The Surreal Weekend
The world has changed over the past few weeks in ways that are likely to leave lasting scars for years to come. In the United States, the atmosphere can only be described as surreal. The Coronavirus pandemic has almost completely consumed all the oxygen in the mainstream media and on social media yet, as of the weekend of March 14-15, there are still plenty of people out and about celebrating St. Patrick’s Day with an attitude that can only be summed up as “carpe diem”, or to use its modern equivalent: “you only live once”. Young people, who have probably been looking forward to spring break for months, flocked to traditional hot spots like Ft. Lauderdale, seemingly oblivious to the risks. The scene repeated in many major cities. YOLO.
Although the statistics at this point are constantly in flux and are heavily dependent on accurate reporting, it has been apparent for weeks that Coronavirus is most deadly for the elderly and those with pre-existing medical conditions. The limiting factor for death rate statistics at this point is that different countries have wildly different rates of testing and both the numerator (number of deaths correctly attributed to Coronavirus) and the denominator (number of cases of Coronavirus accurately diagnosed) can be incorrect. However, the death rate for those under fifty is believed to be well under one percent.
Does this mean that young people should not worry about contracting Coronavirus and spreading it to other young people? Clearly, those out partying this weekend feel that way, and many of them might just not know any better. No harm, no foul, right?
Clearly, this attitude is wrong on many levels. For one thing, Coronavirus may carry long term health consequences that we do not yet fully understand. However, of more immediate concern is the overall rate of spread within communities because the contagion will necessarily impact older and vulnerable people the more it spreads through the country.
While naive ignorance is not an excuse, it is at least understandable that many younger people might feel that they are not doing any harm. However, plenty of people who have access to good information and should know better are perpetuating the idea that it is perfectly acceptable to risk contracting the virus and spreading it to others. Thirty year old Katie Williams, a Nevada politician, had the following to say in response to a tweet by Alexandria Ocasio-Cortez:
This type of attitude can be described as nothing other than sociopathic and should, in any rational world, end a political career. As Nassim Nicholas Taleb wrote in a paper published today, people who take this attitude are risking the overall safety of society based on a narrow view of their own immediate self-interest:
Hence one must “panic” individually (i.e., produce what seems to an exaggerated response) in order to avoid systemic problems, even where the immediate individual payoff does not appear to warrant it.Ethics of Precaution: Individual and Systemic Risk
It is important to avoid condemning an entire generation for the selfish actions of certain members of the group and there are no doubt plenty of responsible young people who are not out partying in an oblivious manner, but they might be less visible. Young people out partying are going to take photos and post them to social media. The young person at home reading a book will not post photos of his or her evening. As Hanlon’s Razor suggests, we should not attribute to malice what can be more easily explained by neglect or stupidity.
It is considerably more difficult to understand the behavior of politicians who, contrary to the opinion of experts such as Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, are urging people to go out to restaurants and bars. For example, Rep. Devin Nunes, in the video below, encourages Americans to visit restaurants and bars this weekend, seemingly oblivious to the risk of community spread:
What is going on?
In a rapidly changing situation, there is bound to be confusion and a cacophony of contradictory opinions and information, but we have the benefit in the United States of seeing how the Coronavirus epidemic unfolded in other countries, such as South Korea and Italy. It strains credulity to think that Rep. Nunes is unaware of the risk of community spread. What could possibly motivate such poor advice?
The medicine we need to take in the United States is harsh and unpleasant in the short run. Shutting down non-essential economic activity is extremely painful for small businesses and individuals who have little margin of safety in their finances. Large companies like Apple can close all of their retail stores and continue to pay hourly employees without much of a blip to the health of the balance sheet. The local restaurant with slim profit margins has no similar luxury even if the owner wants to help workers. Even worse, those who are in the “gig economy” – individuals such as Uber drivers, dog walkers, musicians, food delivery workers, among many others, will see their incomes evaporate overnight with a shut down.
The House of Representatives passed Coronavirus legislation early Saturday morning to alleviate some of the economic hardship that is sure to unfold over the coming days. With provisions such as increased access to sick leave and free availability of testing, the legislation is likely to pass the Senate and be signed by President Trump within the next few days. Other proposals have been made including a temporary payroll tax cut advocated by the President and a trial run of the “Universal Basic Income” proposed by former Democratic Presidential Candidate Andrew Yang.
Some combination of these proposals could alleviate the short term temptation to continue economic activity that risks spreading contagion throughout the country. As I wrote two weeks ago in Thoughts on the Coronavirus Correction, a one-time shock to an individual company does not necessarily imply that the intrinsic value of the company has fallen by very much provided that the long term trajectory of earnings is not somehow diminished permanently.
What is true at the micro level for individual companies is also true for the macroeconomy as a whole. Economists are just now coming to the realization that the United States economy is likely in recession. It seems like a foregone conclusion that real GDP in the first quarter will be below last year’s level. How could it be otherwise with the level of economic interruptions we have seen to date, to say nothing of what the next two weeks might have in store? With a recession defined as two consecutive quarters of GDP decline, it seems very likely that the downturn will extend into the second quarter and trigger an “official” recession.
Whether the recession extends beyond the first half of 2020 is impossible to predict at this point, but the chances of a second half recovery will be greater if we are able to successfully halt the spread of Coronavirus over the coming weeks. This will require tough medicine of a type that few Americans have ever experienced, and leaders willing to put short term considerations aside, up to and including the risk of losing elections in November.
In the long run, the United States economy will come back, as it has from countless panics and stresses in the past. Individual companies, however, may perish during this period if they are not robust enough to withstand a period of stress. In some cases, over-leveraged businesses will be reorganized in bankruptcy with creditors becoming the new equity owners. In other cases, liquidations will occur.
From an investment standpoint, it is important to review holdings with a fresh pair of eyes, but to avoid panic. Market quotes from three weeks ago are not relevant to today, nor are estimates of intrinsic value that were made prior to the crisis. Investors should update their assessments of intrinsic value and evaluate holdings in the context of current quotes. Being a long term investor does not mean one should not constantly update and reassess when significant events occur.
Coronavirus and the economic dislocations to come will certainly be one of the most significant financial events of our lifetimes. But more important than financial difficulties, it could very well become a tragic health episode for many of us in the coming weeks. Hopefully citizens and the politicians who represent us will rise to the occasion.