“Democracy isn’t liberal or conservative, not left or right — at least it isn’t supposed to be. Millions of Americans currently believe that democracy isn’t working, or even that it isn’t worth saving. The battle to prove them wrong isn’t over, it’s just begun.” ~ Garry Kasparov
George Orwell reviewed Hitler’s Mein Kampf in March 1940. His last paragraph is particularly revealing:
“Also he [Hitler] has grasped the falsity of the hedonistic attitude to life. Nearly all western thought since the last war, certainly all ‘progressive’ thought, has assumed tacitly that human beings desire nothing beyond ease, security and avoidance of pain. In such a view of life there is no room, for instance, for patriotism and the military virtues. The Socialist who finds his children playing with soldiers is usually upset, but he is never able to think of a substitute for the tin soldiers; tin pacifists somehow won’t do. Hitler, because in his own joyless mind he feels it with exceptional strength, knows that human beings don’t only want comfort, safety, short working-hours, hygiene, birth-control and, in general, common sense; they also, at least intermittently, want struggle and self-sacrifice, not to mention drums, flags and loyalty-parades. However they may be as economic theories, Fascism and Nazism are psychologically far sounder than any hedonistic conception of life. The same is probably true of Stalin’s militarised version of Socialism. All three of the great dictators have enhanced their power by imposing intolerable burdens on their peoples. Whereas Socialism, and even capitalism in a more grudging way, have said to people ‘I offer you a good time,’ Hitler has said to them ‘I offer you struggle, danger and death,’ and as a result a whole nation flings itself at his feet…..”
David Wood suggests that society may have eliminated many of the challenges that they faced 80 years ago but this makes us even more vulnerable today. If people don’t have real struggles to overcome, or enemies to fight, they will invent them…..
Conservative news channel Fox News have called the election in favor of Joe Biden.
Trump and a few die-hard supporters insist that they will mount a legal challenge to overturn the election result. Here is a quick assessment of his chances by Neal Katyal, professor of National Security Law at Georgetown University and former US Acting Solicitor General (2010-2011):
There were 128,412 new COVID-19 cases on Saturday, November 7, bringing the total number of Americans infected to just under 10 million.
This has the potential to overload the health care system and shut down the economy. We need to ignore the sideshow and focus on what can be done to stop this. Before it’s too late.
Quote for the Week
Crisis does not change who you are.
Crisis reveals who you are.
~ Jakub Janda
An economic depression requires a 10% (or more) decline in real GDP or a prolonged recession that lasts two or more years.
The current contraction, sparked by the global coronavirus outbreak, is likely to be severe but its magnitude and duration are still uncertain. After an initial spike in cases, with devastating consequences in many countries — both in terms of the number of deaths and the massive economic impact — the rate of contagion is expected to drop significantly. But we could witness further flare-ups, as with SARS.
Development of a vaccine is the only viable long-term defense against the coronavirus but health experts warn that this is at least 12 to 18 months away — still extremely fast when compared to normal vaccine development programs.
The economic impact may soften after the initial shutdown but some industries such as travel, airlines, hotels, cruise lines, shopping malls, and cinemas are likely to experience lasting changes in consumer behavior. The direct consequences will be with us for some time. So will the indirect consequences: small business and corporate failures, widespread unemployment, collapsing real estate prices, and solvency issues within the financial system. The Fed is going to be busy putting out fires. While it can fix liquidity issues with its printing press, it can’t fix solvency issues.
There are three key factors that are likely to determine whether countries end up with a depression or a recession:
1. Leadership during the crisis
Many countries were caught by surprise and the rapid spread of the virus from its source in Wuhan, China. South Korea, Singapore and Taiwan were best prepared, after dealing with the SARS outbreak in the early 2000s. Extensive testing, tracing and an effective quarantine program helped South Korea to bring the spread under control, after initially being one of the worst-hit.
South Korea: Initial Cases of Coronavirus COVID-19 (JHU)
The World Health Organization (WHO) did little to help, delaying declaration of a pandemic to appease the CCP. Economic and political self-interest has been the root cause of many failures along the way, including China’s failure to alert global authorities of the outbreak (they had already shut down Wuhan Naval College on January 1st). But this was aided by failure of many leaders to heed warnings from infectious disease experts in late January/early February. When they finally did wake up to the threat, many were totally unprepared, resulting in a massive spike in cases across Europe and North America.
Testing is a major bottleneck, with the FDA fast-tracking approval of new tests, but production volumes are still limited. Abbott recently obtained FDA approval for a new 5-minute test kit that can be used in temporary screening locations, outside of a hospital, but production is currently limited to 50,000 per day. A drop in the ocean. It would take 6 months to produce 9 million kits for New York alone.
USA: Initial Cases of Coronavirus COVID-19 (JHU)
UK: Initial Cases of Coronavirus COVID-19 (JHU)
Germany: Initial Cases of Coronavirus COVID-19 (JHU)
Italy: Initial Cases of Coronavirus COVID-19 (JHU)
Widespread testing and tracing, social-distancing, and effective quarantine methods have enabled some countries to flatten the curve. Australia may be succeeding in reducing the number of new cases but inadequate testing and tracing could lead to further flare-ups. One of the biggest dangers is asymptomatic carriers who can infect others. Flattening the curve is the first step, but keeping it flat is essential, and requires widespread testing and tracing.
Australia: Initial Cases of Coronavirus COVID-19 (JHU)
The curves for North America and Europe remain exponential. They may even spike a lot higher if hospital facilities are overrun. Success in flattening the curve is critical, not just in minimizing the number of deaths but in containing the economic impact.
2. Economic rescue measures during the crisis
Rescue measures amounting to roughly 10% of annual GDP have been introduced in several countries, including the US and Australia, to soften the economic impact of the shutdown. More Keynesian stimulus may be needed if the coronavirus curve is not flattened. Layoffs have spiked and many small businesses will be unable to recover without substantial support.
3. Economic stimulus after the crisis
This is not a time for half-measures and the $2 trillion infrastructure program proposed in the US is also appropriate in the circumstances. Australia is likely to need a similar program (10% of GDP) but it is essential that the money be spent on productive infrastructure assets. Productive assets must generate a market-related return on investment ….or generate an equivalent increase in government tax revenue but this is much more difficult to measure. Investment in unproductive assets would leave the country with a sizable debt and no ready means of repaying it (much like Donald Trump’s 2017 tax cuts).
Social-distancing and effective quarantine measures are necessary to flatten the curve but widespread testing and tracing is essential to prevent further flare-ups. Development of a vaccine could take two years or more. Until then there is likely to be an on-going economic impact, long after the initial shock. This is likely to be compounded by a solvency crisis in small and large businesses, threatening the stability of the financial system. The best we can hope for, in the circumstances, is to escape with a recession — less than 10% contraction in GDP and less than two year duration — but this will require strong leadership, public cooperation and skillful prioritization of resources.
“We are all Keynesians now.” ~ Richard Nixon (after 1971 collapse of the gold standard)
The World Health Organization has not yet declared the COVID-19 coronavirus a global pandemic but investors are not waiting.
Spooked by the rapid explosion of cases outside of China — South Korea now has 2,931 confirmed cases and Italy 889; — and dire warnings from health professionals, investors are fleeing to safety.
The CDC on February 21st announced:
“We are not seeing community spread here in the United States, yet. But it is very possible, even likely, that it may eventually happen.
…..This new virus represents a tremendous public health threat. We don’t yet have a vaccine ….nor do we have a medicine to treat it specifically.
…..We are now taking, and will continue to take, unprecedented aggressive actions to reduce the impact of this virus.”
China claims to have the disease under control, reporting a sharp decline in new cases. But they have zero credibility after the massive suppression of information, frequent revision of statistics, and rapid disappearance of anyone who contradicts the official CCP line.
This report from Trivium China shows how CCP temporizing allowed the virus to spread:
China’s National Health Commission website published minutes from a meeting the NHC held with its provincial branches on January 14:
- “The epidemic prevention and control situation has undergone important changes, and the spread of the epidemic may increase significantly, especially with the arrival of the Spring Festival……
- [We must] implement the most stringent measures, control the epidemic locally, and do our best to avoid the spread of the epidemic in Wuhan.”
- But the NHC didn’t give any public warning about the virus before January 20.
Severity of the disease should also not be underestimated. Of 43,940 active cases, 18% are listed as serious or critical, while 7% of 39,439 closed cases have died. The growing number of relapses, after the patient initially recovered, is also concerning.
China is going to find it difficult to restore business as usual with the constant threat of another outbreak. Activity remains well below normal levels.
Official PMI figures point to a “brutal contraction” for China. February Manufacturing PMI plunged to 35.7, while Services were even lower at 29.6.
It is difficult to estimate the economic impact of COVID-19 on the global economy. Profs. Warwick McKibbin and David Levine take a stab:
The novel coronavirus COVID-19 may become a footnote in history – a disaster narrowly averted. It could also become a global pandemic similar to some of the worst pandemics of the twentieth century. For example, assume the COVID-19 is as easy to spread and as dangerous as the 1957 Asian flu. Based on the epidemiological estimates of mortality and morbidity rates from that experience, our best estimate from a 2006 study on pandemics was that such a virus might kill more than 14 million people and shrink global GDP by more than $500 billion. These estimates are far higher than the costs were in 1957 because our world is increasingly connected and urban. Preliminary results currently being updated in 2020 suggest even higher numbers for worse case COVID-19…..[Brookings]
This is not a problem that the Fed can handle.
No doubt they will cut interest rates. Short-term Treasury yields (gray) are already falling in anticipation of another rate cut (green).
When consumers are scared, rate cuts will not restore normal consumption patterns. This is both a demand and a supply shock. A virus outbreak would cause consumers to drastically curtail demand: use of public transport, holiday travel, business travel, hotel occupancy, visits to restaurants, shopping malls, sporting events and other public venues. Fast food consumption and discretionary shopping would be especially hard hit.
But supply is also likely to contract due to interruptions to supply chains and shipping logistics, slowing manufacturing output.
Donald Trump may call this a “hoax” but I don’t see him taking any hospital tours, to review preparations. If the virus does spread as anticipated, he is unlikely to win re-election.
Spread of the novel coronavirus (2019-nCoV) is a “global health emergency” according to the World Health Organization (WHO). Restricted travel is already having an impact on the global economy, with Goldman Sachs anticipating a 0.4% fall in U.S. annualized GDP growth in the first quarter.
Imperial College in London estimates a dangerously high transmission rate for the disease:
Self-sustaining human-to-human transmission of the novel coronavirus (2019-nCov) is the only plausible explanation of the scale of the outbreak in Wuhan. We estimate that, on average, each case infected 2.6 (uncertainty range: 1.5-3.5) other people up to 18th January 2020, based on an analysis combining our past estimates of the size of the outbreak in Wuhan with computational modelling of potential epidemic trajectories. This implies that control measures need to block well over 60% of transmission to be effective in controlling the outbreak….
Johns Hopkins University CSSE reports 11,374 confirmed cases with 259 deaths and 252 recoveries as of 7.00 p.m. on January 31, 2020. Growth of the number of reported cases in Mainland China appears linear, with an increase of 1,700 per day.
That seems highly suspicious when one compares to mathematical modeling and to social media reports from medical staff on the ground. Contagion rates are likely to grow exponentially, rather than in a straight line, and will only peak when authorities are able to bring the transmission rate below 1.0 (compared to the 2.6 posited by Imperial College).
A report in the Epoch Times suggests that Chinese public health authorities have suppressed the reporting of confirmed cases:
“The outbreak of Wuhan coronavirus is far bigger than the official figures released by Chinese public health authorities who cover up the severity by limiting the number of diagnosis kits to Wuhan hospitals, according to an insider and an independent journalist.
The insider and the independent journalist both say that diagnosis kits are only provided to certain ‘qualifying hospitals’ and in very limited quantities. Medical personnel at these hospitals have said that the number of kits they are supplied is less than 10 percent of what they need to test patients.
Now these hospitals claim that their responsibility at present is to provide treatment only, and they will not perform any diagnoses.”
UK researcher Jonathan Read projects that the epidemic in Wuhan will reach 191,529 by February 4 (prediction interval 132,751-273,649). Chart A shows total number of infections in black and new infections per day in red.
Restriction of road, rail and air travel to/from Wuhan is expected to achieve between 12.5% and 25% reduction in cases in the above areas.
Importations into other countries may also be slowed by travel restrictions.
Mortalities are not limited to young children and the elderly and infirm as with most influenza viruses. Healthy adults, including health care workers, are dying. Reported recoveries (252) are low and provide an indication as to the severity of the infection.
Modelling suggests that the number of cases will double every seven days until it peaks. The peak number of cases will depend on how long it takes to contain the outbreak. Another four weeks would pose a serious threat to the global economy.
Where Fortune is concerned: she shows her force where there is no organized strength to resist her; and she directs her impact there where she knows that no dikes and embankments are constructed to hold her. ~ Niccolo Machiavelli, The Prince (1532)
A long-term chart of the S&P 500 highlights the precarious position of the index, having now doubled since its October 2007 high at 1576. Any time that a stock doubles in price, you are likely to get profit-taking, leading to resistance. The same holds true for the index. Probably even more so because individual stocks have the capacity to post higher gains — of even 5 or 10 times — while that isn’t feasible for the index. Even in the Dotcom bubble.
On the one hand we have a massive triple stimulus creating irrational exuberance, while on the other we have concerns over a coronavirus epidemic spreading from China and Donald Trump’s looming impeachment.
If you think that Trump is a shoe-in for re-election in November, this analysis of his chances is quite eye-opening.
Expect more erratic behavior in the lead up to November.
Nobel prize-winning economist Robert Shiller warns that cracks are once again surfacing in the US housing market.
“We have had a strong housing market for pretty much all the time since 2012. Just after the financial crisis, the housing market didn’t recover, maybe because banking was in disarray and people were still expecting declines after the event. After 2012, it started going up at more than 10 per cent a year nationwide in the US, and has been slowing down since.”
Shiller says that a worrying pattern emerging in house prices is reminiscent of the property market in the run-up to the Great Recession.
The bursting of the US housing bubble in 2006-07 was a key trigger of the financial crisis…… “I have seen this happen before, we’re like back in 2005 again when the rate of increase in home prices was slowing down a lot but still going up.
Growth in the Case Shiller National Home Price Index is clearly weakening but we need to be careful of confirmation bias where we “cherry-pick” negative news to reinforce a bearish outlook. I would take the present situation as an “amber” warning and only a drop below zero (when house prices fall) as a red flag.
Shiller has an enviable reputation for predicting recessions, having warned of the Dotcom bubble in tech stocks and the housing bubble ahead of the 2008 global financial crisis. He is correct that narratives (beliefs) can become self-fulfilling prophecies. If the dominant view is that the economy will contract, then it probably will — as corporations stop investing in new capacity and banks restrict lending. Geo-political tensions — US/China, UK/EU Brexit, and Iran/Saudi Arabia — combined with massive uncertainty in global trade and oil markets, could quickly snowball into a full-blown recession.
As Mark Carney observed at Jackson Hole: the global reserve currency system is broken — it has been since Nixon defaulted on gold backing for the Dollar in 1973 — and there is no fix. We have to find a replacement along the lines of Carney’s suggestion. On Macrovoices, two experts on the EuroDollar system, Jeffrey Snider and Luke Gromen discuss the massive tectonic shift facing the global financial system.
This is a complex topic but it is important that we grasp the implications before a tsunami appears on the horizon.