The Global Corona Craze
Self-isolation lockups are now the new normal. It is amazing how much has changed in a few weeks. Brexit is no longer front-page news and the US-China trade war is now something far different. The only headline that seems to matter is COVID-19.
It has become clear that almost all countries in the world have been incredibly unprepared for the crisis, from both a medical point of view and an economic point of view. The vulnerability of major economies to undiversified supply chains is frightening. An addiction to cheap manufacturing has created this phenomenon. Sometimes there is only one or a handful of suppliers for certain goods or inputs to a production process. The face mask is the most obvious example. Undiversified supply chains worked well as long as there is no disruption but now during this crisis, those supply chains are easily broken leaving most of the world in a state of complete confusion. As we have written in other commentary, addressing this weakness will become major geopolitical and infrastructural issues for the foreseeable future.
Perhaps the timing of the coronavirus crisis was somewhat unforeseeable (although medical researchers would argue otherwise), it is extraordinary to see how unprepared major economies have been to disruption, medical or otherwise. Lassitude and self-preservational politics created a situation where essential goods and services relied on undiversified supply chains. This was evident to anyone with a bed cell and a pulse. For many, it was obvious that there had to be domestic options that could be activated during emergencies. For example, vital food or medical supplies. Extremely short-sighted political and corporate decision making has prevented these backup solutions from materializing. Many vital services were stretched even during normal times, particularly the health sector in many countries, even in most of the wealthiest economies. Now during the crisis, the health sector is just completely collapsing. In the UK, doctors fear for their lives. I have several friends who are doctors and they made their last will over the past few weeks. They have very little protective equipment, sometimes they have to purchase or produce home-made face masks themselves. The UK was laughably ill prepared for this emergency. Just ask Boris how well prepared they were!
We see large differences here: some countries such as the UK and the US and, as usual, most Southern European countries, have reacted in a very dysfunctional manner that went from first denying that there was any crisis at all to then overreacting and already announcing school closures, etc. for many months ahead or even until the end of the year. It’s politics by pandemonium. They have no actionable information. It’s quite pathetic to watch. And we all suffer as a consequence.
Once again, in the COVID-19 crisis, the UK has become the laughingstock of the entire world. UK politicians, in their infinite wisdom, went from calling the virus just a minor flu that did not deserve much of their attention. They followed this with then accepting the untested theory of herd immunity (note we are convinced that they really had no idea what this even meant); then after that the implemented a complete lockdown where UK citizens have even been prohibited to use their own backyard! The British government then put social distancing on top of their priority list. Social distancing apparently applied to everyone except the political class who, by their obvious exceptionalism, must have been deemed to be immune to the virus judging by how the UK parliament functioned until recently. Below is a picture of the UK parliament taken on March 24th, well after store closures and social distancing measures had been put in place.
No wonder that over the last few weeks almost half of the UK cabinet has been either in self isolation or confirmed to be infected by the virus. In fact, prime minister Boris Johnson himself just narrowly escaped death in the intensive care unit of a London hospital where about 50% of patients in the same situation die. If he is incapable of learning from this experience the UK is doomed to failure!
Compare that with some more sensible countries like Singapore, Hong Kong, Germany and other Northern European countries. They all share an underinvestment into the health sector as well but have approached the crisis far more systematically. Curiously, below is how the German parliament looked like on the same day as the above UK photo, March 24th.
The Economic Aspects of COVID-19
To the economy. Retail businesses are now mostly closed, unless they are able to deliver goods without any personal contact. Unemployment rates have skyrocketed or are about to skyrocket. Yet many governments are claiming that they are able to manage the crisis through generous government handouts and loans – the US government being the most profligate (it is an election year after all!). This must be welcome news to consumers and business owners. However, how are these unprecedented government handouts going to be financed? We have not even reached the peak of the medical crisis but governments have already committed several trillions (that’s 1012) of dollars. There will be lots of new debt and/or inflation and probably both. When do governments simply run out of resources? Has any elected leader studied economic history?
In our view, even if the coronavirus crisis ended tomorrow, economic consequences will be severe. There is no way of getting away from that. Capital markets don’t seem to realize this at all and are still operating on wishful thinking. More depressingly, the current medical crisis is almost certain to last for another couple of months with the accompanying disastrous consequences for the economy. Despite those bleak prospects, the S&P 500 has already recovered almost 50% of the previous losses due to the crisis. To us, it looks like these movements have very little to do with reality and much more to do with cosmetic government measures and the story that Trump is trying to spin in order to insure his re-election. Market participants are only too happy to buy into any kind of potentially positive news because this is what they have been doing successfully over the last ten years. We believe that this time is different, possibly disastrously different. It is very possible that we are not heading into a recession but rather into a depression. It is self-fulfilling given the policies in place and their impact on human behaviour. Anyone who argues otherwise seems to be assuming that we will have a globally available vaccine that can be distributed effectively by the end of the year. That seems to be a hope and a prayer at this point and even still will not impact the damage done already. Risk remains very much our primary concern as we evaluate the capital market landscape.