I thought of writing a somewhat different piece to what you have been receiving in your inboxes recently from various CEOs of companies. A piece regarding COVID-19 that I hope will make you feel better. Like many others, we here at Eureeca are working from home and considering all the precautionary measures, and indeed, our services will continue as normal despite the global disarray. However, in these uncertain times, I thought I would take the opportunity to share with our members our thoughts on the COVID-19 matter, and how it could impact our lives going forward.
The last time we communicated with our members regarding an external event, was post-the unforeseen election of President Donald Trump broadly 3.5 years ago. Reflecting on that previous post, it seems all the predictions laid out in that communication were highly accurate. Therefore, we decided to reach out once again to our members to share our thoughts surrounding the current volatile economic climate, in hopes that it would be of value and provide you with some food for thought at a time when we are all eagerly searching for some direction.
New Decade: Enhanced War tactics needed
For decades, we have been used to the same war combating strategies. We have built bunkers, stationed nuclear war heads in different continents, and ensured that our leaders are protected by the likes of the Secret Service, the Republican Guard and Air Force One.
In my humble opinion, this virus is a curse that is worse than an atomic bomb hitting our shores. With the atomic bomb, the damage – despite it being severe – is limited to a city or a geography. If you were to work out best, base, and worst-case scenarios for a country in a nuclear war. History tells us that the worst/best case would be a country deciding to surrender, and you’d assume that further carnage would cease to continue. For example, like Japan did during the Second World War.
COVID-19, however, proved to us that we need more enhanced war tactics. It is sneaking through from under our feet and we cannot see it, feel it, nor can we reason or negotiate with it. It also likes to play fair by not discriminating nor respecting security systems. It knows how to get to presidents, royal family members, government officials, A-list movie stars and religious leaders. Even infecting The Global Capital Markets by causing a complete asset class meltdown.
Again, the theme here for the virus is: no discrimination. The virus will get the poor and the rich, the weak and the powerful, and it also got the equities and the precious metals markets alike.
Unlike the 2008 financial crisis, this bug is leaving us with the midst of 4 crises:
- A global medical crisis: where we cannot cater for the sick. Sadly, as is the case in Italy and Iran, it is getting to a stage where they’ve run out of places to bury the dead.
- An economic crisis: where the service economy industries ie. airlines, hospitality and B2C enterprises etc come to a complete halt as countries adopt ‘lockdown’ measures. Leaving those very industries with no choice but to layoff their staff. Most crises happen due to either the lack of demand, or the lack of supply. These Lockdown measures left us with unprecedented events, where there is hardly any demand, and hardly any supply.
- A financial crisis: where trillions of dollars have been wiped out from our global capital markets triggering margin calls and further selling. Even safe havens such as Gold are getting hammered. Watch the Corporate Bond market on the verge of imploding as the corporates such as the airlines etc struggle to pay back the debt amid plummeting sales. The hunger for cash merely to service the coupons of the paper is evident with the recent Dollar surge.
- A looming retirement crisis: The main purchasers of the corporate bonds – that are on the verge of default across the globe – are pension funds. If the corporate bonds were to default, this would result in significant losses to what our pensioners think they will be receiving upon retirement – assuming the bond market collapses. Our elderly will likely be receiving $0.30 – $0.50 on the Dollar. Approximately a 70% haircut to their pensions.
So, what are the Governments anticipated to do? And what do we have to do ourselves to get through this growing list of crises?
I would be discussing this further, but I just need you to know a few more facts.
Make no mistake about it, every country that has witnessed a handful of cases or higher, will need to get to peak levels. That is just a scientific fact.
Governments such as Italy and Spain (and others) have initiated ‘lockdown’ measures in various attempts to contain it. But the reality is, they will not be able to. The pandemic would need to get to peak levels ie. thousands of cases, and many fatalities, before the numbers start tapering off. Unfortunately, there is no avoiding that fact.
Peak levels need to take place before a country starts recovering. As with other epidemics, a lot of the time things need to get worse before they get better. COVID-19 is no different in this respect, in fact it is proving to be more stubborn.
Having said that, the world has witnessed a glimmer of hope out of China. After the peak of the epidemic, we are now seeing the rate of deaths amongst the infected, dramatically decline from thousands daily to dozens. Already we have seen news footage of people shedding their face masks and wandering freely through the streets of Wuhan. Factories in the South of China are back in operations, in addition to US companies, such as Apple have re-opened their stores in China.
Therefore, we need to get to peak levels in various countries for this to start its descent to normality.
Some other Governments around the world such as the UK, are taking the contrarian view of not implementing such severe lockdown measures – as of yet – for which they are being criticised for. But once you dig in deeper into the rationale behind their decisions, you quickly discover that there is an element of genius behind those decisions, where other markets have failed to see.
Elements of Genius:
Currently many countries are trying their best to contain the virus, whereas the UK is trying to delay the peak of the pandemic, knowing full well that containment is impossible. The reason the UK has moved to the ‘Delay’ stage without lockdown measures yet, are two fold:
- To try and buy time to equip the National Health System (NHS) to deal with the sick at peak levels.
- Attempt for the peak to take place in better and warmer conditions so it doesn’t spread as easily.
The UK has not imposed lock down measures yet because:
- The UK scientists are advising the Government to allow the disease to spread somewhat, for the population to build a natural immunity system against the disease. The next phase after the ‘Delay’ phase is ‘Research’. This is when some of the best scientists around the world will be laser-focused on delivering a cure. This process requires a certain number of the population to be infected in order to find solutions to the pandemic.
- The main driver behind a ‘no lockdown’ approach is something psychologists call behavioural fatigue. It is estimated that human beings will start to get to the ‘fed up’ stage of quarantine approximately 30 days after being asked to stay at home. When human beings reach this stage, they start to disrespect the boundaries of the lockdown and resist those measures. Moreover, scientists estimate it is vastly more effective to time the quarantining approximately 10 days before the peak, and 10 days after. Hence, there is a fear that the quarantined worlds which are under lockdown – prematurely or otherwise – in countries like Spain and Italy will begin to capitulate. We saw signs of capitulation in Wuhan, China where the authorities were dealing with it in a pretty brutal manner. But that is China for you, would be interesting to see how the western world would deal with this matter.
What’s next? And how to deal with the 4 crises?
Thanks to the Global Financial Crisis (GFC) in 2008, we have learnt how to deal with financial meltdowns – and fast. Central Banks would be able to effectively print money and issue more debt to bail out the collapsing industries.
In 2008 the US (being the largest economy in the world) stepped in to bail out the banks and automobile industries as demand fell off a cliff. I recall TARP of $800bn going through congress, followed by QE1 and QE2 – all different terminologies to navigate away from words like – ‘we are printing money.’
In 2020, we expect more of the same, but on a much bigger scale. Initially, Trump was talking about an $8bn stimulus, and I was telling everyone there is no way this amount would cut muster with the markets. That number went up to $200bn a couple of weeks ago, and I was repeating the same message, and now the number is $1.2 TRILLION, and I still repeat the same message – it is not enough.
I anticipate the US Treasury Secretary Mnuchin will announce significantly higher numbers before markets open on Monday 23rd of March. The Federal Reserve have been quick to slash rates to zero – and rightly so.
These measures, in addition to much more, are taken to avoid an economic depression. Indeed, the estimation to reach a depression were the worst case scenario, just a few weeks ago. Now, a depression is the base case scanrio ie. No longer the worst case. This is taking place in the midst of an election year when the Trump Administration will do anything to be re-elected, even if it means to borrow vast amounts from the future (that our kids would have to pay for), to avoid an economic depression, which would take the world decades to recover from. Therefore, this substantial stimulus is the right call, in my humble opinion.
The UK’s Chancellor was brilliantly quick in announcing bailout packages worth 100s of Billions of pounds, signalling the right narratives for companies not to shed staff that could lead to an imminent recession. The Government is prepared to pay staff salaries of the battered industries, in addition to tax cuts and plenty of other measures. I still think Chancellor Sunak will go even further and higher in terms of amounts and steps to contain the cascading economy.
The theme for Finance and Treasury Ministers in developed markets right now is how to solve for two of the crises listed above ie.:
- The Economic Crisis
- The Financial Crisis
Standard Corporate Bailouts as well as Helicopter Cash – which is a live discussion right now – that entails governments to deposit cash into one’s bank account to keep the cycle moving. In addition to another list of measures that include:
- Tax exemptions
- Holidays on loan payments
- Holidays on mortgage payments
- Free rent
- Water, electricity and Gas bills subsidies
And the list goes on…
Point is, developed market countries such as the US, UK and Europe will save their economies by handling the above two crises in the short term. That will include printing vast amounts of money, and printing they will…
By tackling the Economic and Financial Crises, in a quick manner, with vast amounts of stimulus, Governments would be able to reduce the magnitude of crisis number 4, which is the retirement crisis. The simple rationale is, if those corporate bonds do not default as the Governments picked up the bill, then pension funds should somewhat not feel too much of a pain – for now.
So, the only one left now is crisis number 1, the sad and inevitable health crisis.
Expect more rhetoric surrounding Retro-Virals versus vaccines:
Given that the Governments’ aim is to pump quite a lot of capital into the markets, it is only natural that some of the money finds its way to an important element of these crises – which is a to find us a cure.
Rather than have 1,000 scientists focusing 10% of their time to find a cure for another virus eg. The Zika virus. Money would allow us to have 10,000+ scientists focusing 100% of their time to establish a cure that would solve our issues.
So far, there’s been some relatively promising news from the US, where two drugs are currently being tested and seem to have had somewhat effective results when dealing with the Coronavirus.
The first one is called Remdesivir that has been used by doctors in Seattle in attempts to treat patients suffering from the Coronavirus and seems to have had effective results – more tests are still being conducted right now.
The second drug which is showing signs of efficacy is called Hydroxychloroquine, a 50+ year-old drug that is normally used to treat malaria. The FDA of the US are slightly cautious of going out there and announcing its effectiveness before conducting further tests but some Korean doctors reported back that it has been very effective in fast tracking the period of recovery and therefore shortening the period of spreading the virus to others.
The good news is that – if confirmed – the drug is widely available already in other less developed markets such African nations with larger populations.
Expect more positive news as the days unfold as the best scientists on this planet are working around the clock to find us a cure.
That is not guaranteed of course, but at least, the stimulus will allow the developed nations to spend more capital on widely needed resources to deal with the sick ie. beds, facilities etc.
Therefore, for crisis number 1, with the injection of capital and as time elapses, the pandemic will find its way to descend again. At worst, and in the absence of a cure and/or resources in less developed markets, the disease will start to diminish but will take a few weeks longer and an astonishing number of mortalities – sadly.
The Chinese Communist Party’s (CCP) grip on power in China is only as effective if the economy is in good shape. Therefore, a very quick ‘V’ shaped economy bounce back is the CCP’s top priority with aims of full recovery and factories going back to work around mid-April time, once they have emerged from the peak of the virus.
News emerging from China is that they seem to be on track. China, be it the 2nd largest economy in the world, and is vital in this jigsaw puzzle.
The two biggest factors of the global economy bouncing back with strength are:
- The incredible amounts of unprecedented stimulus that’s about to find its way into the economy, and faster than ever – given our 2008 learnings.
- The behavioural fatigue! I am not sure about you, but I personally cannot wait until life is back to normal and we can enjoy holidays in the Bahamas, Maldives or Barcelona. I aim to be doing things that I postponed doing in the past and will for sure appreciate matters that I took for granted such as walking down to the local café to purchase a croissant with no mask on. I am stating this just 4 days post self-isolation.
Imagine what the fiestas will be like on the streets of Madrid, Milan, and Rio once this siege is removed. Which will be removed once we surpassed the peak.
To be clear, global markets react to good or bad news considering what the implications of the news would have to the average person’s behaviour and spending patterns. It is more probable, than not, post this siege and government fiscal guarantees that our spending would remain robust. Hence my argument for a bounce.
Anticipate the above for developed markets, as for less developed and less fortunate markets eg. Egypt, India, Nigeria etc. Below is my last paragraph, the only way I see them getting through this ordeal.
COVID > OCD
Could it be coincidence that the very three letters that describe Obsessive Compulsive Disorder (OCD) happen to compose a bulk of COVID acronym?
We all came across a friend or two that suffer from OCD, the very germophobes that used to wash their hands repeatedly, avoid touching or handshakes, not place their laptop bags on the floor etc. We used to look back at them and perhaps think those measures were extreme, and now we find ourselves doing exactly what they used to do.
The last time I was told to go and wash my hands was by my mother many years ago, and now I hear Prime Ministers like the UK’s Boris Johnson and Presidents such as President Donald Trump asking me to wash my hands! My brain is not used to hearing such messages from these very people, but as the messages are essential, we must adhere.
The whole world will need to adapt to a new threshold of conducting our daily lives. We must become a population of OCDs for us to get through this, and we will. But also, I feel for my friends that used to be OCDs, as they now must elevate to a brand-new level of UOCDs (Ultra OCD). They would naturally feel, that what they used to do is not enough, and they will feel the urge to take it to a more extreme level – saw a couple of those on the plane recently who were wearing the entire hazmat suits that the hospital workers treating the sick usually wear!
We will not be able to mitigate the risk of getting infected completely, but we need to take measures to reduce the risk of getting infected. Becoming an OCD for a temporary period of time until the vaccine finds its way to market, is a very good deal. I would take that any day, and I would urge all of us to take it as well.