From Globalization to Gollum

My precious vaccine

If the coronavirus has, at a very broad level, set in train the post-globalization era, the search for a vaccine reveals the detail of what that world will look like.

A vaccine for a virus that is global should in many respects be a hopeful project, but this hope is also undercut by cynicism. Consider the events of the last week.

On Sunday night last, the Chair of the Federal Reserve declared that apart from the financial stimulus enacted by the authorities the best way out of the crisis was through the discovery of a Covid-19 vaccine.

Then, on Monday details emerged of a positive vaccine trial from biotech company Moderna based on a very small group of people. This news led to a more than 20% spike in the company’s share price. Once the market closed, Moderna surprised investors with a rights issue, and it was announced that the individual heading the US’s Warp Speed vaccine program, would sell his USD 12mn holding in the company (he was a non-executive director). Other executives then also sold shares.

While some doubts have been cast on the early Moderna trial, the company will now move to a much bigger vaccine testing group (1,000 plus people) in the summer, with first results due late summer. If all goes well, an approved vaccine could be ready by the start of next year, and this then has to be mass produced and distributed (vaccinating the world will take three years at least).

If the case of Moderna demonstrates the uneasy intersection of science, ethics and money, the broader vaccine race will become even more complex.

Ideally, given the death toll, huge economic damage and societal disruption the coronavirus has caused, one could imagine a unified, global approach to constructing a pipeline (from research, testing, approval to manufacture and distribution) that would produce a ‘world’ vaccine. Previous pandemics such as Ebola, and HIV, demonstrate how collaboration can work and there are already provisions in the WTO framework that allow differentiated drug pricing between richer and poorer countries.

Instead, the quest for a vaccine has more resembled the Lord of the Rings, with the potential vaccine or ‘ring’ being guarded jealously. In a world that seems intent on replacing globalization with Gollum, the scramble for a vaccine (there are over 70 such ‘quests’ with Oxford University seemingly in the lead) will tell us much about how countries and companies organize themselves in the new world order.

The first is that, even in grave circumstances, collaboration between powerful countries and regions is limited. The US has alleged that China has tried to hack American vaccine researchers, and for China’s leader the prospect of a Chinese made, globally distributed vaccine has obvious geopolitical capital. The fissures undercutting this lack of collaboration are also undercutting two of the institutions of the 20th century, the World Health Organisation and the World Trade Organisation, both of which have been poorly led.

The second trend is that the relationship between innovation and finance will need to be rethought and will in many countries incorporate the state as a player.  The capture of technological innovation by a handful of large tech and private equity and venture capital firms in both the US and China is producing inequitable outcomes, such as the absurd coincidence of near twenty percent unemployment in the US and a near record high level in the Nasdaq stock index. Corporate tax rises and regulatory pruning back of mega companies may be a trend of the future.

Relatedly, with globalization given way to a more geopolitically nervous multipolar world, governments will increasingly insert themselves into the innovation process. France was once derided for its ‘strategic yogurt policy’ but governments like it will increasingly regard cyber security, artificial intelligence, genetic editing and so on, as strategic industries where they need to be involved as core players.

In cases where the state has a competence, such as defense, infrastructure or aerospace related innovation, its involvement can be effective, and obviously much less so where it has little expertise to offer.  Clumsy redirection of supply chains and orchestration of drug production are generally not in the competencies of states and they should resist the urge to over control here.

In a world where economists debate whether we will see more deflation or higher inflation in the future, the effect of the two above trends will be to make economies potentially more fractioned and less effective.

To this end, the danger is that states that are over eager to control the innovation process, combined with an intense concentration in the ownership of the benefits of innovation (big tech, venture capital) creates a world where the benefits of innovation are lost to the broader economy and society. Both parties, like Gollum in Lord of the Rings regard innovation as too ‘precious’.

In that regard, the next phase in this debate should focus on finance and corporate governance – tax systems and ownership structures that encourage and spread the benefits of innovation.

Have a great week ahead,



Shemozzle – Irish style

Mike Tyson is apparently coming out of retirement. America may need him. Last week on the Sino-Indian border Line of Agreed Control (North Sikkim to be precise) there was a mass brawl between Indian and Chinese troops. Helicopters (China) and fighter jets (India) were scrambled to add heft to the situation, which left several injured. The incident recalled the word ‘Shemozzle’ a Yiddish word that denotes chaos, uproar and confusion. In Ireland, sports commentators have used it to describe fights between opposing hurling or Gaelic football teams.

I fear that ‘Shemozzle’ now enters the lexicon of geopolitics, not least because tensions between nations are rising. One relationship to watch is that between China and Australia, where trade, political and diplomatic relations are worsening. I advise my Chinese friends to be wary – every time Australia play Ireland in ‘Compromise Rules’ football, there is a large scale ‘Shemozzle’.

The notion of a ‘Shemozzle’ is not a bad one to describe the world – tensions are rising as governments try to advance beyond lockdowns, and scarce resources such as vaccines will be fought over. In addition, the tension between markets and the reality of the economic damage from the coronavirus is growing.

In my April 4th note ( I laid out three broad scenarios – an optimistic one called ‘Easter’ which outlined how much of the crisis could be over by the end of April, a more sober one called ‘Summer’ which flagged late summer as the point at which we should have largely mastered the effects of the virus, and then a tail, very nasty scenario called ‘Winter’ where the effects of the virus drag on and the economic damage is severe.

As it stands, it seems that equity markets have priced in the optimistic ‘Easter’ scenario while it looks more likely that economies and societies will get ‘Summer’. The tension between high equity markets and the real world betrays a range of factors – the oversized role of the Federal Reserve and wealth inequality for instance.

I am focused on the performance of small cap indices and bank stocks (as opposed to tech stocks) as the lead indicator of where the economy and markets will go, given the risk of a credit crunch. In general, the performance of banks has been very weak, with some like Wells Fargo in the US hitting March lows and others in Europe (e.g. Société Générale) hitting their lowest levels since 1991.

At the other end of the market the outperformance of technology stocks also reflects a lack of forward thinking that in the US as in other countries, corporate taxes will have to rise in order to offset the generous stimulus programs put in place by the government. The five large tech companies (FAANG’s) who make up 22% of the market capitalization of the S&P 500 index are vulnerable here, given their earnings. This is perhaps the so-called ‘black swan’ that investors have not priced in.

To stick with the idea of ‘black swans’, a phrase that is now in the popular lexicon as meaning a high impact event as opposed to a highly improbable one a la Karl Popper’s conception of the term, the two recurring ‘swan’ questions I keep hearing are ‘will Europe breakup?’ and ‘will the US and China go to war’. That people continue to think about these questions shows that in effect they are not focusing on events (black swans) but processes.

In particular, the evolution and deterioration of the relationship between the US and China is a process that bears watching. In a week where the Economist front cover declared ‘Goodbye Globalization’ an opinion poll from the Pew Research Centre showed that close to 65% of Americans have a negative view of China. This compares with only 30% some ten years ago and the darkening in Americans’ views of China tightly tracks the demise of globalization.

With rhetoric picking up, and supply chain restrictions on Huawei now more severe, there are three elements of this relationship to watch in the short run. One is the friction between China and American allies in Asia (Australia) amidst talk in China that it needs to prepare itself for military conflict. Another is the shift in supply chains, the most interesting development here is Taiwan Semiconductors’ decision to invest USD 12 bn building a plant in the USA. Also, China may respond in kind to the Huawei announcement on Monday.

Then finally, is the politics – lambasting China, however illogically (the President has stated that cutting ties with China would save USD 550 bn) creates political capital for Donald Trump, and as such we should expect no let up in anti-China rhetoric until November. The question is what damage this does to trade and diplomacy, and whether it leads to a real ‘Shemozzle’.

Have a great week ahead,


America is the new Europe?

America looks like Europe!

When I try to defend the eurozone financial system to Eurosceptics, or even Europhiles, I remind them that the early years of the dollar were just as difficult as the eurozone crises of recent years. For example, the Whiskey rebellion of 1791 led to a contest between Alexander Hamilton’s Treasury and individual states, and his ultimately successful resolution of the crisis paved the foundation of the American financial system.

Amidst the global economic carnage caused by the coronavirus crisis, many (mostly in London and New York) expect the euro system to face another existential crisis. Though European politicians have generally failed to learn the lessons of past euro crises in that many reforms have not been executed, the euro and EU are more robust than many think.

While the euro is not yet as credible as the dollar, the surprise in coming months may be that America begins to look more like Europe.

Think of it this way. Governors of individual states have never enjoyed such prominence, with for example the governor of California referring to it as a ‘nation-state’. A recent FT survey showed that individual governors are more trusted than the President. In this respect the state governors are like the prime ministers of European countries.

In addition, American states are grouping together to form pacts to coordinate the ending of the lockdown (in Europe it is similar). Unlike Europe though, the political leaning of states is also a determining factor in the speed with which they are reopening, as is the President’s political and fiscal treatment of them (e.g. abandoning Obamacare). In time, this will make states more distinct economically and politically, and less united.

The decisive factor may be the impending credit crunch. We are now moving past both the initial financial shock of the coronavirus crisis, and the comfort of the financial morphine as provided by the Fed and Congress is wearing off. Yet, there is now much less that both the Federal Reserve and Treasury can do to forestall the closure of hundreds of thousands of businesses across America.

Against this backdrop investors are pointing to a growing widening of bond spreads for municipal bonds, and the rhetoric surrounding New Jersey and Illinois echoes with the way Italy and Greece are spoken of. Oil sensitive states may soon also come under pressure.

As the finances of individual states deteriorate, so too will be the expectation of support (bond buying by the Fed), and then, the moral hazard arguments that many in Europe deploy to sanction ECB buying of periphery debt, will resonate in the US.

It is also worth noting that like Japan and Europe in recent years, financial markets have just started to price in negative interest rates in the US (for next January), something that could rattle consumers and its banking sector.

Perhaps the worst thing this virus can do to America, beyond the human tragedy, is to increase the disparity of economic circumstances across states. In a country with extreme wealth inequality and an incomprehensible gap between sharply rising unemployment and a loft stock market, ‘intra-state inequality’ may grow. Migration between states and the current system of federal transfers will not be sufficient to balance this out.

Here, Europe is worth a look. One of the great achievements of the European Union has been the way it has funded infrastructure investment in relatively poorer countries. Americans visiting Ireland will be familiar with the ‘funded by the EU signposts’.

The lesson for America is that at a time when transport, telecoms and educational infrastructure needs to be badly upgraded, this should be done in a way that helps to equalize rather than exacerbate the differences between states. It is a task for the next president, whomever that is. However, the notion that ‘America’ needs to be put back together again needs to be debated now.

Have a great week ahead, Mike

The Decameron

Avoiding the Plague

Giovanni Boccaccio’s Decameron was one of the first literary masterpieces of the Renaissance. It is set in a villa outside Florence, at the height of the Bubonic Plague. Seven women and three men flee the Plague, ensconce themselves in a villa and spend ten days flirting, philosophising and debating. I have no doubt that Netflix or other entertainment channel will copy the idea and send an ensemble of Hugh Grant, Gwyneth Paltrow, George Clooney, Mara Rooney and friends off to the Hamptons to repeat the experience.

If the Decameron were to be repeated, the guests in the villa might even ponder how the world has been changed by the coronavirus. The Black Death itself radically changed Europe, largely through the demographic effect that a 30% reduction in population had – in England nearly 40% of land changed hands, a shortage of labourers meant a rise in wages and innovation of farming methods and produce.

Rising wages for those who survived the Black Death altered the social mix (Walter Scheidel’s The Great Leveler is very good here) to the extent that the wealthy begun to dress more extravagantly in order to distinguish their social standing and in this were helped by regulation (i.e. England’s Sumptuory Laws 1363).

The Black Death altered the geopolitical map of Europe (similar, much earlier plagues like the Athens Plague and Antonine Plague had profound geopolitical effects), led to trade and banking revolutions and spurred the rise of cities like Madrid and Genoa, and the demise of others like Winchester.

Back to the villa, where if our guests were discussing the post coronavirus world they might fall upon the following points. First, the coronavirus crisis has simply exacerbated the faultlines in a fracturing world – indebtedness is growing rapidly, the China-US diplomatic relationship deteriorates, and globalization is crashed.

Second, more optimistically and in the spirit of the Renaissance, the crisis will I hope bring a number of positive changes. One is the realisation of the correlation between climate damage and economic activity. Another is the sense that our cities are places to be lived in – there will be significant changes to the way cities use space, transport and commercial real estate.

A more profound change will be a trend towards improving human development – in developed and developing countries. The components of human development – from life expectancy, to education and healthcare, to economic development – have come to the fore during the coronavirus crisis in the sense that countries with high levels of human development (Germany, New Zealand, Norway) have appeared to deal relatively better with the crisis than others, and the value of good, accessible healthcare systems has become abundantly clear. I might even stretch the point to say that well educated leaders, who take science seriously, have also done reasonably well.

The concept of human development however does not lend itself to political soundbites and as such is hard for politicians to communicate as a policy goal. Neither do initiatives that promote human development pay off in the short term – so politicians need to be around to gain credit for them (Russia is an interesting example where the HDI (Human Development Indicator produced by the World Bank) has been rising steadily). Hopefully, the coronavirus will change this and permit broader discussions on the need to focus government scorecards on human development centric scorecards. If this happens, we may see public goods like accessible education and healthcare become more valued in countries like the US and UK. In this light, there is an opportunity for politicians and those involved in the policy process to craft the idea of human development in a way that people understand and value, and to put it at the centre of political manifestos.

As a final point, when I think of our ten guests in the villa in the Hamptons, Agatha Christie’s book ‘And then there were none’ passes through my head. The idea of wealthy people secluding themselves in a villa to avoid a highly contagious disease is as unpopular today as it was in the 14th century. Again, as Walter Scheidel has pointed out, the Bubonic Plague was a leveller of inequality in the 14th century though amidst plenty of periods of unrest (La Jacquerie in France in 1358 and the Peasant’s Revolt in 1381 in England).

So far, the policy response to the economic fallout from the crisis has arguably boosted wealth inequality (notably in the USA). In the coming weeks the generous provision of liquidity by the Federal Reserve will give way to rising solvency/credits risk, and with it more redundancies unfortunately. As I’ve mentioned before in these pages, market volatility will give way to social and political volatility.

Have a great week ahead,


Wir sind alles Metallgesellschaft

An unhappy meeting of finance and industry

The behaviour of the price of oil in the last week was, to understate the matter, jerratic. A sharply negative oil price (the first time since 1870 at least) in the May contract served to illustrate how topsy-turvy the economic world has become (I hope some airlines hedged in negative oil!). Together with the relatively recent advent of negative interest rates, negative oil prices will convince many that something is not right in the engine room of the global economy.

I mentioned in last week’s missive that assets like oil that did not fall under the spell of central bank asset purchases gave a truer indication of the economic outlook than those assets that did.  

In this context, the signal sent by the price of oil, even today, should be a cause for concern. Of course, other factors conspired to push oil into negative territory – notably a shortage of storage, the convince of some hedge funds and traders as well as the side effects of financial engineering (exchange traded fund (ETF) structuring).

This upside-down oil shock is not over and the effect of low oil prices will continue to ripple through emerging and high yield debt markets, emerging market currencies and the dollar, as well as banks and the Texan economy.

In the greater scheme of things, it also brought to mind the case of Metallgesellschaft, a giant German industrial conglomerate which in 1993 ran up a USD 1.5bn (a lot of money then) loss on an oil hedging contract. Metallgesellschaft fell foul of the same effect we witnessed last week, contango, where the price of near dated contracts (i.e. May) dropped well below the level of later dated contracts (e.g. July).

The Metallgesellschaft case left a mark on the financial economic history of the early 1990’s and is widely taught in business schools as a case study in the dangers of mixing business and financial engineering.

The collapse of Metallgesellschaft came at an early point in the deployment of derivatives in markets and should have served as a salutary lesson to corporates, regulators and banks. That was not the case.

For instance, the lesson that Deutsche Bank, which had arranged the hedging trades for Metallgesellschaft, apparently drew from the blowout, was to aggressively expand its investment banking operation. Today, the share price of Deutsche bank is down 95% on the level it reached before the global financial crisis (without being too unkind to Deutsche Bank, David Enrich’s ‘Dark Towers’ is worth a look).

What the jumpy oil price and Metallgesellschaft have in common is an instruction on how the real economy and finance have become increasingly intertwined.  

From an economic and investment point of view, there is plenty to consider in this regard. I am tempted to say that there is one sector that does not rely on finance – technology – but the corornavirus crisis has turned tech from an industrial gargantuan into a stock market monster (Microsoft, Apple, Amazon, Alphabet and Facebook account for 22% of the market capitalisation of the S&P 500 index). Next week’s tech earnings results may bring a reality check for stocks, and see volatility pick up.

The two other sectors to consider are banks and private equity. In the light of the Metallgesellschaft discussion what is remarkable so far in the coronavirus economic crisis, is that no bank has keeled over (I may speak too soon).

Indeed, the balance sheet restrictions that have been put in place, and general focus on risk management, appear to have paid off. In many countries, banks are now part of the rescue mechanism, and there is an opportunity for many of them to repair their reputations. In Europe the price of heavy regulation has, made banks very cheap from a valuation point of view so that there may be some upside if a round of consolidation takes hold into 2021.

Unlike banks, private equity has for some reason not come under the intense scrutiny of regulators, even as private equity (and private debt) have replaced the role of banks in parts of the global economy (i.e. shadow banks).

A crunch is coming however. In the USA, private equity companies are heavily invested in medium sized enterprises, and in any cases have taken on large amounts of debt to do so. As the economic toll of the coronavirus deepens, the financial pressure on private equity will translate into economic pressure on companies (leading to cost cuts and layoffs), and social pressure on their workforces. Sadly, this may have a deeper human, economic and political effect than the drama of negative oil prices and deserves to be watched closely by policy makers as the summer approaches.

Have a great week ahead,



The Fed as protector in chief

Courthouses are fascinating places, and often help to shine a light on the deeper, darker layers of society. One example which sticks in my mind is the hosting some years ago by the London High Court of disputes between Russian oligarchs. The proceedings provided insights into the workings of Russian ‘capitalism’ and in particular uncovered the term ‘krysha’, or ‘roof’. Its essence is that individuals are given protection (roof) or cover from interference, in return for money or other obligations.

Whilst I know little about the darker corners of the Russian economy the phrase ‘roof’ struck me as a useful one in the light of recent central bank interventions. Regular readers of this note and those who have read The Levelling will know that I consider that in recent years central banks have encroached too far into financial markets, to the extent that they ‘own’ them, economically and psychologically. Amongst the many risks that this can lead to, is for investors to believe that risks in markets are uneven (i.e. the Fed will cover downside risks) and this may help to explain why it took markets so long to react to the outbreak of the coronavirus crisis in January.

The latest moves by the Federal Reserve, in particular that to support the high yield bond market, are redolent of ‘roof’, though ‘floor’ might be a better term. In doing so the Fed distorts market prices, offers one sided ‘bets’ to speculators and helps out reckless investors. Apart from curbing market disorder, some of the Fed’s actions will have very limited economic impact at a time when small businesses and many households in the US are struggling.  

For some, this will create the impression that the Fed is beholden to Washington and more Wall Street than it is responsive to the broader American economy. What is more troubling is that the Fed’s activism will allow a stock market centric president (see my January 19 note ‘Peak Stocks, Peak Trump’) to claim a sense of ‘mission accomplished’, whilst ignoring the deeper economic and public health carnage of the crisis.

In markets, what is noticeable is that assets that do not have ‘roof’ appear to be underperforming those that do. Emerging market debt and fx have been weak, as have energy prices and copper, whilst small cap American stocks (Main Street) have underperformed the Nasdaq (Wall Street).

In this climate, the non-protected (non-roof) assets, or rather those that are not under the spell of big central banks, will likely continue to offer the best steer as to where the global economy is going – in that respect these assets (copper, oil and EM currencies) point to ongoing stress in the global economy. If this continues to be the case it will create a two-tier investment world where investors trade baskets of ‘roof’ (Fed sensitive assets) and ‘non-roof’ assets (economy sensitive assets) against each other.

In Europe, the propensity of the ECB to offer ‘roof’ is constrained by the political-economic divide between northern and southern economies. While the ECB has nonetheless been relatively speedy and generous in its actions, there has been something of a market backlash against periphery bonds (Italy in particular, and also Spain and Portugal). To one end, this strikes me as investors indulging in a habitual trade in that they expect every market crisis to become a euro-zone crisis.

One interesting rebuttal to this is that the US is beginning to look more like Europe. Note that US state governors (like EU state prime ministers) are enjoying a level of prominence they have rarely had and are beginning to form inter-state ‘pacts’ in the same way that countries within the EU are forming coalitions (i.e. France/Germany, the Hanseatic League 2.0). Financially, there will be greater market focus on municipal debt, the variability of real estate prices and mortgage debt across the US (a la Europe). So, Eurosceptics might well look to the US for their next trade.

As a final point Europe to reiterate the sense of recent comments of the French President, needs to give itself ‘roof’. Endless squabbling about debt mutualization is not the way forward here. The best approach is bottom up harmonization of processes – such as setting up a business, corporate governance and capital markets, not to mention harmonization of ‘emergency’ protocols for crises like the coronavirus crisis.

A more profound solution is to do what Europe has not done in a sincere way since its foundation – a strategy to grow its economies together, that goes beyond wordy plans and empty unenforceable commitments. That is the great challenge for Emmanuel Macron and those (myself included) who want the EU to thrive in a post coronavirus world.

Have a great week ahead,


League of Nations

Soon as competitive as the Champions League?

If the defining characteristic of the coronavirus crisis is its speed, then equally, one of its defining effects has been to expose the vast disparity in in the way countries have been affected by and dealt with the virus.

Though it is very difficult to have a true sense of numbers of infected as well as deceased, there are remarkable differences in fatality rates (per capita) if we say compare close neighbours – Ireland to England, Germany to France or even Norway to Sweden.

Whilst there are also some stark inter-state differences across the USA (Kentucky v Tennessee for instance), countries are still the best lens by which to view the effects of the coronavirus because they capture differences in laws, customs, social cohesion, institutions, political leadership and so on.

On balance, countries with good levels of human development, institutions and where the state is competent, seem to be doing a good job of containing the crisis. They are aided in this by largely obedient and well informed citizens, though the Easter weekend will test how obedient those citizens are.

So far, the crisis (beyond China) has centred largely on what we regard as the developed world (Europe, the USA and many Asian countries like South Korea and Singapore), but it is now picking up in developing countries.  

Amongst the big emerging economies (China apart), Turkey and to a lesser extent Brazil stand out in terms of the onset of new cases. By and large, the emerging world has appeared to be be spared the scale of tragedy that has struck Spain and Italy, partly because testing is done sparsely (India has done 121 tests per million people compared to 13,000 for South Korea), and partly because these countries are less intensely connected to China and other international hubs.

In the near term, there is a growing need to tend to sharply rising poverty in the developing world, and a need to ensure that they are also well served in terms of medical supplies and knowledge.

When the crisis is over, emerging economies will have much to think about in terms of the resilience of their currencies (i.e. Rand), structure of labour markets, the patterns of migration and most importantly, urbanization and the role of public health systems.

This is a time when the rise and fall of nations is being accelerated and offers countries with scope for structural growth (i.e. Bangladesh to Ethiopia) a chance to stop and rethink their paths forward. They might also rethink how they are served by the dominant world powers and by international public goods.

In a context where institutions like the World Bank and World Health Organisation are being drawn into the geo-political rivalry between the USA and China (for example, the US President has threatened to cut funding to the WHO) there is an opportunity for emerging nations to speak out and to claim the best parts of these institutions for the developing world.

One suggestion might be to move the headquarters of the World Bank to Africa, which is the one region of the world that continues to need the expertise of the Bank. Locating the experts and executives of the World Bank in Africa will arguably make them more responsive, and better informed of the economic challenges there.

Equally, the expertise of the World Health Organisation could be harnessed for a post-corona crisis wave of public health education across emerging countries and an embedding of the health lessons of the crisis into urban and economic development planning.

There is also a greater strategic consideration at play. The developing world is still condescended to by the dominant economies and in the style of Thomas Pakenham’s influential book ‘The Scramble for Africa’. For instance, the crippling debt burden associated with the One Belt, One Road project will become more clear in coming months (e.g. Sri Lanka).

Given the way in which the crisis has exposed supply chains, there is potential for emerging countries to take stock of their strategic assets – an ability to produce some pharmaceuticals and healthcare equipment cheaply, and in certain cases, they are critical producers of food.

In a word order where national identities and borders have been reinforced, emerging nations may look to strike a tougher bargain with wealthier ones in terms of their hold over agricultural commodities. If they do so, they can become part of the levelling out of geopolitical power in the post coronavirus world.

Have a great week ahead,


Sitting quietly

Blaise Pascal – for how long can he sit quietly?

At this stage in the coronavirus crisis, many of us consider ourselves experts on pandemics and biology. The speed of the coronavirus through our world is paced by the speed at which our concern and curiosity is fuelling a quest for information.

One thread that has become evident to me, is that historically epidemics have not always been greeted with calm and grace. In periods when medical knowledge was not as well developed as it is now, and when democracy and public health education were fledgling, epidemics were often met with violence and disorder.

For example, in the early 1830’s cholera spread across Europe but efforts to contain it in countries as diverse as Scotland, Prussia and Russia were greeted with public attacks on doctors, nurses, and quarantine officers. At times, anyone in a white coat was a target. The general fear was that authorities were using the cholera epidemic to poison people so as to reduce the burden on the state or that doctors simply wanted cadavers for anatomy schools. We trust experts more today!

Compared to the nineteenth century, what is remarkable today is the degree to which populations – mostly in Asia and Europe so far – have followed the lockdown guidelines. In general, adherence to the lockdown has been highest in countries where trust in government (and perhaps fear in some cases) is greatest.

The next stage of the crisis, coming over the next two weeks, will severely test this trust. Whilst I am now tired of reading commentators quoting Blaise Pascal’s ‘All of humanity’s problems stem from man’s inability to sit quietly in a room alone’, millions of people across the world will face severe stress in terms of how they sustain themselves. This much was made clear by last Thursday’s initial jobless claims figure in the USA. At the height of the economic pain of the global financial crisis (March 27, 2009) the jobless number hit 665,000. Last week’s figure was ten times that.

With the number of coronavirus deaths per capita, per day, in the US now higher than during the US Civil War, the pressure on the US economy and its healthcare system will grow. The same will be true of many other countries, and though part-time or partial work schemes in economies like France and Germany may lessen the economic uncertainty, it will still weigh heavily. For instance, the past week has already seen food shortages in Italy, mile long queues for food banks in Pennsylvania. In many cases, loans, compensation and government payouts in the US will not arrive in bank accounts for weeks.  

As this urgent, difficult stage of the coronavirus crisis develops, obligations on governments will grow. In Europe, there is an opportunity for what we might stereotypically call the ‘Northern’ countries to repair the diplomatic damage to the idea of EU solidarity of recent weeks (I am thinking of the Dutch in particular!) and undertake to ensure that food and basic staples can reach parts of the EU where they are needed.

In the USA, the past three years have seen a hollowing out of expertise in government. Consider that in 2017 and 2019 the Pentagon and White House economists respectively developed studies to plan for a coronavirus like pandemic, but the executive did very little to prepare for such an eventuality. In the longer-run, the state of healthcare and the fragility of the US labour market should become major political issues. In the meantime, I expect that both corporate America and the military will play a greater logistical role in meeting the needs of this next phase of the crisis in the US.

As this occurs, the debate on the marginal usefulness of the lockdown (in terms of its contribution to lives saved versus its economic impact) will grow. It has already been marked by what I call the ‘cure is worse than the problem itself’ brigade.

Two more weeks of lockdown in Europe will test the sanity of its citizens (though will I hope also show the value of this strategy) and business people. At very least, political leaders will have to outline some kind of roadmap to normalisation – the continued isolation of vulnerable members of society, wearing of masks, a gradual return to normal working patterns for example. Balancing this will be incredibly hard to do, and control. At this point, market volatility may give way to a pick-up in social and political volatility.

Have a great week ahead,


Why did nobody notice it?

Not amused

During a visit to the London School of Economics in November 2008 Queen Elizabeth II demanded about the debt bubble, “Why did nobody notice it?”. She might ask the same about the onset of the coronavirus crisis, particularly of her prime minister and her eldest son. The defining characteristic of the coronavirus crisis has been its speed. For example, markets have fallen by the same magnitude as during the crisis, but this time the fall took 16 days not 16 months.

The speed is explained by the sudden restriction placed on human movement by the crisis, and the fact that in general we are used to dealing with single set piece economic or financial crises (market bubble, classic recession, regional – EM or EU – crisis) and not five overlapping crises at the same time. The speed and drama of the crisis is heightened by the fact that it is breaking things – diplomatic relations, investment funds, political careers and economies.

The policy response has not, as I have outlined in previous mails – been well coordinated between fiscal and monetary policy, nor between nations. That so many policy makers repeat Mario Draghi’s mantra of  ‘do whatever it takes’, betrays the fact that the magic of those words is vested in Draghi himself.

Still monetary and fiscal support has come thick and fast and will help stem market pain. My worry is that given we are at the late stage in a very long expansion, it will be harder for policy to significantly boost trend economic growth. Of the other policy measures – the quest for vaccines and treatments is the most exciting, whilst Russia and Saudi Arabia’s adherence to their oil price war is the most disappointing.

From here, I see three scenarios.

Easter: Under this optimistic case (25% likely) the fruits of isolation in Europe begin to show, the race for treatments and vaccines is promising, while central bank liquidity dampens market distress. As such, workers, companies and governments begin to get a sense as to the parameters around the crisis and some visibility as to when and how it can be managed. A slow return to ‘normal’ then begins in Europe and the US in late April. Stock markets hit new highs in October and Donald Trump stays in the White House.

Summer: ‘Isolation’ is increasingly debated on ethical, economic and political grounds. It proves hard to enforce across America and harder still to prosecute in emerging economies. Under this ‘main’ scenario (55%) the second derivative in infections and macroeconomic indicators only begins to significantly improve in mid-summer. As a result, many businesses close or are near to ‘broken’, despite fiscal support. At the same time, investment in ‘newer’ industries – data (5G, AI, Cloud), healthtech and digital finance is accelerated. Still, high unemployment and low trend growth are significant policy issues into 2021.

Winter: Under this ‘pessimistic’ (20%) scenario, much of the world’s workforce is disrupted by the virus, and second waves become the norm. Social unrest, political disunity and a breakdown in diplomacy between nations (US and China for instance) are some of the resulting side-effects. Monetary and fiscal policies cannot contain the full effects of bankruptcies and unemployment, to the extent that central banking ‘accidents’ crop up. The 1930’s is the nasty template to follow here. Property markets and alternative asset classes like private equity are hard hit.

While broad scenarios are useful for framing problems, they are often overly simplistic. One distinction to draw here is between the short to medium term return to normal in terms of end of isolation and return to work, and the enduring long-term imbalances that result from, and are exacerbated by this crisis.

Ideally, following a two-month period of isolation in the US (taking us to mid-May) a return to normal might be in sight.

However, under the surface of the world economy the following trends will have been deepened by the crisis – the end of globalization and the resulting multipolar world, the biggest debt load since the Napoleonic Wars and central banks who are running out of effective policy measures. In the alphabet soup of U, V,L and W shaped recoveries that forecasters talk about, we might well have a cyclical V, followed by a structural L.

With three of the G7 leaders now in quarantine, world political leadership is under strain. It has two battles to fight – beating the virus, and then resolving the end of globalization in as constructive and imaginative a way possible.

With best wishes


Quid Pro Quo

No Quid Pro Quo?

Otto von Bismarck, 19th century Germany’s Iron Chancellor, is reputed to have said ‘laws are like sausages, it is better not to see them being made’. With the benefit of very recent experience, the same is true of economic and monetary policy. The lightning speed with which a public health crisis has morphed into a deep, financial crisis has resulted in chaotic policy brawl where bouts of market volatility are met with new initiatives.

There is little sign yet of coordination across nations and regions, and between monetary and fiscal policy authorities. The US, Europe and China are all guilty here. In the short-run, the flow of policy moves will likely eventually swamp market volatility. Policy makers, be it in the Treasury, White House or the Fed may sigh with relief when volatility dies down, but they will do well to focus on the potential of their actions.

While the speed with which the coronavirus has morphed into a deep financial crisis has humbled policy makers, it has also revealed the faultlines in a deglobalizing world.

For instance, world debt to GDP is the highest since the second world war, labour markets have been hollowing out, and instead of investing in capital spending many American companies have deployed cashflow to buyback shares (Boeing, which has spent tens of billions of dollars on stock buybacks and is now seeking a bailout of sorts is an example).

The relevance of share buybacks here is that they have pushed up earnings per share, the choice benchmark for CEO pay.  So, with two-thirds of CEO’s being paid according to rising earnings per share, playing a ‘financial’ trade rather than say making better products (e.g.  Boeing) has been attractive for executives.

Yet, having debated ‘stakeholder capitalism’ at Davos in January, the corporate world is now entrenched in ‘survivor capitalism’. The risk now is that in treating the fallout from these faultlines, that has been catalyzed by the coronavirus crisis, policy makers paper over bad economic behavior that has contributed to unimpressive productivity over the past decade, and growing wealth inequality.

In this context, policy action needs to have a ‘quid pro quo’. The phrase entered the lexicon of American politics through George H Bush, and more recently in the President’s impeachment case. The notion of a quid pro quo should reign over policy interventions, in potentially, a range of ways that will produce a more sustainable and resilient economic model.

A first suggestion is that though the USA has no corporate governance framework in the same way that the UK does, a ‘quid pro quo’ skeleton framework can be introduced in return for policy support. For instance, it should tie executive pay more closely to underlying profitability and an array of measurable goals, rather than earnings per share. Tax and securities laws can make overly enthusiastic share buybacks and excessive debt loading less attractive.

Second, many businesses that will require assistance – such as airlines and energy companies – are vital cogs of the economy but also contribute to climate damage. One brief upshot of the now worldwide coronavirus quarantine is that the skies over China have cleared of pollution and the waters of Venice have a healthier hue.

Here, financial assistance to companies should come with the rider that as a quid pro quo they change business models to become more environmentally friendly – that can entail more investment in green sources of power and raw material, less investment in extractive industries and an acceleration in the adoption of a ‘green’ approach to urban develop.

Then, while medical studies suggest that the human cost of the coronavirus can be severe – one scenario in an Imperial College London study points to over 2 million coronavirus related deaths in the US – the coronavirus crisis, like the global financial crisis, has laid bare the vulnerabilities of American society.

At a time when life expectancy in the US has been falling and where healthcare is a locus of inequality, and when tens of millions of workers are vulnerable to layoffs, this crisis presents an opportunity to rethink the US healthcare model and to fashion a more resilient labour market. If this is not done now, there will be a severe political backlash.

The idea of a ‘quid pro quo’ is to encourage policy makers to stop and think about the faultlines that the coronavirus has exposed, to mend them and to steer industries and society towards a more sustainable path.

Otto von Bismarck also said that ‘politics is the art of the possible’, now is the time for policy makers to grasp this by matching urgency with foresight.

Have a great week ahead,