Wednesday Briefs – 4 March 2020

Check here every Wednesday for brief commentary on current affairs.

This week: Coronavirus; Democratic Primaries; Markets.

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4 March 2020: Coronavirus

If this flu virus behaves like past ones, the number of cases is likely to decline in the warmer months starting in late March or April. We are lucky that it only spread outside China late in the cold season. In the near term however, we could see a rise, or even a spike, in US and European cases. We assume this spike in a bad-case scenario at between 100,000 and 200,000 US infected, resulting in 500 to 5,000 deaths, tragic for the next of kin but marginal to a big picture that sees 20,000 to 60,000 annual deaths from the seasonal flu.

Comparisons to the 1918 flu are too alarmist. Our health care infrastructure, staffing and technology are vastly superior. And information is ubiquitous. In 1918, the world was reeling from four years of the Great War, doctors had been sent to the front and information was suppressed by governments eager to preserve morale among the troops. Further, the spread was accelerated by the return of soldiers from the front to their home countries.

It is worth noting nonetheless that the 1918 flu came in three waves, the second in October being the deadliest. This current flu could return in the Fall and as such could be more dangerous then for having started earlier in the season. It makes sense to assume a return, to ramp up preparations and to accelerate research on anti-viral treatments and/or vaccines to the extent feasible.

4 March 2020: Democratic Primaries

The field has narrowed considerably since we published our prediction that the primaries will end in a brokered convention. In our view, Joe Biden and Elizabeth Warren are now working together, tacitly or explicitly, to sideline Bernie Sanders. Biden’s comeback was directionally predictable but surprising in its strength.

We still believe that Sanders has virtually no chance of capturing the nomination as long as Warren remains in the running. The presence of three contenders, as opposed to the head to head Biden-Sanders contest favored by Sanders, ensures that Bernie will be deprived of a majority on the first round, forcing the convention to move to a second round in which super delegates will vote.

Warren, despite her poor showing in the primaries, still has a shot at being the nominee if the convention moves to a second or third round, and a large enough segment of Sanders’ delegates move to her column. Abraham Lincoln arrived at the convention as an underdog and was nominated on the third round.

Because of Biden’s current strong momentum, there is a possibility that he will gain a majority of the delegates before the convention, which would automatically make him the nominee on the first round.

More likely however, Biden and Warren will jockey to stop Sanders and will then either team up on the ticket or fight it out in the second or third round of the convention.

4 March 2020: Markets

The near unanimous view that markets will not recover quickly probably means that they will. The sell-off was fast and furious and now looks like an overreaction to both the virus and to Bernie Sanders’ erstwhile status as the frontrunner.

The virus is certainly scary but no more scary than the days following 9/11 that saw a sharp recovery in the S&P 500. Further, the virus can be considered more predictable now, if it subsides in warm temperatures, than terrorist plots were in the immediate aftermath of 9/11. The summer months buy us time to organize.

There is a possibility of an asset bubble later in the year after virus cases have declined and the relief summer boom and pent-up economic activity kick into gear. The Fed will be reluctant to take back its 50 bps rate cut right before the November election, opening a window for significant performance in the summer. Of course, that may reverse quickly if the virus returns with a vengeance in October and we are unprepared.

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