Strategic Global Intelligence Brief for March 18, 2020
By Chris Kuehl, Ph.D., NACM Economist
Short Items of Interest—US Economy
Third Crisis Reaction in 24 Hours from Fed
The Federal Reserve is now officially in full crisis mode and is employing nearly all the tools used at the time of the financial sector meltdown in 2008. The economic collapse has not reached the same crisis level as was the case in 2008, but it is getting very close. The central banks are pulling out all the stops as far as affecting short-term liquidity. The markets are in free fall as the investors have no idea what is going on. There are plans in development to blunt the impact of the crisis, but thus far they are all in the idea phase. The hope is that some of these central bank interventions create a floor for the markets, but so far, they have not.
Who Is at Greatest Risk?
There are some major differences between this crisis and the financial sector meltdown that led to the recession of 2008. The key one is the cause of the crisis is supposedly temporary. The virus itself is not shutting the economy down. There has not been a massive outbreak among workers and business is not shuttering for that reason. This is an economic crisis that has been deliberately created by governments who have chosen to fight the virus this way. The economy will presumably bounce back the minute the "all-clear" sounds. It remains to be seen, however, whether the consumer believes that all is well. The risk is to segments of the economy that will not be able to recover the business lost right now—travel, entertainment, restaurants and the like.
Port Activity Falters
The crisis began with the collapse of the supply chain out of China. That was when the virus appeared to be their problem and not the world's. Those days are certainly gone. Now the entire global supply chain has been placed at risk and the economies of the world are finding it very hard to adjust. The collapse of global trade will leave a major hole in every economy. Whole sectors will be shutting down for lack of needed inputs. When the trade issue was just one between the U.S. and China, there was the discussion of alternate supply chains, but now there really are none.
Short Items of Interest—Global Economy
Isolation as Long-Term Strategy
As governments struggle to figure out what they will do to react to the threat of virus infections in the future, there is a growing desire to simply cut off from the world altogether. The shift towards isolation had started even before this crisis and now the virus is accelerating the transition. Expect to see widespread protectionism and to see more and more restrictions on everything from foreign investment to immigration. The sense of open borders and globalization as a business strategy is fading fast.
Progress in Italy?
Of all the European states, the Italians have been the hardest hit as they have the oldest population in the EU and a strained medical system even when there is not an outbreak like this one. There have, however, been some communities able to hold off the infection rate far better than the rest of the country. That has been due to an aggressive testing regime. It has been the rapid use of testing to identify the ones who have the virus quickly and move them to isolation and treatment. The most egregious failure of the system in the U.S. and elsewhere has been the lack of testing. Even after weeks of the outbreak, there are few opportunities to test.
Bond Market Creaking
Bond yields have fallen so low investors are shunning them and seeking shelter in cash and gold. There is virtually no faith in the markets as the investors have no faith in the measures that have been taken to deal with the crisis. There is an assumption that normal will return in May, but there is no guarantee of that. Health authorities are hedging their predictions every day.
Meanwhile—Back in China
It was only a few weeks ago that everything happening in China was front page news in the U.S. That was before the COVID-19 crisis finally made it to the shores of the U.S. Suddenly, the issue in China seemed to fade away. The fact is reactions to the virus in China will present the best opportunity to understand what happens next in the U.S. and the world as a whole. The most encouraging part of this connection is there has been significant progress in the last several weeks. There has been better containment, fewer new cases and better data in terms of how it spreads and what the impact on health actually is.
Analysis: There have been four developments in just the last 10 days that bear examination. The first is that new incidents of the disease in the Wuhan area have dropped to less than 5% of what it was two months ago. The peak seemed to arrive two to three weeks ago and the rate of infection has been falling fast. This decline has been attributed to the warmer temperatures and the extensive use of isolation and quarantine. The fact that President Xi Jinping felt able to visit the region signaled the threat of infection was under control. Some of the restrictions have been lifted and some businesses have resumed activity. China has not declared an all-clear, but it seems close.
The second development is China has started to close the emergency hospitals that had been established to deal with the crisis and the medical community is no longer declaring a crisis in terms of treatment. There is no longer a shortage of beds, equipment or people. There are still many undergoing some form of treatment, however. There also remains an expectation that the elderly patients may die. Those with compromised lungs or weakened immune systems remain at high risk. Most of the population in the region has been tested. It seems that roughly 15% to 20% have been infected. The majority of them have been treated at home.
The third development has been the result of research by both the Chinese and the World Health Organization (WHO) and others. The initial assumption was fatality rates of COVID-19 were roughly three times deadlier than the flu with a fatality rate of 2.5%. The research in the Wuhan region now shows that fatality rates are 1.4%, lower than the flu, SARS, MERS and other viruses. The data also suggests that getting infected is harder than originally assumed.
That is the fourth development. One of the key questions has been how people contract the disease. It was understood early on that most infections occurred as a result of physical contact with the virus. Touching a surface hosting the virus would allow it to transmit to someone. That is still the most common way to catch it—the question was whether it also transmitted through the air. The data now suggests that it can transmit that way, but only for short distances—as someone sneezing or coughing in your face. The droplets appear to be heavier than other viruses and don't travel far or for long. It has also been determined the virus dies within three to five hours unless conditions are ideal.
None of this is to say that there is no longer a threat in China or that everything will soon calm down, but the latest data would suggest a considerable improvement over the situation even a few weeks ago.
New Threat from Imported Cases
The progress that had been seen in Asia as far as containing the outbreak of the COVID-19 virus is being undermined by travelers who are bringing the infection rates back up. The majority of these new cases are people from Europe and to some degree the U.S. who have elected to try to escape the virus at home. They are seeking refuge in Asia as they believe these countries have a better handle on the issue. There have also been a great many expatriates returning home rather than risk isolation in some other country. Millions of Asian workers, students and business people are flocking back home and many are infected whether they are aware or not. This has prompted a concerted effort to test all the incoming travelers.
Analysis: It has become increasingly obvious that halting the spread of the virus will depend on three factors. Right now, there is little sense that any of the three are ready. The first is widespread and swift testing. Even after weeks of the crisis, it is estimated that less than 2% of people have been tested even once. The second factor is an effective treatment for those who are at risk of death or serious illness. There is some hope that such a drug cocktail may have been developed—drugs that have been used to treat Ebola. The third factor and perhaps the most important is an effective vaccine. That still appears to be at least a year away from mass distribution. The steps taken thus far have been somewhat effective, but the virus has not been contained to a significant degree on a worldwide basis.
When Does This End?
The world as we all knew it a few weeks ago has ended. This is not an attempt to be overly dramatic as it is clear that normal patterns have universally vanished as the world makes an attempt to halt the spread of COVID-19. The question at this stage is how long this crisis lasts and how we will know when that moment arrives. If one seeks to find an answer to the simple question of when the quarantines will end, it will prove to be nearly impossible. At this point, there have been no criteria set by any significant authority. Will it be the point when there are fewer cases of COVID-19 or when there are no cases? Will it be when there is a significant breakthrough in treatment options or will it be when there is a vaccine available? Will it be the point at which everybody can be tested? Will there just be a point beyond which people can't be required to "hunker down" any longer?
Analysis: There have been several hopeful statements made regarding the duration of the crisis, but there have been just as many critics of these hopeful assertions. The fact is nobody yet knows how this virus will respond from one day to the next. The hopeful statements assert that warmer weather will make a big impact—as it does for other virus outbreaks. We know there is a cold and flu season and that by spring and summer these outbreaks fade. We know that previous outbreaks of disease (SARS, MERS, etc.) reacted to warmer weather as well. We assume that COVID-19 will as well, but this is not certain.
If the old pattern holds, the crisis may pass by May. Then, it will be up to the authorities to make a call. Will they elect to lift all the restrictions and allow life to return to old patterns or will they decide to err on the side of caution and keep these restrictions in place until there are no more new cases? If the latter approach is employed, there will be no return to normal for many more months. There will soon be a decision to be made based on what would be judged as "acceptable casualties." Wiping out the virus entirely is not possible. It is now with us to stay and will require efforts to control it year after year—as is the case with everything from the flu to Ebola.
Will Stimulus Plans Work?
The latest ideas for stimulus have been coming from the White House. It has taken a very long time for these to emerge as compared to the actions that other world leaders have taken. The first weeks of the emerging crisis were spent denying there was anything to react to and assertions that it was all somehow a hoax. The only response was from the Federal Reserve and, eventually, Congress started to get involved. The majority of state governments responded immediately. Almost all the progress on virus containment has been at the state and local level—even now. Now there is a plan coming from the executive branch, but it is running into the same challenges as the plan from the Fed.
Analysis: The proposal is to dump over $1 trillion dollars into the economy through sending checks for $1,000 to "most" Americans. The tax deadline has been pushed into the summer and there are plans to reduce taxes as well. The plans are all rooted in the same strategy—promote consumption. The crux of the issue is that dealing with the crisis has meant isolation and quarantine. Events have been canceled, restaurants closed, stores and shopping centers closed and so on. Where, exactly, are people supposed to be spending that additional money? The crisis for the consumer is the potential for losing their job and a $1,000 check is not going to make up for losing that job.
The response in some other nations has focused on the business community—trying to ensure that these restaurants, airlines, entertainment centers, retailers and factories stay in business. The offer is pretty simple. If your business agrees to not lay off any of the workforce, the government will keep you afloat.
Collapse of Common Sense
The threat from the COVID-19 virus outbreak remains diffuse. The numbers are clear enough. The death rate from infection is 1.4%, lower than the flu. Those under the age of 60 have a death rate of 0.1% and 85% will not contract it at all. The challenging part is that it is highly infectious. That puts vulnerable populations at risk.
Analysis: The appropriate response is a common sense attitude. Wash your hands, keep some distance from people, limit exposure to those who would be the most vulnerable, but otherwise go about your business.
Insights into One's Fellow Man
By and large, there seem to be three types of people manifesting during this crisis. Two of the three are simply appalling and make me wonder about the future. The third version of humanity still gives me hope. I sincerely wish there were more of them. The first version of an idiot is the one who is wandering around denying that any of this is happening so they plan to do nothing at all to change their behavior. The issue here is not that most of us will remain healthy or be able to fight off a minor case. The fact is that some people are at risk and it is reasonable to want to protect them.
The second version of the idiot is the one hoarding toilet paper and screaming at people with seasonal allergies. The panic buying, the paranoia and the extreme reactions are uncalled for. We know by now who needs to be careful. If we fall into that category, there is justification for trepidation and caution. The rest of us can relax a bit and just remember to wash our hands.
This brings me to the majority (I hope). We know the risks and know what to do to manage them. We wash our hands and keep them away from our face. We exercise reasonable care and understand that if we do manage to catch the virus, we are unlikely to be anything other than ill. Our responsibility at that point is to others and we act accordingly. The damage that has impacted the economy has been wrought by the first two categories. The rest of us have to do our part to limit that impact.
This chart might help with some perspective. The most interesting of the readings comes from China when one compares the deaths with the recoveries. This is a serious issue, but it is not the Black Death or even the influenza outbreak of the 1920s.