COVID-19: A Crisis the Fed Can’t Fix

By John Mauldin

For the last 3+ years, I have maintained it would take an “exogenous” event to send the United States into recession. Historically suboptimal growth? Sure, but sub-3% growth isn’t a recession.

The coronavirus obviously qualifies as an exogenous event. But that doesn’t mean a textbook two-quarter recession, although it certainly may. Financial markets aren’t waiting to find out what COVID-19 will do.

Much of the selling is fear of the unknown. The modern world hasn’t faced anything quite like this, and it’s coming at a time when the economy is vulnerable for other reasons.

We actually face two concurrent crises. One is about public health, the other about the economy and markets. They won’t necessarily track each other. We might find the virus is less deadly and infectious than feared but that the fear itself (plus the control and containment measures) harms the economy.  

After talking to economists and medical researchers this week, I am pretty confident in two things.

First, this is going to be a long slog. The virus will spread slowly but widely. The containment measures are simply buying time. There’s no need to panic, but we should all take common-sense protective measures.

Second, as usual, I am the “Muddle Through guy.” I think we’ll get through this. Not without some damage and tragic loss of life, but it won’t be the end of the world. This is not the zombie virus. I wasn’t thinking of viruses when I said the 2020s would be the Decade of Disruption, but COVID-19 may mark the beginning of it.

Here’s the worst part: The Federal Reserve and other central banks can’t bail us out this time. Their tools aren’t designed for this kind of problem. Powell, Lagarde, Kuroda, and others are all making their ritual pledges to “stand ready” with support. They may even be serious. But they have little to offer. Rate cuts are not vaccines.

We may soon, after a dozen years in monetary policy training wheels, find out if we can still ride a bike.

Y2K Redux

Longtime readers may recall these letters began in the late 1990s when I was writing about the “Y2K” computer problem. Looking back, it is hard to believe how much fear it generated. Some people literally headed for the hills. I said, consistently, we would have problems but get through them. And that’s more or less what happened. A few little glitches, then it was over.

However, the problem was real. Many vital systems would have stopped working on 1/1/2000 had they not been painstakingly rebuilt. We avoided catastrophe because smart people got to work and prevented it. Having that fixed date helped focus their efforts. The coronavirus is different in that regard; experts are sure it will spread, but they can’t say how fast.

This week I spoke with (among other experts) Dr. Joseph Kim, the CEO of Inovio. His company (like several others) is working on a COVID-19 vaccine. He’s been in this field many years and knows how these diseases spread. And he believes this one is not going to care about borders. The outbreaks we are now seeing in South Korea, Italy, and other places are only the beginning. Similar clusters will eventually appear in the US.

This virus’s unique challenge is its ability to spread via “asymptomatic” carriers. With SARS and Ebola, it’s very obvious that someone is sick and contagious. They are relatively easy to avoid. Infection mainly happens with medical personnel and family caregivers. With COVID-19, you can seem perfectly healthy, have no fever or other symptoms, but still carry the virus and spread it to others.

You can also catch the virus, recover, and never know you were infected. We don’t know how often that happens, which makes evaluating the data difficult. The Chinese data seems to show about a 2% fatality rate among the people who show symptoms and are diagnosed positive. That’s not necessarily everyone who is infected, so the true fatality rate could be lower. 

Dr. Mike Roizen said the problem is we don’t know how many people actually have had the virus and how many died as a result. In calculating a fatality rate, we know neither the numerator nor the denominator with truly accurate precision for the equation. As we get more accurate data, we can make better assessments.

That being said, Dr. Roizen and Dr. Kim both told me this virus is far deadlier than our standard influenza. It appears about 20% of symptomatic people are sick enough to need hospital care, even though most ultimately recover. That’s enough to potentially strain our healthcare resources, generating second-order effects as people with other medical conditions have to wait for treatment.

COVID-19 is unlikely to disappear in warm weather. Hong Kong is always warm and that does not seem to be stopping the virus. The likeliest scenario is that the world now has, in effect, another flu-like virus that will be with us for years. If clinical trials are positive, one or more of the vaccines currently in development could be ready later this year. Many biotech companies are working on it. Moderna said it plans Phase 1 trials to start in April. Dr. Kim cautiously (which is his way) said Inovio’s trials should begin in late spring or early summer.

Multiple vaccines will compete, and we will see which is the most effective. But we are, at minimum, several months away from that point, and the virus is still spreading.

In the absence of reliable information, well-meaning people will try to fill the void and make matters worse. A lot of misinformation is spreading on social media, and sometimes in real media, too. I saw one story calling it an “infodemic.” That’s funny but accurate.

We have better data on the economic impact.
Supply Chains Unlinked

We see many comparisons of this virus to the 2003 SARS outbreak. That one also began in Asia and quickly spread worldwide. There was great concern at the time, but the economic damage proved minor.

China’s economy is both much bigger now and more integral to world trade. Chinese GDP is up 4X since then, and its share of worldwide trade flows has grown 10X.
Businesses all over the world depend on Chinese-made components and raw materials, many of which can’t be sourced elsewhere, at least not at the same prices.
And “just in time” production means producers don’t have much inventory on hand.
Right now, it is dwindling as Chinese factories and ports are either shut down or operating at much-reduced capacity.

Here’s how one expert described it to South China Morning Post.

“It really is death by a thousand cuts,” said John Evans, managing director of Tractus Asia, a company that has 20 years’ experience helping firms move to China, but which over the past two has had more enquiries from businesses looking to leave. “This is a black swan event and I don’t think we’ve seen anything like it in recent history, in terms of the economic and supply chain impact in China and across the globe.”

As I write this, China’s travel restrictions have eased, and businesses are starting to reopen. But schools remain closed, which suggests they are not confident the outbreak is truly under control. Beijing is letting local governments set their own rules, so conditions vary greatly across the country.

The economic problem is that inability to obtain one critical component can shut down an entire factory. In this situation, 95% or even 99% may not be good enough. We could be weeks away from some US and European producers running out of input materials. Then what? Plant closures and probably layoffs.

Worse, some Chinese producers depend on parts from the West, which they may stop buying if their own factories stay closed. That’s not only a potentially huge problem for US semiconductor makers but others as well.

And it’s not just China and not just the virus. Growth was already weakening for other reasons, such as the trade war.
Here’s David Rosenberg.

The bottom line is that the coronavirus occurred with much of the world experiencing anemic growth after a year in which supply chains were already negatively affected by all the tariff actions.
“Phase One” did not completely ameliorate that condition. World growth was the weakest in a decade in 2019 and the latest move by the IMF was to trim this year’s outlook. And that was before the coronavirus, which has imposed tail risks for the global economy and financial markets.

A tail risk in the sense that we have such little knowledge about this coronavirus, why it is spreading, or how to treat it. The spread of the virus outside of China to South Korea, the other economic giants in Asia, and to Italy, is particularly worrisome.
The only thing we know with certainty is that South Korea is a massive exporter and much of its outbound manufacturing shipments are inputs into the global production process. So, the implications for disruption to global supply chains are significant, irrespective of the slowing in the rate of infections in China.
The cat is out of the bag.

David’s point about South Korea is important. The outbreak there could well lead to the kind of industrial paralysis seen in China. That would have a quick and severe impact on companies in Japan, North America, Europe, and everywhere else. The Italy outbreak could have a similar but smaller result. Italian authorities responded quickly, but people infected there have already spread it throughout Europe.

Meanwhile, here’s a map of cases in Japan (excluding cruise ship passengers). Note the cluster in Aichi. That’s Toyota headquarters and a heavy manufacturing region.

Source: NHK

Japanese Prime Minister Shinzo Abe has asked schools to close throughout Japan.
If the map keeps reddening, factory workers may be told to stay home, too, even if their plants can get the parts they need.
This would cascade through the world economy.

Fed Futility

We all learn by experience. For a dozen years now, investors have been rewarded for buying every market dip. Indexes always recovered to new highs, often because central banks delivered some kind of stimulus, or at least promised to do so.

So in one sense, seeing this week’s losses as another buying opportunity is rational. Possibly time will show that’s what it was, but count me dubious.
We have known for a long time something would pop the balloon. It proved to be Teflon-coated, impervious to everything bears could throw at it. But bears didn’t create this virus.

Nonetheless, investors are increasingly convinced the Fed will respond with more rate cuts. At year-end 2019, the futures-implied probability of three rates cuts this year was only 20%.
Now it’s up to 80%.

Source: WSJ

Note, any rate cuts would be on top of the existing T-bill purchase program and repo market liquidity injections. I think those are more likely to be expanded than reduced.

If it happens, the Fed will be in full-on stimulus mode, akin to 2008–2009.
But it probably won’t have the same kind of effect.
Peter Boockvar explained this week.

A rate cut won't bring Chinese factories back online any quicker. And a rate cut won't get people flying and traveling again until the virus peters out. Either way, the US bond market has already eased for them. The US 10-year yield at 1.37% [now 1.18%! – JM] has essentially cut rates by 25 [45] bps over the past two weeks for those looking to refi or purchase a home.

Lower rates may ease the cost of buying a car but with car prices at record highs (not hedonically adjusted), it won't do much. Credit card rates with 3 Fed rate cuts are still near 17% so another rate cut or two won't help much here.
And with respect to a rate cut encouraging more capital spending, the cost of capital clearly hasn't been a binding constraint on any capital decision for years. Will a rate cut or two 'ease financial conditions', aka goose asset prices? Maybe but maybe not.

Monetary policy tools just aren’t designed for this situation. All they can do is stimulate demand, and virus containment measures will make any such demand hard to fill. Fiscal stimulus might help but would also increase the already massive deficit.

In China, the government and central bank are responding with targeted loans to affected businesses rather than macro policy changes. That’s probably the right move, but with debt at such high levels, they really had no choice.

That’s the big risk here. I think investors are about to learn central banks won’t always be there for them in every situation. If the delicate faith that’s kept markets rising should break, then what? It’s a long way down.

So what do we do? In my case, this doesn’t change investment strategy. I am not a buy-and-hold advocate. I’m in funds and professionally managed accounts that can move out of the markets or directly hedge when necessary. Some have already done so. I expect others will do likewise if conditions worsen.

As an aside, bond markets are acting as if this is a massively deflationary event.

Some Silver Linings

  • We must remember that 86% of Americans are employed in the service industry/related areas. The manufacturing industry won’t simply shut down, either. Absent multiple large outbreaks in cities across the US, which would cause serious changes in consumer behavior, the US could prove more resilient than some others. This will be contained at some point and business and consumer life move on.

  • Last week, only a few US labs could test for the coronavirus. Clearly, we were massively unprepared, but that is changing fast. As you read this, already 93 labs should have testing facilities. A bedside diagnostic is coming, too, as 70 companies are working on it. The FDA is changing its procedures to allow confirmation at labs other than at the CDC’s main headquarters. This will ease concern by quickly separating actual COVID-19 cases from common colds and flu.

I expect the number of labs which can administer tests to increase dramatically over the next few weeks. New testing kits will come online. I can imagine hospital administrators and staff are beginning to think about how they would handle an outbreak in their city.

  • There is a high probability that vaccines will be available by the end of the year/early next year. We may all be getting an annual vaccine for COVID-19 along with the flu shot.

  • This may seem counterintuitive, but in a certain sense, COVID-19 provides a massive wake-up call to the world. We were not prepared. I, perhaps optimistically, think that will be different in the future. This is not the “zombie virus” of the post-apocalyptic movie genre, but it should make mankind in general, and countries in specific, start thinking about the next, perhaps more serious outbreak.

  • On the economic front, I think it is safe to say that supply chains will be radically different by 2022. Technology was already bringing manufacturing closer to the consumers. I expect that trend to accelerate. That should mean significant capital investment after the COVID-19 problem is contained, providing a nice economic stimulus.

  • Governments everywhere (including the US) need to think about the supply chain vulnerability of certain critical necessities. I don’t mean T-shirts and auto parts. I am thinking of medicines and medical supplies, many of which are now produced in China. Do we need multiple sources? Are some items so critical we should produce them in multiple places within countries? Just asking… This should begin now.

  • As of Friday, there were 60 cases of coronavirus in the United States, the bulk of which were from one cruise ship. All but one could be traced to either a cruise ship or a person or spouse coming from China. We should expect more, but for now, it seems to be spreading slowly here.  

  • I think the base case is that China and Europe enter recession. I would think the US is a coin toss. Because we don’t know of the extent of the potential outbreak, it’s really hard to say. The foreign slowdown will have an effect, but recession isn’t inevitable.

On a personal level, I think we should all just exercise common sense. I asked Dr. Kim if he was cutting back on his travel, including his international travel. His answer was no, life has to go on. Other frequent international travelers I know expressed the same sentiments. Some say they will avoid China, more because they don’t want to land in quarantine upon return than fear of getting the virus. Mike Roizen said he will still be traveling within the US, where he is already scheduled.

Of course, follow official advice if you live in an affected area, but we can’t all seal ourselves into bubbles. I will be traveling to New York in two weeks and plan many dinner meetings as well as other business meetings. As my wife Shane said about my future travel, “Stay calm and wash your hands.”

I have no way of knowing how far the market will fall. But I do expect this current problem will be solved and life will return to normal. This will represent a good, and perhaps great, buying opportunity.

How to Find the Opportunity I See Everywhere

Okay, I just spent a letter talking about the crisis du jour. But it doesn’t change my long-term outlook. I am still bullish on humanity and bearish on government. The problems and the opportunities I see everywhere aren’t going away. I seem to find more every week.

I have structured this year’s Strategic Investment Conference to both help you avoid the problems and find the opportunities. We will talk about more specific investment opportunities than in previous years. Today, I don’t want to go into a long list of the fabulous speakers and faculty who will be there, as you can see them on the website. While the information they give us will be invaluable, most attendees say they get as much or more from their discussions with their fellow attendees… people like you who can share their ideas.

I learn more at the conference, too. Attendees point me to new thoughts and research. They show me new opportunities. I truly think this year’s SIC will the best and most informative ever. You need to be there May 11–14 at the fabulous Phoenician resort in Scottsdale, Arizona. Get there a day early and golf with me. Pamper yourself and your spouse at their fabulous spa while you pick up portfolio-boosting ideas.

Don’t procrastinate. There has never been a better year to come to the SIC. Learn more here.

Instead of my normal personal section, I will simply wish you a great week and hit the send button.

Your Muddle Through analyst,


John Mauldin
Co-Founder, Mauldin Economics

Trump’s re-election would be dangerous for the world

The notion of the west as an alliance with moral foundations would evaporate if the president wins

Martin Wolf

Trump Founding Fathers
© James Ferguson

With one bound, US President Donald Trump was free. With the expected display of naked partisanship, Senate Republicans (with the exception of Mitt Romney) abandoned their constitutionally mandated role as judges of his alleged abuse of power. They have deferred the decision to the voters in November’s presidential election.

Mr Trump will possess many advantages: passionate supporters; a united party; the electoral college; and a healthy economy. His re-election seems likely.

The most obvious reason why Mr Trump might win again is the economy. Even by his standards, last week’s State of the Union address was a case of exaggeration piled on hyperbole.

As Joseph Stiglitz, the Nobel laureate economist, has pointed out, US performance remains poor by the standards of its peers in salient respects, notably life expectancy, employment ratios and inequality.

Moreover, output, employment, unemployment and real wages are largely continuing post-crisis trends. Given the scale of the fiscal stimulus, which has delivered huge and enduring structural fiscal deficits, this is no great achievement. Nevertheless, many Americans will feel that the economy is improving. This will surely play a big part in the coming election.

If Mr Trump wins, this victory could well be even more significant than his first. For the American people to choose a classic demagogue twice could not be dismissed as an accident. It would be a decisive moment.

The most obvious implication of Mr Trump’s victory would be for liberal democracy in the US.

The president believes he is above accountability to the law or to Congress for what he does in office. He holds himself accountable only to the electorate (or, rather, to his electorate). He believes, too, that appointed members of his administration, public servants and the elected officials of his party all owe their loyalty to himself, not to any higher cause.

Chart showing that the Trump Republicans turn the US into a fiscal profligate.  Structural general government fiscal balance (as % of potential output) during the Bush, Obama, Trump presidencies and a forecast until 2024.

The founding fathers feared just such a man. In the first of the Federalist Papers, Alexander Hamilton wrote that, “Of those men who have overturned the liberties of republics, the greatest number have begun their careers by paying an obsequious court to the people; commencing demagogues and ending tyrants.”

In this, he was following Plato, who wrote how a man who gained power as the people’s protector might become “a wolf — that is a tyrant”. In his Farewell Address of 1796, George Washington argued that the “disorders and miseries which result [from factionalism] gradually incline the minds of men to seek security and repose in the absolute power of an individual”. Factionalism is certainly rife in today’s America.

Chart showing that GDP continues its long post-crisis expansion. Annual change, percent during the Bush, Obama and Trump presidencies.

We cannot know how far Mr Trump would want to go or how far the institutions of the republic would let him do so. Yet is there anything Mr Trump could do, apart from losing the loyalty of his base, that would persuade Mitch McConnell, Senate majority leader, to turn on him? It is not institutions, but the people who serve them, that matter most.

Even if the great republic survived the trial largely unscathed (which is optimistic) the re-election of this man — a demagogue, a nationalist, an incontinent liar and an admirer of tyrants — would have worldwide significance.

Dual scale chart showing that employment also continues the post-crisis expansion. Annual change in overallemployment (millions) and Total workers employed innon-farm industries (millions)

Despots view Mr Trump as a kindred spirit. Liberal democrats would feel even more abandoned. The notion of the west as an alliance with some moral foundations would evaporate. It would at best be a bloc of rich countries seeking to hold their global position. As a nationalist, he would continue to dislike and despise the EU, as both an ideal and a wielder of countervailing economic power against the US.

David Helvey, acting US assistant secretary of defence, recently wrote of the hostility of China and Russia to the “rules-based order”. This ideal does indeed matter. Unfortunately, its most powerful enemy is now his own country, because it has always relied on American vision and energy. With his mercantilism and bilateralism, Mr Trump has aimed an intellectual and moral missile at the global trading system.

He even sees his own country as the greatest victim of its own order. The problem, then, is not that Mr Trump believes in nothing, but rather that what he believes is often so wrong.

Chart showing that the unemployment rate continues a long decline. Per cent, 2001 - 2020

More broadly, his short-term transactionalism and willingness to use all available instruments of US power creates an unstable and unpredictable world not just for governments, but also for businesses. This uncertainty, too, might get worse in a second term. It is an open question whether any sort of international rule of law would survive.

There are huge practical challenges that need to be managed. One is the US’s complex and fraught relationship with China. Yet, on this, Mr Trump is far from the most hawkish of Americans. He has a streak of pragmatism. He likes to do deals, however half-baked they may be.

Dual scale chart showing that productivity continues to grow slowly by past standards.  Real non-farm output per hour, Indexed (2012 = 100), seasonally adjusted and Annual change (%). 2001 - 2019

Perhaps the most important issue (if one leaves aside avoiding nuclear war) is management of the global commons — above all, the atmosphere and oceans. Crucial concerns are climate and biodiversity. Little time is left to act against threats to both.

A renewed Trump administration, hostile to these causes and the very concept of global co-operation, would make needed action impossible. Often, this administration does not seem even to recognise public goods as a category of challenges worthy of concern.

We are living through a hinge moment in history. The world needs exceptionally wise and co-operative global leadership. We are not getting it. It may be folly to expect it. But Mr Trump’s re-election could well mark a decisive failure.

Pay attention: the year 2020 matters.

Dual-scale chart showing that there is no Trump boom in real labour earnings either.  Real average hourly earnings for production & non-supervisory workers ($ per hour) and Annual change in real wages (%). 2001- 2019

America’s go-it-alone economy

Addressing the burden on individuals is the next US president’s most important task

Rana Foroohar

© Matt Kenyon

As President Donald Trump keeps insisting to voters, the American economy is strong. The unemployment rate is at record lows. Wages have ticked up at the lower end of the labour market. US stocks remain near record highs.

Yet there is another reality, one that Democratic candidates fighting it out in Tuesday’s New Hampshire primary elections as well as the Super Tuesday primaries in March will be looking to exploit. Opportunities for many Americans, particularly younger people, middle-skilled employees, gig workers and minorities, have eroded in the past two decades — thanks to globalisation, technological job disruption and a superstar economy that rewards top performers far more than others. This narrative helps progressive candidate Bernie Sanders and to a lesser extent Elizabeth Warren.

Both versions are true — not only in the US, but in many other developed economies. A new report from the McKinsey Global Institute examining growth in OECD countries since 2000 finds that work opportunities have increased everywhere: 45m more working age people are employed now than in 2000 in the 22 countries studied. “Rich countries have created a lot of jobs, and that should be celebrated,” says McKinsey director and co-author James Manyika.

He cites central bank stimulus, growing demand for services, rising government employment and a broad recovery as key factors in that job growth.

Indeed, this is the trend that Mr Trump has leveraged to such good effect, recently in his State of the Union address, as well as his appearance at the World Economic Forum in Davos. He makes the classic argument for supply side economics: that low interest rates, tax cuts and deregulation have buoyed corporations, which have in turn created more jobs. He doesn’t, of course, admit that the recovery from the 2008 financial crisis did not begin with him. But he has the headline numbers of higher growth and lower unemployment — the ones that are easiest to communicate to voters — in his favour.

But this argument works only at a national level. If you start to break the data down to individuals and families, the numbers are much less favourable. Rising housing prices, education costs and to some extent healthcare have eaten between 54 and 107 per cent of all income gains for households not only in the US, but Australia, France and the UK, the McKinsey report says.

Employment protections are lower, and the pension burden for individuals is higher. Savings (especially for young people) have fallen. Commuting times to good jobs, which are clustered in just a few areas in the US, have increased. Contract work has risen and full-time employment with benefits has fallen.

Amid these changes, governments, which have assumed much of the post financial crisis debt burden once held by consumers and the financial sector, are doing less and less to mitigate the fallout from all these shifts for individuals.

It is true that rising wages in emerging markets including China have made it harder for US and European companies to cut their labour bills by moving jobs offshore. But many employers are turning to labour saving technology rather than hiring more people. Meanwhile, although the prices of many goods and services have decreased, the costs of those things that really matter — your home, your health, your kids’ college fees — are continuing to rise dramatically. All this leaves individuals carrying much more of a load. In short, we’re on our own, and it doesn’t feel good.

That is why I believe that traditional metrics, such as the unemployment rate, fail to capture what is really happening on the ground. This is especially true in the US, where education inflation, in particular, is off the charts. No wonder the more progressive candidates in the Democratic race have made hay with the idea of free college and student debt forgiveness.

Young Americans are floundering, and not only as workers and savers: they now hold more debt than 40-somethings, according to Mr Manyika. This is a historic shift. They are also falling short as consumers. Having to pay off an average of $29,000 apiece in student loans leaves many with little left over to buy houses and fill them with stuff. The US Federal Reserve has flagged their struggles as a long-term threat to overall economic growth.

All this presents an opportunity for a moderate Democratic candidate like Pete Buttigieg or Michael Bloomberg, who can acknowledge both sides of the economic story. While Mr Trump focuses only on the growth part, Mr Sanders, and to a lesser degree Ms Warren, highlights mainly the negatives.

But the truth is nuanced, which is admittedly not always the easiest thing to communicate on the campaign trail. Americans ought to celebrate job growth but we also need to acknowledge that the burdens on individuals have risen in ways that are simply unsustainable.

Growth matters but so does the share of income that people have to spend in order to live near good jobs, stay healthy enough to do them, and pay for the schooling that will ensure that they and their children have a shot at those jobs.

That is the full reality of the go-it-alone economy. We should all be looking seriously at any presidential candidate who can explain it — let alone solve it.

The world gets ready

Covid-19 is now in 50 countries, and things will get worse

But there are proven ways to limit the damage

IN THE EARLY scenes of Michelangelo Antonioni’s “The Eclipse”, eerily empty Italian streets provide a stark contrast to the frenzy of the stockmarket floor. This week saw that striking juxtaposition played out for real. Under a sky of unbroken light-grey cloud, isolated figures hurried through the spaces between Milan’s towering office blocks and across its broad traffic-free avenues. Meanwhile, inside a frantic Borsa Italiana, share prices were collapsing.

On February 21st the Italian authorities announced that a cluster of 16 cases of covid-19, the disease associated with the novel virus SARS-CoV-2, had been detected around Codogno, a small town in Lombardy 60km south-east of Milan. By the next day the number was up to 60, and five elderly people had died. On the 23rd“red zones” were set up around the infected areas (see map).

Inside the zones there is a strict lockdown; outside 500 police officers and soldiers stop people from leaving. On the same day the government of Lombardy ordered the closure of any establishment where large numbers of people gather, including cinemas, schools and universities. Inter Milan has missed a home match; the legendary opera house, La Scala, is shuttered; sightseers are barred from the cathedral—though worshippers are not.

Iran, where the first covid-19 cases were reported two days before Italy’s, has also closed schools and cancelled football games. There too, though, worship continues, with what appear to have been dire consequences.

The ceaseless flow of pilgrims to the mosques and shrines of Qom has continued despite the city being the site of the first cases.Ahmad Amirabadi Farahani, an MP from the city, said on February 24th that the death toll there had reached 50, though other officials deny this. Recent cases of covid-19 in Bahrain, Kuwait, Iraq, Lebanon and Pakistan are all thought to be linked to returnees from Iran.

The outbreaks in Italy and Iran, along with a large one in South Korea, have convinced many epidemiologists that attempts to keep the virus contained within China have run their course; it will now spread from second countries to third countries and on around the world. As of February 27th, cases had been reported in 50 countries (see chart 1).

Studies suggest that the number of people who have left China carrying the disease is significantly higher than would be inferred from the cases so far reported to have cropped up elsewhere, strongly suggesting that the virus’s spread has been underestimated. Some public-health officials still talk in terms of the window for containment coming closer and closer to closing. In reality, it seems to have slammed shut.

That is the message the world’s financial markets have taken; the Borsa Italiana in Milan was far from alone in its miseries. Investors had previously acted as though the economic impacts of covid-19 would be limited to China and those whose supply chains wind through it. The spread of the disease to South Korea, Iran and Italy caused a massive sell-off on February 24th. The next day prices fell further when the Centres for Disease Control and Prevention warned Americans to prepare for the virus.

As of the morning of February 27th, stock markets had fallen by 8% in America, 7.4% in Europe and 6.2% in Asia over the past seven days. The industries, commodities and securities that are most sensitive to global growth, cross-border commerce and densely packed public spaces got whacked particularly hard, with the prices of oil and shares in airlines, cruise-ship owners, casinos and hotel companies all tumbling. Investors have taken refuge in assets that are perceived to be safe: yields on ten-year Treasury bonds reached an all-time low of 1.3%.

The place least hit was China, where a huge sell-off took place some time ago. Investors, like some public-health officials, are starting to think that the epidemic there is, for now, under control. But if economic models developed for other diseases hold good, the rich world stands a distinct chance of slipping into recession as the epidemic continues.

That will bring China, and everyone else, a fresh set of problems.

The paths all taken

How the virus will spread in the weeks and months to come is impossible to tell. Diseases can take peculiar routes, and dally in unlikely reservoirs, as they hitchhike around the world. Two cases in Lebanon lead to worries about the camps in which millions of people displaced from Syria are now crowded together and exposed to the winter weather. But regardless of exactly how the virus spreads, spread it will.

The World Health Organisation (WHO) has not yet pronounced covid-19 a pandemic—which is to say, a large outbreak of disease affecting the whole world. But that is what it now is.

Part of the WHO’s reticence is that the P-word frightens people, paralyses decision making and suggests that there is no further possibility of containment. It is indeed scary—not least because, ever since news of the disease first emerged from Wuhan, the overwhelming focus of attention outside China has been the need for a pandemic to be avoided. That many thousands of deaths now seem likely, and millions possible, is a terrible thing. But covid-19 is the kind of disease with which, in principle, the world knows how to deal.

The course of an epidemic is shaped by a variable called the reproductive rate, or R. It represents, in effect, the number of further cases each new case will give rise to. If R is high, the number of newly infected people climbs quickly to a peak before, for want of new people to infect, starting to fall back again (see chart 2). If R is low the curve rises and falls more slowly, never reaching the same heights. With SARS-CoV-2 now spread around the world, the aim of public-health policy, whether at the city, national or global scale, is to flatten the curve, spreading the infections out over time.


To flatten the curve you must slow the spread. The virus appears to be transmitted primarily through virus-filled droplets that infected people cough or sneeze into the air. This means transmission can be reduced through physical barriers, good hygiene and reducing various forms of mingle—a strategy known as “social distancing”. Such measures are already routinely used to control the spread of the influenza virus, which spreads in a similar way and is responsible for hundreds of thousands of deaths a year.

Influenza, like many other respiratory diseases, thrives in cold and humid air. If covid-19 behaves the same way, spreading less as the weather gets warmer and drier, flattening the curve will bring an extra benefit. As winter turns to spring then summer, the reproductive rate will drop of its own accord. Dragging out the early stage of the pandemic means fewer deaths before the summer hiatus provides time to stockpile treatments and develop new drugs and vaccines—efforts towards both of which are already under way.

Ben Cowling, an epidemiologist at the University of Hong Kong, says that the intensity of the measures countries employ to flatten the curve will depend on how deadly SARS-CoV-2 turns out to be. It is already clear that, for the majority of people who get sick, covid-19 is not too bad, especially among the young: a cough and a fever. In older people and those with chronic health problems such as heart disease or diabetes, the infection risks becoming severe and sometimes fatal. How often it will do so, though, is not known.

An epidemic’s fatality rate can only be definitively calculated after the fact: you take a population in which you know how many died and test a large random sample for antibodies against the pathogen in question—antibodies they will only have in their system if they were once infected. The Chinese authorities have just approved such tests, but they have yet to begin.

Estimates of the proportion of the infected made in the thick of things are, by contrast, liable to two different types of error. One affects the numerator—the number of the dead—and one the denominator—the number infected.

Mixed fractions

The first stems from the fact that there are always some people destined to die who have not died yet. People who die from covid-19 typically do so some three weeks after the onset of symptoms. If you divide the number of the dead at a given time by the number infected up until then you will miss those who will die in the next few weeks, and your answer will be misleadingly small.

The second sort of error, typically seen near the beginning of an epidemic, pushes in the other direction. People diagnosed early on tend to be very ill. It takes further investigation, and broader public awareness, to turn up all the people suffering only mild symptoms. Before that is done, an underestimate of the number infected leads to an overestimate of the fatality rate.

Analysis of data from more than 40,000 Chinese patients who had tested positive for the virus by February 11th found that, at the time, about 80% had mild symptoms, 14% had symptoms severe enough to warrant hospital care and oxygen, and 5% were critical, requiring intensive care that often included mechanical aids to breathing. Based on that data, the fatality rate in Hubei, the province in which Wuhan sits, was 2.9%. Outside Hubei it was 0.4%.

There are various reasons why the rate in Hubei would be expected to be genuinely higher than elsewhere. Its hospitals had no warning of the sudden influx of covid-19 patients and were thus overwhelmed, whereas hospitals in other cities had more time to prepare, laying in respirators and oxygen. Hubei’s doctors had to work out how to treat a brand-new disease, whereas those elsewhere have been able to learn from both their successes and failures.

But many experts think that a lot of the difference stems from the early-stage small-denominator problem. In other places there has been time and an incentive for less severe cases to be diagnosed, and so the fraction that has proved fatal is lower.

At the moment, epidemiologists reckon the true rate for covid-19 is in the range of 0.5-1%. For SARS, a disease caused by another coronavirus which broke out in 2003, the rate in China was never fully ascertained; but worldwide, the WHO put it at about 10%. The rate for seasonal flu in America is typically around 0.1%.

The fatality rate is not an inherent property of the virus; it also depends on the care received.

This puts poorer countries at particular risk. They tend to have weaker public-health systems in the first place, and thus can expect higher levels of serious disease and death—including, sometimes, among overstretched and inappropriately protected front-line health-care workers.

That puts further strains on their health systems. And this will all be exacerbated by the pandemic’s economic effects, which models suggest will also be greater in poorer countries.

Higher fatality rates causes larger hits to the workforce. Service industries in poorer countries are less digitised, meaning they require face-to-face contact, and therefore are more likely to be avoided when consumers take fright. And poor countries risk capital flight when financial markets are spooked by risk. They could lose their ability to borrow and spend just when they need it most.

Better health care reduces the fatality rate. Better public-health interventions reduce the total rate of infections. Epidemiologists start their curve-producing models off with a “basic reproductive rate”, Ro. This is the rate at which cases lead to new cases in a population that has never seen the disease before (and thus has no immunity) and is doing nothing to stop its spread.

Estimates of Ro for covid-19 based on data for Wuhan put it at between 2 and 2.5, according to the WHO. Academics reckon that an Ro around this range could see between 25% and 70% of the world becoming infected.

How an epidemic actually unfolds, though, depends not on Ro but on R, the effective reproductive rate. If policymakers and public-health officials are doing their job and a trusting public pays attention, this should be less than Ro. The lower it gets, the flatter the curve; get R below one, and the curve starts to slope down. That will not wipe out the virus completely. But it will eventually see it limited to sporadic outbreaks, usually when the rare infected person mingles with lots of vulnerable people (such as those in nursing homes).

Back to school

It is possible that the huge efforts made in China have reduced R nearly this far—hence the current optimism there. Outside Hubei, cities which pre-emptively imposed travel restrictions and bans on large gatherings have seen flatter epidemic curves; the measure that made the biggest difference was closing down public transport.

There is now a risk, though, that as people start going back to work and school new infections will start to rise (see article). Bruce Aylward, who led a WHO-appointed group of experts sent to investigate the situation in China, says the authorities have used the time when transmission was severely suppressed to prepare and re-equip hospitals.

As the pandemic unfolds, the reproductive rate in different parts of the world will differ according both to the policies put in place and the public’s willingness to follow them. Few countries will be able to impose controls as strict as China’s. In South Korea the government has invoked the power to forcibly stop any public activities, such as mass protests; schools, airports and military bases are closed.

Japan is urging companies to introduce staggered working hours and virtual meetings, limiting both crowding on public transport and mingling at work. Other developed countries are mostly not going that far, as yet. Something that is acceptable in one country might result in barely any compliance, or even mass protests in another.

There will also be scapegoating and fear. In Novi Sanzhary, in Ukraine, a busload of evacuees from Wuhan was attacked. To assuage fears, the country’s health minister joined the evacuees in quarantine, demonstrating that she could do her job remotely. Other politicians will be less noble. In a world where disinformation on social media is already a much used tool, covid-19 will provide new opportunities for spreading fear, uncertainty and doubt. Disrupting attempts to slow the spread of SARS-CoV-2 by such means could be an easy way to weaponise it.

In countries with stronger public-health systems, data scientists will busily model the course of the epidemic as it unfolds. Such modelling already informs public-health choices during flu season in many countries, suggesting when various measures might be prudent. They could in principle be adapted to covid-19.

But for the time being such adapted models will be a lot less useful than the ones for flu, because much less is known about covid-19’s basic biology. For example, the question of whether infected people can transmit the disease before they show any symptoms is a matter of quite hot debate. If they can, then putting heavy stress on having infected people isolate themselves will be much less effective than it would otherwise be, because many infectious people will not know that they carry the virus.

There is also no explanation for the low number of children so far diagnosed with the disease. Do they not get it? Or do they get very mild, or different, symptoms? Either way, this will make the dynamics of covid-19 quite different from those of flu, where high rates of spread among children are a big factor, and closing schools can bring large gains.

However well people put up with whatever social distancing is asked of them, covid-19 will hurt the economy. Until recently, market analysts expected China to have a slow first quarter but world GDP to be little affected. When on February 22nd the IMF revised its global growth forecast for the year, it was merely shaved down from 3.3% to 3.2%. A full blown pandemic can be expected to have a much deeper impact.

Viral messaging

Work would be lost both to disease and to social distancing. The financial system was not much hit by this week’s market falls. Although the riskier corners of the debt markets suffered some jitters, the borrowing costs for the biggest Western banks remained fairly stable.

However, large poorly understood risks are likely to reduce investment. Consumers could stop spending, both through fear and because controls on mingling reduce opportunities for various types of fun.

Such effects can be out of proportion to their cause. When South Korea had a small outbreak of 186 cases of Middle East Respiratory Syndrome in 2015, the hit to the economy totalled $8.2bn, or about $44m per infection, points out Olga Jonas of Harvard University. Cities with large service sectors are particularly vulnerable; the economic impact of SARS was greatest in places like Hong Kong and Beijing.

Some hints of what may be to come can be gleaned from an economic model of an influenza pandemic created by Warwick McKibbin and Alexandra Sidorenko, both then at Australian National University, in 2006. Covid-19 is not flu: it seems to hit people in the prime of their working life less often, which is good, but to take longer to recover from, which isn’t. But the calculations in their model—which were being updated for covid-19 as The Economist went to press—give some sense of what may be to come (see chart 3).

In their “severe” scenario, a pandemic similar to the Spanish flu outbreak of 1918-19, global GDP dropped by nearly 5%. If that were to happen today, it would cause a slump similar in size to that of 2009. In their “mild” scenario—30% of people infected, losing on average ten days’ work each, and a fatality rate of 0.25%—the cost was just 0.8% of global GDP. That would mean losing about a quarter of the global growth previously forecast for this year.

Mr McKibbin says the moderate scenario in that paper looks closest to covid-19, which suggests a 2% hit to global growth. That corresponds to calculations by Oxford Economics, a consultancy, which put the possible costs of covid-19 at 1.3% of GDP.

Such a burden would not be evenly spread. Oxford Economics sees America and Europe both being tipped into recession—particularly worrying for Europe, which has little room to cut interest rates in response, and where the country currently most exposed, Italy, is already a cause for economic concern. But poor countries would bear the biggest losses from a pandemic, relative to their economies’ size.

As the world climbs the epidemic curve, biomedical researchers and public-health experts will rush to understand covid-19 better. Their achievements are already impressive; there is realistic talk of evidence on new drugs within months and some sort of vaccine within a year. Techniques of social distancing are already being applied.

But they will need help from populations that neither dismiss the risks nor panic. The patrons at the Tempio Caffè, just off Milan’s Piazza Cavour, had it about right: not too disturbed, getting informed. Only one of the ten breakfasting on cappuccino and brioche was wearing a mask, and she was Chinese.

Containing the Coronavirus: What’s the Risk to the Global Economy?

On Monday, February 24, stock indices tumbled, spooked by reports that the coronavirus outbreak that emerged in China is spreading to countries including Italy, Iran and South Korea.

A day later, trading in stocks across world markets remained choppy, reflecting hope that the economic fallout might be manageable — just as damage from the SARS epidemic was some two decades ago — but also fear that the economic impact could be significant and linger longer.

The markets’ movements mirror the uncertainty that prevails and persists not just in the U.S. but all over the world. Several weeks into the coronavirus outbreak that has brought the world’s second largest economy to its knees, some of the most basic aspects of the virus remain unknown.

It’s not yet clear how widely beyond China COVID-19 will spread; this week, numbers of infected individuals have surged outside China. Still, exactly how it is transmitted, how easily, and how lethal it might be are aspects of this coronavirus that remain to be uncovered, according to University of Pennsylvania scientists.

As the human toll mounts, so does the economic damage. The business realm, of course, tends to shudder in the face of uncertainty, and right now, with reports on the seriousness of the coronavirus evolving each day if not each hour, the eyes of commerce are on epidemiology.
 “This has many economic implications,” says Wharton management professor Mauro Guillen.

“It has implications not just for China but for the entire world. The world depends on Chinese growth,” he says, citing both the country’s supply-chain role and consumer buying power. Still, he notes: “It is unclear how much impact in the end this is going to have.”

But what is clear is that if politics and trade wars emerged as uncertainties in recent years, now a third leg in the stool holding up global confidence has suddenly gone wobbly. Some observers describe it as a classic “black swan” — a random event that is completely unpredictable. (An interview with Nassim Taleb, author of the book from which the expression is derived, can be heard here.)

“The long-term repercussion quite apart from whatever happens now is that we’ve got a source of risk we hadn’t thought about,” says Marshall W. Meyer, a Wharton management professor emeritus who consults in China.

“My view is there is going to be a big adjustment of global trade patterns unless we are really lucky and [the virus] goes away very quickly. This became apparent after SARS, but SARS went away. And this may or may not go away.

The real problem is people’s confidence, and in China how much political damage there will be and whether it will be contained. And there is no way to know.”

An Economic Earthquake

The damage has already been severe and has reached into a surprising array of sectors. As noted above, this week the markets responded negatively to the sharp uptick in cases outside of China, with the Dow Jones Industrial Average falling more than 1,000 points on Monday — its third-biggest one-day decline. (The selloff continued on Tuesday as the Dow fell another 879 points.) Major American orchestras have canceled tours in China.

The cruise industry has seen the public-relations nightmare of more than 1,200 passengers quarantined aboard the Diamond Princess in Yokohama. With moneyed Chinese travelers forced to stay home, European tourism has taken a hit.

“It’s seen as on par with an earthquake, a situation of emergency,” Mattia Morandi, spokesman for Italy’s ministry of culture and tourism, told The New York Times.

Supply chains in the retail sector and others have been disrupted, factories in China have gone quiet, and passenger air travel has been curtailed. Apple recently announced that it now expects to miss its next quarterly revenue forecast as a result of shuttered factories and closed retail shops in China.

“This is going to be a slow-rolling, highly consequential event,” says Meyer. “I would say stock up on aspirin and Ibuprofen now, because the base ingredients come from China. Antibiotics come from China. Hong Kong wholly depends on China for its food supply, for its water.”

Economic disruption related to the coronavirus is expected to rob the world economy of growth for the first time since 2009, according to London-based research firm Capital Economics. “We assume the virus will be contained soon, and that lost output is made up in subsequent quarters, so that world GDP reaches the level it would have done had there been no outbreak by the middle of 2021,” the firm said in a statement.

What’s the potential outcome if the virus isn’t contained? According to a report by CNBC, Moody’s chief economist Mark Zandi noted on Tuesday that if the virus becomes a pandemic in Europe and the U.S., “that is the prescription for a global and U.S. recession.” Meanwhile, Federal Reserve chairman Jerome Powell suggested that there will “very likely be some effects on [the economy of] the United States” from the current outbreak, but, in recent testimony before the House Financial Services Committee, said it’s too early to say how much.

The philanthropic sector is beginning to divert resources to the crisis. The Bill & Melinda Gates Foundation has committed up to $100 million toward efforts to help strengthen detection, isolation and treatment efforts, to protect at-risk populations, and to develop vaccines, treatments and diagnostics. Hong Kong investor and philanthropist Li Ka Shing has donated $13 million to assist Wuhan, where the outbreak has been concentrated. Alibaba founder Jack Ma has committed $14.4 million, including $5.8 million to fund research into a vaccine.

‘Still Learning’

Of course, how much philanthropy eventually gets moved to combating COVID-19 depends on the eventual scale of the epidemic, and at any given point, no one has been able to say whether it has peaked.

But so far, this new coronavirus appears to be less lethal than SARS, says Susan R. Weiss, a faculty member in the department of microbiology at Penn’s Perelman School of Medicine. Its sudden, dramatic appearance may have been a function of some special circumstances.

“It started in Wuhan, a really dense city at the crossroads of many different means of transportation, and this happened at New Year’s, when a lot of people were traveling, so this was a perfect storm,” says Weiss. “SARS started in the Guangdong Province, which is much less dense and was more easily controlled.”

On the other hand, she says, SARS spiked up over about eight months, and then disappeared, and it’s not yet known whether COVID-19 will behave the same way. “We don’t know whether it will burn out, like SARS, or come back seasonally like the flu,” she said.

What is known at this point is the coronavirus’s nucleic acid sequence, “and that gives scientists a lot of information,” says Penn professor of medicine and infectious disease specialist Harvey Rubin. This helps in developing diagnostic tests and informs the approach to coming up with a vaccine.

“What that doesn’t tell you is how transmissible it is. It doesn’t tell you whether the disease can be spread when it’s asymptomatic. We don’t yet know how transmissible it is person to person,” he says.

“Right now, 99% of cases are still in China, but a small but important number are out of China, so the trajectory of this problem is still a time-dependent process…. We are still learning, and numbers are still coming in.”

Trade, Disease and the Moral High Ground

Experts have been vocal about what China has done wrong, debating whether the country recognized the epidemic soon enough and if the government’s ideological aversion to transparency delayed action and cost lives.

But what about the U.S. reaction? Is there something the U.S. can and should be doing beyond the $100 million that the U.S. government says it is prepared to spend to help China and other countries where the epidemic has spread?

“It’s already daunting for China to be coping with this, but we have a trade war going on, and it would actually be in the best interest of the U.S. to stop the trade war,” says Guillen. “It would create a lot of goodwill and would give us a good relationship as opposed to a confrontational one.”

In the meantime, he says: negotiate. “The U.S. can seek an agreement, but from a high moral ground — as in, ‘we know you are in trouble, let’s see what we can do about it.’ And if they don’t want to do what the Trump administration wants to do, the U.S. can re-impose tariffs.”

Getting to a trade solution now is also a recognition that our fates are intertwined. After the big 2011 tsunami in Japan, Guillen points out, “within weeks, many factories in the U.S. had to stop producing because they were getting components outsourced from Japan. This is a global economy.

We have businesses and operations and connections with China, and if the second largest economy in the world is brought to a halt, it has the potential to disrupt things all over the world.”

Will the coronavirus crisis cause companies to look at China differently in the future?

“They are very likely to do so,” says Howard Kunreuther, co-director of Wharton’s Risk Management and Decision Processes Center and professor emeritus in the operations, information and decisions department. In research with Wharton professor Michael Useem for their recent book Mastering Catastrophic Risk: How Companies Cope with Disruption, the authors contacted chief risk officers and leading executives at more than 100 S&P 500 firms on the most adverse risks they had faced in recent years.

“Every one of them said we are now paying much closer attention to the potential consequences of catastrophic risks than in previous years because they are happening more frequently: the 9/11 terrorist attacks, the 2008-2009 financial crisis, the 2011 Japan trifecta (earthquake, tsunami and nuclear accident) and more intense natural disasters.

Firms are now engaging in enterprise risk management to reduce the likelihood and consequences of future adverse events that will affect their operations and are asking questions, such as how safe is it for us to operate here?”

Part of the rationale for these firms considering taking steps now is the high visibility of the coronavirus. “I don’t think they would be paying attention if it weren’t in the news every day,” says Kunreuther. Still, that doesn’t mean businesses should not consider taking action now given the potential for a pandemic.

“The question is, what will they do? Will they undertake an assessment of the risk and ask what kind of risk-management strategies they can follow by examining the potential costs and benefits of undertaking these steps?”

“Many of us have been saying for years that it’s only a matter of time,” says Rubin, referring to the arrival of a serious epidemic or pandemic. “If we are lucky and this starts to abate and the mortality is relatively low, it’s unfortunate for the people who are sick and died, but next year or the year after something else could happen.

The world needs to have not only medicine and healthcare infrastructure but also economic and information infrastructure. If there is some message here, it’s that this is totally predictable.”

A lot of attention gets paid to infectious disease outbreaks in the moment, and there is a lot of talk about vulnerabilities, preparedness and response.

“We talked about it after Zika, Ebola, during the measles outbreak, and then nobody talked about it anymore,” says Rubin. “For some reason this captures attention while it’s there, but then it goes away. People forget.”