There is so much fear flying around right now. And we loathe it. We have written about this before, but using fear to compel action is just the worst. And what we have right now is large-scale policy responses born out of fear. There was a meme that was shared with us the other day that we feel is very appropriate:
We’re going to start this newsletter with personal opinion and a little objective perspective on policy response so far. Then, because that response has absolutely blown up the service sector of our economy, we’ll segue into a first look at the Brave New World that we’re in. MMT is here, and it is not going anywhere. The Fed has been all up in the headlines recently, and not necessarily in a good way.
Here has been the evolution of policy response over the last two weeks:
These were announced as either “temporary suspensions” of “indefinite closings”, with the former sounding a lot better than the latter. Most of them are running for 2-3 weeks or so, with something around April 7th being the magical target for re-opening.
As of noon on St. Patrick’s Day (3/17), at least 74,000 public schools in this country were closed or scheduled to close. There are 98,277 public schools in the country. There are 50.8 million public school students in the country. Current closures impact at least 38.8 million of them. NYC accounts for 1.1 million of them by itself, and of that 1.1 million, it’s estimated that about 10% - 114,000 - are homeless and rely on the school system for food. 114,000 in NYC alone, and that’s not counting those who rely on the school system for food because of poverty despite not being homeless. 114,000. There are currently (as of 3/18) 6,500 confirmed cases of coronavirus across the US, 1,700 of which are in New York. 1,700. 114,000.
As of March 16th, here’s a list of states that have shuttered restaurants and bars that we’re aware of (with, parenthetically, the number of confirmed COVID-19 cases present in the state according to the Johns Hopkins tracker as of 3/17 - and the overall percentage of that state’s population):
In statistics, those are what are known as “rounding errors”. And for that, you’ve got kids going hungry and millions of people instantly unemployed.
Because no, government cannot just step in with a new program to provide for what has been lost with all these closings. NYC has pledged to continue feeding students during the closures. Good for them. But think about the logistics there for a second. NYC schools serve 900,000 meals a day, every day. How do you coordinate that? How do you communicate to the affected students and families? How do you arrange for pickup or delivery? Especially in a way that is consistent with social distancing and/or self-quarantine orders?
Is it possible? Yes. Is it something you expect a city government bureaucracy to be able to manage effectively under the best of times, much less while under a state of emergency and trying to do everything else all at once? When was the last time you thought to yourself, “Wow, the TSA is just so efficient at what they do.” How about: “Man, the DMV really has their act together!” In fact, if you can construct a sentence along the lines of “(any government agency) is (any positive word) at (anything related to logistics or efficiency)”, let us know and we’ll post your answers in next month’s newsletter.
In a similar vein, the promises of unemployment support sound good in theory, but are a cluster in practice. If you’re sitting at home and bored, try and jump on your state’s expanded unemployment benefits website and see how long it takes until it crashes. (Spoiler alert: probably less time than you have on your hands right now.) So, revamp the entire unemployment benefits system to account for the 25 million service industry (specifically, “Leisure and Hospitality” and “Retail Trade”) jobs you just vaporized, plus add systems for suspending student loan payments, mortgage payments, utilities payments, child care, and some sort of government-sponsored food and/or grocery delivery...yeah, that should all go off without a hitch.
SBAs all over the country are offering 0% loans to small businesses to help them get through this crisis period. Again, nice in theory, but realistically profit margins for many small businesses in the service industry are so thin that another loan (because they probably already have at least one), even at zero percent, would never get repaid. That’s why so many businesses are laying people off or closing their doors for good.
Also, if you haven’t thought about this yet, start preparing yourself for this quarantine state to get even worse and last for about 5 months - until July/August. Not kidding. We’ll get to the April 7th time period and closings will be extended by a week or two. And they’ll keep getting extended by a week or two through the summer. Best case scenario, we transition to some kind of “rolling quarantine” system where things are open or closed on a week-by-week basis depending on the number of new cases in the last week. But this virus is not going away in three weeks, and if you remove the quarantine measures it will spread just as easily as it would have in February. Note the recent resurgence in Asia.
We finally got our hands on the original research report that was purportedly presented to the White House to cause the about-face in response tenor last week. It was authored by Neil Ferguson and the Imperial College of London’s COVID-19 response team in partnership with multiple infectious disease modeling/analysis/analytics organizations. It’s solid research. If you want to read it, you can find it on Scribd here.
Their modeling suggests that doing nothing would lead to an epidemic that would kill about 2.2 million in the US. At its peak, you would have about 25-28 critical care patients for every available critical care bed in the US. And that’s just from COVID-19, never mind every other thing that sends patients into critical hospital care on any given day.
The researchers then go through a myriad of mitigation techniques - case isolation, household quarantine, school closings, social distancing for old people - and model the “curve flattening” that is everyone’s new catch phrase. Even under the most optimistically mitigated scenario, however, they still anticipate 1 million deaths from COVID and 8 critical care patients per available bed at the peak.
So, the conclusion they come up with is attempted “suppression” rather than just mitigation of the virus. Those conclusions seem to have been adopted wholesale by the government, and that’s why you’re seeing a radically authoritarian lockdown response spreading rapidly across the country despite a statistically insignificant viral incidence.
If you read the study, however, the authors note that for suppression to be effective, the measures undertaken need to be kept up for at least 5 months (which gives us the July/August timeframe, and why Trump mentioned July/August in his press conference) and will likely be needed at least intermittently until there’s a vaccine (estimated at 18 months out).
Three weeks is awkward but likely manageable for most. 5 months is a 13%+ unemployment rate and massive social unrest. Which is why you’ll get strung along a week or two at a time.
In our view, the response to this virus has been a dangerous mix of fear and virtue signalling that is doing real, long-term damage to the economy as a whole and likely tens of millions of people individually. Here’s the COVID-19 crisis as we see it and as we’d like to see it managed:
It is our view that government is never the best answer to a crisis. And the increasingly authoritarian response we’ve seen is just downright loathsome. We had an issue with this when Boston got locked down during the manhunt for the Tsarnaev brothers after the marathon bombing in 2013. We had an issue with this when Baltimore got put on a curfew in 2015 in response to protests over the death of Freddie Gray. And we definitely have an issue with it taking over the country “indefinitely” in response to an irrational fear that is stoked and spread throughout our society.
Get ready for another upcoming round of fear mongering this week as US cases are set to pass 10,000, global cases surpass 250,000, and global deaths also pass the 10,000 mark. They’re all nice round numbers that make for good scary headlines. After 9/11 you got the Patriot Act, TSA, and Homeland Security. Who knows what we’ll be stuck with coming out of this current authoritarian overreach. Brave New World, indeed.
Alright, at 5 pages we’re hitting the send button on this and calling it Part 1. Stay tuned for Part 2 now that we’ve gotten the political rant out of our system and can focus on a Fed- and market-specific rant.
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