Daily Comment (February 25, 2020)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

After a deep selloff yesterday, equity markets around the world are mixed.  We are seeing some retreat in the flight-to-safety assets after a massive rally yesterday in gold and Treasuries.  As usual, we update news on the COVID-19.  The president wraps up his India trip.  Germany is preparing for a new leader for the CDU.  Here are the details:

COVID-19:  The number of reported cases is 80,289 with 2,704 fatalities.  South Korea is now reporting 977 cases.  As an undergrad, I took a course on organizational behavior.[1]  In that course, we discussed conditions that tended to undermine organizations.  The three most common were dissonant objectives, information overload and information depravation.  To some extent, we are seeing all three exhibited in the reaction to the COVID-19.  In terms of dissonant objectives, nations are trying to prevent the spread of the disease and avoid recession.  These objectives are mostly exclusive—ensuring that the virus doesn’t spread requires actions that will undoubtably lead to an economic downturn.  The second method is being seen in the West.  The media is putting so much information out there that it is difficult to ascertain what people should do.  Outside the developed world, we are seeing just the opposite; propaganda and the lack of information is leading to unfounded rumors being spread, some of which work against containing the virus.[2]

Here is the problem for policymakers.  If the virus is really the “big one” then taking aggressive steps to enforce quarantines is necessary and an economic downturn is a reasonable price to pay.  But, if the virus is mild, these aggressive steps are unnecessary and the cost of a recession is excessive.  So, where does COVID-19 fall?  Early evidence leans toward this being a mild virus.  A report from China’s CDC did a study on the virus using data through February 11.  It looked at 72,314 cases and it found a fatality rate of 2.3% for the confirmed cases and 1.4% for confirmed and suspected cases.  The fatalities were concentrated among the elderly (>60 years old,[3] 829 of the 1,023) and most of those who died also had chronic conditions (heart disease, diabetes).  Mild cases were reported in 81% of the cases.  Overall, the data likely confirms that this respiratory virus is similar to influenza; it does kill, but most who are infected survive and older people are at greatest risk due to other health complications.

So, where do we go from here?  Financial markets are clearly taking a second look at COVID-19.  If this event turns out to be a mild pandemic (as the data seems to suggest now), there will be a temporary hit to the global economy.  By summer, it will probably be past us.  It is going to spread further.  The rise in Italy and South Korea is worrisome; in fact, it may affect Korean politics.  The situation in Iran is also unsettling.  The country is claiming 61 cases and 12 fatalities, which would make this virus especially deadly.  In reality, the number of cases is probably far larger.  Unfortunately, Iran lies at the crossroads of the Middle East and the region is in such turmoil that if the virus spreads to refugee camps then it will become almost impossible to control.  At the same time, if the data can be trusted, it appears the number of new cases in China may have peaked.

In general, fear of this being a bigger deal will probably have a greater impact than the virus itself.  Of course, that assumes it remains mild.  In the history of the Spanish influenza of 1918, the virus seemed to mutate at least once into a much more virulent form, so the world isn’t out of the woods yet.  Nevertheless, our base case remains that this will be a three- to four-month event.

India:  Although there were hopes that a trade agreement might be part of this visit, it doesn’t appear that one was made.  The trip does seem to be a popular success for both Trump and Modi.

Germany:  The CDU will hold a special congress on April 25 to select a new party leader.  We are in the twilight of Chancellor Merkel’s reign; depending on who replaces AKK, that ending may come before her term ends in 2021.

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[1] This is Bill speaking here.

[2] A good source for readers wanting reliable information on the virus can be found here.

[3] Bill resents this characterization.