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This is a somewhat long post, but a lot of thought and research have gone into it. Please seriously consider it. I hope to answer two questions:
1. What course of action, shutdown or no shutdown, is preferable (in strictly economic terms)?
2. If the best course of action is pursued, what kind of market projections can be made?
There is a widespread illusion that we must now pick between economic health and literal health. But this is just an illusion -- economic health cannot exist until this virus is taken care of.
First, a few points:
Ten days ago, we had 550 new cases. Five days ago, we had 2,484 new cases. Today, we had 10,168 new cases. These are daily gain figures, not cumulative case totals. That's a 1,749% increase in just ten days, and most of those ten days have involved a shutdown.
There is roughly a two week lag between new cases and deaths. Over the last two weeks, Italy's number of new cases per day has increased by 167%. That means that, two weeks from now, they will likely be around 1600 deaths per day, and their daily new cases may not have peaked yet.
Our trajectory looks pretty similar to Italy's, but our population is five times as large. Sure, we have a slightly younger population and a slightly lower smoking rate, but they have more doctors and beds per capita than we do. We have also taken a less-serious approach to shutting things down.
Most parts of the US are still very early in their trajectories. This is not a good thing. Another illusion that seems to have crept up is that many areas just "haven't been hit as hard." That's not true. They just got a later start. We can't say anything about how hard they were hit yet. NYC might not even end up being our worst hot zone.
There is also a very broad range of projections regarding the timeline until the virus is diminished in the US in a significant way. The most bullish seems to be from our own President, who somehow thinks we might turn a corner by the time the 15 day period is up in a week. I don't know who the most bearish is, but even Trump himself has mentioned August. The cognitive dissonance in that man's head must be incredible, but that's another topic. Anyway, what's important here is that we do not have a single similar counterpart to look at in terms of another country that has used a similar approach and is now on the downswing. China and South Korea used very different approaches than we have. Italy has probably been pretty close to us in relative terms, but it's not at all clear that they are on the downswing.
Italy is about ten days ahead of the US in terms of virus progression (this is also not certain given our large geographic footprint and the varying trajectories that exist across US cities), so if they hit peak new virus cases today, we would hit it in ten days (again, it would probably be later due to our scattered start times within the US). That means we would hit peak deaths in 24 days (remember, deaths run on a 14 day lag). But guess what? Barring significant outside intervention, viruses typically look like a bell curve, where peak virus or peak death days have equal cases both before and after. That means 48 days from now would look about like today looked, and our peak would be halfway between now and then (if Italy hit peak virus today, which might not be true).
Finally, and most importantly:
There is a direct correlation between how successfully a country locks things down (social isolation) and how well they control the spread. Aside from mass testing and quarantining early in the process, which is what South Korea did, the only way this virus has been controlled is through serious shutdowns.
The bottom line, in terms of the virus in the US, is that, even with a shutdown in place, there is a very good chance we will have more deaths and cases than any other country in the world. Our trajectory is pretty similar to Italy's, but we're much larger. This all seems rather clear if we look at the data.
So how can we answer question one?
These forecasts are pretty dire, and they are all based on outcomes from countries that did at least as much of a shutdown as we have, and in most cases, more. Even the shutdown scenario involves higher virus activity than most people understand. If the shutdown is removed or significantly reduced, there is a very high likelihood that nearly every American will get the virus within a couple of months, and our medical facilities will be catastrophically overwhelmed. People will not want to go to work and go out to eat and go to the movies if they know they are almost certainly going to get a virus that could leave them in an ill-equipped ICU with no hope of a ventilator should they need one. On top of all that, they would almost be guaranteed to pass the virus on to their parents or grandparents, giving them a roughly 1-in-6 chance of death. Our medical resources would be completely obliterated. You think our resources are stretched thin now? We only have 45,000 cases! It is quite possible that a significantly less restrictive approach could leave us with 45 million active cases at peak. Our medical system wouldn't stand a chance. How anyone thinks the economy would chug along under those conditions is beyond me.
Clearly, our only option is to continue with a shutdown that is at least as restrictive (and ideally more restrictive) than what we have now. The hope is that we can be back to where we are now in seven or eight weeks, and we can then begin to open things up. If we do not continue with significant restrictions, all of these numbers, and their subsequent economic effects, become much worse, not better. We will get over this thing much more slowly due to the catastrophic hit to our medical system, and there will be far-reaching economic effects for the foreseeable future.
Okay, so that's the virus situation. Bear with me here.
A few economic points:
There is currently a very broad range of projections regarding the US economy over the next couple of quarters. The only quarter that really matters and can be predicted with anything better than a pure guess is Q2. Those projections range from Bullard (the St. Louis Fed head) on the bearish end at -50% GDP and 30% unemployment to JP Morgan on the "bullish" end at -14% GDP. Those are both terrible by any standard, but critically, they are very far apart. Markets move based on half point GDP fluctuations. We are talking about a range of 26 percentage points! By the way, the worst GDP loss of 2008 was -8.4%.
There is a very big difference between being down 14% for GDP and being down 50%. There is also a very big difference in having seven more weeks of serious virus left (best-case scenario outlined above) and having ten more weeks of serious virus.
A very serious corporate debt issue exists, and the difference between these various projections regarding GDP and unemployment could very likely be the difference between survival and failure for some very big US firms.
The bottom line in terms of the economic situation is that veritable experts have given economic projections that vary wildly, thus it is impossible for investors to know what the market has priced in and what it hasn't. The fact that things are very bad does not mean the market is assuming -50% GDP growth and 30% unemployment. Our country, even in the great depression, has never seen those kinds of numbers, but we have seen 35% market drops before.
So What Does This All Mean?
I've laid out a lot of datum points here, but I want to do more than that. I want to pull it all together and produce some kind of actionable information based on those data. There are two things to keep in mind when trying to predict markets:
1. In a perfectly rational and informed market, a future world that looks worse than the consensus belief among investors about the future will produce below average returns.
2. Markets can be wildly irrational. As the great Keynes once said, "Markets can stay irrational longer than you can stay solvent." This makes it very difficult to approach market projections as though they are a perfect science. If we believe the future world is 15% better than what the market currently believes it is, that might not be helpful if the market is currently 15% overvalued or doesn't properly recognize the additional 15% of value (the market becomes undervalued).
Number two is a great big asterisk that will accompany my conclusions here, but that asterisk exists for all market forecasts.
Number one leads us to the only question we really need an answer to: Is the future likely worse than what most investors believe? Based on what I've presented here, I think the answer is a resounding "Yes." Our best-case scenario is at least seven straight weeks of coronavirus that are as bad or worse than the current situation, and based on Italy's current and projected numbers, there is a lot of room for things to get really ugly. There is a significant downside risk that would easily warrant more than a 35% market drop and could honestly justify an historically large drop -- and that's assuming we take ideal action.
What if we don't take ideal action and instead try to remove restrictions? In my opinion, we run a significant risk of prolonging the economic hit, and that only increases the chances that secondary, systemic concerns, like the corporate debt issue, come into play in a way that will have life of its own.
If you've made it this far, thanks for reading.
Last edited by Wittgenstein's Ghost; 03-24-2020 at 01:00 AM..
Very nice post. Judging by the rep points I get I'm assuming the silent majority favor a full quarantine and not these half measures where everyone is still working and going to Walmart, and we do live in a representative democracy, so... We need to start quarantining people over 50 for sure...making sure they have supplies but working in factories and going to Walmart as people still are doing, I'm sorry this crap is still gonna spread. They finally yesterday started social distancing in our break rooms. As an introvert it was kind of peaceful not having tables full of screaming people. This virus has really turned the world into an introvert playground. Lol.
Where I work they have lots of doors separating one area from another. They had good intentions trying to separate one area from another but all these doors just act to spread diseases. In my opinion all the doors should be removed. Most diseases are not airborne. To get to my line from break room I have to open 5 doors.
I don't know where market is going. Logical mind says lower emotions say higher.... We are only in second inning of virus infection....too many variables.... We are not undervalued but the top 1% has amasses a ton of money and stocks are the only place for it...or metals and real estate...not bonds. Like you said there is a corporate debt problem.
I am very concerned about the economy, jobs, small businesses, retirements, stock markets. The consequences of The Great Shutdown are more severe than most realize.
But . . . . returning to a lifestyle "precoronavirus" would result in a freaking disaster.
It's a big problem. Which path is worse? I don't know.
What if we don't take ideal action and instead try to remove restrictions?
"Is the cure worse than the disease?" This is the $64000 question. There are 2 sides to the argument and no one can be absolutely certain. One thing that is for certain is that this decision will decide whether Trump is reelected or not. His opponents will criticize whatever decision he makes and take the opposite position as it gives them at least a 50/50 chance of being right and beating him in November- far greater odds than other scenario or tactic available.
This is a somewhat long post, but a lot of thought and research have gone into it. Please seriously consider it. I hope to answer two questions:
1. What course of action, shutdown or no shutdown, is preferable (in strictly economic terms)?
2. If the best course of action is pursued, what kind of market projections can be made?
There is a widespread illusion that we must now pick between economic health and literal health. But this is just an illusion -- economic health cannot exist until this virus is taken care of.
First, a few points:
Ten days ago, we had 550 new cases. Five days ago, we had 2,484 new cases. Today, we had 10,168 new cases. These are daily gain figures, not cumulative case totals. That's a 1,749% increase in just ten days, and most of those ten days have involved a shutdown.
There is roughly a two week lag between new cases and deaths. Over the last two weeks, Italy's number of new cases per day has increased by 167%. That means that, two weeks from now, they will likely be around 1600 deaths per day, and their daily new cases may not have peaked yet.
Our trajectory looks pretty similar to Italy's, but our population is five times as large. Sure, we have a slightly younger population and a slightly lower smoking rate, but they have more doctors and beds per capita than we do. We have also taken a less-serious approach to shutting things down.
Most parts of the US are still very early in their trajectories. This is not a good thing. Another illusion that seems to have crept up is that many areas just "haven't been hit as hard." That's not true. They just got a later start. We can't say anything about how hard they were hit yet. NYC might not even end up being our worst hot zone.
There is also a very broad range of projections regarding the timeline until the virus is diminished in the US in a significant way. The most bullish seems to be from our own President, who somehow thinks we might turn a corner by the time the 15 day period is up in a week. I don't know who the most bearish is, but even Trump himself has mentioned August. The cognitive dissonance in that man's head must be incredible, but that's another topic. Anyway, what's important here is that we do not have a single similar counterpart to look at in terms of another country that has used a similar approach and is now on the downswing. China and South Korea used very different approaches than we have. Italy has probably been pretty close to us in relative terms, but it's not at all clear that they are on the downswing.
Italy is about ten days ahead of the US in terms of virus progression (this is also not certain given our large geographic footprint and the varying trajectories that exist across US cities), so if they hit peak new virus cases today, we would hit it in ten days (again, it would probably be later due to our scattered start times within the US). That means we would hit peak deaths in 24 days (remember, deaths run on a 14 day lag). But guess what? Barring significant outside intervention, viruses typically look like a bell curve, where peak virus or peak death days have equal cases both before and after. That means 48 days from now would look about like today looked, and our peak would be halfway between now and then (if Italy hit peak virus today, which might not be true).
Finally, and most importantly:
There is a direct correlation between how successfully a country locks things down (social isolation) and how well they control the spread. Aside from mass testing and quarantining early in the process, which is what South Korea did, the only way this virus has been controlled is through serious shutdowns.
The bottom line, in terms of the virus in the US, is that, even with a shutdown in place, there is a very good chance we will have more deaths and cases than any other country in the world. Our trajectory is pretty similar to Italy's, but we're much larger. This all seems rather clear if we look at the data.
So how can we answer question one?
These forecasts are pretty dire, and they are all based on outcomes from countries that did at least as much of a shutdown as we have, and in most cases, more. Even the shutdown scenario involves higher virus activity than most people understand. If the shutdown is removed or significantly reduced, there is a very high likelihood that nearly every American will get the virus within a couple of months, and our medical facilities will be catastrophically overwhelmed. People will not want to go to work and go out to eat and go to the movies if they know they are almost certainly going to get a virus that could leave them in an ill-equipped ICU with no hope of a ventilator should they need one. On top of all that, they would almost be guaranteed to pass the virus on to their parents or grandparents, giving them a roughly 1-in-6 chance of death. Our medical resources would be completely obliterated. You think our resources are stretched thin now? We only have 45,000 cases! It is quite possible that a significantly less restrictive approach could leave us with 45 million active cases at peak. Our medical system wouldn't stand a chance. How anyone thinks the economy would chug along under those conditions is beyond me.
Clearly, our only option is to continue with a shutdown that is at least as restrictive (and ideally more restrictive) than what we have now. The hope is that we can be back to where we are now in seven or eight weeks, and we can then begin to open things up. If we do not continue with significant restrictions, all of these numbers, and their subsequent economic effects, become much worse, not better. We will get over this thing much more slowly due to the catastrophic hit to our medical system, and there will be far-reaching economic effects for the foreseeable future.
Okay, so that's the virus situation. Bear with me here.
A few economic points:
There is currently a very broad range of projections regarding the US economy over the next couple of quarters. The only quarter that really matters and can be predicted with anything better than a pure guess is Q2. Those projections range from Bullard (the St. Louis Fed head) on the bearish end at -50% GDP and 30% unemployment to JP Morgan on the "bullish" end at -14% GDP. Those are both terrible by any standard, but critically, they are very far apart. Markets move based on half point GDP fluctuations. We are talking about a range of 26 percentage points! By the way, the worst GDP loss of 2008 was -8.4%.
There is a very big difference between being down 14% for GDP and being down 50%. There is also a very big difference in having seven more weeks of serious virus left (best-case scenario outlined above) and having ten more weeks of serious virus.
A very serious corporate debt issue exists, and the difference between these various projections regarding GDP and unemployment could very likely be the difference between survival and failure for some very big US firms.
The bottom line in terms of the economic situation is that veritable experts have given economic projections that vary wildly, thus it is impossible for investors to know what the market has priced in and what it hasn't. The fact that things are very bad does not mean the market is assuming -50% GDP growth and 30% unemployment. Our country, even in the great depression, has never seen those kinds of numbers, but we have seen 35% market drops before.
So What Does This All Mean?
I've laid out a lot of datum points here, but I want to do more than that. I want to pull it all together and produce some kind of actionable information based on those data. There are two things to keep in mind when trying to predict markets:
1. In a perfectly rational and informed market, a future world that looks worse than the consensus belief among investors about the future will produce below average returns.
2. Markets can be wildly irrational. As the great Keynes once said, "Markets can stay irrational longer than you can stay solvent." This makes it very difficult to approach market projections as though they are a perfect science. If we believe the future world is 15% better than what the market currently believes it is, that might not be helpful if the market is currently 15% overvalued or doesn't properly recognize the additional 15% of value (the market becomes undervalued).
Number two is a great big asterisk that will accompany my conclusions here, but that asterisk exists for all market forecasts.
Number one leads us to the only question we really need an answer to: Is the future likely worse than what most investors believe? Based on what I've presented here, I think the answer is a resounding "Yes." Our best-case scenario is at least seven straight weeks of coronavirus that are as bad or worse than the current situation, and based on Italy's current and projected numbers, there is a lot of room for things to get really ugly. There is a significant downside risk that would easily warrant more than a 35% market drop and could honestly justify an historically large drop -- and that's assuming we take ideal action.
What if we don't take ideal action and instead try to remove restrictions? In my opinion, we run a significant risk of prolonging the economic hit, and that only increases the chances that secondary, systemic concerns, like the corporate debt issue, come into play in a way that will have life of its own.
If you've made it this far, thanks for reading.
The bottom line-
1. One cannot predict the future
2. Human fears are usually worse than reality
3. Markets rarely behave as predicted over the short and intermediate terms
What if we don't take ideal action and instead try to remove restrictions?
"Is the cure worse than the disease?" This is the $64000 question. There are 2 sides to the argument and no one can be absolutely certain. One thing that is for certain is that this decision will decide whether Trump is reelected or not. His opponents will criticize whatever decision he makes and take the opposite position as it gives them at least a 50/50 chance of being right and beating him in November- far greater odds than other scenario or tactic available.
One could argue that IF the virus will eventually infect 80% of the population, what is the point of the isolation strategies?
1. Avoiding a mass influx of cases that overwhelms the medical system
2. Being able to control medical resource allocation over a longer period of time
3. Keeping death numbers lower per day to reduce panic
As a physician, I DO BELIEVE that marked precautions are in order. It has been shown in other countries that isolation strategies have reduced the impact of the virus. However, simply using aggressive hand washing, wiping down contact areas, and avoiding excessive crowds is probably adequate without "shutdowns" of an entire system. Our hospital initiated limited entry points and measuring temps of everyone entering the hospital. Both one of my partners and I registered 85 degrees farenheit. Thankfully, they did not kill us for being zombies. Such a system puts a "choke point" on entries and groups people closely, thus creating a worse situation than if they simply re-opened all entry points and stopped temp testing. Further, the "tester" is essentially acting as a vehicle to transmit the virus from one person to the whole medical staff in rapid fashion.
One recalls Poe's "The mask of the red death" in which aristocrats, attempting to avoid the Bubonic Plague, isolated themselves, yet ultimately succumb to the disease. The "cure" and efforts to contain can sometimes do the opposite of what we expect.
I would be looking at the trajectory of the death rate versus diagnosis. We knew the rate would climb considerably once testing started to increase. We likely have had a much larger number of those infected versus those diagnosed.
The analysis I read started with an assumed death rate of 1% and a time from infection to death of about 15 days. Based on that each death implied about 1500 more people infected. At 515 US deaths that implies over 3/4 million infected individuals which will result in several thousand more deaths.
Of course the 1% assumption could be wrong. It seems that is a low estimate, but if it is even lower that means more people are infected. If it is higher, fewer people are infected, but the deaths will be substantially greater as the infection spreads.
With a population of 330 million, if eventually 75% are infected and the death rate is 1%, that is roughly 2.5 million deaths and at least 25 million requiring intensive care. Flattening the growth curve can help, but it seems essential to develop treatments and/or attempt controls with serious attempts at isolation. From what I have seen that is not happening currently especially in dense urban areas. NYC is near me and is an especial concern. People are packed in so tightly that isolation is difficult and the realization of the importance is slow in coming.
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