There is something very different about the coronavirus and the world’s reaction to it. That reaction is unprecedented, and unnerving.
The past 4 wks have seen huge responses from central banks which were confident in the global economic outlook and in no hurry to move on rates. Since then we have seen huge changes in attitude from political leaders who saw the coronavirus as China’s problem.
And 4 wks ago, the S&P 500 was at an all-time high.
Everything seen and heard 4 wks ago has been turned upside down by the spread of the coronavirus and the reaction to it.
The Q-1 GDP is now almost completely irrelevant, because it will not capture the shutdown measures associated with the effort to curb the spread of the coronavirus. Q-2 will and that GDP print should be, well, scary.
I am talking a double-digit percentage decline in real GDP on an annualized basis, 1 Wall Street economist is forecasting an annualized decline of 20%!
The largest decline during the financial crisis was 8.4% in Q-4 of Y 2008, making it fair to assert that what we are all experiencing right now is far worse and far different from than that financial crisis.
When the coronavirus black cloud lifts, there will be an unleashing pent-up demand, but huge damage has been done in the past 4 wks.
And there is no good sense yet when this drastic shutdown will end.
California is 1 of the largest economies in the world in its own right, and it announced an indefinite stay-at-home order, except for essential needs.
The state of New York which hosts the financial capital of the world in New York City, has ordered all non-essential employers to have their employees work from home for an indefinite period.
The virus and its impact will unfortunately live longer than anyone would like to imagine.
Perhaps the arrival of warmer temperatures will send it into hibernation, but if that is the case, it will take economy more time to wake up from this frightening happening when it is over.
The Victory coming out of this pandemic crisis will not be achieved in 1 or 2 Quarters. The main reason is because of how damaging this coronavirus has been to consumer, business, and investor confidence in the US and the world over.
The economic effects are shaking the pillars of support all over that fiscal stimulus plans cannot reinforce overnight, they are as follows:
- Business investment decisions will be permanently altered.
- Supply chain arrangements are going to be rethought, and, in many instances, relocated.
- Employers will have to reclaim employees who were laid off, some of whom might have concluded during the downtime that they want to work somewhere else, which will add to rehiring and retraining burdens that slow productivity.
- Private equity and venture capital decision makers will be even more discerning with investment decisions, which will impede startup activity.
- Financing markets will be less accepting of corporate issuers.
- Local and state municipalities will spend added time licking the wounds of lost tax revenue.
- Trade channels and port activity will be slowed.
- Consumers, scarred by the hit to their income and savings, will be more reserved with their spending behavior.
- Investors, scarred by the rapid wealth destruction, will be more reserved with their spending behavior.
Government spending is sure to pick up and that will help some, but it isn’t going to make everyone whole again soon to the extent that they were whole before this sudden economic stop happened.
In due course, this pandemic will subside, the economy will rebound, consumer confidence and investor confidence will rebound, and the stock market will rebound. That course of meaningful change, though, is still indeterminate
The reaction to the coronavirus, and the fallout is not like anything we have seen before.
But this is no time to panic
As America and other parts of the world endure the most frightening pandemic in a Century, the COVID-19 coronavirus outbreak, it is important that decisions affecting the lives, liberties, and livelihoods of hundreds of millions of people are being reached through reason, not collective fear.
Pandemics are different from economic depressions and fuel shortages, but some of the same lessons apply. Like an economic panic, pandemics incite mass fear, which can lead to flawed and irrational decision making.
We know that human beings by nature are mostly crowd-followers, especially during periods of social unrest and panic. This instinct has resulted in some of the greatest tragedies in human history.
COVID-19 may prove to be as dangerous as we have been led to believe. Epidemiologists, vaccine researchers, and other medical experts agree it is highly contagious and deadly for some, especially for certain at-risk people, the elderly and people with compromised immune systems and lung damage, for example. Yet many of the same experts disagree on the scope of the COVID-19 threat.
A Key problems medical professionals are encountering is they do not have a lot of reliable data to work with.
“The data collected so far on how many people are infected and how the epidemic is evolving are utterly unreliable,” John PA Ioannidis, an epidemiologist and professor of medicine at Stanford University who co-directs the university’s Meta-Research Innovation Center wrote.
Pandemics are scary.
This is 2X true in the age of social media, when the scariest models tend to be the 1’s most shared, which fuels even more panic. Because of the heightened level of fear, it is not unreasonable to think public officials could “follow the crowd,” which is a bad idea even when the crowd is not completely petrified.
“Crowds do not reason….they tolerate neither discussion nor contradiction, and the suggestions brought to bear on them invade the entire field of their understanding and tend at once to transform themselves into acts,” wrote Gustave Le Bon in his seminal Y 1895 work The Crowd: A Study of the Popular Mind.
In his book Crisis and Leviathan, the historian and economist Robert Higgs explains how throughout history, crises have been used to expand the administrative state, often by allowing “temporary” measures to be left in place after a crisis has abated, example: federal tax withholding during WWII.
“When crises occur… governments almost certainly will gain new powers over economic and social affairs,” wrote Mr. Higgs. “For those who cherish individual liberty and a free society, the prospect is deeply disheartening.”
So, let us take the novel coronavirus deadly seriously, but let us not throw reason, prudence, or the Constitution out the window at the same time.
If we do, we may find the government’s “cure” for the coronavirus cure is even worse than the disease.
Have a healthy week, stay home!