Fear is Also a Contagious and Destructive Virus

Somewhere near the bottom of a COVID-19 content rabbit hole the other day, I found myself thinking about Franklin Roosevelt and his famous quote (from his first inaugural address in 1933) about the grip in which the Great Depression held the country:

“Let me assert my firm belief that the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

FDR who, aside from Lincoln and Washington, arguably presided over the most turbulent and challenging years in American history, was both brave and astute in this statement. Astute because it shows a clear understanding of the profound impact that a negative feedback loop can have in exacerbating the damage from already damaging events, and brave because in early 1933, extreme fear was a justifiable and fairly rational response to the situation, which at that point was beyond dire.

The Great Depression, by then on its third and largest year of GDP contraction (-12.9%!) with unemployment at 25%, had already taken a massive toll on the US (and global) population, was still getting worse, and probably felt like it would never end. Despite that, however, Roosevelt knew that the second order effects, the further damage that a continuing culture of fear and hopelessness would cause (the “animal spirits” as Alan Greenspan would later call it), could multiply the damage many times over.

I find Roosevelt’s words to be even more pertinent today, because I believe that the fear and panic around COVID-19 could end up doing many magnitudes more damage than the virus itself, and the possibility that we enter a self-perpetuating cycle of existential dread and hopelessness is what honestly concerns me most at this point.

With the caveat that I’m neither a doctor, nor a biochemist, my read of the science community’s feedback on the direct impacts of the virus (realized and potential), has me feeling unsettled and concerned in the shorter term to be sure, but not panicked or fearful for the medium and longer term, and I find this to be inconsistent with both the tone of reporting on the topic (especially the sensationalist headlines, which unfortunately color everything that follows, however responsibly reported) and much of the commentary I’ve seen and heard directly, often from very bright, otherwise reasonable and highly-educated people whom I greatly respect.

I don’t mean to make light of the deaths that COVID-19 have caused, nor the pain this has caused to the victims’ families and friends, and I applaud the tireless efforts of first responders and the global medical community to combat this virus, but I would also hope that people will rationally consider the underlying data being presented (not just the click-bait headlines) within a broader context of the many risks to human life that were present before this virus and will remain afterwards; that above all, we remain cognizant of the damage that could be done if we collectively fail to balance prudent and robust near-term responses with a more sober, calm and rational longer-term perspective.

Starting with a quick look at the underlying data, we (in the collective sense) seem to have a decent and steadily improving picture of the risks posed by COVID-19 (and in the vein of optimism, consider for a minute how impressive a global medical establishment we have to get from 20 or so people sick from an unknown cause in a remote part of China to what we know today, only 10 weeks later).

Stats via the initial findings of China’s Center for Disease Control and Prevention, this incredibly helpful database and various articles quoting the WHO and US CDC.

· While the overall mortality rate in the initial COVID-19 cluster in China was 2.3% (higher than the flu, lower than SARS and some other recent outbreaks), it is overwhelmingly concentrated in older and already ill people (9.8% mortality rate for patients 70 and older, 14.8% for those 80 and older, and 5.6% — 10.5% for those with cardiovascular disease, diabetes, chronic respiratory disease, hypertension, and cancer)

· The WHO and others have speculated that quoted mortality rates may be overstated due to testing sample bias (i.e., in most areas, only those with more pronounced symptoms have been tested thus far)

· Data from South Korea — by far the largest sample size yet published (more than 140,000 administered tests vs. roughly 13,000 so far in the US) — appears to confirm this suspicion, as the mortality rate there is reported at around 0.8%.

· The global number of “severe and critical” cases appears to have peaked on February 18th and are down 50% from that peak as of yesterday

· Active cases in China peaked on February 17th and are down 77% since then (dropping every day since)

· New daily cases in Korea peaked on March 3rd and the spread seems to have slowed rapidly since (from 851 new cases on 3/3 to 114 yesterday)

· If the US were to follow the same pattern as China, cases here would peak in the first week of April (obviously there are a huge number of underlying factors to consider, so this is not meant to be an actual estimate, just some general perspective on the potential duration of the outbreak)

· Add to this some context as to the risk posed by COVID-19 compared with risks we take for granted in our daily lives:

o In days since the first reported COVID-19 case in the US, 41 people have died from the virus, while over that same time period:

§ 15,900 people are estimated to have died from the seasonal flu

§ Roughly 5,373 people on average will have died in car accidents (though maybe fewer this year since no one is going to work), including 871 pedestrians

What follows is admittedly a bit reductive, but the broader points I’m trying to make here are:

1) Ordinary daily activities we typically take for granted like interacting with other people and commuting to work (on foot or by automobile) have and will always present risks of fatalities, even for otherwise healthy, working age (and younger) people.

2) Of the data sets we have available, those which span the longest time horizons suggest that there is at least some reason to believe this phenomenon is more likely than not to be fairly short-lived

3) As a biochemist friend of mine pointed out to me yesterday, the relatively long incubation period for COVID-19 (compared with SARS or Ebola, for example) could result in a higher absolute number of deaths, because the risk of infecting others prior to being diagnosed is higher; however, it does seem clear based on what we know thus far that the overall mortality rates are far lower than with other recent outbreaks.

4) This is not 2008 all over again. The fact that most of the active global workforce are in the lower risk demographic materially reduces the risk that even a broad outbreak does any long-lasting structural damage to the global economy (directly, that is), and in any event, it does not remotely compare to the structural damage done by the near-collapse of the global financial system and a massive global credit default of unprecedented scale. That may sound cold, but it is true.

Now contrast all of this with the damage that the reaction to COVID-19 has already caused and more importantly, where an escalation of fear and panic could lead. We’ve already seen spending on travel, tourism and entertainment activities plummet, and while this sector only accounts for about 7% of US GDP, a 20% drop could wipe out most or all of Q1 GDP growth.

What’s more concerning, though, and the risk that is analogous to FDR’s 1933 concerns, is if an atmosphere of fear causes a broader and longer-lasting freeze in investment, growth and commerce, particularly among small and medium-sized businesses (employers of more than half of the US workforce), who cannot survive a sustained shock in the same way bigger companies can.

Consider also the herd mentality that we can all fall into at times like this. For example, I’ve had several people tell me that the situation must be dire because the stock market is tanking, but the stock market sells off for all kinds of reasons, especially at times when it has recently hit an all-time high and valuations may have gotten a bit frothy. Furthermore, sharp moves in the stock market are often exacerbated by all manner of structural factors that have nothing to do with macroeconomic or earnings outlooks (e.g., ETF rebalancing, unwinding of short volatility yield strategies, quarterly fund manager reporting optics, etc.).

I’ve also had people tell me there’s no way the market recovers before the end of the year, but we’ve seen many (many) instances where this type of short-term panic selling quickly turns the other way (as a more sober and rational assessment of risk returns), and typically, the more swift the drop, the more swift the recovery. The key takeaway here is not that I’m making a specific prediction (I most certainly am not), but rather a reminder that while the stock market is highly rational over the long term, it can be, and often is, highly irrational over the short term, and as such, we should be careful not to read too much into any short-term move.

The point of all of this, is not to be cavalier about the risks posed by a novel virus that has spread rapidly thus far, nor to suggest we don’t take decisive action to combat this spread in the short term, but rather that we also need to make concerted efforts to be rational about it, to put those risks into perspective, to avoid panic and group-think, and to understand that the far greater risk in times like this is that we descend into a self-perpetuating cycle of fear and panic.

This post may very well age poorly, especially if things get materially worse for an extended period of time, but in one man’s (possibly wrong, but at least reasoned) opinion, the odds of this virus directly causing a global catastrophe with lasting impact are many, many times lower than the odds that a sustained, panicked reaction to this virus cause a lasting negative impact.

I’d very much encourage everyone to be thoughtful and form their own opinions, but I’m going out on a limb here and predicting that the world is not ending, we are not in the first inning of a months-long crisis and in a few weeks, everyone will be back to wondering how we ended up with three versions of that crazy uncle that everyone tries to keep away from the bourbon at Thanksgiving as our presidential finalists.

Or, in the much (much) more eloquent words of FDR:

“This great Nation will endure as it has endured, will revive and will prosper.”