I believe this is the largest black swan event anyone alive has seen. It will have dramatic health and market/financial consequences that are vastly undervalued. Below is my rationale for that thesis.
- In 2009 H1N1 infected 1/5 of the world population (crazy, right?) due to its airborne transmission characteristic but ended up having a very low mortality rate of 0.02% as humanity’s general influenza antibodies proved very effective.
- COVID19 spreads more effectively than H1N1 through airborne transmission (this is a disputed fact/assumption) and 2x incubation period. Unlike H1N1 influenza, people have no have antibody defense for this strain of coronavirus – hence the novel nomenclature. The purported 1-4% death rate would be the most deadly virus to spread in the last 100 years and tens of millions of people could die.
- The virus is insidiously effective because it A) Does not cause large complications/illness in most people so they go about their life and spread continues; B) in the portion of the population it does seriously affect – it is serious serious, with numbers indicating 10ish% of infections require hospitalization and ventilator support. There is no healthcare system on the planet that can accommodate this, the system will get overwhelmed.
- The social distancing protocol that China put in place is almost unfathomable. 1.5 billion people have largely not left their apartment in 6 weeks other than to buy food periodically. This is why new numbers are declining but based on 1 and 2 this is just temporary and the virus will inevitably spread again. The virus is incapable of being “contained”. Extreme social distancing a la China might buy time until the 12 month lead time for a vaccine arrives but this would decimate economies.
- China style social distancing is impossible outside of China and smaller dictatorships but governments will impose and people will begin self imposing smaller versions. Expect to see March Madness, Coachella, etc all canceled and any business that is able move to work from home.
- The economy at the end of the day is driven by end consumer consumption of goods and services, often provided by small mom and pop businesses. Those speaking of a v shaped recovery are non sensical. A drastic month to multi-month drop in cash flow will tip over many of businesses and they will not meet obligations such as payroll. Your neighborhood burger joint can’t fall back on its strong balance sheet and wait for the V/U.
- 6 will lead to recession and a domino effect through the economy. Where 08 was a top down driven recession this one will be bottom up. It being bottoms up also means it more resistant to the few monetary policy tools we have come accustomed to using. There will be a complete shakeout in the economy as we physiologically grapple with what this virus is going to mean and what things will look like when it is over. Once people start to understand that people they know will die things will get even more panicky.
- The world will recover and economies bounce back but we are in for a ride that has largely only been text book theoretical before this. Buckle up.
Disclaimer: This is a guest post and it doesn’t represent the views of IWB.