Some videos discussing the coronavirus outbreak
David Siegel directed me to a couple of very interesting videos discussing the coronavirus outbreak:
Another video looks at the situation in Wuhan:
This last video is produced by the Chinese government, and thus is presumably biased. But there is some criticism of the initial response, and it does provide quite interesting (and moving) coverage from a “human interest” angle.
The first two videos effectively explain why things here and in Europe will get much worse than most people realize, partly due to the incompetence of Western governments. The numbers likely won’t be as bad as the simple extrapolations discussed in the videos would suggest, but that’s only because we’ll eventually end up taking some pretty extreme measures to isolate people. In other words, right now it looks like either there will be a massive number of cases, or a pretty big hit to the economy.
Even worse, the beneficial effects of warm weather are not as likely as I had assumed. The epidemic still may fade in the summer, but it’s probably not as overwhelmingly likely to fade as I had once assumed.
A few days ago, I did a post at Econlog arguing that we should not rely on the government to save us in a crisis. Watching those videos, it seems even worse than I had imagined. Our ability to deal with a crisis has absolutely collapsed since 1941. In 1941, we would have been building crisis hospitals just days after the news of the outbreak (as did the Chinese). Now it would probably take years to just get through the environmental approval process for hospital construction. Thousands of Americans will die because of government incompetence, perhaps tens of thousands.
Perhaps the bond market’s pessimism reflects an expectation that this will hurt the economy for the next two years, and by that time the economic distortions will be so large that there will be some hysteresis even beyond two years.
The big unknowns are the effects of summer, and the severity of the secondary surge in China as people return to work. I don’t consider the death rate to be a huge unknown; 0.5% to 1.0% is probably a ballpark estimate for the overall population of infected people. Nor is the number of hidden cases in the US a big unknown, it’s a few thousand. The effects of weather and the secondary surge in China are what to watch for.
Have a nice day!
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8. March 2020 at 11:21
thanks for the links. it’s difficult to imagine a bond market pricing in hysteresis effects that linger 10 years or 20 years but a stock market still at october 2019 levels and credit spreads still lower than early 2016. can we describe an equilibrium where rates across the real curve are expected to be very low even 10 yrs hence but isn’t also pretty terrible for credit and stocks? probably, but it doesn’t feel right, especially given the force of the
bond market moves. is it possible the bond market in pricing some strange scenario where the central bank does just enough qe to avoid a disaster, perpetually generating the segmented markets and portfolio balance effects everyone keeps writing about, but not enough effective signaling to jump us to a higher nominal growth equilibrium and (back to, post presumed slowdown) full employment? seems like that also threads the needle a bit too narrowly. it’s a bit of a strange moment.
8. March 2020 at 12:05
dlr, I see your point. However, if real interest rates fall sharply, then stock prices can only drop modestly even as future cash flows for corporations drop sharply. P/E ratios should be higher, where E is expected future profits, not current earnings.
8. March 2020 at 12:24
However, if real interest rates fall sharply, then stock prices can only drop modestly even as future cash flows for corporations drop sharply. P/E ratios should be higher, where E is expected future profits, not current earnings.
it must be my birthday. i get to tell you not to reason from a price change? maybe real interest rates on risk free assets (or perhaps negative risk given the term premium) are mostly falling because nobody wants to risk having less stuff in 20 years as opposed to a change in time preference.
in the summer of 2011, long term real interest rates quickly fell by 200 bps and the stock market declined significantly. In 2002, long term real interest rates fell by 200 bps and the stock market declined significantly. it can definitely happen.
now i get that i can read you to be saying that you were not talking about risk premia but overall real rates, since risk spreads are higher but not high enough to fully offset the rate decline. i’m just saying this is a bit of tautology when it comes to surprising co-movements in the risk and bond markets, and we normally do not act surprised when real rates and the stock markets both decline precipitously despite the possibility of a change in intertemporal preferences countering changes in expected returns on capital and risk preferences.
8. March 2020 at 12:36
Friday I saw the long bond for periods of time up over 9 points. Not seen that in 30 years. Implied vols were approaching financial crisis levels. Apparent stress in financing markets too. All seemingly consistent with impending doomage…
I thought this vid was also good just breaking down some simple math aspects of virus propagation and exponential growth.
https://www.youtube.com/watch?v=Kas0tIxDvrg
8. March 2020 at 14:11
dlr, Sure, it depends why real rates fall. But my point stands. It’s not implausible that this particular fall in real rates reflects expectations of lower real rates in the future.
8. March 2020 at 14:23
it is very irresponsible for you to opine about anything involving this crisis of health care. it shows a peculiar arrogance.
8. March 2020 at 14:34
“The first two videos effectively explain why things here and in Europe will get much worse than most people realize, partly due to the incompetence of Western governments.”
Hmmm.
The first video, thanks for posting it, but I would make a few points.
1. Both in his own his video, and in the Twitter feed that he goes through, the same one Tyler Cowen linked to I think yesterday, there is significant “larding.” I.e. he and she do not just make their points in a dispassionate fashion, but add some self-aggrandizing commentary of the “I know this stuff” and “I’m good at math” and “you should have listened to me” and “I was a voice crying in the wilderness” and “this has certainty implications for the future direction and understand of our society that may just happen to comport with my personal ideology and/or hobbyhorses” variety.
Maybe I’m being churlish to mention that, and maybe I’m the only one who sees it. But definitely an unSumnerian tone, on that score, if you ask me. I’m a little concerned that I’m not really seeing a “down the middle, just the facts” or neutral presentation and analysis, but rather something possibly affected by wishful (of a sort; I don’t mean they wish for a bad outcome) thinking.
2. To me, the general point that our “pandemic bureaucracy” was caught flat-footed is a banal point. If you’re surprised or don’t just take it as a given that any large US bureaucracy x chosen at random will be caught flat-footed by problem y with probability p, p >> 0, well, what other sorts of things might surprise you? A cloudless sky colored blue? Rom-coms where the couple gets together at the end? An anon/portly comment that isn’t overly long and hard to follow? [Wait, scratch that last one].
3. The “giving up” point that is made in the context of the already deleted EvergreenHealth web page may actually be unfair to them, if their intent was simply to protect their workers, *given* that they couldn’t test for coronavirus, which is my guess.
However, I don’t think there’s any indication that the towel has been thrown in on testing – why on Earth would there be? That makes no sense. UW Virology has come through to some degree now, and Bill & Melinda are planning to step in, and the second video says the tests are in the mail (and who wouldn’t believe an administration headed by DJT on that score?), so hopefully testing is going to ramp up very quickly.
And our governor, Jay Inslee is a “science guy,” right? You think he’s gonna let his state look bad in a science-oriented way? Guess again!
4. For all the “we get the math” triumphalism of the video and the Twitter feed, I would gently say, maybe they get the math, maybe they don’t.
For example he combines the “I don’t believe anything coming out of China” with the “the Chinese have obviously achieved a reasonably impressive level of containment” in a way that explains why we have the term “hand-waving” in our lexicon.
Anyway, I don’t feel I learned anything from these videos, at least not in comparison to the amazing (and lard-free) stuff by Muge Cevik, Trevor Bedford, et al, coming out on twitter. Yes, one scenario is outlined in dramatic fashion, but were we really unaware of that scenario? Maybe they’re doing us a service by focusing our attention, but that’s it.
8. March 2020 at 14:46
I agree close to 100% with Scott here.
The exponential growth curves appear exaggerated, this will not continue for long, but at the price of strong countermeasures.
First the Western governments were slow, but this could lead to case figures like in Italy, and then this will lead to reactions that are all that stronger. Italy is the playbook to watch.
Other commentators here called this a “pessimistic” scenario, well sorry, there are few plausible reasons why the Italian scenario should not occur in a comparable manner in countries like Germany and the US.
This could so blow up in Trump’s face.
Scott is nailing it even better in this comment:
https://www.themoneyillusion.com/movie-of-the-month/#comment-5394500
8. March 2020 at 15:24
Excellent analysis by anon/portly and by Christian List. My only contribution is to repeat China may be reporting ‘zero new cases’ because it’s faking the numbers. If the stock market believes China is faking numbers the DJ-30 will crash to 20k or 10k levels. Sumner is feeding the panic frenzy to get page clicks, which is fine with me, free speech and all.
@Sumner – “It’s not implausible that this particular fall in real rates reflects expectations of lower real rates in the future” – still beating that RatEx hobby horse? It’s also not impossible that the Tulip Mania was rational, and the 1987 US stock market crash was caused by some obscure proposed changes to the tax code. The Real Business Cycle people might even agree. But the more logical explanation is simply Shiller’s ‘animal spirits’, which explains 90% of all economics.
8. March 2020 at 16:31
I would not call this a try for page clicks. The only explanation (that ignores market factors) for a 30 year bond trading 90 bps is his hypothesis. Or some kind of bad fed that doesn’t do enough to hit a 2% inflation target. At this rate the 30 year will trade 0 by Friday.
My gut says that the rate market is struggling with an existing short base. Add in algo trading and quants and its a massive short squeeze.
We created 300k job last month and the economy was function with a 1.6% short-term rate. Now 80 bps thru that. That is far scarier than stocks being down 20%.
8. March 2020 at 16:43
What explains the extraordinary infectiousness and lethality of the Wuhan coronavirus, aka Covid-19?
Indian scientists analyzed the virus and concluded it had been created artificially.
And the Communist Party of China maintains its top virology lab….in Wuhan.
https://www.zerohedge.com/geopolitical/what-are-odds-timeline-facts-linking-covid-19-hiv-wuhans-secret-bio-lab
I would be afraid, very very afraid. The artificially created Covid-19 virus may not only be highly infectious, it may be designed to evolve and mutate in the future to exceedingly lethal forms.
8. March 2020 at 16:51
Too soon for eulogies?
“Washington(CNN)Sen. Ted Cruz announced Sunday he will self-quarantine in Texas after interacting with an individual who tested positive for the novel coronavirus at last week’s Conservative Political Action Conference.
Cruz, the first member of Congress to announce such a step, said in a statement he is “not experiencing any symptoms” but “out of an abundance of caution” will remain in Texas until a full 14 days after the interaction have passed.
The Texas Republican said his interaction with the individual consisted of a “brief conversation and a handshake.'”
—-30—-
That’s too bad. He had been an early supporter of nominal GDP targeting.
8. March 2020 at 17:06
10y below 50 bps and SPX down 4.5% in Sunday futures…
8. March 2020 at 17:43
Thanks Mark.
Anon/portly, I mostly agree, the tone is rather arrogant. (First video, not the second) But I see no problem with criticizing the US bureaucracy given that several Asian countries did far better. Yes, all sensible people have a rather low opinion of bureaucrats, but if we don’t criticize them how will they improve?
Does this make you wonder “What’s the plan if a solar flare knocks out our electrical system?”
Ben, You said:
“Indian scientists analyzed the virus and concluded it had been created artificially.”
Now why didn’t I think of that?
Garrett, Maybe the market watched that video.
8. March 2020 at 17:57
https://twitter.com/dwallbank/status/1236832993844420610?s=19
8. March 2020 at 18:06
ssumner:
“Nor is the number of hidden cases in the US a big unknown, it’s a few thousand.”
Probably over ten thousand. You have 2-3 deaths every day right now, which means that 200-300 people were getting newly infected every day 2-4 weeks ago (the average time it takes from contracting the virus until you die). Linear spread would mean at least a few thousand; but we know from China and Italy that it spreads exponentially when unchecked. So you’re really lucky if you still have less than ten thousand infections right now.
8. March 2020 at 18:22
Scott agreed,
America’s non meritocratic elite has had negative consequences for the country.
I wonder how different states are doing in handling the crisis. Texas for instance, has reported no deaths from the coronavirus yet, indicating a very low number of cases. Yet the liberal, cosmopolitan areas seem totally incompetent and unable to handle this crisis.
Who knows however, this may change.
Also to your point of the government being efficient in 1941 over today, that is entirely due to demographics. In those days, the entire federal government was run by competent White people, selected based on merit. Today’s federal government is selected by diversity and pity points. Even Whites in today’s federal government do not get there by skill, but by connections(E.G Trump’s federal government picks). Had America stayed the same in 1941, with a civil service exam, things would have been better. Had it maintained its demographics, situation would been enourmously improved.
https://www.fedweek.com/issue-briefs/demographics-of-federal-workforce-summarized/
Look at this report, no mention of skill, but minorities. Thank god China doesn’t listen to pro-immigrant/diversity people!
8. March 2020 at 19:02
Oil at $30 and change.
True, oil used per GDP unit is way down from previous decades.
But I think central bankers may wish to consider factors beyond “fighting inflation” when implementing policy…just a thought…for this year…..
I saw a sensible suggestion for a holiday on federal withholding taxes….
http://macromomblog.com/2020/03/08/what-should-the-government-do/
Helicopter drops executed through tax cuts is a good idea.
9. March 2020 at 03:13
Suppose health and life insurance companies collapse? A bail-out? If health insurers collapse, then hospitals collapse next.
The free-market solution? Mass euthanasia?
So…the federal government and the Fed bailed out the financial industry…but won’t bail out the healthcare industry?
Strange…shares in Humana, a large health insurer, have hardly been hit by the coronavirus scare…Anthem, another large health insurer, trading near all-time highs…
So, the stock market is saying health insurers will do better with huge hospital bills to be paid? Much higher than anticipated claims? Seems off….
9. March 2020 at 03:40
Either the stock markets are way off, or Moody’s is.
Moody’s Investors Service said on Sunday, taking into account COVID-19, “We have therefore revised our 2020 baseline growth forecasts for all G-20 economies. We expect these countries, as a group, to grow by 2.1% in 2020, 0.3 percentage point lower than our previous forecast. We have lowered our 2020 forecast for China’s growth to 4.8% from our previous estimate of 5.2%. For the US, we now expect real GDP to grow by 1.5% in 2020, down from our previous estimate of 1.7%.”
A drop in the US GDP growth in 2020 to 1.5% from 1.7%? That’s it?
9. March 2020 at 03:57
Until we have enough test results to establish a baseline of infection all discussion of the morbidity and mortality of COVID-19 is mere conjecture. I don’t mean to minimize this problem but a group of us who are retired biopharma folks have been discussing this for the past four weeks or so. There is very poor epidemiological data at present and some curious results such as the lack of morbidity and morality for those <20 years of age (mainly from Chinese data). This may be attributable to weak symptoms that did not warrant a healthcare provider visit.
We know that the elderly are most at risk. I've not seen any data that breaks this down by sex or by past history of smoking (high rates of smoking in China and Italy) or other lung co-morbidity. You cannot assess risk in the absence of this data.
Yes, the US dropped the ball on testing and should have piggy backed on the WHO test kit which was deployed quite rapidly (a number of US medical schools used those primers to develop testing for their own hospitals, showing that there was a viable alternative). The bigger problem has been the lack of ongoing research following the MERS and SARS outbreaks into antiviral targets and new vaccine approaches. We are in a position of doing Phase 1 safety trials on mRNA & DNA vaccines that have promise but unknown safety issues. This is the type of work that could have been done 3-4 years ago along with addressing production at scale which has not been addressed yet. The various target components of these types of corona viruses have been known for a while but there has been little done to examine what the best approach for an anti-viral drug is. We have one compound going into trials, Gilead's remesdivir, and fortunately it was studied before and the requisite toxicity studies have been completed. If it's effective, it can be quickly licensed.
It seems that we are hitting the perfect economic storm now with quarantines, possible collapse of the tourism industry, problems with global supply chains, and now a geo-political oil fight between Russia and Saudi Arabia. It the latter continues, the highly leveraged US energy sector will be in deep trouble even with low interest rates.
9. March 2020 at 05:27
you say monetary policy is not fiscal. so the fed announces a doubling of repo today in response to panic. what is repo, cash for assets. 21 dealers. why not for everyone, because the law won’t let the fed. but what about the people who will be cash short soon? can they repo their house, their car (as somewhere near face as i assume the fed allows for collateral), their future wages, their future contributions to society by having children (the surest way to overcome our aging problem)? no, they will suffer, albeit minimized to the extent social net helps. but how did that work out in gfc 2009? open your eyes.
9. March 2020 at 07:17
Alan Goldhammer:
“Until we have enough test results to establish a baseline of infection all discussion of the morbidity and mortality of COVID-19 is mere conjecture.”
Doesn’t the Diamond Princess data seem reliable? Everyone was tested, and a little less than 1% are dead now, several weeks after most would have been infected. A few more might die, and the demographic is much older than that of most countries; but countries differ greatly in demographics and quality of health already. Doesn’t it seem like a reasonable estimate for humans in general?
9. March 2020 at 13:04
“But I see no problem with criticizing the US bureaucracy given that several Asian countries did far better. Yes, all sensible people have a rather low opinion of bureaucrats, but if we don’t criticize them how will they improve?”
Well first of all what things are the most deserving of criticism? What I am seeing from the experts is “lack of funding for public health over an extended period of time” and the testing snafu. Part of the testing snafu is the problem with the kits, but another part is (or seems to be) the way testing was regulated. (UW Virology only started testing under the guise of doing “research,” I believe).
Yes, criticize them, but criticize them constructively and with nuance and with expertise and I would even add modesty and gentleness. Finger pointing and score settling and the like – especially so early on in the crisis – strike me as offensive and useless. It goes tribal, and when it goes tribal truth and nuance will eventually go out the window.
9. March 2020 at 13:13
My last comment doesn’t mean that all criticisms, however harsh and ungentle, are not on point. I thought this was a far tweet point from Angela Rasmussen, U. Columbia virologist:
https://twitter.com/angie_rasmussen/status/1236715180152635392
9. March 2020 at 13:59
yersinia, If you still have an open mind (which I doubt) read my new Econlog post.
anon/portly, I am criticizing the entire government. If the problem is that Congress never provided funds to prepare for a pandemic, then I include Congress in my criticism.
9. March 2020 at 16:09
To the earlier point about the P/E multiple of the market having to hold up as rates collapse… because the equity risk premium should only go so high…
A couple comments from this fund manager:
1) There is evidence that the “goldilocks” phenomenon is real. Meaning that equity prices inflate when interest rates are low, so long as the economy is perceived as healthy. 2% real GDP growth in the US, with steady +150k monthly employment figures, against a backdrop of 1.5% 10yr treasuries, was “goldilocks.”
2) During Goldilocks, because there is little fear, investors gravitate towards areas where they can get the best risk-adjusted returns. If you were confident that the economy was healthy, and likely to remain healthy (as 99% of people did at YE2019), you’d keep bidding up stocks as they were “cheap” vs alternatives. The VIX was telling us (wrongly, with hindsight) not to worry about risk.
3) Goldilocks breaks down when something is perceived as “wrong” with the economy. Look at Japan. Look at Europe. Stocks have held moderate multiples even though rates have been pinned to 0% for a long time. The 0% rates reflect a “problem”. Demographics being a significant component.
I suppose one could try to make a counter-argument about nominal rates vs. real rates. But, it gets a bit abstract. Equities are generally priced in nominal terms. With nominal inputs into DCF’s (nominal terminal growth, nominal required return, nominal risk free rate).
Lastly – I agree with the poster who made reference to quants / algos / positioning. Market movements in the short-term are a byproduct of a whole messy set of factors. The ivory tower view gets it more right over the long-term. In the short-term it’s a voting machine with participants harboring myriad interests and constraints.
9. March 2020 at 16:54
Jay, Japan and Europe have lower nominal growth rates, and fewer companies with strong potential.
9. March 2020 at 18:39
Here is a study which really helps to explain why the virus spreads so quickly.
https://www.statnews.com/2020/03/09/people-shed-high-levels-of-coronavirus-study-finds-but-most-are-likely-not-infectious-after-recovery-begins/
9. March 2020 at 19:19
Jay,
One can make a case that the reciprocal of the P/E ratio for a broad stock index should equal both the current NGDP growth rate and short term nominal risk-free rate, in monetary equilibrium. In that case, the equity premium is entirely due to a bias toward tight monetary policy, which is inherent with inflation targeting.
Monetary policy also often had a tight bias pre-mid 1960s, in the short run.
If this perspective is correct, monetary policy has mostly been too tight since the late 90s. The tech boom could have been a bit bigger, and there needn’t have been a crash.
It would imply a RGDP potential of about 4.5% then and about 3.5% since the Great Recession. Even this approach recognizes some secular stagnation.
To my knowledge, no economist finds this idea the least bit compelling, but their models don’t provide much agreement on even where unobservable variables were in retrospect, so one can’t call them very useful in this regard.
That’s one reason I think so many economists have expressed surprise at the extent to which long-term nominal interest rates have fallen during this crisis. I don’t think they appreciate that we’ve been in a depression since even before the Great Recession, overestimating secular stagnation. The closer we get to the ZLB with the current monetary policy regime, the less effective policy is expected to be, and that risk is a drag on growth even when rates start moving up.
Economists have also expressed surprise at how low the unemployment rate has gone, but I’ve said for years that it would continue going lower.
None of what I’ve seen is surprising me, yet my perspective is the one deemed unworthy of consideration.
10. March 2020 at 07:14
Scott, exactly! There’s something “wrong” with Europe and Japan.
I think your argument is that the lower multiples can be entirely explained by the lower growth outlooks. That’s definitely a big component.
But even if you assumed a MRP of 5%, and a rf of 0%, and a terminal growth rate (in $ of FCF) of 1% in aggregate, you’d expect stocks in Europe and Japan, in theory, to trade at ~25x based on standard CAPM-type models. Over the last decade, Europe has traded at an average P/E of 13x. At 13x P/E, with the other assumptions noted above, the market is baking in an ERP of ~8%. And it’s even higher if you assume terminal nominal growth is better than 1%.
8% is something we just don’t normally see in the U.S.
In late 2017, when the 10-year was around 2.5%, and Terminal Growth assumptions were generally around 3.0% (nominal, see Aside below), and the market was trading a bit north of 18x consensus forward earnings, the ERP was around 6.25% if I didn’t fat finger the calculation. Still high by historical US standards, but meaningfully different from Europe.
(Aside: I don’t know whether 3% is the right nominal terminal growth rate or not for time periods 20 years out, but almost all Wall Street models and buy side models I’ve seen are reluctant to model terminal growth above 3.5%, for the large majority of companies… I don’t want to get into a debate about the exactly right nominal growth rate 20 years hence, but I agree again that it’s something we could debate).
To conclude, I’m sticking with the argument that based on my experience investing in the equity markets – all else equal – the equity risk premium is higher in countries with greater structural problems.
But, dis-entangling the exact contribution from elevated MRP vs. lower growth assumptions is art as well as science. There are definitely scenarios one could draw to make a counter-argument to what I’m saying. e.g. if you believed Europe’s terminal growth rate is actually -0.5% in nominal terms.