Corona Craze

The Global Corona Craze

Self-isolation lockups are now the new normal. It is amazing how much has changed in a few weeks. Brexit is no longer front-page news and the US-China trade war is now something far different. The only headline that seems to matter is COVID-19.

It has become clear that almost all countries in the world have been incredibly unprepared for the crisis, from both a medical point of view and an economic point of view. The vulnerability of major economies to undiversified supply chains is frightening. An addiction to cheap manufacturing has created this phenomenon. Sometimes there is only one or a handful of suppliers for certain goods or inputs to a production process. The face mask is the most obvious example. Undiversified supply chains worked well as long as there is no disruption but now during this crisis, those supply chains are easily broken leaving most of the world in a state of complete confusion. As we have written in other commentary, addressing this weakness will become major geopolitical and infrastructural issues for the foreseeable future.

Perhaps the timing of the coronavirus crisis was somewhat unforeseeable (although medical researchers would argue otherwise), it is extraordinary to see how unprepared major economies have been to disruption, medical or otherwise. Lassitude and self-preservational politics created a situation where essential goods and services relied on undiversified supply chains. This was evident to anyone with a bed cell and a pulse.  For many, it was obvious that there had to be domestic options that could be activated during emergencies. For example, vital food or medical supplies. Extremely short-sighted political and corporate decision making has prevented these backup solutions from materializing. Many vital services were stretched even during normal times, particularly the health sector in many countries, even in most of the wealthiest economies. Now during the crisis, the health sector is just completely collapsing. In the UK, doctors fear for their lives. I have several friends who are doctors and they made their last will over the past few weeks. They have very little protective equipment, sometimes they have to purchase or produce home-made face masks themselves. The UK was laughably ill prepared for this emergency. Just ask Boris how well prepared they were!

We see large differences here: some countries such as the UK and the US and, as usual, most Southern European countries, have reacted in a very dysfunctional manner that went from first denying that there was any crisis at all to then overreacting and already announcing school closures, etc. for many months ahead or even until the end of the year. It’s politics by pandemonium. They have no actionable information. It’s quite pathetic to watch. And we all suffer as a consequence.

Once again, in the COVID-19 crisis, the UK has become the laughingstock of the entire world. UK politicians, in their infinite wisdom, went from calling the virus just a minor flu that did not deserve much of their attention. They followed this with then accepting the untested theory of herd immunity (note we are convinced that they really had no idea what this even meant); then after that the implemented a complete lockdown where UK citizens have even been prohibited to use their own backyard! The British government then put social distancing on top of their priority list. Social distancing apparently applied to everyone except the political class who, by their obvious exceptionalism, must have been deemed to be immune to the virus judging by how the UK parliament functioned until recently. Below is a picture of the UK parliament taken on March 24th, well after store closures and social distancing measures had been put in place.

No wonder that over the last few weeks almost half of the UK cabinet has been either in self isolation or confirmed to be infected by the virus. In fact, prime minister Boris Johnson himself just narrowly escaped death in the intensive care unit of a London hospital where about 50% of patients in the same situation die. If he is incapable of learning from this experience the UK is doomed to failure!

Compare that with some more sensible countries like Singapore, Hong Kong, Germany and other Northern European countries. They all share an underinvestment into the health sector as well but have approached the crisis far more systematically. Curiously, below is how the German parliament looked like on the same day as the above UK photo, March 24th.

The Economic Aspects of COVID-19

To the economy.  Retail businesses are now mostly closed, unless they are able to deliver goods without any personal contact. Unemployment rates have skyrocketed or are about to skyrocket. Yet many governments are claiming that they are able to manage the crisis through generous government handouts and loans – the US government being the most profligate (it is an election year after all!). This must be welcome news to consumers and business owners. However, how are these unprecedented government handouts going to be financed? We have not even reached the peak of the medical crisis but governments have already committed several trillions (that’s 1012) of dollars. There will be lots of new debt and/or inflation and probably both. When do governments simply run out of resources? Has any elected leader studied economic history?  

In our view, even if the coronavirus crisis ended tomorrow, economic consequences will be severe. There is no way of getting away from that. Capital markets don’t seem to realize this at all and are still operating on wishful thinking. More depressingly, the current medical crisis is almost certain to last for another couple of months with the accompanying disastrous consequences for the economy. Despite those bleak prospects, the S&P 500 has already recovered almost 50% of the previous losses due to the crisis. To us, it looks like these movements have very little to do with reality and much more to do with cosmetic government measures and the story that Trump is trying to spin in order to insure his re-election. Market participants are only too happy to buy into any kind of potentially positive news because this is what they have been doing successfully over the last ten years. We believe that this time is different, possibly disastrously different. It is very possible that we are not heading into a recession but rather into a depression. It is self-fulfilling given the policies in place and their impact on human behaviour. Anyone who argues otherwise seems to be assuming that we will have a globally available vaccine that can be distributed effectively by the end of the year. That seems to be a hope and a prayer at this point and even still will not impact the damage done already. Risk remains very much our primary concern as we evaluate the capital market landscape.


The capital markets have reacted to recent legislation with enthusiasm. The injection of government resources has created an extraordinary BTD reaction. Buying the dip has become the mantra across the investment universe for the past decade. Investment professionals have become so well trained that they simply believe to their core that no matter the fundamental backdrop if the market goes down it must go up immediately. The Federal Reserve liquidity machine has made it so. It is simply an irresistible combination (Robert Palmer is ringing in my ears). Last week was another example of this dynamic. Perhaps it is closer to the machismo version known as buying the f****** dip, BTFD!

It may be that the markets initially overreacted (like most leaders) to the virus. But the suddenness of valuation changes signals to us just how little the markets really know how to value securities. Ultimately, fair value of an asset represents the present value of future cash flows. This can be crudely expressed as V=∑df(t)*CF(t), where df(t) are the discount factors and CF(t) are estimates of cash flows (dividend, coupon, earnings, etc.), corresponding to some future date t. When V fluctuates so massively one must ask which of these variables is changing so wildly? For risky assets, neither input is known with anything close to certainty. It becomes strictly a trading environment with no reference to the basic valuation relationship. So supposed investment professionals revert to the liquidity driven insanity of the BTFD paradigm. It is concerning for anyone who elementarily understands valuation and market principles, like us. The pure hubris and shortsightedness of this reaction is quite astonishing as we watch the world literally shut down.

It is more than a little disconcerting to witness. In the span of a few days the market has spasmed so violently it’s ridiculous. Meanwhile, the world is literally closing operations and university dorms are being converted to hospitals. [Granted, as we wrote about last week, these same universities will probably be going out of business!] And the capital markets have somehow re-estimated valuation inputs upward with these new facts coming out? Why? Because of some poorly structured domestic spending bill? It’s just difficult to understand other than the BTFD-Fed feedback loop. Could this time be different?  Yes, to the downside. The entire world will suffer economically like we have not seen in a century. Emerging markets, including China, are going to be impacted worse than during any other crisis in history. They simply do not have the capabilities to deal with the issues they are confronting, and the developed world is too busy trying to deal with the same problems. Investment opportunities will present themselves for those with liquidity and patience.

Fiscal Policy – We’re all Keynesians Now

The principle that resonates through all government decisions over the last few decades is the government takeover of the economy. Keynes would be ecstatic. Bush-Obama-Trump have used the government as a hedge fund with no thought on the country’s future. Fiscal profligacy. Our debt level is now larger than our economy. This threshold has historically doomed nations.[1] We are there now. We will be writing more about this for a long time. Mindless spending is not helpful in this crisis. Targeted and focused policy is what is needed. We have written about this exhaustively in previous commentary.

Legislation really needs to be more reactive and information based. This proactive, buy votes, legislation is largely a waste of resources. Policy makers need to be facts based not fear and emotion based. We are distraught by the horrible decision making by policy makers. However, we must keep asking what are the fundamental investment implications? When the markets are in the Fed-BTFD mode, is it possible that the markets continue to completely ignore the facts that are plain to see? Can we simply have a situation where so much federal money floods the equity markets it has nowhere to go but up in the short term? It’s a simple supply vs. demand phenomenon – so much cash with no asset class competition – that prices percolate upward as the BTFD approach loses steam. This is what happened last week. We firmly believe that this cannot last. Ultimately, fundamentals and economic reality will pull this equity market and risky debt to a new equilibrium. The days of the Fed-BTFD dynamic will peter out and risk managers like us will enter the markets.


The markets will continue to fluctuate wildly in the coming weeks. The magnitude of what’s coming is just unknown. I have not read or experienced anything like what’s coming. And neither has the trading environment. The BTFD approach will fail miserably in this environment. We must invest, not trade. We believe strongly that investment opportunities will present themselves in the coming months. Right now, we care primarily concerned for the well-being of our society. Make no mistake: that is what’s at stake! The economic impact will be violent and much longer than anyone currently trading understands. These traders really need to familiarize themselves with an acronym that crosses my mind when I watch the tape, WTF?


Finally, a word on the constant harangue across political parties regarding the decision making process on how the virus was addressed over the past few months. Having coached for several years I have always found the MMQB mind numbingly useless. It’s easy to criticize decisions after you know the outcome. It’s disingenuous and unproductive. Shoulda, coulda, woulda is no way be taken seriously. We are here now. Where do we go from here? That’s what we need to focus on. Let’s figure out the best plan forward that exclusively focuses on the health of our fellow citizens. Stop the finger pointing and the perfect hindsight game that is being played out across the media outlets. It trivializes what’s happening across our great country. Overcoming the virus will be far easier if we fight together. God Bless America!

[1] See Reinhart, Carmen M., and Kenneth S. Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton, New Jersey: Princeton University Press.