If you assume the US is a few weeks behind Europe, there's more and more bad news to come. It's always hard to know how much is priced in, or even how to price in something so alien to financial people.
Also keep in mind there's a number of mechanisms that pushed the market up that will now push it the other way:
Credit cycle makes collateral worth more, giving more capacity to extend credit.
Momentum funds buy when things have gone up.
Risk parity funds add when risk is low. And risk as measured by realised volatility gets lower as we creep up.
Retail sees the market is going up, much like momentum funds.
Selling options makes sense when there's barely ever a move in the market.
The only lesson from Europe so far is that no matter how much money you throw at the problem, the market is going to respond with another steep sell-off –— because that's what the US is already doing; without success.
> no matter how much money you throw at the problem, the market is going to respond with another steep sell-off
There are two problems. A public-health problem, which is killing people. And a quarantine effects problem, which is putting people out of work.
Throwing money at the latter works. It keeps unemployed bartenders paying rent. That keeps them in their homes and their landlords from defaulting.
As the first problem evolves, however, it makes the second worse. That means we don't know how much support is enough. Until we know how bad the first problem is, the second's effects will remain poorly constrained. That turns every public action, with respect to either the first problem or second, into a cause for panic for the markets. (It doesn't help that the quality of communication around these actions has been poor.)
At the same time, everyone who can get liquidity is taking it. That's stressing the notoriously-chaotic credit market. This is a problem entirely manageable through throw-money-at-it central banking solutions.
At some point we'll have to adopt a combination of what Boris first said and only a partial lockdown, and I say that as a guy who has voluntarily self-isolated for almost a week now. There's no way for the whole Western economy to function on made-up money for more than a month, let's say a month and a half. Yes, that will most probably mean triaging people in hospitals, which will probably force elderly people to remain isolated in their homes a little more than the rest of the population, but to be honest I do not see any other solution at this moment.
The workforce is largely made up of heathy people under 60, so it’s at minimal risk. My suspicion is gatherings like movie theaters will shut down until a vaccine is available, restaurants are going to swap to carry out, and the sick or elderly are going to be expected to self isolate. That’s still a huge economic hit, but far from the end times.
Looking at Wuhan, a total shutdown can dramatically reduce the number of new cases. We can’t really afford that for long, but it buys time to prepare and may be required if things start to fall apart.
>> We can’t really afford that for long, but it buys time to prepare and may be required if things start to fall apart.
AFAIK Wuhan and South Korea are both at the tail end of their their infection trajectory and they are still not back to normal working situations/environments. I'm still not sure if this will be a short, blunted infection with all the quarantines taking place, or something we have yet to see the top side of.
Either way, this is going to crater a ton of small/medium sized businesses. All of the gains the market made in the last few years has been completely erased by this virus.
> Two and a half month of draconian quarantine may work
That will probably be insufficient in duration:
”We [...] show that policy strategies which aim to mitigate the epidemic might halve deaths and reduce peak healthcare demand by two-thirds, but that this will not be enough to prevent health systems being overwhelmed. More intensive, and socially disruptive interventions will therefore be required to suppress transmission to low levels. It is likely such measures – most notably, large scale social distancing – will need to be in place for many months, perhaps until a vaccine becomes available.”
Wuhan is on track for zero new cases by the end of this month after starting the quarantine on January 23. So, in no way is the collapse of their heath system part of a total quarantine. But, I am saying what happens after that? Do you shut everything down on the next case, when infections it 100 or 10,000 etc.
Basically the quarantine option has a known outcome in the short term, and doing nothing as millions die is another option. But, they have such high costs and are so far apart a middle ground seems desirable.
I suspect European governments had all settled on that plan, and only the British said it out loud. The only reason they switched to a total lockdown is because the spectacle of mass death at the ICU is too much for the public to bear. The time to take drastic measures was a month ago, when the spread from Italy could have been contained.
> The time to take drastic measures was a month ago, when the spread from Italy could have been contained.
IMO, I don't think it could have even been contained then. Once this thing left China, the genie was out of the bottle. Now, the rest of the world is just trying to manage the spread best they can by 'flattening the curve.' Which, as you mention, is really going to end up with the plan the Brits said out loud.
I wonder how long it will take everyone else to catch on that the Brits plan is happening regardless?
It was definitely controllable after it left China, as we can see from the fact that countries such as South Korea have managed to control it. European countries were completely unprepared for it, despite the fact that SARS should have been a warning call. (I assume that's why South Korea was ready for it.) It was partially a cultural failure -- I know several Chinese students living in Europe who thought the European reaction was insane -- and partially a government failure. European government should have started reacting months ago stockpiling supplies such as masks and tests. A widespread testing regime should have been in place. Travel back and forth to Italy should have been curtailed much earlier, rather than people traipsing back and forth on holiday, and people who did travel should have been tracked as much as possible.
> The only reason they switched to a total lockdown is because the spectacle of mass death at the ICU is too much for the public to bear.
It's mathematics. Assume a country of 100M people, of which roughly 2/3rds have to be infected to achieve herd immunity. That's 66M people. Of these, expect 2M people to die if the mortality rate stays at 3% (at the moment it's 3.4% according to WHO).
Now, as no medical system in the world has enough beds, expect that the mortality rate goes through the roof once the ICU beds are full - Italy at the moment is at 10%. This would mean 10 million deaths in the assumed country.
Or, scaled to the US: 32 million deaths.
"Herd immunity" is mass slaughter on a scale not seen since Mao's "Great Leap" with 18-45M deaths.
That doesn't matter. Italy has about 3.31 beds per 1000 citizens and these are already way over capacity, so much that doctors have been forced to "triage" patients between whom to save.
The Netherlands only have 4.18 beds which isn't much more so with more people being infected thanks to inadequate protection they will be overloaded, sending the mortality through the roof.
The US have it worse, they only have 2.89 beds and many people who are sick will still go to work to survive PLUS many won't dare go to the hospital unless they are facing death due to fear of extreme bills so coronavirus has the potential to be a massacre. Plus, unlike Europe where most citizens believe the experts, large parts of the US population takes pride in ignoring science (40% per https://www.msnbc.com/rachel-maddow-show/glaring-partisan-di...).
Governments can’t simply make this go away. So, a rational market should be crashing either way, the only question is how bad it’s going to get. IMO trying to prop up the market is pointless, it’s keeping the economy functional that’s going to make a difference.
The only upside I see is people are saving money by self isolation which is going to ease the recovery significantly.
We're actually running a ventilator plan, rather than a stimulus plan. We're going to spend $2 trillion, most likely, trying to keep businesses and people alive over a few months, until the realization hits like a truck that this can't go on for very long (60-90 days max), at which point mental capitulation will happen. The next step then is everybody is going back to work, regardless of the virus, regardles of the risk. We'll quarantine the old and most vulnerable, while we pursue a vaccine and ramp up medical supplies and try to handle the ICU load.
Mass shutdown and quarantine will be viewed as a horrible mistake of available choices, but only in convenient hindsight. It will turn out we unnecessarily destroyed trillions and trillions of dollars in wealth and capital, because our understanding of the situation was very poor (how wide spread the virus actually is).
> because our understanding of the situation was very poor (how wide spread the virus actually is).
It's estimated that there is at least a scale of 10x unknown infected vs known infected. South Korea, Taiwan and Singapore have only been able to stay nearly CV-free because they have extremely strict testing regimens - while the US has almost no testing capacity at all (and many have to ignore a positive test as they need to work to survive/keep health insurance), and Europe doesn't fare that much better to be honest.
No nation has done mass randomized testing to see how much of their population has had the virus. If China did it, they haven't released the results of that test.
South Korea will not be able to remain quasi Covid free, unless they plan to never open their borders up ever again. The rest of the world is going to be flooded with the virus and the disease. The bulk of the populations in the EU and the US will likely get the virus, and as you note, fortunately, the death rate hopefully maybe plausibly is 1/10th or 1/20th what we think it is due to the volume of unknown cases roaming about.
The only way SK remains mostly free of Covid, is if the virus goes away and doesn't come back next year (and or we get a vaccine they can use next year). SK can hold in place, while the US and EU and other regions (China already) likely go back to work; then as it fades elsewhere with increasing herd immunity, SK can come out of their protective shell. Otherwise they'll have to remain in perma lockdown, perma quarantine, perma heightened mode.
Also keep in mind there's a number of mechanisms that pushed the market up that will now push it the other way:
Credit cycle makes collateral worth more, giving more capacity to extend credit.
Momentum funds buy when things have gone up.
Risk parity funds add when risk is low. And risk as measured by realised volatility gets lower as we creep up.
Retail sees the market is going up, much like momentum funds.
Selling options makes sense when there's barely ever a move in the market.
Now try these in reverse.