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Virus Economics: When Markets Feel Poorly

by John Brian Shannon

Fearing that the Coronavirus pandemic might affect their investments, perception became reality for investors in the world’s stock exchanges as markets see their biggest drop in recent years.


‘Money flees uncertainty’ – You’ve heard it before or read it in print

It vaporizes during civil unrest, it dissipates into thin air when politics goes awry such as when a national leader faces a coup d’é·tat, and it leaves without saying goodbye during natural disasters. In short, the thing we call “money” isn’t our friend at all, in fact, “money” (by which, I mean ‘investment’) is the most fair-weather friend we could have.

And that’s a good thing!

(I hear what you’re thinking, “Is Gordon Gekko writing this post? You know, the whole, “Greed is good,” thing and all that?) Hehehe.

No, Gordon Gekko from the movie Wall Street isn’t writing this post, I’m merely remarking upon what’s patently obvious in the global marketplace — that the de facto rule is that individual and institutional investors prefer stable and profitable companies and countries to unstable and less profitable companies and countries. Of course.

What it means on the ground is that organizations that prepare in advance for the ‘bad times’ are seen as more stable, and therefore a better long-term investment, and that’s where the money flees to during challenging economic times.

Which is why some countries have a AAA+ credit rating and others don’t. It’s why some companies have triple A credit and others don’t. It’s why some countries need IMF loans and others don’t.


Stayin’ Alive, Yeah!

Being prepared, means staying alive, even while your competitors are dying all around you. (Not literally dying; But that’s the kind of talk you hear on trading floors during the so-called ‘bad times’)

I say ‘bad times’ because, for prepared countries (and companies) there really are no ‘bad times’.

Prepared organizations sail right through recessions, depressions, war, civil unrest, natural disasters and more — precisely because they’re well managed and well-equipped to weather any sort of storm, whether it be political, economic, or even natural disasters that can strike without warning.

Any CFO knows that recessions occur every 25-years. They know their factory (or whatever) is located in a floodplain, or in an active earthquake zone, etc., therefore, long in advance of any of those events occurring, they create a ‘rainy day fund’ to carry the company through a catastrophic period with surprisingly little upset.

The reward for this kind of long-term thinking is that when disaster finally strikes (and it surely will, it’s just a question of when) your organization will carry-on with ‘business as usual’ even as your competitors are dying in the market. It’s called ‘building resiliency’ into your company (or country) and it’s a fine thing.

And that’s the time that your company can go ’round and snap those companies up for ten cents on the dollar. ‘Picking their bones’ as we used to say in the halcyon days of Carl Icahn, investor, corporate raider… and strangely enough… philanthropist. Cool, huh?

Anyway, ‘Fortune favours the prepared’ said Louis Pasteur, and he was right.

So it follows then, that countries that aren’t prepared for Coronavirus version 2019 (called COVID-19 now that it’s been officially named) aren’t going to sail through it unaffected.

Rather, it’s easy to see even at this early stage which countries have engaged in long-term thinking, and have long ago upgraded their medical capacities to handle pandemics such as COVID-19, and although some cases showed up on their healthcare systems they had the ability and the capacity to deal with those cases with immediacy.

And if there’s one thing that pandemic-type viruses hate, it’s timely diagnosis, speedy quarantine and effective treatment.

Consequently, those prepared economies will see little economic impact from COVID-19 or any subsequent mutation of the COVID-19 virus which is likely to be called COVID-20 if it occurs in 2020. And there’s always, always, a mutation eventually, however it’s almost impossible to predict when that mutation will occur. At that time, the treatment for COVID-19 won’t work on COVID-20 (or whatever that mutation gets named) or if it does work, it’s likely to be less than 50% effective. Just sayin’.

Again, those governments that believe in long-term thinking and have prepared in advance of the latest Coronavirus pandemic have already inoculated their economies against the worst of the problem, although they could still (secondarily) be affected by other countries whose economies may now suffer on account of not being prepared.

Therefore, it was the perception of investors who have themselves created the entire ‘Black Monday’ market devaluation by pulling their investments from the stock market. But if there are more countries that are prepared for and respond well to the Coronavirus threat, then today’s market recalibration will turn out to be nothing more than a blip on the year-end 2020 annual report.

But if it turns out that a majority of countries aren’t properly prepared to handle this Coronavirus pandemic then this market slide could last a long time and worsen as thousands more become infected.

And then what happens around November or December 2020 if a new, mutated COVID virus appears?

Just as the markets get back to normal, suddenly a newer and more virulent version of this virus begins to run through the world’s healthcare systems… will they be ready then? Let’s hope so.


More Pandemics are On the Way. So, Let’s be Ready Next Time!

One thing’s for certain. In this increasingly interconnected world, there will be more pandemics and perhaps much more deadly and with a more rapid onset than the COVID-19 virus.

In such an instance, only the countries blessed with leaders who aren’t afraid to make the big decisions (like closing their airports and even their land borders and seaports for 2-weeks to prevent millions more infections from occurring) will survive the next viral onslaught.

In the case of the COVID-19 virus (so far) it looks like the major economies have dodged a bullet, because it turns out that it isn’t the strongest virus, as it’s only able to kill the elderly and the infirm. However, future pandemics may not be as mild as this particular Coronavirus.

We need to get ready. We have so far failed this drill, but Western healthcare systems are quickly ramping-up to meet the present threat. Until governments begin to provide permanent ongoing funding to healthcare providers to help them get more efficient at capturing such viral threats, isolating those who are contagious, and effectively treating those who’ve been exposed to such contagions, we’re living on borrowed time.

Let us thank the medical professionals on the front lines diagnosing, isolating, and treating those people who’ve had exposure to the virus, and thank them for doing much in a short time, with only tepid support (at first) from Western governments. Bravo!


Bonus Graphic

Markets see their biggest drop in recent years as fears of the COVID-19 virus spreads.

Markets see their biggest drop in recent years as fear of the COVID-19 virus spreads.


 

Is Growth Possible in a Brexit Economy?

by John Brian Shannon

“KPMG predicts economic growth of 1.4 per cent next year, but cuts this to 0.6 per cent if Britain leaves the EU without a deal.”The Times

While some firms predict slower than normal growth for the UK economy in the post-Brexit timeframe, it’s always good to reflect on the assumptions that forecasters employ in creating their reports and why such forecasts can cause more harm than good.

  1. If you tell your employees that, ‘the chips are down, the economy is sinking, and corporate belt-tightening isn’t far off’ they are likely to respond in a negative way. Some may look for other employment, some will opt for early retirement, while others spend more time in the staff room talking with their coworkers about their employment concerns than getting their work done. Which means such reports can actually cause the negative outcome they’re warning about. It’s human nature to perform to a predicted level instead of trying to exceed expectations. There are few exceptions to this behavior and they are called names like; Olympic athlete, Pulitzer Prize Winner, President, or Astronaut who have the innate ability to ‘power through’ the negative times without losing momentum.
  2. Such reports deal with known inputs only. For example, a zero-tariff trade deal with the Americans may seem far off today, but by 2020 it may already be signed. And not only the U.S., other political and trade blocs are likely to sign trade deals with the UK following Brexit. The AU (Africa), MERCOSUR (the South American trade bloc), the Pacific Alliance (several Pacific nations), the CPTPP (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) nations, ASEAN (the Association of Southeast Asian Nations), The Commonwealth (Commonwealth of Nations), and China, are likely to expand their trade links with the UK after it departs the European Union. America and those seven trading areas will have a combined total of 7.0 billion people by 2020. That’s a lot of potential consumers, and the massive opportunities presented by signing zero-tariff trade deals post-Brexit are absent in most economic projections by design. Even if the UK were to sign only one free trade deal (with the U.S., for example) it could improve UK growth by a full 2 per cent or more. Presto! A shiny new UK economy!
  3. “Now we’ve got them!” While economic forecasting provides vital information for policymakers, Brexit negotiators aren’t helped by the news that growth will slow even in the face of a ‘good Brexit deal’ and will slow moreso in a ‘no Brexit deal’ scenario. It’s the kind of report that makes Michel Barnier’s day! KPMG is certainly one of the most respected firms around, but if you’re a Brexiteer and a report like this has been released to the public instead of it remaining in the hands of policymakers it plays with your mind; “Are they working for the UK’s best interests or are they working for the EU’s best interests?” (and) “Who commissioned (who paid for) this report and what parameters were used?”

So, while the good people of KPMG do their best to provide policymakers with the best near-term assessment of the UK economy, making such reports public can actually cause the negative things to occur about which the report warns.

That’s why policymakers everywhere must be ahead of the curve and treat all such documents as ‘the worst-case scenario’ without exception.

Now that UK Prime Minister Theresa May has been reliably informed that the worst the UK can do is 0.6 per cent growth between now and 2020, it should be an easy matter to arrange a number of free trade deals and blow the doors off that projection by 3 or 4 per cent by 2020.

Looking at this in the proper context means accepting that exiting the European Union is merely a necessary stepping stone to get the UK to 4 per cent growth by 2020 — which should result in Theresa May keeping the PM’s chair for at least one more term and with all past ‘political sins’ forgiven.

Not a bad deal Theresa, if you’re up for it! 🙂

Brexit, and now, Trump. What’s driving voters to reject the status quo?

by John Brian Shannon | November 14, 2016

After eight years of competent and relaxed rule by President Barack Obama, real estate tycoon Donald Trump arrived on the scene and swept Democrats and other Republicans aside to win the presidency of the United States. So obviously a protest vote — but a protest against what?

Pollsters and so-called ‘elites’ seem astonished at the Trump victory yet many saw it coming from afar. How is it that some people ‘never saw it coming’ while others saw it as a logical progression of the present societal moment?

The U.S.A. has a total population of 325 million people (November 2016) and when we look at the demographics of the country by quintiles, we see that there are five groups of 65 million people.

Each group is ‘one quintile’. The ‘top quintile’ are those who are the top income earners in the country, while the ‘bottom quintile’ are the lowest income earners in the country, etc.

The so-called ‘elites’ live in sumptuous luxury that few can imagine and tend to have stable lives which is a direct consequence of their high income levels and (usually) higher level of education.

Ninety-four percent of the people who live in the top-two quintiles are children of parents who also lived in the top-two quintiles.

(Yes Virginia, wealth is largely inherited and many studies attest to this — the myth of ‘work hard and you’ll get ahead’ represents only six-percent of the top-two quintile population in Western nations)

The bottom-three quintiles in America have been losing ground since the 1970’s when one person (the ‘breadwinner’ of the family) was able to earn enough to support a family, buy a reasonable home, and a new car every 2-3 years without needing to finance the purchase, take one vacation per year, and send their kids to college. All on the strength of one income-earner!

Nowadays, the bottom quintiles are barely working, many of their jobs off-shored to Asia. For those fortunate enough to have a job, it takes two income-earners to rent or buy a condo, buying a car means financing it for up to 8-years, and one ‘staycation’ per year (staying near home during vacations, with only daytrips to nearby sights) while their kids must obtain expensive student loans that can take decades to pay off.

It’s a different world from the 1960’s and 1970’s.

The major reason for this is the Reagan-era tax cuts that were designed to stimulate growth and investment in the U.S. economy (which were the right prescription for the times) and those tax cuts created a record number of billionaires which eventually resulted in the creation of the so-called ‘1 percent’ who now invest their money in the ‘Asian Tiger’ economies which bring better financial rewards for those investors, but results in the off-shoring of millions of jobs in the Western nations.

At present, the 1 percent own more than 50% of the world’s total wealth. Leaving less than one-half of the world’s wealth for the remaining 7.3 billion people.

But by 2030, the 1 percent will own more than 75% of the world’s total wealth. Leaving only one-quarter of the world’s wealth for the (then) 8 billion people on the Earth.

And in 2040, the 1 percent will own more than 85% of the world’s total wealth. Leaving only one-sixth of the world’s wealth for the (then) 8.75 billion people to fight over.

World Wars have been waged over less!

Brexit, and now, Trump.

Brexit, and now, Trump. Share of the world’s total wealth for the Top 1 percent and the Bottom 99 percent. Image courtesy of OXFAM.

People wrongly blame ‘Globalization’ for this sorry state of affairs but it was a profound change in U.S. tax laws that allowed wealth to flow upward to the 1 percent who simply take their money and invest it in Asia. It represents trillions of dollars (U.S. and Canada) and trillions of euros (EU) and hundreds of billions of pounds sterling that will never, ever, return. It’s money that has left the West forever.

And some people wonder why things like Brexit and the stunning repudiation of the status quo candidate in the U.S.A. (Hillary Clinton) have occurred? Really? Are you kidding me?

Politicians and so-called ‘elites’ who didn’t see this coming have no business leading nations, nor should they be calling themselves ‘elites’ — nor have they ever spent a minute talking with a member of the bottom three quintiles in any Western nation.

In democratic societies ‘The People’ are always right. Some 52% of Britons voted to leave the EU, hoping for a better democracy and a better economy, while in the U.S.A. millions of voters chose hope over the status quo.

Upcoming elections in Italy, the Netherlands, France, and other Western nations are likely to show similar results.

It’s startlingly clear. ‘The People’ aren’t looking for more of the same. They voted for real change — not talk about change!

Politicians like PM Theresa May and President-elect Donald Trump have garnered a huge mandate for change. For politicians, it doesn’t get any better than this. Whatever these politicians do as long as it looks like they’re attempting to meet the needs of ‘The People’ they will be generously rewarded for their successes and easily forgiven if a particular policy fails to meet expectations.

It’s a time of unprecedented opportunity for politicians who’ve upset status quo candidates, but failure to deliver meaningful change now will bring us uncomfortably close to a total breakdown of the social contract that has worked so well for citizens and governments in the postwar era.

For those politicians elected to bring change, but who subsequently fail to do so, will find themselves losing landslide elections four years on — while bringing the wrath of ‘The People’ against ‘The Establishment’.

Let us do our part to make it easy for newly-elected politicians to do the right thing, and to forgive them easily if perchance some minor policy point goes awry.

We all need to do our part to assist the change that must now occur — otherwise, by 2040, some 8.5 billion people will be fighting over 15% of the world’s total wealth — resulting in an apocalypse worse than anything we’ve yet seen.

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