Hyperbolic Approach to Virus Creating a Big Monster

Coronavirus

We are being told that governments are doing everything they can to save us from doom. If we are going to be facing real doom, it is the treatment, not the cure that will bring it on.

With each passing day, the hyperbole surrounding our response to COVID-19 just keeps growing, like a cancer. In the last 24 hours, both the states of California and New York, the two most populous states in the country, are under lockdown, and it’s their economies that are being locked down here with both the number of people working and the places where they could spend their money being severely reduced.

In the era of COVID-19, the natural limits to exaggeration get tossed out of the window, and this was made completely clear by California governor Gavin Newsom’s reasoning for locking down his state. He told us that he expects 25 million people to be infected by this virus in just 8 weeks, and if there was any truth in this, or even if this is even a small risk, then perhaps shutting down California’s economy for these 8 weeks might be seen as worth it.

At the time, there were less than 1000 people who had contracted this virus in the state, after all this time, and somehow this was supposed to explode to this mind-boggling number. We have no clue where he got such a ridiculous number, but this at least deserves that we take a step back and try to gain a little perspective.

California has a population of about 40 million, compared to China’s 1.4 billion. California is a pretty big state as far as states go, but not compared to the world’s largest country, which happens to be 350 times bigger.

China did a pretty good job overall of controlling the spread of this virus there, and seeing them keep the infection rate down to just 81,000 people in a country that large was impressive indeed. Maybe California will even have the misfortune of an infection rate 10 times China’s, although that would be a stretch in itself. 100 times more would be an even bigger stretch, with 1000 being truly ridiculous, but for Newsom’s scenario to come true, the infection rate would have to be 108,000 times greater than China’s, which more than boggles the mind.

They passed 1200 on Saturday, on their way to their 25 million. The entire world is now up to 275,000, and we just happen to be 8 weeks into this now. The prospects of California alone adding almost 100 times more in the next 8 weeks than the entire world added in the first 8 is a detached from reality as we possibly could get, short of saying that everyone in the state will die soon of people are allowed to go to work and shop.

People are now comparing this to the Spanish flu of 1918, and given that this epidemic caused 10,000 more deaths than COVID-19 has, and they sit on completely opposite ends of the spectrum. The Spanish flu was truly an epic event, infecting a quarter of the world’s population with a mortality rate of 25%, whereas this one has affected only 0.003% of the world’s population so far. Sure, this number will grow, but growing 10 times from here only gets us to 0.03%, and this growing even that much more just isn’t supported by the data, not that even this would be worthy of any attention.

If 25 million people get infected just in California, that translates to 175 million people getting this virus in the United States, and based upon its 0.7% mortality rate, that’s 12.5 million deaths, something that is well within the realm of scary and certainly in the category of the Spanish flu.

We may rightly ask where Newsom or whomever conjured up this ridiculous number of infections got their data, but perhaps people are so scared that they don’t even pause to think about such things even a little.

This in itself might be the scariest thing of all time, to choke an economy as big as California over something that has only affected 1 in 44,000 people in the state. If you went around and kissed everyone at a game at Dodger Stadium with a packed house, your chance of getting this would be pretty high, and if you did get it, you’d have a 95% chance of getting the mild form of this that is similar to the common flu.

You’d still get to roll the dice and would have a 95% chance of coming out of this with a minor illness, if you were foolish enough to kiss that many people that is. It might be wise to advise people not kiss this many Californians, but insisting they all hide at home is another matter.

If we were back in 1918, the risk would perhaps be high enough to lock down the state, but we would think that these extreme measures would be reserved for real crisis, with hundreds of thousands of lives at risk, or at least a reasonable belief that such a thing would be probable.

There is a real price to pay with actions like this, for starters, throwing the majority of the population into unemployment, which is in itself produces a crisis that is far worse than anything this virus could possibly do to their state. The chances of this even making it up to the level of the annual flu outbreak, which no one cares about at all, given that the country is less than 1% to the level of deaths the flu causes, is all but impossible, but no one cares what is possible it seems.

We always need to weigh the costs and benefits of government action before we jump. Each year, over 3.000 Californians die in a car accident, and the state is the car accident capital of the country, but we don’t tell people to just park their cars because, for one thing, this would interfere with their livelihood.

This virus has taken 24 deaths so far, and in order to limit this, they aren’t just shutting down car travel, they are keeping the great majority of people from working. This is the sort of thing we would want to do in order to avert an actual apocalypse, as a last resort to save ourselves when the threat has grown so great that we have no other choice in order to survive, but not for such a frivolous risk.

New York and California Team Up to Scare Us for Real

New York has chosen the same path, and unlike California’s laid-back approach to enforcement, relying on voluntary compliance and not the force of law, New York has their guns drawn already and are ready to use them on those who try to fight the power.

The only good thing that may have come out of this massive paranoia is that even Newsom is using 8 weeks as a reference point, which is actually pretty reasonable and may be on the high side of anything given how this played out during the first 8 weeks. Even if this continued to grow at the trajectory that it is on for all that time, you just can’t get to the numbers that are being thrown around and not even close to them. It happens like this in the outbreak movies though, and we are sitting at one right now, clutching each other as the horror increases.

This doesn’t matter to anyone it seems because that’s how fear works, it suspends the mind like this. We would have not ever thought that the human mind could be as suspended as it has been, with public officials blowing up our economy the way that they are doing and people literally being afraid for their lives in a country where the risk is so outrageously small.

We don’t even have time to kiss everyone at Dodger Stadium even if we wanted to, as that would take a few hundred hours and the game lasts less than 3. We’re told to avoid events of over 50 people, and some areas even are down to more than 10, and remaining 6 feet away isn’t even felt to be enough. They just don’t want us running into anyone, and the precautions that are recommended are on the far side of paranoia to be sure.

We used to laugh a bit at all the people who believed that a recession was inevitable from this virus, although we could have never imagined such a violent and dangerous response to it as we have seen since. Due to not the virus but our severe response to it, we’re not even that’ sure how bad the damage may be over the next couple of quarters, but it will be severe to be sure.

JP Morgan believes that GDP is about to get a 14% haircut, putting us not only in a recession-sized hole, but in a depression-sized one. JP Morgan’s numbers may end up being too conservative as we watch the situation worsen each day now.

If this trend continues, we may have unemployment rates so high that this would make the Great Depression look like bustling times. Some have predicted 20%, but if the country goes into lockdown, it will be a lot higher than this, as the majority of us will be out of work, those deemed non-essential to keeping the nightmare together. We have no idea what 20% would do to the economy, let alone a higher number, but we do know that the bill will be extraordinarily high, and one that will cause permanent damage to the American economy.

If we were out to devise a plan to damage the American economy as much as we could, sending this many people home from work and then trying to pick up the load would be a pretty effective way. When we throw in all the bungling from the Fed on top of this, we won’t just be paying the piper in the end, he may be holding us prisoner.

This money does not just come out of thin air like a magician might create, even though there are no real magicians, just illusionists. None are gifted enough to create what is surely the biggest illusion of all time, this virus being such an immense threat that it is a good idea to wreck our economy over it.

We already don’t come close to getting enough back in revenue to pay the bills, but this situation is about to get a lot worse. Never mind the relatively paltry trillion-dollar deficits that we are now facing, because this debacle is going to cost us far more than this, and we aren’t ever going to get it back.

The U.S. will keep borrowing, but there will come a time where they can borrow no more, and then it will truly be game over. Each extra trillion we borrow brings this day closer, and while it’s still far enough that older people at least don’t have to worry about it, this will mark the end of the American Empire, which will fall much harder than the Roman one once the end does come.

There is only a finite amount of capital out there that is in a position to buy treasuries, and the Treasury Department’s appetite for borrowing is growing at a faster rate than the world’s capacity to lend. We are headed toward the cliff, but to prolong our prosperity, we need to try to slow things down by seeing debt accelerate on a little flatter curve.

If we take measures that hasten our demise, we at least need to make sure that the crisis that we are trying to avert is greater than the one that we cause. It’s a guess how many Americans would die from this inevitable fall, but it would be a high percentage. People will be stuck at home, but not by order of public officials, but as a place to go to await their end.

Imagine trying to manage this if you are the government and have no money to do it, and with governments broke and no access to borrowing, everything will collapse. This is a real fear that no one seems to care at all about, being preoccupied with things such as the risk of global warming, which is a walk in the park compared to the economic collapse that we’re on the road to, and the journey there just got shorter.

When We’re All This Drunk, Count on a Big Hangover

Coronavirus fears top anything we have ever seen though, although no one is afraid of either the long-term effects of this nor the short-term ones, and both deserve far more fear than this virus ever will.

The U.S. has gone all-in with this, and while people worry about a short-term recession, the real worry here needs to be with inflation, which is a much more dangerous foe. Our recent actions have woken up a rather docile animal and turned him into a ferocious monster, and the cost to slay this monster will be plenty high.

There’s no telling how high that the Fed will have to raise rates to combat the inflation to come, but as they do, this is going to visit us with not temporary unemployment like we’re facing, as this can’t go on for more than a few more weeks before it peaks, the unemployment that will be caused from fighting this inflation beast will be the sort that is much more enduring.

Being out of work as your place of work is temporarily shut down is one thing, but having this happen because they closed down because they could no longer pay the bills is quite another. With this happening to so many people, it’s not that you can just go out and get another job.

Whenever we look to stimulate the economy, we need to make sure that it is actually addressing and countering the opposite force in the economy, like we did during the financial crisis of 2008. A lot of houses got knocked down and had to be rebuilt, so this was money well spent.

This time, the houses are still standing, and when people get back to work, this stimulus will still be doing its thing, overstimulating our economy by a very concerning amount. Most people would not worry about this and confine themselves to worrying about a virus that is 100 times less likely to kill you than the flu, but inflationary viruses infect us all and can wreak a whole lot of damage.

The best way to think of the danger here is to look at the full employment we had prior to this virus hitting, and factoring in larger and larger amounts of unemployment as interest rates need to be put up. This is essentially how we cool ourselves off, with the Fed taking actions that will put people out of work, a lot of people if needed, because this is still preferable to runaway inflation.

We have done enough damage already that the rosy skies that we saw when we looked down the road for the next few years have turned to grey. This is not to say that the road we will be going down instead will be all that rocky, but the economy is a far more fragile thing than most people realize, and enough people already complain that they aren’t as well off as they would like to be. Adding significantly to this number by way of a massive attack of paranoia is just not good.

The last decade has been the best ever because monetary policy has been managed the best ever. When you can have both very low rates and very low inflation, that’s a dream. The dream may be coming to an end though, by our own hand.

Once things return to normal, with all this extra money pumped into the economy, there’s just no way that we can keep inflation acceptably low with the Fed rate at zero. We could not have done this, or anything close, even before this, and there were some very good reasons why the Fed put the rates up these 225 basis points, the 75 from last summer and 150 more lately. The first 75 seemed reasonable enough, but 225 is very much overdoing it.

Who knows how much further we are prepared to go to fight this cardboard dragon, replete with the latest laser printing to make it look very real to all who only dare to squint at it, although its true nature does reveal itself when we view it with open eyes.

Stocks hate rate hikes, and while, at the start of this, there wasn’t much to worry about longer term, the Fed going to zero changed all that. This is not to say that these hikes are scarier than this coronavirus, as the market is pretty scared of this virus, and waking up from this fear and dealing with adding back this 150 basis points at least may still leave it up, although nowhere near as much as if we had not all looked at this so-called health crisis through a kaleidoscope.

If we don’t put them away soon, things will indeed get worse. Our expanding testing so enormously is a good idea, but not if people do not understand that this does reveal cases at a higher rate and we need to interpret the growing number of cases we’re now getting accordingly. We won’t though. The only pandemic we have on our hands is a pandemic of an epic decline of mental health, which worsens with each passing day.

Time will serve to bring us to our senses, and when cases start to decline, we will be able to relax more, and eventually chalk all of this up to a near-death encounter that wasn’t so near. That may not even shed much light on things, and people like Gov. Newsom may even be seen as heroes, keeping the 25 million down to just a few thousand. It’s a crazy world we live in.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.