Last week, the markets experienced true panic. The S&P 500 saw its fastest-ever 10% correction from all-time highs; the 30-year U.S. treasury bond yield fell to all-time lows on safe-haven buying; and the Chicago Board Options Exchange (CBOE) Volatility Index, also known as the VIX, saw a bigger intra-month spike than it did in October 2008.
The source of fear was the coronavirus, which has now killed more than 3,000 people and spread to every continent barring Antarctica.
Coronavirus, also known as COVID-19, is without question a pandemic — a global disease outbreak — regardless of whether authorities drag their feet on applying the label.
The real issue is not what has happened with the virus, but what is still to come. For example, take the recent news from Washington state.
Two patients in Snohomish County, Washington, were confirmed to be infected. The first had traveled to China in January, but the second had not. The patients didn’t know each other, and the second had no known coronavirus exposures or travel links.
Virus samples from both patients were tested by computational biologist Trevor Bedford, the Washington Post reports, at the Fred Hutchinson Cancer Research Center in Seattle.
Because the virus samples in the two patients looked almost identical — though they didn’t know each other and the second hadn’t traveled — the tests were a sign of “community spread,” the term for when a virus is spreading through a local population.
“This strongly suggests that there has been cryptic transmission in Washington State for the past six weeks,” Bedford writes. “I believe we’re facing an already substantial outbreak in Washington State that was not detected until now due to narrow case definition requiring direct travel to China.”
We know that China was a month or two behind the curve in identifying outbreak, in part because authorities in Beijing suppressed warnings from Wuhan. We also know China had extensive travel links with the U.S. prior to travel bans being put in place.
Put two and two together, and it becomes likely that coronavirus is already highly active not just in Washington state, but all up and down the coasts.
As of early March 2020, the official tally of confirmed cases in the United States is 86 (as posted on the Johns Hopkins University Global Cases dashboard). But that data point is grossly out of date — in reality there could be thousands of cases in the United States by now, if not tens of thousands.
The official numbers are hopelessly behind, in part, because of the glacial pace of testing within the U.S.
As frustrated doctors have pointed out in on-air interviews, some countries are testing for coronavirus at the rate of 10,000 people per day; within the U.S., the testing rate is not even 1% of that, and the supply of testing materials is inadequate due to regulatory hurdles.
The problem for markets, and for the psychology of the U.S. population, is what happens when the number of confirmed cases explodes higher. This is inevitable; it’s only a matter of time.
We are already seeing this in countries where test volume is ramping up: Italy confirmed a 50% rise of confirmed cases in a single day. Testing is like shining a flashlight into the dark: It lets you see what was already there.
Because coronavirus is so contagious, there is no way to keep it from spreading broadly in countries where citizens have freedom of movement. In China, the authorities put 50 million people on lockdown, essentially creating martial law conditions. You can’t do that in a free country. In fact, you can’t even stop people with flu symptoms from going to work.
The coronavirus mortality rate gets a lot of press, but a New York Times article proposes that a bigger problem might be a shortage of hospital beds and ventilators. While fatalities are unsettling, the hard-to-shake image may be local hospitals turning away patients. To address the ventilator shortage, tens of thousands of units will have to be produced at the cost of a midsize car for each.
In the coming months, there will be a stream of anecdotes and images that will make consumers paranoid about traveling, attending social events, or congregating in a public place.
The downstream impact here is a built-in series of demand shocks as consumers turtle up and avoid discretionary spending. Countless small things that used to be routine — going out to eat, taking a quick business trip or vacation flight, going to the mall or a public event — will turn from “sure, why not” to a hard “no.”
In some ways, the coronavirus could act like a biological electromagnetic pulse (EMP) attack.
The theory of an EMP attack is that, if a nuclear bomb is detonated at high altitude, the electromagnetic pulse that radiates downward would fry all manner of high-end electronics, knocking out computers, phones, control systems, and power grids.
An EMP attack takes out the electronics, but leaves the people, buildings, and infrastructure in place. The coming spread of the coronavirus, and the optics of overwhelmed hospitals and rising case numbers, could have an EMP-like impact on consumer demand.
The shops, restaurants, airports, and train terminals will still be around — but a drastic behavioral change could turn them into ghost towns, or otherwise drive down traffic for months on end.
China has offered a preview of this effect. “Coronavirus turns busy Chinese cities into ghost towns,” a Reuters headline read three weeks ago. Beijing restaurants with 50 tables, normally jam-packed at lunch hour, would have 45 tables empty.
So what happens if the U.S. economy — which historically attributes 70% of GDP to consumer spending — sees net consumer demand drop by, say, one-third to one-half or more for months on end? How would businesses weather such a drop, and how many would not survive it?
Nobody really knows what happens next. We haven’t seen anything like this before.
The rescue response from central banks is another big X-factor, which we’ll talk about tomorrow.