CoVid-19 coronavirus. A black swan’s potential impact on pensions, society & geopolitics
Stand both firm and flexible if you can, for the rollercoaster ride ahead. Don your tin hats, get your life raft, stock the cupboard….and check in on your neighbours! For the trauma that could hit us all, either this time or via a subsequent more damaging pandemic, will likely test our social cohesion, our governance structures and individual character to the max. In short, our very way of life could be about to change, dramatically. Perhaps for just a short spell, but if not, then quite likely for longer.
Some of the following may disturb. Though not intended, it may sound like panic. It may even offend. But if any of this is a surprise, you just haven’t been paying attention. And if I’m overreacting? Well, only the paranoid survive ! And of course, I hope I’m wrong. I’m also not an epidemiologist, but I am in the business of managing risk, so on that basis here are my thoughts.
As many of you know, I work in finance. Investments in particular. So I’ll start there. Markets are off, down a good bit (as of 29/2/20, generally off say 10–20% or thereabouts from their, to me ridiculous, peaks). The main negative financial and economic scenario impacts of CoVid-19 are now being speculatively assessed and reported as “significant”, or otherwise approaching a crisis-engulfed, very sweaty level. Even the central bankers, those foghorns of moderate and mediocre “herdism without leadership”, are now on board. Packages of “measures” to follow. News at Ten. The common knowledge is changing, has now changed rapidly from “Don’t worry; it’s ok, it’s over there” to “Oh shit, it’s here, it’s everywhere”.
But those economic and market adjustments are just numbers. Ya know, old cartoon stuff like “Yay, GDP” — down drastically; “Yay, Wages” — down somewhat, for those who can retain a job; “Yay, Production” — down a ton; “Yay, Chinese Purchasing Managers Index” — down to 29–30 (below the level in 2008) for both manufacturing AND services — a “never seen before” level.
But down small, down large, down whatever; it doesn’t really matter. No, financial and other numbers and all that gobbledegook, from whichever government or economic source, credible or otherwise, in the CoVid-19 context are of declining importance or consequence. There’s no great learning to be had here in number-ology. Instead, the key lesson perhaps soon upon us, looming large now in our midst, our key truth, the lesson we seemingly need to learn the hard way over and over again is this….That which can be counted, doesn’t necessarily count. That which cannot be counted, counts for a whole lot…at least sometimes, and this is such a time.
As an actuary that sentiment may go against every grain in my professional thinking, but it’s not against my human understanding. The impact and pain around the corner, if CoVid-19 develops as I expect, at least until a vaccine is produced, really will run deeper. Through our families and friends; through our neighbours and our work colleagues. This is the more important stuff; the stuff that matters, the stuff that really counts. So we best be ready. Or we best get ready, and soon.
Let’s check what we “know”. The R0 (rate of infection) for coronavirus so far calculated or estimated is somewhere between 2–3 (roughly the number of people each infected person subsequently infects). That means it infects geometrically and infected numbers rise exponentially, before efforts at containment (which in theory could hopefully bring that R0 number down towards 1, whereupon onward transmission is more or less manageable, but read on — we’ll come back to containment efforts and impacts later).
Want to know what exponential looks like? In real life? It’s small explosions, maybe quite a few, maybe lots, followed by big, big waves. Huge ones in fact. (This bit is all credit to Ben Hunt, @EpsilonTheory, for the great analogy).
It’s Iran, where the sight of the health minister sweating and showing obvious symptoms of “something” whilst doing a press conference to convince the nation everything is under control, will go down in the annals of documentary clips. Reminds me eerily of the intro stills from Survivors the British post-apocalyptic BBC fiction drama television series broadcast in the seventies. That series concerns the plight of a group of people who survive an apocalyptic plague pandemic, which was accidentally released by a Chinese scientist and quickly spread across the world via air travel. Hmm!
Fact and fiction; strangely close bedfellows sometimes.
It’s Italy, kaboom. Now Algeria, Norway, Brazil, Denmark, New Zealand, country names piling up; bang, bosh, boom, boom. How this starts. These are the small explosions. Explosions nonetheless.
Meanwhile, here in the UK last week started with the (almost daily) NHS “crisis” reports we get each mid-winter. Business-as-usual. Struggling to cope with “normal” and now reported almost gleefully by the media. In the weeks and months to come we may well re-define, re-learn, really begin to understand, the true meaning of that word: crisis.
Rapidly passé narrative defenders (still) shout, “Well what about the flu? It’s not much different.” Making ad hominem arguments, drawing false equivalences (“but cars/bears/surgical errors/guns/the flu kill x00,000 Americans/Brits/humans every year. And we’re worried about coronavirus?”) Some still worry not. “The mortality rate at 2% is not so bad! Not much different to flu. And flu kills 650,000 every year”. Out of 350million to a billion infected worldwide. [Shome mishtake surely on that maths; anyway, let’s move on].
“This coronathingy; it’s no big deal.” Almost like, “Let’s have more deaths from something new that we can’t, at least not yet, but no doubt of course will, very soon, or for sure eventually, with cast-iron certainty, control.” But as with most GDP claptrap, the headline mortality rate number is far less important than the distribution across the population. And whilst a quick death is say, cheap and affordable, a longer drawn-out battle for survival is far more wearing on society, especially for the survivors.
Moreover, (again) this is additive. That is, we’ll have normal flu and everything else (bears, guns, car accidents, cancer, etc.) PLUS coronavirus thank you, not INSTEAD OF. And as implied above, the death rate is not the real point anyway. Very much “au contraire”; it’s the survivors who’ll impact society most, short and perhaps long term.
Firstly the key stat is this…as many as 1-in-5 “infected” need hospitalisation with up to 20–25% of those getting serious pneumonia or other complications; again the distribution is important (see below). Most of these people will pass into and hopefully out of a serious condition, over some time, possibly a month or so, hospitalised (subject to available healthcare real estate ie beds). China‘s now indicated that 14% of those who’d been discharged from hospital as “recovered”, have since re-presented as being re-infected. (The experts don’t yet know how and why it transmits, let alone how and why it re-infects.) So, hospitals fast become institutionalised petri dishes, more so even than cruise liners! Hence the “don’t turn up here” advice, unless its an emergency, of course.
Now multiply THOSE pneumonia rates, the “complications” morbidity and re-infection rates by some big population number of infected. What big number? Well, leading Harvard epidemiologist Marc Lipsitch believes that within a year up to 70% of the world’s population could/will have been infected.
If that comes to pass, then just as a mathematical, theoretical, philosophical, ya’know management scenario exercise of course, because I really don’t want to be panicking anyone, that’s maybe 20million or more infected in the UK (after halving Marc’s top end numbers to be perhaps “conservative”). That means the numbers additionally fighting pneumonia or hospitalising lie in the maybe 2–4million range, possibly more, all going through pneumonia or similar treatment or at least seriously impaired for a few months.
You getting the picture yet? Never mind the average death rate being at flu levels.
That’s maybe 400,000 extra deaths and at 10 times the average death rate, a minimum of 500,000 say and as much as 3–4million in the UK becoming quickly negatively productive; many needing a hospital bed, all needing our support. Quickly. In say 12–18 months. And whilst the NHS is struggling to cope with “normal”? And with maybe 15–20% of hospital staff becoming infected also, if we halve Wuhan’s experience (to give us the benefit of “better” services and practices)?
Still sound like a marginal “flu+” game here? I’m sorry, but this “no worse than flu” narrative, like many among us soon potentially, if not dead, will be laying on the floor. That my friends is the big, big wave.
To borrow from a Hemingway character, “So how did I go bankrupt? How did the old world die? Gradually…..then suddenly”.
Speaking of which, here are the actual mortality rates by age as calculated from infected numbers (mainly Chinese government ie CCP numbers, so the phrase “comes with a health warning” is cruelly and doubly apt)….
AGE / DEATH RATE (all cases)
80+ years old / 14.8%
70–79 years old / 8.0%
60–69 years old / 3.6%
50–59 years old / 1.3%
40–49 years old / 0.4%
30–39 years old / 0.2%
20–29 years old / 0.2%
10–19 years old / 0.2%
0–9 years old / no fatalities
https://www.worldometers.info/coronavirus/coronavirus-age-sex-demographics/
A couple of quick points. 1) No one knows the mortality rate, at any ages. Dividing the number of deaths to date by the number of infected is not the accurate mortality rate. That’s missing a lag effect from cohort. Also missing variation across age ranges etc. Important, as is location/source. Even with an age and location summary, you’re off course due to the first issue. 2) The mortality rate is an estimate and needs careful analysis. Number of infected, the denominator, is a key major doubt. Only time will tell. some say it’s likely to be much higher overall than 2%; some a little lower.
Nevertheless, on this basis, for the young and healthy the danger is most likely “flu” or maybe even less. But at older ages the death rate seems to rise steeply, nearer to 1-in-6 if you’re over 80. For any ages over 60, it’s significant, more so in that it’s additive (eg to the flu distribution and other killers); and higher for those with existing ailments. Yes, every other extended family really could lose an elder family member (or perhaps two) to this.
Secondly the virus is alarming not despite the low death rate, but because of it. Unlike SARS and MERS, which came before this, the low death rate means it’s less isolatable (and these other diseases had much lower R0 ie infectiousness levels). With CoVid-19 the infected apparently can show no symptoms (incubation period of anything in the 1–3 weeks, maybe wider, range), while they’re infectious and infecting. As mentioned above, the virus also seems to re-infect a material portion of recovered patients. And people die in different ways, including multiple organ failure. It’s almost “offensive by design”.
But believe it or not, there will be “winners”, pockets of economic, maybe not personal, beneficiaries (a bunch of drugs or healthcare companies, pensions insurers perhaps, the millennial generation — see below). However the pain and loss from premature deaths amongst our older friends and family cannot be offset by, say, an increased funding level in your DB pension plan. That which can be counted, will not count. A weird segue to my favourite technical subject: pensions. How will the CoVid-19 virus affect our pensions world?
Insurers, and trustees could well gain at the expense of corporates. The call here is that the liabilities will shed value as older-ages mortality spikes materially. Faster than real interest rates decline? Probably. Faster than asset values will decline? Maybe, maybe not, but the reduced mortality “boost”is definitely irreversible, whilst the asset and real interest rate decline may not be, at least in the medium term.
Should they find themselves sitting on improved funding levels, then morally at least and perhaps in conflict with elements of a more extreme governance role interpretation, Trustees may need to not just bank that gain, but to step up in a wider social sense to relieve pressure (temporarily) on active employees through the sponsor company contribution rate. You know, like the “S” in ESG implies. To minimise unemployment will remain a worthwhile goal, even if in the short term for sure, employers instruct workers to stay at home if they get a sniffle. As HSBC, JP Morgan, Royal Mail and plenty of others have done this last week. The sniffles/hopey/stay-at-home instruction will to my mind contain things only marginally, given that the virus is infective even before the symptoms arrive and that testing, like life, is imperfect at best….or as it seems to be in the US, only begrudgingly undertaken if at all (what Presidential incumbent would want to see rising infected rates published as we go further into the election year) and subject to insurance cover or high unit cost (I’ve seen $3,000 quoted for a test), thus inflaming the potential for social disaster, adding to personal health hazard and further undermining already-ebbing confidence in today’s Sopranos “administration”.
So in summary, maybe we can expect life insurance companies and pension funds, with those of the latter that are larger relative to the sponsor, at the more mature end of the spectrum (ie heavier with older aged pensioners), in deficit and running an asset/liability mismatch to show the greatest gain in balance sheet / funding levels. For Trustees and the wider industry, the new thing to grasp is that for many years the longevity impact on liabilities has been rising, pretty steadily with longer lifespans, through “life improvements” (again merely measurable rather than also meaningful) and have also been none too volatile ie longevity risk has been quite stable, increasing (OK the really only very recent exception is the US where “deaths of despair” and obesity appear now to have “ceiling-ed” lifespan improvements). Real bond yields ie the measurement of liability net present “value”, have been a little more volatile, trending lower (ie increasing liability valuations), whilst assets have generally been less volatile (particularly since central banks have been running, sorry I mean supporting, markets post the GFC, though with concentrated spikes, such as the GFC itself in 2008–9, and this present one).
Now however, from this pandemic (if that’s what it becomes), for the first time we may see quite extreme longevity (ie liability) volatility, and that’s something new.
You don’t think so? Run those higher ages CoVid-19 death rates above across the pensioners liability book. And remember these are additive to anything else already out there, already in the actuarial mortality assumptions. Get the picture?
So with a spike in deaths at older ages what else is possible? Well an acceleration perhaps of inheritance wealth transfer to the next generation and through to millennials. This may be a saving grace for society; hard to tell and literally tough to say. Wealth transfer acceleration to surviving younger generations, over time, may very well aid some sort of social renewal, providing investment/risk backing to the younger and middle aged productives, just when they, nay we all, need it! Not a salve for the personal pain, but support for a chance to renew.
What are the impacts of a relatively rapid generational transfer of inherited boomer wealth (assuming that wealth isn’t mashed in the meantime)? What are the consequences of rapid one-off “rebalancing to the younger generations”? (BTW if a forlorn opportunistic Remainer shouts that we should then really have another Brexit referendum re-run…“coz so many old people, ya’know, those Brexit voting racists hankering for a return to a lost imperial past, have now died. And so implementing the 2016 referendum result will now just be soooooo undemocratic”….I literally will scream, for a long time!. But thankfully, I think that sophistry has also died.)
So, what, if any, are the saving social graces? I am, after all, an optimist. Beyond the structural adjustments just mentioned being potentially positive long term (in a cloud and silver lining way I guess) they might include:
- re-distributing wealth and opportunity across the age ranges (if not necessarily across wider demographic / geographic / “class” structures) and thus empowering the younger generations with risk capital (as mentioned);
- urban to rural population movement perhaps as cities are deemed more “infectious”;
- global economics and business models being replaced by national and ultimately even more local emphasis as we learn again (and here I paraphrase Mervyn King’s observation on banks) that in life, these models may be global, but in death it’s all about the national or local. At a personal level, when all is going well, we’re all globalists, but as we’re finding out, when the proverbial hits the fan, we’re all very quickly national/local. In this instance, for clarity, pretty much all your CoVid-19 impacting policies and support mechanisms will be national/local;
- a lower global carbon footprint — well I never, there’s a bounty. For sure the world’s CO2 footprint for 2020/21 is going to shrink, possibly massively. For the sociopathic extreme environmentalists in particular, who think that we humans are the virus, I guess that could be a nice by-product. But again, unlikely to offset the pain of lost loved ones or the inconvenience of queues for food at Waitrose.
- cheaper housing — extra supply freed up in line with older-age deaths;
- faster vaccine development (see below);
- (re)-development of more local supply chains;
- rebalancing of corporate vs individual wealth ownership (not sure I actually have a rationale for this last one, maybe just my hope springing eternal, or a by-product or reducing globalisation).
Sadly, most other benefits (eg return to “normal”) are only reached when the / a virus really is ubiquitous. At least then, we’ll likely be beyond masks, we’ll be beyond casual, maybe understandable but nevertheless distressingly sad, anti-Chinese racism in crowded spaces. (At a recent major European investment conference, I’m told it was noticeable that handshaking was down, and that handshaking with Chinese attendees was almost non-existent). At least then, we’ll be no more scared of flying to SE Asia for a holiday, than of going on the tube. Mass events may then be open to attend again, once we’ve got to grips with and lived through the worst of the impact adjustments. Who knows, LiveNation’s share price and those of airlines and tourism companies might even recover. Though meanwhile suggest you likely write off the Tokyo Olympics! (Japan, now there’s an aged society, where adult nappies outsell those sold to infants, that seems particularly vulnerable). And the 2020 Euro Football tournament is probably gone too. Depends, on whether the weather warms up to reduce CoVid-19’s R0.
More broadly, of geopolitics, what is there to learn, both from where this all began and where it might be going?
Two dead narratives for sure: 1) “China is wonderful; just look at how economically powerful, all-round brilliant and technically productive it’s become.” Just sweep that ole governance / transparency / values thing under the carpet would you please? After all, I’m invested now;….and 2) “Globalism is of great universal benefit”. I’ve covered this subject before (www.pensionstrumpbrexit.com). Suffice to say, that “just-in-time” management processes would accelerate the demise of global supply chains and that globalisation (ie the supply chains being global) is likely to exacerbate any economic downturn. This is a supply AND a demand shock. Whilst globalisation has undoubtedly benefited billions in emerging markets, large swathes of developed markets populations now realise the long-term cost they’ve paid to obtain 4 T-shirts for a fiver in Primark/Walmart/Tesco. In the context of a potential (to my mind, likely) global pandemic, that Developed vs Emerging Markets distinction is null and void. Both worlds, pretty much all humanity are now in the same battle together, facing the indiscriminate nature of CoVid-19, the black swan virus that may sound the death knell of globalisation.
On the first of these two narrative themes more generally, one key conclusion of a pandemic scenario is a “rapid erosion of trust in governments”.
In this case the “source government”, China, is frankly facing international humiliation, with reputational damage bigger than Tiananmen Square, and much bigger than the Hong Kong riots. It’s one thing for the NBA to help sack the odd coach who tweets in favour of the HK rioters for fear of losing out on Chinese money. But when your countrymen and women are dying in their hundreds, thousands or even hundreds of thousands from a virus “released” on your watch…and your data, propaganda and containment efforts fall short, then your money is no longer wanted elsewhere or at least is certainly less attractive. Belt and Road? More like seat belts and rollercoaster.
UPDATE: Compared to the US (a democratic, “free”, capitalist society), China (a centrally-planned, collectivist, socialist society) has been aggressive and able to implement radically on social distancing. As a result it now may have capped the virus’ growth. China may thus lead the recovery and their governance may thus come to lead the world, given the US’ likely demise at the hands of its incompetence.
In China’s potential favour the CoVid-19 genome sequence was published rapidly, enabling vaccine professionals worldwide to start work swiftly (average time to create a vaccine I’ve seen quoted is 6m, including testing). However I note that the Shanghai Public Health Clinical Centre which released the sequence was ordered to close the next day for “rectification”. Almost as if the CCP regret the early info release and loss of control.
For me, too many further suspicions compound, that a jury might view as “circumstantial” or maybe even “sufficient to convict”…. The only grade 4 biolab in China is in Wuhan. It’s had a prior history on leaking transmittable diseases (SARS). There’s an apparently common practice in China where lab technicians sell the dead animals after they’ve run their tests on them, down at the market, for extra cash. Early reports that there may be an “unnatural” thread ie a man-made insertion to the DNA of CoVid-19 are not yet authenticated. But certainly there has for some time been widespread concern over the “leadership” amongst Chinese gene scientists whose technical drive and ethical practices “know no boundaries”. And then there are the published CoVid-19 cases numbers. Exquisitely, and in the early days almost binomially, patterned, they easily fall prey to the old suspicions over China’s data output integrity. Believe in these numbers however and since the more recent trend is “positive” (on the the deaths-to-infecteds canard) you might also believe we are all over-hyping CoVid-19’s impact, that we are “hive-minds” spewed out by Twitter (or “cybercondriacs”, as the FT delightfully penned and pinned it). Maybe you’re right, but I just try to look at incentives. I just don’t buy that China (or the US) is on top of this, or anywhere close (and too many governments, despite best intents, may be destined to deliver comparable incompetence). On China I smell a rat, not a bat. At best, could something close to being a vaccine, eg a failed vaccine, have some of the weird properties of CoVid-19? Dunno; I’m not qualified. But either way, a low probability / massive impact event is a risk to which I pay very close attention. I wear a seat belt when I drive (and would still do so if it wasn’t compulsory).
Looking more widely, Presidents Xi and Trump have been and are now in lock-step on this. Neither may survive, without a vaccine — literally and politically. The former may go, in time, for the sake of the CCP; the latter, for the sake of us all. In a final flailing rally, I fully expect The Donald to shout “BioWeapon” from the White House rooftop in the next month or so. It may even play well for him, but only if a vaccine comes to his rescue. Israeli tech teams I understand are fast on the case and claiming 3 months is possible. I’d even back the Chinese to get there first or be close to it. Do the math: best, largest bank of data; inside knowledge (?); earliest start; biggest incentive by far! They could even come out of this OK. Better than OK. They could be heroes.
On the other hand, is there a legal case to answer in due course, if this was man made, if Chinese government / corporate negligence or worse came into play? Top legal minds specialising in international law can advise on reparations, jurisdiction, process (costly, long), likelihood (small) etc. but I bet the top US administration lawyers are on this already. At least as much as that administration appears to focused on health support (and here I refer to physical, not market, health). Who knows what value of claims might be justified, if CoVid-19 were found to be “man made in China”? Perhaps tens of millions times millions of dollars? That’s trillions. What price or value for the Chinese “miracle economy” then?
The final point is of course one of trust and confidence. Already reeling in the west, erosion of trust in government would likely accelerate. Hardly surprising. All governments are struggling to balance: identifying infecteds, contact tracing, social panic, political liability, targeted support and resources to individual patient care. Quite a challenge. IMHO both China and the US are where the greatest political tensions could shock (Bernie Sanders for a late inside run on the rails anyone?). The former for already understandable “source” reasons; the latter as the health infrastructure is below par, poorly distributed for the masses and the incentives at the top are very much awry politically, especially in this, an election year.
I suspect overall, governments will be found wanting if the pandemic hits hard (though am thankful that here in the UK the NHS, despite its winter struggles with “normal”, might just be the best bet around). That’s usually a safe bet IMHO, and perhaps in this case inevitable. But that doesn’t mean society should fail. [I even hear that “No-deal” Brexit contingency planning for supply shortfalls could be of benefit — OK, no, let’s not go down that rabbit hole again. More important things at hand.]
Yes it may be a crisis, a post-GFC crisis, a post-tech crisis even; the black swan we’ve dreaded and not just in financial markets. And if so, to survive, you best be plugged into your community, local or otherwise. And yes, we CAN survive this. But we have to be firm culturally about what we are defending and we have to be operationally flexible to survive the storm. Firm and flexible. So we huddle round. We go local. That is the necessary and rational posture. And that is the natural defence strategy for whole societies, when faced with a foe. Local, firm and flexible. Can our governance structures adopt this approach? Quickly enough? Can our governments hold on to our trust? Only with full transparency, honesty and the stiff resolve to take some very tough decisions.
And in the midst of all this, there’s you. What are you going to do?
After you’ve sorted out your immediate family and your home, there’s maybe your job, if it remains. For a while, just as in 2008, focus must be on those nearest and dearest. In governance, in our jobs, in our businesses and in our communities.
So gird your loins and get into that defensive, firm but flexible, formation. Look around you. Engage your community. Keep your friends and loved ones close by. For the challenge shared can, especially locally, be overcome.
