Part I of 2: Ultra-low Interest Rates and Their Consequences

It is a strange time in the capital markets. We have negative interest rates for junk bonds. Mortgages where the bank will pay borrowers interest when they take out a home loan. Some depositors in Germany now have to pay the bank interest on their deposits. In the wake of the coronavirus, such strangeness could become widespread. Some economists are now making the case for moving to “deeply negative” interest rates — rates -3% or lower. The head economist at the Bank of England just recently confirmed that the British central bank is considering moving to negative rates “well below” zero.

I keep seeing opinions saying that the CFR of the coronavirus is ~2% — and not to worry, that’s probably a higher end estimate because we’re missing lots of mild cases. I wish that were true, but let me explain why that simply not the case.‬ And why even if it was, you should still be tremendously concerned.

Hospitalization and ICU Rate

Firstly , let’s talk about the hospitalization rate. Every reputable source agrees that 10–20% of cases require hospitalization, and 5% require an IUC. Even if we stopped the whole discussion right here that would be enough info for tremendous concern. There is not anywhere *near* to that number of ICU beds or ventilators in the county. If this becomes widespread- which experts now agree it almost certainly will — at least 5% of people will need, ‬and largely be unable to get, significant medical care. …

The novel coronavirus spreading around the globe is now a pandemic in all but name. Iran is estimated (based on cases exported to other countries) to have 18,300 infected. South Korea now has 1700+ cases, Italy has found 655 infected. Around the world — excluding China and the cruise ship Diamond Princess — a large and growing percentage of these detected cases are from local community transmission, and disturbingly from unknown transmission chains.

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Graph via @GHoeberX — an excellent source of coronavirus analysis on twitter.

According to the CDC, the spread of the virus in the US appears inevitable. “It’s not a question of if this will happen, but when this will happen and how many people in this country will have severe…

Status of the Outbreak

Just over two weeks ago I wrote that there wasn’t enough data yet to say what the likely outcome of the virus would be. Last week I wrote that the outlook had worsened as more data from outside of mainland China became available — but that it was still early in the epidemic. Today, the four reported deaths in Iran (and the two exported international cases) makes it extremely likely that there are hundreds of cases in the country. The Iranian health ministry says that:

Based on existing reports, the spread of coronavirus started in Qom [and] has now reached several cities … including Tehran, Babol, Arak, Isfahan, Rasht and other cities and it’s possible that it exists in all cities in Iran.

With better data the range of outcomes has narrowed and the likelihood this blowing over seems small.

Last week I wrote that there were not a lot of hard facts to go on when trying to estimate the likely outcome of the novel coronavirus outbreak. Firstly, because there was simply not a lot of data available, but also because as I said last week:

…the numbers from China are inherently unreliable (lets not forget that China deliberately drove sick SARS patients around in ambulances to hide them from the World Health Organization back in 2003)

In the past week the case against trusting China’s data has strengthened considerably. Barron’s reported that an analysis of the variance in China’s data showed it was too perfect to be real…

Hard facts on the coronavirus are surprisingly hard to come by.

It is unclear how many are currently infected. Not only because the numbers from China are inherently unreliable (lets not forget that China deliberately drove sick SARS patients around in ambulances to hide them from the World Health Organization back in 2003), but even if you trust China’s data it is clear they are hitting the limits of their testing capacity.

Officially, just over 40,000 people have been confirmed to be infected with the virus in China. However a study in the Lancet estimated back on January 25th that 75,000 people had already been infected and that the virus was doubling every 6.4 days — which would suggest that more than 300,000 people may now be infected with the virus. But no one knows the true number. …

Adapted from chapter two of Sleeping on a Volcano: The Worldwide Demographic Decline and the Economic and Geopolitical Implications

In 1968, Paul Ehrlich published The Population Bomb. Opening with the line “The battle to feed all of humanity is over” Ehrlich argued that the increase in fertility rates and the accompanying surge in population that was the baby boom meant that “hundreds of millions of people are going to starve to death.”

In retrospect, we know this did not happen. But to be fair to Ehrlich — the scale of the baby boom was tremendous and his prediction was not unreasonable. The enormous increase in world population did not result in worldwide hunger as Ehrlich predicted, largely because of the work of Norman Borlaug, “the man who saved a billion lives .” …

The Developing World Is Increasing Emissions At Such A Rate That Any Emission Reduction By The Developed World Will Be Offset — It’s Time For A Plan B

Writer H. L. Mencken once said, “… there is always a well-known solution to every human problem — neat, plausible, and wrong.” For climate change that well-known but wrong idea is that the world can meaningfully reduce emissions by switching from fossil fuels to renewables in the required timeframe. The Green New Deal is the epitome of this approach. It is an ambitious plan which proposes to spend trillions of dollars to convert our economy to renewables and have the country reach net zero emissions by 2030. It sounds good — it feels good — but if you look at the numbers and the reality of the global situation, it’s simply the wrong approach. …

Moving into election season there is a lot of discussion about spending, taxes, tax cuts, budget deficits and the like. But very rarely is the entire federal budget shown in sufficient perspective to make the numbers discussed meaningful. Even more rarely is the data shown over a long enough timeline to understand the trends. The numbers are further obscured by political partisans cherry-picking data to support their positions and by bipartisan accounting tricks which Congress has foisted into the official budget projections.

While the country will certainly be discussing federal spending going into 2020, the issue of the federal budget deficit has fallen sharply in importance to Americans. According to Gallup polling, the issue has fallen from its high in 1996, when 28% of Americans said the federal budget / budget deficit was the most important problem facing the country, to only 2% who felt that way in 2018. …

If you’re an avid China watcher you probably already know that the military balance of power in Asia has shifted significantly over the last two decades. However, if you’re just now starting to take a closer look at the region given the heightened US-China tensions with the ongoing trade war, then you may not fully grasp the scale of China’s recent military buildup. Based on current trends, respected analysts predict that China could achieve military parity with the United States in less than fifteen years.

We must be wary of extrapolating too far into the future from trends which may not continue. There are a host of challenges currently facing Beijing. China has an approaching demographic cliff, an asset bubble worse than Japan’s in the 1990s, and worries about capital flight if the yuan continues to devalue. …


Joshua Konstantinos

Founder and Global Macro Strategist at Cassandra Capital LLC and author of Sleeping on A Volcano

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