“Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.”
― Karl Popper
“… three critical goals: First, we must detect outbreaks that occur anywhere in the world; second, we must protect the American people by stockpiling vaccines and antiviral drugs, and improve our ability to rapidly produce new vaccines against a pandemic strain; and, third, we must be ready to respond at the federal, state and local levels in the event that a pandemic reaches our shores.
To meet these three goals, our strategy will require the combined efforts of government officials in public health, medical, veterinary and law enforcement communities and the private sector. It will require the active participation of the American people. And it will require the immediate attention of the United States Congress so we can have the resources in place to begin implementing this strategy right away.
The first part of our strategy is to detect outbreaks before they spread across the world. In the fight against avian and pandemic flu, early detection is our first line of defense. A pandemic is a lot like a forest fire: if caught early, it might be extinguished with limited damage; if allowed to smolder undetected, it can grow to an inferno that spreads quickly beyond our ability to control it. So we’re taking immediate steps to ensure early warning of an avian or pandemic flu outbreak among animals or humans anywhere in the world.”
George W. Bush
President Outlines Pandemic Influenza Preparations and Response
11-1-2005
The words of George W Bush went unheeded. Policy considerations of the post 9/11 era faded as the US engaged in drawn-out overseas conflict. Stockpiling of protective gear was not a priority issue.
It is possible that stay at home orders did more economic damage than they gained in pandemic spread reduction. We may now be entering a mask / goggles phase that will hopefully buffer the spread. There are some indications that everyone wearing masks will significantly reduce the transmission of the virus.
The origin story of quarantine is not reassuring as the science behind these extreme measures is unable to calculate the economic consequences to public health. The NYT noted on 4-22-20; “Fourteen years ago, two federal government doctors, Richard Hatchett and Carter Mecher, met with a colleague at a burger joint in suburban Washington for a final review of a proposal they knew would be treated like a piñata: telling Americans to stay home from work and school the next time the country was hit by a deadly pandemic.”
Social Distancing for Coronavirus Has a History
Shelter in place and business shutdowns were vigorously debated during the GW Bush presidency. The arguments focused on a balance between pandemic mitigation and the economic consequences of extreme measures.
The COVID-19 crisis of 2020 has spawned volatility in markets and society at large. Defining this event and the vast ripples that have cascaded across the globe will take many years. Government policies have been deployed unevenly around the world while echoes from the 1960s civil rights movement have drawn societal focus on race and police tactics in the US and globally.
US history of civil struggles and setbacks loom as society lurches into realization of the inequities that are now broadcast via ubiquitous camera phone videos. The dilemma of policing and racial inequality has converged across YouTube, social media and the 24/7 news cycle. Hope rises that this ray of video sunlight will foster equality and elimination of police brutality.
The H3N2 virus (often referred to as the Hong Kong Flu) of 1968 is a useful analogy yet very different to this current health crisis. The virus wrought havoc in Europe. The US was impacted dramatically, yet this pandemic of 52 years ago is relegated to a footnote of history. It imposed global damage and suffering for two years. Public policy in the late sixties was focused elsewhere and policy reactions were muted. The virus faded after having a two-year run through the global population.
Observing the daily drumbeat of negative news, investors can be left to wonder how the market has seen a brutal first quarter downswing pushed back upwards by a historic 2nd quarter upswing. How is this possible? The global pandemic is likely to take 18-36 months for normalcy to resume, yet markets seem to be rising in anticipation of robust economic times.
This market upswing is not as irrational as it may seem. The cheap money created by central banks must be positioned while bargains are available. Ironically, the “cheap” prices created by the initial selling have been bid up rapidly. There is an investor saying, “low prices are the cure for low prices”. There is little precedent for the rapidity in Q2 2020 that those low prices were “cured” via vigorous buying, particularly in technology and areas thought to be beyond the damage of the pandemic.
The market tends to “overshoot” on the downside and the upside. The historic gains of the recent quarter may have brought trading to levels that are simply too high. Buying demand reacts rapidly, while economic changes take much longer to reveal themselves.
The action of central banks to cut interest rates to zero is fueling demand for yield and potential for growth. One of the great challenges to monetary policy is the unintended consequences of fueling market bubbles with cheap money and low or zero interest rates.
Ultra-low interest rates have been impacting markets since 2008. The United States Federal Reserve has led a global effort to keep rates down. It is impossible to forecast the consequences of these actions as we live in an era of massive growth in the money supply. The hope here is that we are becoming more adept as a society at buffering economic downswings. The fear is that by trying to guide the economic cycle, the cleansing and market discipline of downswings will diminish.
This year is a stark reminder of the unlikely odds of timing the market correctly. Tactics other than courageous buy and hold for the long term are unlikely to produce greater results. Markets are in the midst of a year that has shown great resilience in the face of unpredictable societal crisis.
The sturdiness of the market has been greatly lifted by Federal Reserve action that stated, and then delivered, “whatever it takes”. The Fed announced unlimited money would be available to buffer the fear, shutdowns and uncertainty created by the pandemic.
Unlimited quantitative easing is a new economic force that is unique to our times. There has been a significant shift in the philosophy of the federal reserve in this post 2008 era of low-cost money. It is likely that “moral hazard”: lack of incentive to guard against risk where one is protected from its consequences, will become a wider concern. The fiscal and monetary narrative has remained one of intervention and we will deal with the consequences later.
Buy and hold strategies have experienced a first half of the ages. 2020 markets began by building on robust gains of 2019. After 2/19/20 the COVID-19 downswing began to unfold. Prices then moved lower at a more rapid pace than almost any time in modern market history.
The Federal Reserve then began a series of the most aggressive steps in the history of central banking. The market fears of a modern depression quickly quieted, and bargain hunting pushed the market up as rapidly as it had declined.
The timeline of Federal Reserve actions for 2020 illustrates the dramatic actions taken thus far:
Tuesday January 28, 2020 – Wednesday 29, 2020
The Fed holds its first policy meeting of the year. Policymakers see 2020 as likely a year of steady growth with continued strength in the job market, and Fed Chair Jerome Powell expresses cautious optimism, in contrast to a rocky 2019 in which the Fed cut rates three times to blunt the effects of the Trump administration’s trade war with China.
Wednesday February 19, 2020
The S&P 500 closes at a record high of 3386.15.
Friday February 28, 2020
Markets report largest single week declines since the 2008 Financial Crisis
In an abrupt turn, Powell releases a short statement pledging to “act as appropriate” in the face of economic impacts from the coronavirus outbreak as stock market losses accelerate, risk premiums on corporate bonds widen, and the U.S. Treasuries market is hit by deep illiquidity.
Monday, March 2, 2020
The Fed holds an emergency meeting by video conference and unanimously decides to cut interest rates by 50 basis points as “a clear signal to the public that policymakers recognized the potential economic significance of the situation and were willing to move decisively.” The cut is announced on the morning of Tuesday, March 3.
Sunday, March 15, 2020
After another emergency video conference, the Fed slashes rates by 100 basis points to near zero, reintroduces forward guidance, restarts large-scale asset purchases, and launches coordinated swap lines with five major foreign central banks, among other measures. One policymaker dissents. The Fed says the pandemic will take a “toll on U.S. economic activity in the near term” and makes clear it is “prepared to use its full range of tools to support the flow of credit to households and businesses.”
Wednesday March 18, 2020
The U.S. Treasury and Internal Revenue Service (IRS) announce non-corporate tax filers can defer any owed income up to $1 million until July 15, 2020, without penalties or interest.
Thursday March 16 – Tuesday March 31, 2020
The Fed launches a range of measures to increase liquidity in financial markets and promises unlimited, open-ended large-scale asset purchases, including purchases of corporate and municipal bonds.
Thursday April 9, 2020
The Fed rolls out a $2.3 trillion emergency lending effort to bolster local governments and small and mid-sized businesses.
Timeline: Fed’s response – pandemic downturn vs financial crisis
The US fiscal reaction has also been unprecedented. Checks to the public where the opener and we may see more to come. For a complete catalog of these unprecedented actions, see State Fiscal Responses to Coronavirus (COVID-19)
During challenging times it can be comforting to look to Warren Buffet statements of the past:
“Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit had reversed his views on the market.”
— 1996 letter to shareholders
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.”
— 1988 letter to shareholders
Studying historical freak-outs is a useful tool in retaining courage and composure. The late sixties have so much to reveal about this arduous journey of the USA. The period from 1965-75 was filled with so many dramatic and dire events one could spend years studying without ever exhausting the lessons to be learned. Below is an excerpt from a publication titled “The Limits To Growth”.
“A series of early meetings of the Club of Rome culminated in the decision to initiate a remarkably ambitious undertaking — the project on the predicament of mankind.
The intent of the project is to examine the complex problems troubling men of all nations: poverty in the midst of plenty; degradation of the environment; loss of faith in institutions; uncontrolled urban spread; insecurity of employment; alienation of youth rejection of traditional values; and inflation and other monetary economic disruptions.”
The Limits to Growth. A report for the Club of Rome’s project on the predicament of mankind.
This was part of an eco / overpopulation forecasting punditry that foresaw a dire future for mankind. The vision was overpopulation and environmental calamity as man’s destiny. I most recently wrote of this in my commentary that discussed Paul Ehrlich and his famous book, The Population Bomb.
https://adviceman.net/market-comment-q1-2015/
These warnings have yet to be proven accurate and the end of the world has been continuously postponed. Wildly inaccurate predictions of the past can help investors place current gloomy forecasts in the proper perspective. The concept of mankind’s “limits” is continually being proclaimed while innovation roars ahead.
The New York Times Book Review from April 2, 1972 stated:
“The Limits to Growth” is a product of an interdisciplinary M.I.T. team led by Dennis Meadows. It is financed and publicized as part of the “Project on the Predicament of Mankind,” an activity of the Club of Rome. The Club of Rome is a four‐year‐old international organization of 75 technocrats and businessmen self described as an “invisible college” dedicated to probing “the complex of problems troubling men of all nations,” including poverty, degradation of the environment, alienation of youth, rejection of traditional values, and monetary disruptions. These “seemingly divergent” problems are, says the Club, in reality part of a single “world problematique,” which can now be analyzed with the help of computers. Using techniques developed by M.I.T. systems‐engineer Jay Forrester, the Meadows team claims to have limned the underlying fallacy of industrial expansion.
The times review goes on at length to excoriate the book and the pseudo-scientific cloak of the work. The accusation of flawed assumptions has been proven to be the case as the predictions have never come close to being realized. Nonetheless, The Limits To Growth went through numerous printings and sparked a prodigious debate that continues to this day.
This material can help investors step back from the perplexing dynamics of COVID-19 and the challenges continually faced here in the real world. The transcendence of nature and all its challenges is what defines mankind.
Like past messages about economics or social policy, the daily news flow will be filled with noise and confusion. Attempts to make sense of it can lead to anxiety and loss of conviction for what will be the best outcome over the next two or five years and beyond. This is likely to be an 18-36 month event that does not result in a changed world.
The economy is being impacted by the pandemic in infinite ways, yet the flexibility of the virtual tools invented over the last 15 years has created robust functionality that allows significant productivity. Telemedicine, virtual classrooms, engineers working at home terminals are just a few examples of remote work that allows economic life to retain its heartbeat.
The global economy is flexing to adapt to the pandemic. At the same time, many hotel, entertainment, sports, and restaurant businesses are comatose. The workers victimized in these industries will either wait it out or need to migrate to parts of the economy that are functioning. There is immense damage, yet the world is grinding forward. Vaccine and treatment news continue to offer hope. Upside surprise in these areas has the potential to change everything quickly.
Hindsight bias is an investor tendency and psychological phenomenon where people convince themselves after events that they had accurately predicted those very actions in advance. This bias can develop false confidence that other events can also be predicted. Hindsight bias is studied in behavioral economics as it is particularly destructive to rational financial and investment decisions.
Those that saw the initial news regarding COVID-19 as a great threat to humanity may now believe they possess predictive abilities as to what will happen next. The risks of this mindset are that it ignores the impossibility forecasting accuracy. Hindsight errors ignore the predictions that do not prove to be accurate. SARS or Ebola may have also been greatly feared, yet pandemic did not occur. As we can witness in the dire predictions in projects like “The Limits To Growth” worst case scenarios are usually subverted by resilience, innovation and adaptation.
9/11/2001 generated massive volumes of prediction, most of which were inaccurate and have faded into the dustbin of useless punditry. During that time there were countless proclamations regarding a future where the world was altered. The event was a human catastrophe and the consequences are still being felt today yet making significant portfolio modifications during that time was unlikely to be beneficial. The world has moved forward, and the nihilist death cult of Al Qaeda has been dramatically diminished if not rendered irrelevant.
We are now entering the masks and goggles phase of the pandemic with little grace. The messaging on this issue was at first contrary to the utility of masks in personal protection. That gave way to politicization of masks direct from the President. In surreal fashion, numerous leaders and the “man in charge” himself have broadcast conflicting signals on the crucial behavioral changes and protective gear that must be worn by everyone.
Looking to history for lessons, rather than to deceive oneself via delusion about predictions is crucial. This study offers reassurance that external shocks force adaptation and innovation that ultimately provide a new path for growth and potential reward for investors.
The challenges of civil rights and the journey of Black Americans has taken center stage during the pandemic. These challenges to American society are yearning for progress, not only towards what is morally right, but also to our better economic future as a people. The LBJ civil rights legislative actions are a fascinating era for viewing the past struggle and possible future scenarios.
Nixonland by Rick Perlstein is an incredible book that illustrates the era of Federal legislative activism at its highest level. The list is amazingly long; Civil Rights Act of 1964,War on Poverty, Medicare, Medicaid, Housing Act, Voting Rights, Immigration Reform Law.
Nixonland: The Rise of a President and the Fracturing of America
Yet President Lyndon Johnson DID NOT run for re-election. It is difficult to separate his political implosion from the turmoil and difficult policy decisions driven by the Vietnam War. Whatever the cause of the collapse, the push for progressive Federal action was met with backlash. The vision of “The Great Society” was dramatically impacted by the shifting views of the American public from progressive bloom to craving for conservative nostalgia.
The late John Kenneth Galbraith, another leading critic of the Vietnam War, has called for “historical reconsideration” of the Johnson Presidency:
“In the New Deal years ethnic equality was only on the public conscience; in the Kennedy presidency it was strongly urged by Martin Luther King and many others.…It was with Lyndon Johnson, however, that citizenship for all Americans in all its aspects became a reality…[O]n civil rights and on poverty, the two truly urgent issues of the time, we had with Johnson one of the greatest changes of our time.…The initiatives of Lyndon Johnson on civil rights, voting rights and on economic and social deprivation…must no longer be enshrouded by that [Vietnam] war.”
The acts of legislation passed during the Lyndon Baines Johnson administration
For those that allow recency bias to shade their thinking, this is a great historical example of how trends break down. This is applicable to all types of movements; as my Dad used to say, “it is until it isn’t”. Hoping here for greater political unity for the country, that may be closer than it seems.
Recent issues that previously rattled the market now barely register. There has been an escalation of trade tension with China as this strange social distancing election season beckons. It seems that claiming toughness towards China is a winner politically. The trend towards de-globalization has been dramatically accelerated with global travel effectively halted and vigorous talk of bringing critical manufacturing back on shore.
The consequences of slowing or reversing globalization will be driving markets in ways that are impossible to anticipate. The 2020 election season is being muted by the call of social distancing and general reluctance of the public to gather in large groups. It is disturbing to hear accusations that the voting methods in the United States are subject to “rigging” or fraud.
The positives in development of virtual work are likely to be the lasting benefits of this struggle against the invisible enemy of COVID-19 and the graphic images of police brutality. Positive surprises on both fronts may await us. Stay patient, positive and remain invested in a future that is likely much more vibrant than we can imagine today.