Friday, April 17, 2020
By Jeffrey Kutler
"The coronavirus pandemic is a different kind of shock. Never before have modern economies shut down at the drop of a hat."
Thus wrote Tobias Adrian and Aditya Narain, director and deputy director, respectively, of the International Monetary Fund's Monetary and Capital Markets Department, as they contemplated the force and severity of an economic downturn potentially worse than the crisis that world governments and central bankers rallied to resolve in 2008-'09.
Even as economic activity was plummeting, the pithily perceptive IMF Blog at the end of March was but one contribution to a veritable explosion of pandemic-centered commentaries, analyses and projections - financial and analytical, scientific and philosophical. The sheer volume of studies, opinions and prognostications - not to mention the underlying data that they draw upon - reflect high levels of uncertainty and unknowns about the near- and longer-term fates of markets and societies.
Coronavirus statistics are part of the daily news drumbeat, and a new torrent of information that market participants and pundits are factoring in with their more familiar runs of earnings and economic reports, ratios and benchmarks.
"This is as it should be," says Nigel Green, CEO of U.K.-based financial advisory firm deVere Group, though he is also wary "that the all-encompassing coronavirus news could prevent investors from tracking other key factors that could significantly impact their returns," such as the U.S. presidential election and the lingering economic and geopolitical risks of a no-deal Brexit. Green believes a recovery could be underway by the end of 2020 - a relatively optimistic and not entirely outlying point of view.
There are, to be sure, differences of opinion and interpretation, based on different models of coronavirus contagion; on how those health statistics may overlay GDP and other economic indicators; and on how and when to restart shuttered economies. President Donald Trump's impatience to open up as early as Easter Sunday (April 12) clashed with the caution of public health authorities, who prevailed. Spain began lifting its lockdown restrictions on Easter Monday in the face of political and labor criticism, followed a day later by tentative steps in Italy.
Looking past the fog of debate, uncertainty and confusion, on some crucial points there is general consensus: the need for and efficacy of lockdown or stay-at-home measures; the likely magnitude of recession and the appropriateness of muscular government interventions; and the importance of diagnostic testing to fill gaps in data about people's immunity and vulnerability and thereby inform future policy actions.
There is even agreement - directionally if not on specifics - on the biggest of the hanging questions: How long will this last? It amounts to a classic scenario development exercise for risk management and public policy.
Recovery could take any number of shapes. Although many economists do not expect a rapid, so-called V-shaped rebound, few question the pharmaceutical reality that it will take 18 months for a COVID-19 vaccine to be developed and distributed and put an end to the misery. That's not to say that an economic bounce can't begin sooner, which McKinsey & Co. has illustrated as a function of government policy and effective public-health response.
"The scenarios consolidate assumptions into a range of estimates of the GDP impact of lockdowns on consumption and economic activity," McKinsey explains.
Data and Models
Since late January, and increasingly visible through March and April, accompanying the coronavirus' spread and public attention to it, were datasets and analyses from tracking organizations. Among the most prominent are the globally comprehensive Johns Hopkins University, the University of Washington Institute for Health Metrics and Evaluation (IMHE), and supplementary aggregators like the COVID Tracking Project, which claims to pull together the most complete testing data, and Bloomberg's Mapping the Coronavirus Outbreak Across the World.
Although such metrics have come a long way in a couple of months, their application has not always been clearly or transparently explained in public discourse. IMHE states that its widely followed projections, for countries and U.S. states alike, assume "full social distancing through May 2020." It would be misleading to anticipate "flattening of the curve" in that timeframe if less intense distancing were in place.
Inputs such as these were cited, often loosely, in White House news conferences when economy-restart dates in mid-April or early May were under discussion. When one cited model showed a possible range of U.S. deaths between 80,000 and 200,000, a forecast from a team at Imperial College London, led by epidemiologist Neil Ferguson, had death tolls as high as 510,000 in Great Britain and 2.2 million in the U.S. - numbers so staggering as to drown out the scenario's qualifier: "an unmitigated epidemic" overwhelming critical-care hospital capacity. (According to Johns Hopkins, global confirmed cases climbed past 2 million on April 15, with deaths exceeding 132,000.)
During a recent series of webinars of the University of Maryland's Robert H. Smith School of Business, professor of the practice and executive-in-residence Clifford Rossi included model risk alongside credit, market, supply chain, operational and other factors requiring attention in the age of the coronavirus. A former chief risk officer and chief credit officer in the financial services industry and principal of Chesapeake Risk Advisors, Rossi at the time of those presentations raised questions about inherent biases or inexperience affecting how models were being cited, warned that models can be "quite fragile," and underlined the need for model validation, as would be the case in any disciplined financial enterprise.
He added, though, that if public officials were motivated by models to prepare for worst-case scenarios, "that can be a good thing."
Justin Klevs of Spinnaker Consulting Group discussed in a blog post on credit risk modeling how "reasonable assumptions and historical relationships in data [are] being turned on their heads in the face of the sharp and unprecedented events that have unfolded during the early stages of this pandemic. And sure enough, as the pandemic spreads, most banks are finding that traditional loss forecasting models are quickly breaking down against these new external forces."
His recommendation, in the face of uncertainty and the need to react quickly: "Relying on a range of outcomes will be key to avoid over hedging on a specific methodology, and banks should aim to evaluate risk through a suite of different models and heuristics that cover each other's blind spots."
Beware Early Data
Another caveat, in coronavirus analytics' earlier stages, was exactly that: "Beware the earliest data," said an April 1 article by Barrie Wilkinson and Helen Leis, partners of consulting firm Oliver Wyman, on the World Economic Forum website. "When tracking and forecasting the potential number of new cases for a region, it's important to understand that the early stages of data collection can be highly volatile. The number of new cases generally becomes more predictable after regions have at least 100 confirmed cases."
They added: "Our scenario modeling shows that the degree and timeliness of containment measures such as social distancing can alter the number of new cases in an area by orders of magnitude over an eight-week period."
The McKinsey article, by McKinsey Global Institute chairman Sven Smit and co-authors, said, "Amid the fast-moving pandemic and the policy responses, economic forecasting has become an unusually uncertain enterprise . . . Forecasts in this period must be looked upon with robust skepticism."
Also noted was the fact that the Organisation for Economic Co-operation and Development (OECD) put off the March release of its forward-looking composite leading indicator (CLI).
When the CLI report was issued, on April 8, it reflected "the largest drop on record in most major economies, in line with the considerable economic shock caused by the COVID-19 pandemic and its immediate impact on production, consumption and confidence in the wake of lockdown measures."
OECD says that the reading is more "strength of signal" than a measure of actual economic contraction. Nor does it hold a clue about the duration of the slowdown, "especially as it is not yet clear how long, nor indeed severe, lockdown measures are likely to be. However, as the situation settles, even with a more prolonged lockdown, the CLI will begin to recover its ability to predict as firms and consumers begin to adapt to new (even if only short-term) realities, especially as governments begin to formulate and provide signals around longer term strategies, beyond the initial immediate measures they have had to impose."
Depth of Downturn
There is no disputing the immediate hit to U.S. GDP. A compilation of analyst forecasts in Oliver Wyman's Pandemic Primer as of early April found expected declines for 2020's second quarter ranging between 25% and 40%. The consensus, or median, of negative 28.9% would be more than three times worse than the 8.4% of 2008's fourth quarter.
Rossi of the University of Maryland points out that GDP in the Great Depression shrank 26.7% from peak to trough, in a downturn lasting 43 months. The Great Recession saw a fall of 5.1%, and an 18-month duration.
A consensus of Goldman Sachs, JPMorgan and Morgan Stanley economists, according to Oliver Wyman, had U.S. GDP climbing back near fourth quarter, 2019 levels by late 2021.
Oxford Economics' April-May Global Economic Outlook estimates a 7% decline in world GDP in this year's first half, moderating to 2.8% for all of 2020 - which compares to 1.1% in 2009. That would turn into nearly 6% positive growth in 2021 with "a return to more normal conditions," despite a "permanent output loss for the global economy" that the coronavirus shock leaves behind.
In a similar vein, the IMF, releasing its World Economic Outlook on April 14, projected what it characterized as a sharp 3% global contraction this year, "much worse than during the 2008-'09 financial crisis."
It went on to say that in a baseline scenario "which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound," global growth would recover in 2021 to 5.8% "as economic activity normalizes, helped by policy support. The risks for even more severe outcomes, however, are substantial," IMF warned.
The Economic Cycle Research Institute, while dubious of "a sustained V-shaped recovery," foresees an "extremely deep, very broad, but relatively brief" recession of around six months. But, it adds, "the jobless rate will still be very high, and it certainly won't feel like a recovery. Millions of formerly employed people will still be without jobs and incomes, so sales would still be pretty weak, meaning there wouldn't be enough demand for production to really ramp up."
These expected swings fall more or less within the anticipated 18-month vaccine timetable, a milestone that, for some, would arrive after one or more therapeutic treatments prove effective. Eighteen months is also time enough for at least one repeat wave or spike of infection if containment progress is not sustained.
Signals from Stocks
Another source - or, perhaps more accurately, "crowdsource" - of signals, the stock market, may be reacting on a shorter horizon.
Cautious optimism followed in the wake of the bear-market plunge from February's record highs. By the end of March, a scan of risk assets by JPMorgan Chase & Co. strategist John Normand led to the conclusion that "enough has changed fundamentally and technically to justify adding risk selectively," Bloomberg reported. "Most risky markets have probably made their lows for this recession, except perhaps oil and some EM [emerging market] currencies beset by debt-sustainability issues."
Goldman Sachs' strategy team including David Kostin, citing fiscal and monetary policy actions and flattening of virus growth curves, said on April 13 that barring any further surge in infections after the economy reopens, equity markets are unlikely to hit new lows.
Certain assumptions and expectations for a return to normalcy may just be priced in.
"If this doesn't go on much longer than expected, if it really is a three- to six-month event from the time we turned the switch on the economy off to when we turn it on, then markets have already accounted for that and are looking ahead," Jim Paulsen, chief investment strategist of the Leuthold Group, told the New York Times. "It could be that the virus stays hot, and this situation stays in place for three or four quarters, and we're not priced for that."
William Longbrake, a Robert H. Smith School executive-in-residence at the University of Maryland, said in an online interview: "When matters return to a semblance of normal, lower interest rates will support high stock market valuations. So, there is considerable potential that stock prices will return to or exceed previous highs within the next year or two."
A Quantitative Calculation
Dan diBartolomeo, president of risk analytics provider Northfield Information Services, has published an inference on the length of the pandemic, based on quantitative financial and epidemiological modeling, for consideration by institutional investors.
The bottom-line finding of the paper, dated March 20 and subject to future refinement, was an "implied length for the pandemic of approximately seven months." This was derived from analysis of S&P 500 volatility and options pricing theory. "So, if investors believed that the massively heightened risks would be permanent, the S&P 500 should have fallen by 78%, not the observed roughly 20%," diBartolomeo wrote.
Modeled global death-toll estimates were not seen as a "material threat to global financial stability."
"Much greater risk to investors and the world economy at large comes from clumsy handling of mitigation measures than from the virus itself," the paper said. Still, it acknowledged, "The worst scenario of global exposure leading to mass death remains . . . If countries now struggling to slow the spread of the infection are unsuccessful, the loss of life will be horrific on a human scale, irrespective of materiality or long-term impact on financial markets."
The inferred timeframe is not far off from what deVere Group's Nigel Green said of economic recovery: that it could be underway within six months, but under two conditions - a rapid rollout of mass testing, and government support of demand to prevent a continuing downward spiral.
Economics and Public Health
"The virus makes the timeline," Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, famously said. "Rough estimates of disease scenarios" in a Federal Reserve Bank of Minneapolis paper by Andrew Atkeson go out 18 months, weighing potential economic impacts of disease progression according to an SIR model of the population (susceptible, infected, recovered).
Atkeson, of the University of California, Los Angeles, department of economics, concludes "that it will likely require severe social distancing measures maintained for an entire year or even 18 months (until a vaccine can be developed) to avoid severe public health consequences."
He writes that to avoid a catastrophe on the scale of Italy's, "prolonged severe social distancing measures will need to be combined with a massive investment in health care capacity. Under almost all of the scenarios considered, at the peak of the disease progression, between 10% and 20% of the population (33 - 66 million people) suffers from an active infection at the same time. This level of infection in the population will likely require a significant diversion of the workforce from work to either self quarantine and recuperation or caring for these sick individuals for a period of weeks or more."
He says it is "hard to determine" whether "the economic costs of strong social distancing measures imposed for an entire 12-18 months" are more severe than "the economic costs of a large cumulative burden of lost work time (and life) due to the disease."
On the question of when it is safe to return to normal activity: "The model predicts that once mitigation efforts are relaxed, the disease simply restarts its rapid progression and sweeps through the population in less than 18 months, reaching its peak infection rate about 450 days from now. Thus, while the mitigation success of these countries [such as China and South Korea] is good news, a much more sustained mitigation effort will be required to capitalize on this success."
This point of view converges with the messaging from experts in public health and epidemiology - the likes of Fauci and representatives of the U.S. Centers for Disease Control and Prevention - about the need for sustained containment measures and vigilance. Elected officials in the U.S., particularly those dealing with coronavirus "hot spots," have taken up the call.
On CBS News' Face the Nation, April 12, New Jersey Governor Phil Murphy said, "Any sort of an economic reopening or recovery depends first and foremost on a complete healthcare recovery." Lori Lightfoot, mayor of Chicago, said that "all the healthcare controls [must be] in place. That means widespread testing, contact tracing, and we've got to see not just a flattening of the curve, but a bending down."
"There is light at the end of the tunnel," Richard Florida and Steven Pedigo write in How Our Cities Can Reopen After the COVID-19 Pandemic, for the Brookings Institution. "In the not-too-distant future, the pandemic will end and our cities will return to something approximating normal. What we do over the next 12 to 18 months can ensure that our city and metro economies get up and running again while protecting themselves against similar scenarios in the future."
Florida, a professor at the University of Toronto Rotman School of Management and School of Cities, and Pedigo, professor of practice at the Lyndon B. Johnson School of Public Affairs, University of Texas at Austin, present a 10-point preparedness plan for urban areas to be "back up and running as soon as they safely can," with forward-looking "plans in place to prepare for future pandemics, and any social or economic lockdowns they necessitate."
The recommended steps include making airports pandemic-proof; other cultural, institutional and infrastructure upgrades and adjustments; embracing telework; and ensuring survival of Main Street. Such projects involve varying amounts of time.
Some experts say restoration can be accomplished in well under a year - with strict adherence to distancing rules, shared commitment and acceptance of inconvenience.
Ezekiel Emanuel, vice provost for global initiatives and chair of the Department of Medical Ethics and Health Policy at the University of Pennsylvania, called for such measures as nationwide shelter-in-place for eight to 10 weeks, a concurrent mobilization of public health resources, mass education, and blood testing to certify immunity, in order to "safely restart the economy in June" - words in the headline of a March 28 article by Emanuel in the New York Times.
A couple of weeks later, however, "We still don't have a consistent shelter-in-place policy nationally; there are too many exceptions allowed in different states," Dr. Emanuel said. "We haven't normalized things like wearing masks outside. We need infrastructure for testing in real time, so you don't get results five or six or seven days later. We need real contact tracing that uses technology so that you can do it very rapidly."
Social distancing may have to remain habitual: A Harvard T.H. Chan School of Public Health study in the journal Science suggests "prolonged or intermittent social distancing may be necessary into 2022," with surveillance continuing perhaps to 2024, as long as a resurgence in contagion is possible.
"Crush the Curve"
Harvey Fineberg, president of the Gordon and Betty Moore Foundation and the recently named chair of the Standing Committee on Emerging Infectious Diseases and 21st Century Health Threats, National Academies of Sciences, Engineering, and Medicine, set his short target in a New England Journal of Medicine article, Ten Weeks to Crush the Curve. A unified national plan, diagnostic tests by the millions, and sufficient supplies of personal protective equipment (PPE) for health workers are three of his six quick-turnaround recommendations.
"If we persist with half-measures against the coronavirus," Dr. Fineberg said, "we risk saddling the economy with a long-term and avoidable burden of anxious consumers, illness, higher medical costs, and constricted business activity."
Former Food and Drug Administration commissioner Scott Gottlieb, resident fellow at the American Enterprise Institute, had a hand in AEI's National Coronavirus Response: A Road Map to Reopening; and A National COVID-19 Surveillance System: Achieving Containment, a publication of the Duke Margolis Center for Health Policy.
The AEI paper maps out four phases: stop the spread (current); state-by-state reopening; establish immune protection and lift physical distancing; and rebuild readiness for the next pandemic.
The Duke Margolis Center paper sets out objectives for a "test and trace" infrastructure, a national syndromic surveillance system, capacity for widespread serologic testing to identify immunity, and rapid response capacity for isolation, contact tracing, and quarantine.
Regarding timing of the surveillance system: "as soon as possible, and certainly in time for the fall, when COVID-19 may become a seasonal threat."
Testing and Data Management
Common to virtually all of the prescriptive agendas is a call for widespread testing and the data it will yield. "Testing, contact tracing, isolating, and supporting those who are positive or exposed" is the first of "six indicators" that California Governor Gavin Newsom listed on April 14 for eventual modification of the state's stay-at-home order.
James Bullard, president of the Federal Reserve Bank of St. Louis, according to a Reuters report, said that near-universal testing of the U.S. population would be part of a risk-based plan to ensure "a safe work environment knowing this disease is out there and we are not going to have a vaccine in the short term."
A National Plan to Enable Comprehensive COVID-19 Case Finding and Contact Tracing in the U.S., from the Johns Hopkins Center for Health Security and the Association of State and Territorial Health Officials, spells out the need.
While social distancing has had some effect on the spread of the virus, it "cannot be sustained indefinitely at this scale," the report says. "As COVID-19 incidence in states begins to decline, a new phase of pandemic management will be required to avoid resurgence of the virus while also allowing individuals to return to work. Civic and community engagement will also be needed at appropriately timed stages throughout mid- and late 2020.
"A national effort to scale up and expand local, state, and territorial case investigation and management is necessary before U.S. communities can begin to return to 'normal.' If we can find nearly every case, and trace the contacts of each case, it will be possible, in time, to relax the bluntest approaches: the extreme social distancing measures, such as stay at home orders, and realize the commensurate social and economic benefits."
Communities would need: ready access to rapid diagnostic tests for all symptomatic cases or those with a reasonable suspicion of COVID-19 exposure; widespread serological testing to understand underlying rates of infection and identify those who have developed immunity; and the ability to trace all contacts of reported cases.
"In order to trace all contacts, safely isolate the sick, and quarantine those exposed, we estimate that our public health workforce needs to add approximately 100,000 (paid or volunteer) contact tracers to assist with this large-scale effort," says the report, adding that full deployment would require Congress "to appropriate approximately $3.6 billion in emergency funding to state and territorial health departments."
Also implied is the massive data management challenge of organizing and communicating contact-tracing and surveillance information to state and national health authorities.
MIT computer scientist Alex "Sandy" Pentland agrees that identifying and certifying "safe workers" could be an economic-recovery imperative. Taiwan, Korea and Singapore have done essentially that with brute force, big-brother-like tactics, Pentland has written, but a digital identity system, built on existing infrastructure with available technology, can accomplish those ends while safeguarding personal and health privacy.
"Individuals with health certification can have their mobile phone automatically check the status of people around them without sending personal data off of their phone or identifying the people around them," Pentland says. "This is accomplished by use of either sophisticated methods such as Secure Multiparty Computation (already nearly universally deployed for some types of updates on mobile phones), or simple 'risk maps' aggregated from anonymized data and appropriately sanitized using differential privacy methods (such as employed by the U.S. Census Office)."
Degrees of Optimism
Even in the dark hours, there are glimmers of resilience.
While McKinsey was saying "the course of the pandemic and the human tragedy it is causing are far from exhausted," the firm's Global Economics Intelligence report even in March detected a pattern toward recovery, albeit "embryonic and fragile."
A less sanguine Kenneth Rogoff, the Harvard University economist who co-authored the financial crisis history This Time Is Different, said in a New York Times article: "I feel like the 2008 financial crisis was just a dry run for this. This is already shaping up as the deepest dive on record for the global economy for over 100 years. Everything depends on how long it lasts, but if this goes on for a long time, it's certainly going to be the mother of all financial crises."
"Simply put, it may be too early to tell" if financial policy actions will have the desired effect, said Tobias Adrian and Aditya Narain of the IMF. "At this point, conditions in many countries are as severe as the adverse scenario of the stress tests that banking regulators commonly use to assess the strength of their banking systems. And it might get worse," which would require consideration of more adverse scenarios.
That's scenarios, plural. Oliver Wyman's Barrie Wilkinson and Helen Leis said scenarios "are only a starting point for conducting a more detailed analysis based on the particular circumstances of different locations. But the data make one thing clear; if companies and hospitals tie their futures to a strategy based on one potential scenario, they might miss the mark by an order of magnitude. The richer the understanding of the possibilities, the less destabilizing the outbreak will be - and the sooner life can begin to get back to normal."
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