The Coronavirus Will Be the Defining Event of Our Generation
Note: I drafted this on Friday. It’s getting less contrarian by the minute.
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When it comes to the coronavirus, things could get a whole lot worse before they get better in almost every respect — socially, (geo)politically, and economically. I share these thoughts below in order to induce “panic”, a controversial way to say “seriousness,” amidst what is otherwise a sea of complete unseriousness right now in the West.
We’re on the cusp of a once in a generation event.
It’s not unreasonable to think the coronavirus could kill ~25 million people globally this year (0.3% of the population, with older people especially susceptible); spark a severe global recession, reset of the US healthcare system, and shut down of major cities & entire supply chains for months; and/or permanently shift many of our social behaviors.
I remain a long-term optimist, but 2020 will be bleak, especially for the US, which is where I live and where I’ll focus most of this post since we seem to be one of the most at risk countries in the world right now.
Trump’s Bet The Country “This Is Fine” Response
If I were to defend the US government’s response to the coronavirus so far — at gunpoint and using the most charitable assumptions — my argument would go something like this:
“Based on the data we’re looking at overseas, this pandemic appears inevitable, and most people will contract the coronavirus. That said, most cases will be mild and this will end up looking like a bad (very bad) flu season rather than an apocalyptic health care crisis, even if people lose their minds for a few weeks out of irrational fear.
Perhaps 40% of the country will get this, but then only 0.5% of those people will die, and most of them will be old or sick already. That’s much worse than the flu, and much worse than the swine flu, but at the risk of sounding callous, it’s a mere ~500k incremental deaths this year. Given that 3 million Americans die in a typical year, perhaps it’s better for us to rip off the bandaid; let everyone catch this; minimize alarming over-preparedness measures to avoid social and economic hysteria; and let what should be a short term crisis run its course until it is killed off by warm weather and natural recoveries.
It won’t be that bad.”
This is certainly one strategy.
It’s a “bet the country” strategy from which there may now be no turning back. But it could still prove ok (lucky?) if rosy assumptions surrounding infectiousness and fatality rates of the coronavirus hold true.
Hope tends to be a pretty piss poor management strategy in most cases, but the truth is that most course correction options at a federal level may be politically, economically, and socially impossible in a democratic society.
If our strategy is to even preserve options to aggressively contain the coronavirus, we’d better ramp up testing (like, yesterday), pass emergency health coverage reform for COVID-19 patients (not to mention a monster stimulus package), and create enforceable quarantine counter-measures.
Instead we have this f*cking bullshit:
We should hope the dawn of spring bends the virus infection curve; that this thing mutates to a milder version; and that the federal strategy of hysteria minimization vs. containment — while inconceivably risky to me — proves ok.
I want that to be the likely scenario, but it’s not the one I’m planning for. My expectations are darker, as I think this is a slow motion train wreck that will cause some of the greatest tectonic shifts in our lifetimes.
Bad, But Temporary?
The non-healthcare impact is already obvious, as we’re likely heading towards a global recession. The only question is how deep that recession will be, and how long will it last.
In the US, the Fed’s emergency 50 basis point emergency rate cut last week was the first in over a decade. The previous two cuts of that kind took place following the Lehman bankruptcy, and the September 11th attacks. That’s not the type of move the Fed makes off-the-cuff. In fact, rates globally are likely heading to zero or negative in a matter of months (or weeks).
Japan may already be in a recession thanks to a brutal Q4 that included a super typhoon and stifling tax hikes. Germany is wobbling, and a quarter of Italy is now under lockdown. (Except not really.) Oil prices are tanking 30%, and the Saudis are starting a price war in the hemorrhaging oil markets. (UPDATE: S&P futures are now limit down on the night, too.)
China’s slowdown is obviously extreme, but who knows what the real data will look like coming out of the country as manufacturing hubs come back online in the weeks and months ahead. Short term, things look gloomy in the world’s second largest economy, and the open question is whether China faces lasting damage from massive disruptions that could finally force many multi-nationals to rethink their entire supply chains.
You know all that, though.
Most investors have been chatting about these challenges as short term headwinds. Not as flashing red sirens, but potential buying opportunities in advance of a “V-shaped recovery.” That’s tempting to buy, but I’m skeptical, which is why I’m focused on where the obvious weaknesses are in short-term.
“I’ll Give You Something To Cry About!”
The initial recessionary pressures will come from things that look like minor inconveniences to most consumers. Most Q2-Q3 travel will be scrapped, most “knowledge work” will be pushed remote, and most entertainment will be virtual by mid-March through Q4. Annoying, not existentially bad for most.
But we’re not used to inconvenience as consumers or to thinking about the underlying causes and second-order effects to those inconveniences. We’re also not used to thinking in terms of the collective good of other citizens in one of the most individualistic nations on earth. I happen to think these are the reasons we’ve been slow to adapt to the virus in the US so far.
We’re spoiled and soft.
That’s a bad combination for our virus containment prospects, but it’s a good combination for monitoring how bad things may get!
Bitching is something we Americans are really good at. It may even be our leading unofficial export. A flight delay can turn into an angry livestreamed production that spreads through our vast online networks within hours.
And the bitching always has a highly personal “why me?” tone that we can expect to get louder in the months ahead. Later the subjects of complaints will get more serious, but at first they will manifest themselves in progressively angrier “It’s just the flu! Fake news!” posts about travel restrictions, event cancellations, and (gasp) major disruptions in concerts and sports.
I’d put the odds that college basketball’s March Madness tournament is played in empty arenas — if at all — at 75%. Augusta will be eerily empty for the Masters. The odds the Summer Olympics in Tokyo gets cancelled are 90%. All 5,000+ person live events for the next several months have a 50–90% risk of crowd cancellation (broadcast only) or outright postponement.
Movie theaters and Broadway shows will soon shut down, too. Most smaller industry conferences will get postponed or cancelled — voluntarily or by government decree (force majeure lawyers rejoice!). Most personal and business travel will have to be re-scheduled.
There’s no good answer (yet) for whether this will prove to be overkill in hindsight, or too little too late, but the themes of our coronavirus bitching will be a good leading indicator for how bad things are getting on the ground. As long as we’re complaining about sports, it means everything is ok. I fear we’ll soon long for the days we bitched about Coachella’s cancellation.
Chances are good that the coronavirus is our daddy, and he’ll give us something to really cry about.
Three months of remote-first work, global travel disruptions, and live entertainment cancellations aren’t a panicky scenario right now; they’ve become the new normal in under a week.
We’ve already cancelled planned travel and conference appearances through Q2 at Messari (likely through Q3), and we’ve implemented new work-from-home policies that mirror most of the rest of the Big Tech firms. It will likely be days vs. weeks for more giant non-tech firms (banks, media, insurance, etc.) to announce similar mandatory remote-first policies in the US.
A silver lining of these temporary disruptions might be that they give us an opportunity to recalibrate and think through how we can manage remote teams (or as we’ll soon call them: “teams”), cut T&E fat, address carbon footprints, and jettison non-core projects. Those short-term disruptions will create supply and demand shocks that catalyze or cripple various markets, but the impact will be permanent.
Winners: International engineers, remote-first software companies, online gaming, VR (we’ve bought our team Oculus Go’s), decentralized technologies, online education, lawyers (they always f*cking win), and Amazon.
Losers: San Francisco, live events, venture capitalists & cash burning startups, health insurance companies, travel (duh), higher education (which are really just live events businesses anyway), western governments/fiats.
I’ll cover some of these later on, but at a high-level, you have to think about who is most permanently exposed to supply chain disruptions (physical and financial), and under what conditions those players survive or fail if you want to know where things are heading.
A V-shaped recovery might be likely for manufacturers who resurge once workers return to their posts, but there is no private market “make-whole” for companies that miss an annual conference, scrap an athletic tournament, or lose months worth of restaurant patrons. You can surge produce widgets, but you can’t manufacture more time.
We’ll likely need major fiscal stimulus programs a la TARP, transfer payments, and tax relief, for the travel industries ($100 billion for airlines??), main street food and entertainment firms, conference dependent cities whose tax receipts will flag (e.g. Austin alone will lose $300 million in business activity from the cancellation of SXSW), and the general citizenry themselves.
The scale of those bailouts may be wildly underestimated, and that’s before we ever include the possible second-order effects on the insurance and credit markets, startup economy, or commodities markets. To say nothing of trade wars or potential hot wars.
The loss of general productivity is nothing to sneeeze at either.
The most alarming trend to keep an eye on in the US, is forced in-person work for up to 60% of the national workforce. There is ‘no historical precedent’ for forcing employers to let employees work from home, so the employer-employee stress tests to come will be significant. Given most employers cover their employees’ healthcare, but don’t have paid sick leave, staying employed and insured will mean coming to work sick or amidst sick colleagues unless you’ve got a smart and benevolent employer.
Tough shit, otherwise.
(Remote work isn’t a panacea either. Only about 5–10% of workers today are fully remote, and you can expect short-term productivity dips for those 30–40% who are moving remote simply because they aren’t yet accustomed to things. It’s not nearly as bad as the other disruptions, but it’s not nothing!)
Political ramblings aside, Paul Krugman summed up the current challenge well: “a lot of what you need to contain a pandemic is social, rather than strictly medical. You need to get people tested, and have them stay home if the test is positive. But we have a society in which cost deters people from getting tested. And the absence of paid leave makes it hard, perhaps impossible, for many to take time off. I have American friends currently in Europe considering whether to extend their stay in the belief that universal health care and leave policies will make them safer.”
Indeed, our healthcare system’s dysfunction will be exposed during this crisis.
The Healthcare Breakdown
The post so far is more “summary results” than “doomsday prognostication.” It also may seem that I’m going out of order in discussing the economic impact before the health impact, but that’s intentional.
Almost no one has seemed to take the non-healthcare economic and social impacts seriously until this past week. It’s as if the unprecedented shutdown of 500 million (and forced quarantine of 50 million) workers half a world away was a mere CCP work experiment, not something that could happen in the West or have significant ripples beyond a quarterly blip in growth.
On the other hand, most people simply have not — and still *do not* — feel threatened by the coronavirus itself as a healthcare crisis. The economic concerns in the West (how will this affect my business and portfolio) are still primary, and seem likely to spike further. Unfortunately, the real impact of the coronavirus, could also be the collapse of the entire US healthcare system.
Here are the inputs to my mental model from the past couple of weeks. (I’ve been in denial about this because the situation seemed impossible until somewhere around Friday. (h/t Liz Specht on some of the below stats.)
- There could be several thousand coronavirus cases already in the US. I’d guess the figure is as high as 10,000, because we know there have been chronic delays in testing and inexplicable refusals to test sufficiently so far. We’ll say 2,000 is the real case number today even though only ~500 are currently confirmed cases (March 8).
- We can expect to see a doubling in case growth each week for a while, which would get us to a million cases by the end of April. That assumes our containment response continues to be slow to non-existent (a fair assumption), and we don’t get lucky with warm weather curbing spread. Things could quickly spiral out of control in May and beyond.
- In light of what’s happening in Italy right now, the chart below should scare you. We’re on the low end of the developed world when it comes to hospital beds per capita, with just one million beds for a population of 330 million. With a current utilization rate on hospital beds of about 65%, we currently have just 350k beds available at a national level.
What does that mean? At current case growth rates, and a 10% coronavirus case hospitalization rate (conservative?), there will be no vacancy at US hospitals within 60 days. That’s to say nothing of ICU availability, which is what the more conservative 0.5% reported case fatality rate hinges on. When acute care services become unavailable, the results will be much, much worse. Perhaps as high as 3–5% could die, as we saw in Wuhan. Trent McConaghy wrote up an excellent analysis (and opened up the underlying model) to demonstrate just how quickly some regions could get overwhelmed.
Washington state could run out of hospital beds within three weeks:
Berlin could run out of beds within a month.
You should read Trent’s full piece to dig in to the assumptions, but the tl:dr is that the most important metric to keep in mind with respect to the havoc the coronavirus could wreak on a given region is the case “tipping point” per city.
I call it the chaos capacity curve.
Multiply the case rate in your area by 10% (hospitalized cases), and divide by 35% of hospital bed capacity (current health system slack). A ratio over one means the system is about to break, and you’d better hope the US military is building temporary hospitals and triage facilities nearby.
This is why containment and delay is so important, and why “let’s just let everyone get the virus and get it over with” is so unbelievably stupid. And I’m not singling out Rick Santelli, who apologized quickly for the remarks. As I outlined in the intro, it seems to be our national f*cking strategy!
Here’s my new default graphic for showing people how close we are to catastrophe in the West. Thank you, Trent.
We are wayyy too close to the chaos capacity line in Italy, Berlin, Washington, and I’m sure many other (yet untested) cities in the US in particular.
It Gets Better — Just Kidding. It Gets Worse.
There are complicating factors to consider as well.
Namely, the system burden and supply chain disruptions will also lead to prescription drug and equipment shortages, which could cause more complications for patients with chronic conditions who have their routine care disrupted. I can’t think of a much more terrifying and dystopian scenario than millions of people watching their loved ones get shut out from their critical treatments, or literally run out of oxygen amidst a mass shortage of ventilators, as happened in Wuhan.
Death rates spiked in Wuhan because the city crossed its chaos capacity line. It was only thanks to an unprecedented quarantine, hospital construction initiative, and martial law that the CCP was able to reverse the virus’s trend line. In an odd way, China also benefited from becoming the epicenter of the virus, as they had but one primary battlefront to fight.
Unfortunately, now that the coronavirus is a risk to the US, we’ll have no chance at censoring the coverage of the response (or lack thereof), and we’ll potentially have to fight Wuhan-scale containment battles in a number of major cities simultaneously if the overdue tests come back with the wrong results. So yes, it could get much worse still.
This could be still further exacerbated as healthcare worker infections constrain capacity. The mere specter of HCW infections that will arise from the extreme supply shortage of personal protective equipment like surgical masks and respirators could keep medical personnel absent from the front lines.
For the workers who are available, our national PPE stockpiles will last a couple of weeks assuming we hit national system constraints (2–3 million cases). We’ll see PPE stockpiles exhausted first in “hotspot” cities like Seattle or San Francisco, which would serve to make the situation that much more dire for professionals in the second wave of affected outbreak areas. The healthcare workers who remain at their posts will be heroes.
But where will the supply reinforcements come from?
Certainly not China, who will continue to need these materials to address their own internal challenges. The vast majority of critical medical supplies will likely not be manufacturable in the US any time soon, even if our production hubs could miraculously get repurposed tomorrow. That’s because the necessary raw materials will need to come from China, as well!
We won’t be the only trading partner looking for this equipment, and to be honest, we probably won’t be the most deserving given our lackadaisical and inept federal response.
To brutally paraphrase a famous movie villain, the Chinese reaction might be:
“These are the new masks. These are the n95 masks. To you, they’re gold; and you don’t get them. Why? Because to give them to you is just throwing them away.”
The US Government Is Not Going To Save You
We are not prepared for this because it will take some shared sacrifice, and the urgency is unlikely to be appreciated until we are already on the wrong side of the chaos capacity curve.
I asked a friend of mine from Beijing (who fled the mainland in mid-January) whether he had any plans of heading back to China. “Helll no.” But last week his tone changed: “I’m worried for the US. Visited some friends in NYC and they actually asked if it was a big thing back home or just a fad. I’m like… lol.”
We are completely oblivious, and my Chinese friend’s anecdote is consistent with my own social conversations. At least some of this obliviousness comes top down from our nation’s leadership. The rest seems to be rooted in tough to shake American exceptionalism: bad shit can’t happen to us because it never has (or at least, we’re not old enough to remember it).
This comment in Wired’s coverage of President Trump’s surreral weekend CDC briefing resonated with me:
“As a reporter, in general I’m not supposed to say something like this, but: The president’s statements to the press were terrifying. That press availability was a repudiation of good science and good crisis management from inside one of the world’s most respected scientific institutions. It was full of Dear Leader-ish compliments, non-sequitorial defenses of unrelated matters, attacks on an American governor, and — most importantly — misinformation about the virus and the US response. That’s particularly painful coming from inside the CDC, a longtime powerhouse in global public health now reduced to being a backdrop for grubby politics. During a public health crisis, clear and true information from leaders is the only way to avoid dangerous panic. Yet here we are.”
I find it nearly impossible to believe this President would take the aggressive measures that China has in order to contain the disease within the US, especially during an election year, and especially since he just lauded the “perfectly coordinated and fine tuned plan at the White House for our attack on CoronaVirus” this morning!!!
No apologies. No reversals. No responsibility.
And no margin for error.
So Where Do We Look For Answers?
Who do we look to for guidance on how things might play out?
I’d follow the agile and relatively “smart” institutions (the Fed, Big Tech, and VC) who appear light years ahead of this thing compared to bureaucracies (big government, the healthcare machine, and the media). You should probably trust the smart institutions, even though most all of them have been mocked and reviled by the second-tier bureaucracies for so long we’ve all been conditioned to distrust and resent them.
The Fed is smarter and more functional on this than the broader Federal government right now (very low bar), Big Tech appeared better informed and earlier on coronavirus threats than most domestic healthcare workers (cue outrage), and VCs have generally been ahead of the reporting curve on this than the 24/7 media (with the NYT and WaPo being two notable exceptions).
I’m not saying we should ignore experts. On the contrary.
I recommend following the epidemiologists themselves before anyone else. I’ve compiled a good list of folks to follow on Twitter, which is where I’m getting most of my info right now. (If you follow one person, follow former FDA commissioner, Scott Gottlieb.)
That said, it’s my strong conviction that the institutions taking the expert advice most seriously are the Fed, Big Tech, and VC vs. The White House, Big Healthcare, and Media.
The technocrats vs. the political scientists.
When I say they are smarter, what I mean is they are more discerning and seem to be looking to the right sources more consistently.
Our national response has been so awful, with such dire consequences, that I fear this is setting up to cause enormous political upheaval well beyond the November elections. Whether that’s to the benefit of the right or the left, the virus is shaping up to be yet another event that will inappropriately lead to our most dysfunctional central institutions asserting more control over society and the economy than they had before.
An overcorrection that further empowers ineffective and untrustworthy command and control structures should be a catalyst for decentralized technologies. But I’ll let Balaji elaborate on that further this week in a post I know he has been working on for some time for Nakamoto.
RIP Moon Times
The ramifications of a systemic global healthcare crisis that could kill tens of millions of people is fodder for a book vs. a blog post. Suffice it to say, this could roil global and domestic elections, destroy currencies, create unpredictable credit crises, bankrupt legacy institutions, and permanently alter the geo-political axes of power.
I don’t want to minimize the importance of any of those topics, as they all deserve their own posts. That said, the news cycle and markets have continued to move at a breakneck pace over the weekend, and I’d like to post this before it becomes even more outdated (not to mention get back to the important work of planning Messari’s revised 2020 strategy). That said, here are some things that seem possible, if not likely in the months ahead.
- By April, at least one major US city may have its healthcare system overrun, and will experience a shutdown similar to Wuhan. Right now, that could be Seattle or San Francisco or New York. We won’t really know because we haven’t tested enough people, and we have no idea where the spread has gotten most aggressive. The social media stories will be horrific, and the experience will finally lead to stronger containment counter-measures. I just hope multiple cities don’t fail at once.
- If we have a multi-city healthcare system overrun, it will be a nationwide crisis, and it will likely be more cost effective to transition to a national healthcare system, blow up the insurance companies (rather than bail them out), and start to triage patients by QALYs (quality adjusted life years). In prior elections that was political suicide to even mention, but with hospitals overrun, you’d want to implement hospice triage for patients over 80 (whose death probability in a normal year is already 8–10%) and save the ICU resources for those under 65–70.
- Every investor is currently in the process of going risk-off. The treasuries chart is completely insane, with the 10 year yields just plummeted below 50 bps, and the 30 year below 1% for the first time ever. Oil just plummeted 30% due to an OPEC conflict. I’d expect the S&P to continue tanking this week amidst the rising uncertainty and flight to liquidity. There aren’t many measures the Fed has left to calm the markets. We’ll need to see a bi-partisan stimulus bill get passed to prop things back up. For once, it would be nice if Congress could do it’s f*cking job and get something done.
- The startup fundraising market just got absolutely f*cking walloped. Sequoia’s “Black Swan” post will spook dealmakers, and lead to recut deals, startup layoffs, and distressed M&A. “It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges. While The Fed and other central banks can cut interest rates, monetary policy may prove a blunt tool in alleviating the economic ramifications of a global health crisis.” Reading the post was eerie, and now I know how my older colleagues in PE/VC must have felt when the original “RIP Good Times” post dropped in 2008.
- There’s no way of telling how this will impact the US election, but it will become the most important policy issue at the ballot box. There’s a good chance at least one of the three remaining septuagenarian candidates for US President gets the virus. This could cause a shake up in leadership domestically and worldwide, and will get much more viscerally real once we see our first high-profile “celebrity” deaths in the West.
- Ultimately, I think China emerges stronger than ever from this crisis, especially if their response is juxtaposed to the US response. There’s an outside chance that they permanently swing to the world’s pre-eminent economic superpower seat in the years to come.
What about crypto?
With crisis comes challenges and opportunities, and I expect four things to happen in the crypto markets over the remainder of the year.
- We’re in the midst of a historic flight to safety and liquidity. Bitcoin is a risk asset. It’s not a safe haven in a recession, but rather a check on fiat inflationary pressures. It will sell off with the rest of the risk asset market at first, but may perform moderately better if there’s real juice in the “digital gold” meme. The halving narrative is completely dead now. The only thing that matters with respect to the halving now is whether it breaks the mining market.
- The Fed is out of policy tools as this isn’t a financial crisis. The economic stimulus will soon hinge on the MMT narrative picking up steam, and Congress passing a relief package that eclipses the multi-trillion dollar stimulus bills we saw during the financial crisis. We’ll see QE and negative rate setting world wide, and it will put more pressure on pensions to find historically uncorrelated assets that could boost returns…however unconventional. That means we could see a bottom for bitcoin followed by its first rally as part of a bona fide digital gold basket.
- Outside of BTC and ETH, I’d expect a late 2018 caliber bloodbath. Nothing else is critical to own or hold right now outside of these two assets, and in a market that may go down 20, 30, 40%, with an unknowable negative human toll (both health and economic wellbeing), the parlor games of the shitcoin casino are over. Crypto assets with strong fundamentals will finally have their day in the sun, and we’ll see the decoupling of good and weak projects. There are perhaps 50 assets that could do moderately well in the next 2–3 years in USD terms. Few will outperform crypto’s monies.
- Crypto infrastructure M&A is about to go into hyperdrive. Investment round prices will come down, but I still predict great teams and projects will get funded as decentralized technologies get catalyzed as part of the coming response to some truly breathtaking macro disruptions.
The full moon has been cancelled. And soaring bitcoin prices will likely take another cycle to come to fruition. Still, crypto’s mainstream moment as a utility may finally, if quietly, be here.
Not investment advice. Stay safe.