Covid-19: Do we know what we are doing?

Morgan Housel, more often than not, makes us think. This post is no different (ht: Rohit Rajendran). How human minds work is fascinating. Not fully understood.

England is a fascinating example because of the relentless night bombings that took place during the Blitz. Sebastian Junger writes in his book Tribe:

Before the war, projections for psychiatric breakdown in England ran as high as four million people, but as the Blitz progressed, psychiatric hospitals around the country saw admissions go down. Emergency services in London reported an average of only two cases of “bomb neuroses” a week. Psychiatrists watched in puzzlement as long-standing patients saw their symptoms subside during the period of intense air raids.

Junger writes about the bomb shelters nearly all Londoners crowded into while their city above was decimated:

Conduct was so good in the shelters that volunteers never even had to summon the police to maintain order. If anything, the crowd policed themselves according to unwritten rules that made life bearable for complete strangers jammed shoulder to shoulder on floors that were at times awash in urine.

Of course, human minds can soar to greater heights and also plumb depths in crises. This is the other example: AIR INDIA staff not beng allowed to return to their homes in housing societies because they flew to Covid-19 hotspots and ferried Indians stranded there. This too is unsurprising.

Had to buy essentials and to attend to some chores on Monday. Stepped out after, quite a gap of spending time at home except for evening walks, in Singapore. In ‘Parkway Parade’ mall, it appeared to be business as usual on Monday morning. ‘Cold Storage’ Supermarket practised social distancing in the checkout queue. But, customers queueing up to enter the United Overseas Bank Branch were not doing that. 

Singapore announced further restrictions on Tuesday evening: shutting down bars and movie theatres and guidelines on how restaurants must seat customers. Religious congregations are closed. Some predictable surge in supermarket last night. Overall, the Singapore government management of the virus outbreak has come in for high praise and deservingly so.

That said, more and more voices are questioning the tightening of the social distancing measures across the world resulting in virtual shutdowns of societies and economies. The trade-off between health-lockdown and economic lockdown is coming into sharper relief.  

John Authers had alluded to a paper from the University of Bristol that models the inflection point at which the economic pains (including its impact on human health and life expectancy) begin to exceed the gains from the lockdowns that are currently in force in many parts of the world. The paper deals with the UK situation but the author points out its relevance for the rest of the world.

In a way, he provides the formal quantification for the questions posed by two economists and also by two professors of medicine. Writing for the New York Times, Paul Romer and Alan Garber question whether the US economy would die before the virus does. Specifically, they write:

Loan guarantees and direct cash transfers will stave off bankruptcy and default on debt, but these measures cannot restore the output that is lost when social distancing keeps people from producing goods and services.

To protect our way of life, we need to shift within a couple of months to a targeted approach that limits the spread of the virus but still lets most people go back to work and resume their daily activities….

If we keep up our current strategy of suppression based on indiscriminate social distance for 12 to 18 months, most of us will still be alive. It is our economy that will be dead. [Link]

Two professors of medicine at Stanford Medical School, writing for the Wall Street Journal, pose the same question in different words:

A universal quarantine may not be worth the costs it imposes on the economy, community and individual mental and physical health. We should undertake immediate steps to evaluate the empirical basis of the current lockdowns. [Link]

They are simply saying that the world does not know the true number of infected persons. All that it knows is the number of people dying. But, the first number is vastly understated, perhaps. Therefore, the true fatality rate must be much lower.

Actually, that point comes out in this article on the number of people infected and who died from the virus, aboard the Diamond Princess cruise ship: 

3700 passengers and crew aboard Diamond Princess; 800 infected; 46.5% were asymptomatic; 9 died [Link]

Confirmation comes from another source too:

Another team used data from the ship to estimate2 that the proportion of deaths among confirmed cases in China, the case fatality rate (CFR), was around 1.1% — much lower than the 3.8% estimated by the World Health Organization (WHO).

The WHO simply divided China’s total number of deaths by the total number of confirmed infections, says Timothy Russell, a mathematical epidemiologist at the London School of Hygiene and Tropical Medicine. That method does not take into account that only a fraction of infected people are actually tested, and so it makes the disease seem more deadly than it is, he says. [Link]

Michael Levitt, Nobel Laureate in Chemistry (2013) and Stanford biophysicist, also points to the evidence from the cruise ship Diamond Princess as indicating a not-so-scary picture. He is supposed to have correctly anticipated China’s total number of infections and the deaths. He makes one point about the media:

…he also blames the media for causing unnecessary panic by focusing on the relentless increase in the cumulative number of cases and spotlighting celebrities who contract the virus. By contrast, the flu has sickened 36 million Americans since September and killed an estimated 22,000, according to the CDC, but those deaths are largely unreported. [Link]

Lest we forget

We need to remember that China deserves a large share of the blame for hurting billions of people on the planet in terms of livelihoods and/or health. Attempts to whitewash it will continue – directly by the Chinese autorities and by certain commentators in the West.

My column in Mint on Tuesday was meant to put it on record what happened in the third and fourth weeks of January. It was based on an article in ‘Nikkei Asia Review’.

Few other links we should save:

(1) Why did Italy get affected the most? Read this. Italy walked into it – a case of economic and other forms of capture.

(2) Read the ‘timeline’ of lies from China, aided and abetted by the World Health Organisation, in this article in ‘The National Review’

(3) A nice summary of (2) is to be found in this tweet by Kanchan Gupta

(3) Taiwan said its doctors had heard from mainland colleagues that medical staff were getting ill — a sign of human-to-human transmission. Taipei officials said they reported this to both International Health Regulations (IHR), a WHO framework for exchange of epidemic prevention and response data between 196 countries, and Chinese health authorities on December 31.

Taiwanese government officials told the Financial Times the warning was not shared with other countries.

“While the IHR’s internal website provides a platform for all countries to share information on the epidemic and their response, none of the information shared by our country’s [Centers for Disease Control] is being put up there,” said Chen Chien-jen, Taiwan’s vice-president. [Link]

(4) China’s Ambassador to the US takes exception to Chinese foreign ministry spokesperson’s claim that the virus originated from the U.S. army. [Link]

Covid-19: India’s lockdown

The Indian Prime Minister went on national television on Tuesday night and announced a countrywide lockdown until April 14. The tradeoff between a medical lockdown and an economic lockdown is acute in India. India has chosen to go by the advice of health experts, evidently. A good friend pointed to the work of a team in University of Michigan which, according to him, has guided India’s thinking.  The article linked here has a link to their full report.

Paragaph 5 is important:

5. What long-term impact will interventions like travel bans and social distancing have on India?

Though the epidemiologic and mathematical calculations make a convincing case for enforcing severe interventions, they come at a tremendous price to social and economic health. Economic losses can spread from directly impacted sectors (like hospitality and transportation) to others (like online retail and apparel) through a contagion process not dissimilar to that of the virus itself. It can last months or even years after the restrictions on social mobility are lifted, because the damage from business closings and layoffs are often irreversible.

Amar Bhide of Tufts University makes a good point:

Lockdowns each winter could potentially turn a bad year into a good one, saving 50,000 deaths, reducing stress on intensive care units and forestalling catastrophes. Fatal car accidents would also fall, further reducing demands on emergency care. 

Yet sensibly, we reject safety at all costs: we risk more deaths to live better lives. That’s a lesson worth remembering now

In other words, we face the same trade-off every winter and we make a different choice. Why choose differently now? Is it because, as Devi Shetty, it is much more easily transmissible than the already-circulating flu?

That said, could India have exercised its brains more and burnt the midnight oil and come up with a better balance between ‘medical lockdown’ and an ‘economic lockdown’ especially since there is no sign, still, of an economic package that includes fiscal and monetary policies?

Gulzar Natarajan and I did not burn the midnight oil but still wrote six drafts to come up with this piece for the ‘Swarajya’ magazine which carried it online last evening. We do make the point that the economic consequences of this could, arguably, be worse than that of the 2008 Global Financial Crisis. Of course, the action in US stock markets on Tuesday mocked at us. No problems.  

Discussions are raging in many forums on whether India needed a lockdown or can it withstand a lockdown. It is an impossible question to answer. India has gone, according to a friend, as per the UMich group recommendations. We do not know. It does not matter really.

India has to announce an economic package that includes fiscal and monetary policy actions. It has to commit the error of doing too much rather than too little. There will be free riders. There will be leakages. Criteria will have to be set so that those who did not deserve are excluded. Even then, some who did not deserve would manage to avail of the relief. That is par for the course. That cannot be the excuse for being tight-fisted nor inaction.

A friend sent a chart of capital outflows from Emerging Economies:

But, this has to be broken down: (1) We need to parse this into three categories of EM nations:   (a) Current account deficit + commodity producing countries are cutting rates – their currencies are weakening dramatically and their bond yields are rising. That is, markets are not approving of them. They need the rate cushion. Example: Indonesia and South Africa.

(b) Current account surplus countries + global trade dependent countries – South Korea, China and Taiwan – they cut rates and yet their currencies are not collapsing BUT depreciating mildly. Their bond yields are not spiking up like in (1) above.

(c) Current account deficit countries + Oil Importer + Less globally exposed via trade: That is India. Our remittances will fall this year but it will be made up by reduced bilateral trade deficit with China. Our oil import bill will drop so sharply that the current account will balance this year. Our exports were growing barely if at all. So, no major impact there.  Our real GDP growth will be between 4% and 5% this year (2020-21).

Therefore, the market will not treat India (of course, it is a prediction and guess, I admit) the same way as it has treated South Africa and Indonesia.

Therefore, our central bank can afford to cut rates without waiting for too long.

At the same time, India has to implement the lockdown with sensitivity and firmness. Admittedly, easier to say it in a blog post than to do it on the ground amidst pressures. We can only hope that we are lucky that, somehow, law enforcement achieves that just with minor exceptions.

After the rate of infections is slowed, testings increased and hospital facilities prepared better, the Union Government has to find ways to adopt and disseminate best practices from other States, eg., Kerala.

What specific lessons can the rest of India learn from Kerala?

(1) local civic bodies and field workers from the health department to keep a tab on communities for people who have returned from abroad

(2) The scarcity of masks and dispensers was addressed in the way that all prisons in the state were asked to manufacture them

(3) While educational institutions are closed, but 375,000 children are provided mid-day meals at their homes.

(4) telecom operators were asked to strengthen the broadband system to allow people to work from home.

(5) The state libraries are also working overtime providing books to those in quarantine.

(6) Besides engaging psychologists for infected persons put under quarantine, ….

(7) the patients have been allowed to use laptops and other communication devices.

(8) Two robots have been deployed to distribute masks and dispense sanitizers by spraying it on people’s hands in Kochi….

Perhaps, a meeting of the GST Council can be called to share best practices. It will also ‘defang’ critics and opposition and smoothen Centre-State and State-State coordination.

In the meantime, India must hope that scientists who are now guessing that warmer weather would be a deterrent to the spread of virus are actually right.

The Return of the Seventies

About two hours ago, the Federal Reserve Board (FRB) committed to buying unlimited amounts of US Treasury Securities and Mortgage Backed Securities.

More than that, the Federal Reserve is lending directly (almost) to businesses:

Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.”

The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.

The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility.

Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.

In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.

This is unprecedented. The Central Bank is directly lending to the Main Street.

This took me to the piece that John Authers had written few days ago on the melting of the ‘Ice Age’, a concept proposed by Albert Edwards of SocGen.

There are two ways to interpret the calling of the ‘End of the Ice Age’ where Ice Age refers to low growth, deflation or very low inflation and low nominal bond yields.

End of Ice age and the arrival of helicopter money (see the Federal Reserve announcement above; it is almost there) which has been hastened by Covid-19 does not necessarily have to be an equity bull market. It could simply mean the end of the bull market in bonds.

In that case, we could have a return of the Seventies. Those were the years of stagflation. Bad bond returns and worse equity returns, in real (i.e., inflation adjusted) terms.

(1) Pl. see table below (Only USA):

Real Returns on US dollar instruments

Source: This is from the text book, ‘Macroeconomics’ by Dornbusch, Fischer and Startz.

(2) On Real S&P 500 Equity Returns:

(3) Nominal returns for S&P 500 are as follows and interesting:

Source: (accessed 23rd March 2020)

In the Seventies, nominal returns were positive mainly due to dividends and real returns were negative since the inflation rate averaged 7.2% per annum.

Now, American companies are not in the habit of paying dividends as the table above clearly shows. Therefore, nominal equity returns in the decade of 2020-2029/2030 could be low or negative and real returns even lower (more negative).

So, the end of Albert Edwards’ ‘Ice Age’ could hearld the end of the bond bull market rather than presage the continuation of the QE inspired bull market in stocks which had no fundametnal underpinning as David Rosenberg had pointed out.

So, quite why John Authers is ‘anxious’ (my impression, of course) to point to Albert Edwards as turning bullish towards equities or quite why Albert Edwards should be willing to let that impression prevail is not clear to me. Perhaps, it points to anxious personal hedging. It can be too lonely to be a bear in QE inspired world in which very few are willing to call the emperor out for his nudity.

It is worth keeping in mind that two wrongs cannot make a right.

What is the connection – 2?

The government should scrap LTCG. Most stocks are down from the levels seen on January 31, the cut-off date for grandfathering, and investors are likely to book losses and carry forward the losses for the next eight years. Tax on buybacks and dividends should go as well. The government is hardly getting any money from these initiatives and it is better they are done away with for good,… [Link]

What is the connection?

The FT has a long article on the demands bankers are making of regulators.

Let us see the demands in one place:

(1) “One executive said banks were pushing for an extension of the implementation of Basel IV — which is due to come into full effect by 2027 — to prevent banks having to build up capital levels by 2021.  

(2) “Lenders in the UK have written to the Bank of England to demand that the transition to the new accounting rules — which are due to come into full effect by 2023 — is extended, said several people who have seen the letter. ” 

(3) “Several executives said the industry was also asking supervisors to take a “best efforts” approach to money laundering and market abuse, whereby banks would avoid punishment as long as they had tried to do the right thing — even if they had technically breached rules.” 

(4) “Executives have also asked that the transition from the discredited Libor rate to new interest benchmarks be delayed from its current hard deadline of 2022 to free up employees to work on more pressing matters.” 

(5) In the UK, banks are also pushing for the BoE to delay climate change stress tests. “Steps on the whole green debate have put an additional onus on banks,” said the executive. “We’ve got to be pragmatic.” 

FT can hold a contest among its readers to guess the most egregious demand of the five listed above. Personally, my vote is for no. (3).

Regulations that are to come into effect at least two years from now are being asked to be suspended for banks to lend now!

What is their record on lending for productive purposes, to small and medium businesses and to low income households?

How much of their earnings they derive from these relative to the monies they make from lending to capital market participants and from proprietary trading?

Articles galore on how much humans are going to change for the better on account of the crisis – sustainable living, respect for climate change, respect for the environment, cooperation over conflicts, etc. 

Most of us know, from past evidence, that such behaviour tend to be fleeting. They occurred during the previous WW II (see this: That is why they are called fleeting social utopia. But, at least, they instil some hope and make for good reading.

Stories such as these bring us down to earth and keep us grounded in a way. We must be grateful to the bankers for reminding us of the inherently self-destructive nature of Sapiens.

India rises to the occasion – 1

(1) The PM’ address to the nation on March 19 (

(2)  RBI’s coronavirus contingency plan: Keep it going from a secret location (

(3) Coronavirus: Tata group companies commit full payment to daily wage earners (

(4) ‘India Inc rules out cut in jobs and salaries amid coronavirus outbreak’ (