I have been sounding the alarm about coronavirus for a few weeks both on this blog as well as my IG page which has been providing almost daily updates on the spread. The momentum downward started building last week and looked as if it is inducing panic mode in investors right now, and for good reason.

Source: Reuters

It was already obvious that there was going to be a severe economic slowdown in Asia due to the virus. China is virtually locked down and an attempt to try to get factories up and running was quickly reversed the other day in Hubei Province, the source of the outbreak. Companies that depend on China for their supply chain such as Apple have already been issuing revenue warnings for this quarter as production will not be able to meet demand.

Now the outbreak has reached a critical phase as outbreaks in South Korea, Iran and Italy and as of this morning Spain, are roiling markets and producing the now familiar lock down response in local governments. This is a critical phase because it now seems as if the virus definitely has a foothold in multiple countries. All there needs to be is one weak link that doesn’t clamp down sufficiently, and the virus will begin to spread elsewhere.

There is evidence that this is what happened in Iran. No one is sure exactly how the virus got there but it is being surmised that the porous border with Afghanistan may have been a contributing factor. Even if it did come through the border, how it got to that point is a mystery, although I’m willing to bet that someone likely was able to escape Wuhan before the quarantine was implemented.

Diagnosis is also a problem and a likely reason that the numbers we are seeing in the press are vastly underreported. The cases being reported are coming in after they are verified with kits and other diagnostic tools, likely only available in hospitals. People who just happen to be sick at home or show mild symptoms that don’t send them to the hospital, are not being counted. Combine that with the fact that the virus has shown to have benign to no symptoms in some people, who can also spread the disease and you have the recipe for a global pandemic. It’s for the contagious nature and the fact that it doesn’t make some people as sick that are contributing to the spread. In the case of SARS many years ago, it was so deadly, people who had it could be identified quickly and isolated, if someone is showing no symptoms, they could be unwittingly passing it to someone who reacts differently and gets sick. The news lately suggests this is already happening.

How it Will Affect the Economy

The spillover from Asia is obvious and clear, however when the virus arrives in the US is when we will really start to see the economic and lifestyle fallout here at home. Many companies formed pandemic response procedures after the swine flu outbreak years ago and would likely enable these once the first confirmed uncontrolled infected reach large cities.

This would mean millions who could would need to work from home. Sectors of the economy would be hard hit. Trucking is an important element of the US internal supply chain and if a virus were to slow down movement, not only would the economy be impacted but supplies may become scarce in some places which depend on trucking to supply them. In fact, most grocery stores would run out of food in 3 days if trucks were not supplying them.

Not only would markets take a hit but companies would be deeply impacted by a slowdown. Workers could not come in to production centers and customers may not be in the stores. Even if we all use online delivery, who is going to drive knowing the next door that opens for them could have an infected person? Slowing demand on the consumer side would produce defaults and layoffs, which would just exacerbate the downward spiral. This isn’t a hypothetical scenario, just take a look at this article from 7 years ago explaining the impact of SARS on the economy of Asia and arguing that we are not prepared for anything similar now:

It’s not surprising that a pandemic hurts businesses dependent on employees or customers moving from point a to point b (as AIG and the airlines learned), but SARS also set back transport companies such as FedEx (closed airports; fewer people doing business), telecom equipment-makers such as Nortel (vendors and customers staying home) and cable-TV-box maker Scientific-Atlanta (multiple parts made in Asia). It even cut deeply into profits for Estee Lauder, which under normal circumstances sells a lot of cosmetics in Hong Kong, Singapore and China, and in duty-free airport shops.

It’s important to keep in mind that this type of downward spiral with the economy would be highly dependent on how people and governments react to the virus. Death numbers will tick up. Even if the mortality rate of the virus are lower than the 2%-3% seen currently, a rate of 0.5% is still high compared to the flu which is 0.1%. Some epidemiologists estimate the coronavirus could infect as many as 40% to 60% of the population, a 0.5% mortality rate for 50% of the population could mean 800,000 people in the US could die as a result of the pandemic. That is a huge number and are the types of numbers that contribute to the panic. Panic produces drastic measures like we have seen in China and now Italy with whole regions locked down and regional economies coming to a standstill.

This is why diagnosis is so important now that this is likely to become a pandemic. Initial mortality rates tend to be inflated for these types of events which is one reason I am skeptical of the China infected figures. The other is that if the mortality rate is shown to be lower, this could tamper down the panic that many people are going to die. Instead of trying to lock down hundreds of millions of people, being more transparent may show people that yes this is a serious virus but unless you develop severe complications, the chances are you can survive it. A non-panicked reaction could also stress better habits: washing hands often, wearing of protective gear, conscious ramping up of production of protective equipment and intense work on treatments and a potential vaccine.

How the public reacts and handles this will also be affected by how governments react which leads me to my next point.

How This Could Affect the Election

It’s not a question to me at this point whether the virus will hit the US in an uncontrolled manner. As of right now we have travel into and out of areas like northern Italy and Spain where people are infected. Just take a look at all the flights between Western Europe and North America in the air as of this morning:

Source: Flightradar24

So there is a very high likelihood it will arrive or has already arrived in the US. The question now is how will the government respond and in an election year, that has political consequences.

Politicians in power face difficult decisions in this case. Attempting to mimic the lockdown techniques would have dire economic consequences. Not locking down and making people seem like everything is OK risks looking like a cover up or seeming heartlessly indifferent to those that are suffering. Media coverage and public perception will likely determine how politicians react so that they can gain short term popularity which may backfire in the long run. The outcome is likely to be either a downturn in economic activity or a scandal. When either a downturn or a scandal is produced, it is going to have consequences for an election. Which way this is going to head and who it will impact is too far off to say at this point but knowing that it will happen is important to not letting irrationality and emotion start to drive our decisions.

It’s Not All Bad

A recent article in The Atlantic titled You’re Likely to Get the Coronavirus envisions a pandemic but also a situation where coronavirus becomes a seasonal illness similar to the flu or common cold, just with more severity. Indeed, the raw data mortality rates by age show that the virus is falling much harder on a familiar segment of the population when it comes to illness: the elderly.

Source: Bloomberg

Although this isn’t a happy statistic and supports the fact that we need to be vigilant, it also shows that we can start to think of this virus not in terms of outright fear, but as a public health issue that needs to be tackled with education and targeted treatment. Focus will now need to shift to those most at risk rather than attempting to contain it, which has likely failed at this point. In addition to the elderly, those in the healthcare field will need special attention placed on them and making sure they have the proper equipment and tools necessary to avoid contracting the virus. Already a large number of cases of coronavirus are with healthcare workers that were treating those with the virus.

Now that it has the market’s attention, we may be able to start tackling this challenge more rationally and with the seriousness it deserves.

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