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Thursday 26 March 2020


Oops, Apocalypse
The pandemic that’s upon us is – obviously – a complete surprise, one that couldn’t be planned for. Understandably governments are reacting in real-time to an unfolding threat in the best way that they can. It’s – as they say – a Black Swan event.

Only – it isn’t. Pandemics are not unknown unknowns, they’re known unknowns. Just as in 2008 when governments had started to forget the lessons of the Great Depression so they have forgotten the lessons of the Spanish ‘flu pandemic of 1918. History will not be kind.

Flu is Inevitable
The great, but sadly late, Hans Roslen identified a global pandemic as one of the main threats to humanity in his must-read book Factfulness:
"Serious experts on infectious diseases agree that a new nasty kind of flu is still the most dangerous threat to global health ... we need the World Health Organisation to remain healthy and strong to coordinate a global response."
The second highest funder of WHO is not a government, it’s the Bill and Melinda Gates Foundation. The latest proposal from the US – currently  the largest donor – would cut its contribution by half. Expecting other countries to pay more into the world’s health police force is reasonable – but proposing to cut existing contributions seems a tad shortsighted.

Flu is Really Inevitable
In 2012, Vaclav Smil noted in Global Catastrophes and Trends: The Next 50 Years that, based on the evidence of previous pandemics, it was highly probable that we would have another one before 2021 and it was as close to certain before 2050. Overall, Smil is frankly pessimistic, noting that a global pandemic will be far-reaching in effect and will not be over in a short space of time:
"But the event may not be over in six months, as substantial mortality could continue during the second season, and many cities and countries may find it particularly difficult to cope with such a second wave."
One positive note – and I really don’t consider it positive – is that Smil’s worst case analysis is based on an assumption that the disease will have the same age related mortality as Spanish flu in 1918. That primarily killed young people. Covid-19 mainly kills the old – which reduces the overall economic effect but doesn’t actually make me feel any happier, being at the higher end of the age scale. Still, the young will inherit, if not the Earth, the tattered remains of my portfolio.

Media Madness
In particular, Smil notes that the psychological consequences of dealing with a pandemic may be almost as bad as the physical ones. Knowing that the disease is coming can lead to feelings of helplessness and fear – and as he says:
"And what would 24-hour nonstop news media, so adept at flogging a few accidental deaths to all-day marathons of despair and end-of-the-world comments, do with so many deaths that would just keep coming, day after day, week after week? Can we foresee how the financial markets would react to such massive and indiscriminate dying?"
These points are well made – focusing on the grim daily updates from global media is not constructive or healthy, the press are unbelievably good at sensationalizing bad news. As for financial markets – well, I think Smil is wrong. Inhumane they may be but they – in their own fashion – calculate the odds of the economic impact of human death in the same way that they factor in any other crisis.

Underlying all of this rhetoric is the evidence that a pandemic – probably flu based and likely to cause mortality at the levels we’re seeing with Covid-19 – is not an outlier. Based on what we know it was almost certain it would occur sometime before 2050 and highly likely before 2021. Given that, the relatively lack of unpreparedness for an airborne virus is, well, disappointing.

Economic Consequences
As far back as 2005 the Congressional Budget Office analysed the economic impact of a flu pandemic. They were specifically focused on a bird flu outbreak but their worst case mortality rates are startlingly similar to those projected from the UK’s recent modelling for coronavirus – 90 million sick Americans and 2 million deaths. In that scenario the CBO came up with some economic impacts:
"Nonessential activities that required social contact would be sharply cut, which would lead to significant declines in retail trade. People would avoid public places, such as shopping malls, community centers, places of worship, and public transit. Attendance at theaters, sporting events, museums, and restaurants would decline. It seems likely that many schools would close, and even if they did not, attendance would fall dramatically as parents kept their children at home. In either event, large-scale school closings would lead to a spike in workplace absences because parents would stay home to care for their children even if they were not sick."
Notably they point out that if the pandemic primarily affected either the young or the old it would have little long term effect on GDP. Not much comfort for me, but probably a relief for most of you.

Winners and Losers
Overall the analysis showed huge impacts on hotels, restaurants and recreational activities, significant impacts on all travel related businesses and virtually no impact on utilities, information, education, business services and financial services. Healthcare was the only sector that was positive under any pandemic scenario.

Sectors that they expected to see only minor impacts included agriculture, mining, construction and manufacturing. This, of course, was before widespread globalisation so the analysis didn’t include the potential effects of widely distributed supply chains. But, to a reasonable approximation, that looks like a pretty good summary of where we are today.

OK - In The Long Terms
In summary – a pandemic was inevitable, there should be no excuses accepted from politicians. However, there are limits to what preparation was possible given the unknown timing and virulence of the disease.

Beyond this, the long term impacts are likely to be minimal as the age profile of people dying is outside of the main economic workforce (if that sounds unfeeling, remember I’m up there myself). In the short term, dips in prices of the sectors that are likely to be relatively unscathed are opportunities to top-up. In other areas, if you fancy you can pick the survivors, there's lots of money to be made. If you’re brave – or foolish.

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