systemic issues is the exploitation of foreign workers, particularly from Bulgaria, Romania, and Poland who work and are housed in horrible conditions and employed through a byzantine network of subcontractors (link here in German).
This is much like the US, where cheaper (often undocumented) labour from Latin America is lured to occupations like meatpacking and chicken farming so that American consumers can have cheap meats to eat. In Germany, the labourers are from Eastern Europe. The practices are the same.
This incident leaves you a bit rattled – not necessarily about a pandemic second wave, but about the seedy underbelly of what European integration has meant.
Elsewhere in Europe, I saw that Denmark reported its worst unemployment figures ever. Here’s my translation from Danish (link here)
Newly published figures from Statistics Denmark show that the employment rate fell by 73,000 in April. And since the decline in employment has already been estimated at 20,000 for March, overall employment has now fallen by 93,000 in just two months.
…This is worse than all forecasts, both from the National Bank and from the government’s economic coronavirus experts.
By comparison, employment fell by around 30,000 in the two corresponding months of 2009, when the financial crisis was at its peak.
Remember, up to 240,000 people have been paid by the state while the lockdown was in place. This is in a population of 5.7 million. And many remain on this state aid scheme, which expires on August 29. Denmark has one of the best records in fighting Covid. So, that gives you a sense of how widespread the economic damage has been.
The coronavirus pandemic has caused a major global recession. And although we are leaving the unprecedented lockdown period, the virus poses a continued lethal threat. This is especially true in countries like the United States that have had inadequate social distancing and testing protocols. And I believe that will have severe negative economic consequences.
For example, in March a paper was published showing evidence from the 1918 Flu Pandemic that the pandemic itself depresses the economy, not public health interventions (link here). That’s because early and aggressive non-pharmaceutical interventions (NPIs) caused the viral spread to lessen, reduced fear, and, therefore, allowed the economy to breathe.
In a separate paper NIH found that “cities in which multiple interventions were implemented at an early phase of the epidemic had peak death rates approximately 50% lower than those that did not and had less-steep epidemic curves” and that “viral spread will be renewed upon relaxation of such measures”.
This goes to my thinking about economic outcomes now. The lockdowns were a bit of a panic. The economic toll was severe. Nothing from previous pandemics compares. I think the economic devastation the lockdowns wrought will prevent wide-scale lockdowns in the future during second and third waves – even if the NPIs taken are inadequate as they are in the US.
Were they necessary? Perhaps. Western countries simply weren’t prepared for the pandemic. And without an all-out assault, death rates would have been much higher.
But now, we are beyond the acute viral response and in chronic mitigation mode. What research indicates to me is that continued vigilance is important to prevent spikes. And I am thinking of two spokes in particular: a second wave from post-lockdown freedom and a third wave from a return to greater indoor living in the Fall and Winter.
All evidence is that the United States is uniquely unprepared. Its NPIs are weak. There is a porous social safety net including poor healthcare insurance coverage. And policy fatigue is more likely to lead to a resumption of ‘austerity’-induced thinking than anywhere in advanced economies around the world.
I have more confidence that the frugal four in Europe will spend to mitigate downside coronavirus risk than I do that the US will. The problem in Europe is a lack of cohesion during a period that calls for mutualisation. Europe’s problem is the euro, not the social safety net or policy fatigue.
The US, on the other hand, is walking blindly into a worsening coronavirus pandemic without being prepared in terms of its healthcare response or its economic policy response. Any downside risks from that approach will crystallize by September and October. And that’s when the economic impact will be plain to see. Rather than just hope for the best, we should prepare for the worst.
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