A private conversation with 15 experts and 100+ investors

Sunday, 22 March 2020

I had the opportunity this evening to participate in a private conference call where 15 speakers, each (except for one — me!) an expert in his or her field, shared brief thoughts on the COVID-19 epidemic. The audience was primarily large investors and business leaders, and so as you’ll see much of the commentary was around the economic, financial, and market impact. Most participants were in the US so it was also a US-centric conversation.

The conversation was under the Chatham House Rule, meaning I can share a summary of the content but not the names of the participants. I’ve shared near-verbatim notes taken live (as I type this, the call has just ended) but removed identifying information about the speakers. To give you a sense of the speakers, we had a Nobel laureate, a federal judge, a former members of the NEC, an IMF senior executive, and senior leaders / former leaders at major investment banks, hedge funds, and private equity firms.

Because my brief comments echoed (with some small updates) points I’ve made here previously, I’ve moved them to the end, though I was the first speaker.

As you’ll see, the tone around markets and the economy were very negative in the short term. I think the verbatim notes mask the fact that there was a strong consensus that this is something we will get through in a period of 1-2 years and that there will then be a strong recovery in the economy and the markets; that governments and central banks will do everything within their power to mitigate the impact; and that the health issues are going to be addressed successfully. Still, for some sectors and businesses, the impacts are clearly going to be enormous.

It was particularly interesting to hear from experts on Mexico, Africa, and on the real estate sector.

How did I update my priors after the conversation? On the negative side, I am only beginning now to appreciate the magnitude of the economic impact, with reportedly a 24% rate of contraction on an annualised basis in GDP in the US — something not seen in living memory. The impact on individuals and companies in the near-term could be enormous. On the positive side, the Federal Reserve’s readiness to do whatever it takes, and to ramp up firepower never before deployed, has clearly impressed these sophisticated market participants. And there was enormous optimism about the speed at which we will ramp medical capacity and deploy therapeutics.

Speaker: former National Economic Council member
Topic:    What will the Federal and State Response be to the ongoing Crisis?

  • Every gov’t focused on the health care surge with no constraints
  • Big question of how you tide people over during period of much lower economic activity.  Enough to eat, shelter, get health care.
  • How to you maintain institutional integrity: Market integration; avoid mass bankruptcy and spikes in unemployment that make it harder for the economy to recover when controls are released. 
  • No sense of fiscal constraints.  $1.8 trillion currently, so around 9% of GDP.  That’s meant to last for around 3 months and potentially more infusion after that.
    • A cheque to every American adult tapering from $75K/year income, tapering to $99K/year, after that nothing, plus $500/child.  That’s around $250B.  Another $50B of assistance to small business, not clear what form. 
    • Then TARP money to protect [sarcasm] the strategically important golf course and hotel sector with maximal discretion to the administration to decide who to save.  A lot of the negotiations in Congress today are around imposing constraints on that.  Limitations like not laying off workers, exec compensation, stock buybacks are being negotiated.  

Speaker:  chief equity strategist for a major investment bank
Topic: Solvency & liquidity

  • Solvency & liquidity:
    • usually 200K unemployment claims/week — >2 million this week.  24% Q2 annualised rate of contraction in GDP.   In 1958 down 10%, in 1980 down 8%, 4Q08 8.6%
    • Stimulus approaching 2 trillion, 10%
    • Lots of concerns about liquidity to survive the next 90 days.  Many small businesses will not survive.  Larger companies have a better position.  
    • Most companies will have a loss in Q2
    • No earnings reported until 20 April through May.  Lots of pre-announcements and negative commentary to be expected.
  • Market?
    • Used to think 2450 would be the low, now I think 2000 could be the low.
    • Very powerful rally after that up to 3000 at the end of the year.
  • Why am I so optimistic?   Money flow from hedge funds, retail, foreign investors.  Market was 2 standard deviations above average, now 1.5 stddev below average.  All the low points in 4Q2018 were 2.5 stddev below average.   We’re not fully cleaned out in the positions, market goes lower before it goes higher.
  • U-shaped not V-shaped as it’s Q2 and part of Q3.

Speaker: Well-known investor from major bank and hedge funds.
Topic:    What are the implications for the March Quarter End Rebalancing by Real Money on the Equity Market?

  • Fresh capital moves slowly, it’s existing capital that moves markets.
  • Change in value between equity & bonds causes investors to rebalance; it calls for a lot of selling bonds and buying equities.  
    • If you had 50/50 as target, equities have gone down 20%, you have $40 in equities and you want $45, so you need to buy $5 which increases equity holdings by 10%.  Similar numbers for allocations up to 70/30 or 30/70
    • There could be global 40 trillion of assets managed this way to target allocations.
  • Approaching from another direction, of this 40 trillion, 50% target in equities would mean that a high % of total public market equities are managed this way.  10 trillion are with Vanguard, Black Rock, State Street so that’s ballpark correct.   So the rebalancing buy of equities is $2 trillion — that 4% of total global market cap.
  • Q: Did we see this in 2008 after the sharp equity decline?
    • A: We ultimately did see some of it.  But in the last decade the share of assets managed this way have grown dramatically.
  • Impossible to say how long this will take.  The sell-off has been much more compressed than 2008.   Hard to compare.
  • Q: Your utility function is different when you make money than when you lose money.  How does this impact investors psychologically?  And if volatility is much higher than we thought, does that mean I have to reduce my equity weighting?
    • A: Long-term volatility isn’t that much higher based on this; and this significantly increases expected future returns.
  • Our high-net worth investors have mostly held or increased exposure after a period where they reduced.

Speaker: Hedge-fund investor specialised in fixed income
Topic:    How are fixed income markets working?  Anything crazy in spreads?

  • Last few markets is unprecedented level of illiquidity.  Result of changes of market structure that made dealers less important as market-makers, and others more important.  All the other market-makers have disappeared and we’re left with banks who are providing very little liquidity.
  • Treasury, interest-rate swaps: bid/offer compared to normal, they are 8x wider than usual on average.
  • Volatility also extraordinary, swinging in both directions, gigantic rate moves.
  • Policy makers, Fed: the Fed has been all over it.  Lots of QE so far but they are going to pump in much more liquidity.  They’re spending >$50B/day in the treasuries market and will keep going at that level until it’s fixed. 
  • They’re going to spend $100B in the mortgage market.  Maybe yield-curve control.  Maybe $100s of billions more.  They clearly are signalling that they’ll do anything it takes.
  • A lot of fear out that about markets being closed.  T-Bills are a proxy for cash but if you think the market is closed for even a week then a T-Bill isn’t as good as cash.  They need to make it very clear that markets will not close.
  • Think the Fed is going to succeed in getting treasuries and mortgage markets to trade in an orderly way.
  • Less clear what will happen in corporate credit.  That’s the next rabbit they need to pull out of the hat — we didn’t have a programme there in 2008.  How can they backstop that market to prevent companies from going bankrupt?

Speaker: Real estate investor / developer at one of the largest real estate investors in the world.
Topic:    Senior Living and Other Real Estate Disasters

  • Seniors are the most impacted by COVID-19, and they are an important tenant.
  • Our buildings are used to occasionally going onto lockdown in seasonal flu from time to time; we have been on lockdown for some time and have had no cases.
  • Senior living move-outs is 50% since average length of stay is 2 years.  Also there could be high deaths in this population.
  • Some of the largest operators in this space have high leverage.  One company has stock down 80% and had only 1x lease coverage prior to this — it’s severe.  Another has 62K units with a corporate guarantee and their stock is down 70%.  Sum-of-the-parts is that they are trading at 50% of replacement cost.
  • Hotels — we own large hotel chains.  We shut down a 30+ chain of hotels, we don’t know when it can reopen, and revenue is approaching zero in most hotels.  Most companies are announcing layoffs and furloughs.  Other hotels depend entirely on large events like conferences and trade shows — when will they again be full?  Same thing with hotels that depend on tourism.
  • Marriott and Hyatt are down 40-50% and they are asset-light.  
  • Las Vegas: all hotels are closed.  When will they reopen?  Will gambling resume?  Many stocks down 60%+
  • Retail — all sales have dried up other than grocery/pharmacy.  Those tenants are begging for rent relief from landlords.  
  • Apartments are holding up the best; people need to live somewhere.  People are sheltering in place.  Many places banning evictions.  Home sales and rentals are at a standstill.  NYC: no tours permitted.
  • Student housing? Don’t know when schools will reopen, and can’t charge students when not there.
  • Office buildings?  Technically not closed but office workers aren’t there; only maintenance etc.

Speaker: Mexican PE investor
Topic:    What is happening in Mexico?

  • History — in 2009 Mexico had dress rehearsal with H1N1 in early March that had an early curve that looked like China’s.  CDC says 12K people were infected / suspected; other studies say 55K-370K.  Around 100 deaths.  Mexican governments suffered many of the same issues in the US, like lack of testing.   They were very transparent; within six weeks implemented social distancing, closed schools and offices.  By beginning of May economic activity was returning to normal on an accelerated basis.
  • This is much worse of course.
  • GDP lost around 1% in 2009 with a bad Q1 and Q2.
  •  This time Mexico is 2-3 weeks behind the US.  Two weeks ago no economic impact, not even in airlines or cargo/logistics.  Last 10 days that has changed, starting to see some sell-off.
  • Mexico gets hit three ways: oil shock which is fiscally important; tourism is a large part of the economy; and the supply chain that feeds into US industrial production.
  • Currently economists expect -4% to -2% GDP decline vs +1% a month ago.
  • Government is copying the early US script.  Said two weeks ago, “don’t worry, keep your activities;” last 72 hours they have changed the script and now gov’t employees will not work from Monday.  Private sector, especially multinationals, banks and law firms implemented WFH a week ago.
  • One doctor says they’re treating 45 suspected cases in a single hospital

Speaker: Major PE investor in Africa.
Topic:    What happens when the virus hits Africa?

  • Outlook is grim.  High urban concentration, weak health care system, 16% of the population but only 1% of health care spending.
  • Kenya has perhaps 50 ventilators in the whole country and they’re probably the largest spender on health care.
  • Lots of the playbook won’t work there.
    • You can’t have everyone shelter in case; they don’t have savings, refrigerators.
  • Positives
    • 50%< 25, very young population, small older population
    • Fewer people living with chronic conditions because it would have killed them already
    • Few nursing homes
    • Some experience with Ebola and other pandemics
  • Big question for the world is how the climate impacts this.  Currently concentrated between 30-50% attitude.  Don’t know.
  • Not much testing in Africa.  We were infected early; so far not seeing many deaths.  Doesn’t seem to be spreading as quickly as elsewhere.
  • Big issues because of decline in oil, commodities from China.  Tourism is important in many countries. 
  • Many countries were already in recession prior to this. 
  • At minimum pressure on currencies.
  • Impact on GDP won’t be as big as in the developed market.  Less formal supply chains, more informal economy that is more flexible.

Speaker: biotech investor.
Topic:    What are you hearing from the NIH?  What are you hearing from your private company investments?

  • Lockdown is there to buy time, keep hospitals from overcrowding, build supplies.  It absolutely will decrease the number of cases.
  • Everyone is saying most important thing is: we need testing.  Who has it now?  Who has had it?  Tests will cost $2.50-4 so very cheap.
  • Once you relax after lockdown, need to use tests to identify and stop breakouts.  
  • The treatments will get better quickly.  Will reuse existing treatments and develop new ones.
  • Vaccine best case: 12-18 months.
  • Could you test temperature at high-volume areas like subways, offices, grocery stores so that people feel confident?
  • Think we can get the economy back on track in 2-3 months.

Speaker: Former senior IMF executive
Topic:    How will the IMF and the other international organizations respond to the crisis?

  • Worried that there will not be the geopolitical cooperation we need among major parties.
  • We don’t know how long this will last, lots of uncertainty.
  • If we start handing out cheques, how do we stop?  
  • We can do demand stimulus, not sure how well this will work. 
  • Q: Intra-EU transfer payments — e.g., Germany to the south?  Risk of Italian default?  Will the ECB refinance Italy?
    • I don’t know.  Italy: the key thing is the European Stability Mechanism, which was created to deal with this kind of crisis.  Can borrow as much as member countries allow. Debt constructed to be as close as possible as a joint/severable liability. If there was a political consensus, they could do it with massive firepower.  The question is the political consensus.

Speaker: Senior corporate banker on the credit side
Topic:    How are the banks doing in these crazy times and why is it different this time?

  • This week, unprecedented draws — one big company drew > $15B!
  • Covers the whole credit spectrum.
  • Lots of asks for new credit.  There are the impacted industries like airlines and cruise lines; many clients who have lost faith in the commercial market including many A1 issuers; and people who have realised that even if they don’t have an immediate liquidity need, they want more insurance.
  • This breaks the mechanism of the old revolver market, which was priced so low because no one ever drew it down.
  • What’s different?  No flight to quality. In the past, the best companies didn’t feel the pain; today, they all are, including mega-caps.  
  • The large-caps enjoyed low cost of commercial paper; now they have to revisit entire capital structure.
  • Investment-grade market usually recovers quite quickly.  We’ve done deals > $63B in total supply; but even when you over 60-90bps better pricing, the bonds are not selling as we’d expect.
  • Huge new issue calendar coming up.
  • The old credit desk culture doesn’t exist any more.  
  • The energy collapse is a double whammy.  
  • Good news?  
    • Banks are incredibly healthy.  
  • Expecting big bifurcation between the best and the rest.  Big, healthy will be at the front of the queue.  Smaller, market cap collapsed, will not.  
  • European banks: some of the market caps for big wealth managers vs some of the commitments they’re still writing worry me.
  • CARES act — what does that mean for airlines and cruises?  Where do the banks sit vs government?
  • Big tech company asked: what do we do about payables?  No one knows what the credit quality is.  Can the Fed provide a mechanism to allow companies to extend AP days?
  • Q: Bernanke said that in the Great Depression, banks would not lend to small enterprises.   Who is going to lend to the small players in this situation?
    • We’re providing support up and down the size spectrum on the credit side.  
    • Lots of fintech people since we can do this better than we can — but in a credit we’re seeing that tested.

Speaker: Senior investment banker.
Topic:    What are you hearing from your corporate clients and access to markets?

  • Many of our clients are PE/VC owned.
  • Corporate portfolio managers, public credit/equity funds, PE funds: if they are already invested, they are focused on damage assessment.
  • Lots of corporates, the stronger ones, are thinking about how we take advantage of the position.
  • No one we have heard is having trouble drawing down revolver.  Everyone is doing it except some high-yield borrowers who have maintenance covenants, and would have new targets they’d have to it.  They are the only exception.
  • Public equities: 10 days ago people were doing converts; that’s stopped last week.
  • Lots of capital out there to be put to work.  Question is how much goes to new names, how much has to go to existing portfolio.
  • We’ve heard of 20 structured credit funds who are preparing to help be a solution but they will charge a big price.

Speaker: Fintech founder specialised in Big Data
Topic:    What do you see from big data?

  • What data are we looking at?
  • Bloomberg survey: 10 days ago forecast was +1.4% for the quarter and the year.  Those clearly no longer apply.  Very rapid change.
  • As of March 14th: how often do people visit a retail establishment based on mobile phones?  Down 13-15% nation-wide, seasonally adjusted.  Concentrated in the northeast and the west coast which tracks the outbreaks.
  • Even around New Rochelle, when containment started and before NYC controls, we saw aggregate activity in NYC down.  Friday-Saturday was quite active, but retail visits overall were down even including more grocery shopping.
  • Putting all data sources together, including job offers, even some data that we use for China as well as the US (e.g., NASA air pollution) — all are very negative.  We can see the early effects, very quickly.
  • Think we still have more downside surprises to come.
  • Looking at China:
    • January 23rd was t=0 on lockdown.
    • Sharp decline in January and February.
    • Looking at things like mobility, activity started to come back somewhat exactly 1 month after the quarantine started.
    • Now, 2 months from t=0, in the first 3 weeks of March, it’s about flat vs February.  This is consistent with “U shape” — straight line down, across, and then going back up somewhat but not the full amount.
    • Hard to know what Chinese GDP will be.  Maybe 10% annualised decline.
    • We aren’t halfway back to where we were.  Some parts of the economy are recovering more quickly than others — e.g., factory activity ramped sooner than people-to-people.   That part of the economy is still fairly week.
    • You can go out again; e.g., Shanghai is like 60-70% of normal in terms of street traffic.
    • Second-round infections from returnees may cause some back-and-forth.

Speaker: Professor of Economics
Topic:    Economic impact

  • The VIX / volatility, and the S&P 500
  • The VIX is around 80% right now.  This goes up a lot as correlations increase, and we saw a huge spike in correlation — everything went down together.  No diversification, everything is based on average volatility.  
  • Actual composition of the index changes dramatically as well as the actual asset betas take over.
  • The level of the VIX isn’t something I pay attention to.  I look at the distribution of strike prices to understand the tail of losses and gains might be, what the market is saying right now.
  • Even though the Sharpe ratio goes up as the expected gain over the expected loss goes up, under most asset allocation models, volatility / risk dominates in the short-run.
  • With a big increase in volatility, that should mute the amount of risky assets that individuals/asset allocators will tend to hold.
  • So the expected tail losses in the market — the worst 10%, integrating across that — is around 51% right now; normally that’s 10%.  That suggests a 51% drawdown possibility in the market, similar to 2008.  The ratio of upside to downside, in log space, is less than 1 at the current moment.
  • 5-7 standard deviations to the downside.
  • This looks like November 2008 in terms of high volatility and high downside.
  • The change in these measures is interesting.  If we use market prices as a guesstimate, we have to ask about the change in the Sharpe ratio and what is the change in vol.  Lately, the change is all negative.  Upside/downside has fallen and expected tail loses have increased.  You might get a V-shape but the options market is not saying that.  
  • Q: When vol goes up, small stocks often outperform large stocks.  Is that priced in?  A: right now it doesn’t matter because the correlations are so high; you get no diversification.  Small stocks have even higher beta so more downside.  The options data suggests smaller companies are more exposed.

Speaker: Former treasurer of a major investment bank
Topic:    What learning about liquidity can we apply from previous financial crises?

  • Real interest rates of zero were penalising cash and pushed capital up the risk curve which meant it wasn’t there to cushion an event like this.
  • Market participants are realising that what they thought was cash isn’t cash, and they need more than they thought, so they are selling less liquid assets.
  • What is cash?  Currency, demand deposits if banks remain open, Fed.
    • Not: ETFs, mutual funds backed by corporate bonds or equities.
  • Removal of historical shock absorbers makes this worse.
  • Banks and dealer balance sheets were taken off-line by Dodd -Frank.  
  • Challenge for the market: despite intervention by the Fed, the financial system is not equipped to intervene.  Banks do not have the staff and skills to prudently assets risk etc.
  • Fed is the only option.  Must step in, expand remit, deploy balance sheet.  They will have to go further, maybe even all the way to equities. 
  • Amount needed?  $22 trillion global GDP, $15B/day needed  based on declines so far.  At $2 trillion that’s 133 days.  

Speaker: PE investor with connections to defense
Topic:    What are you hearing from your portfolio companies, especially defense?

  • I’m a middle-market LBO investor focused on defence, government services, energy.  
  • Little impact on my portfolio so far.  Government is being accommodative, letting people work from home where they have never done so.  Even secured employees at the Air Force.  Unpredecented.
  • State & local is almost entirely remotely.  NYC: strangely net positive.  Each company spending what they need to, worry about it in the future, no fiscal limits.
  • We had a health-care company (GP offices) — we closed a big investment on Tuesday, even in the middle of the crisis.
  • 1/3 of my friends’ portfolio companies are strongly exposed to impacted sectors.  People are in shock, none of us expected this.  These are small caps, we don’t have covenant light deals.  They don’t have the balance sheet to absorb this.  In normal cases the lenders would move in and take the companies over when the default; will the accommodate in this case?

Speaker: A Federal District Judge
Topic:    What will happen with regard to the Federal Judiciary?  Will the Judiciary give incredible latitude to Federal, State and Local Officials?

  • Much of what we do is incompatible with social distancing!
  • Most urban districts have taken drastic measures, closed their doors for 3 weeks.  No trials, no sentencing.
  • The grand jury met last week, probably won’t this week.
  • Have extended all deadlines by 21 days to start with.
  • Seeing similar actions across the country.
  • Federal government have limited powers as enumerated in the Constitution.  Local/State governments have more general police powers to take measures necessary to accommodate public safety.  

Round-table discussion among speakers:

  • Q: What will Fed do, buy corporates?
  • A1: They will want maximum flexibility to put out fires.  
  • A2: I asked a Fed governor.  This tool is not in their toolbox and requires legislative approval. 
  • A3: Bloomberg just posted: Congress likely to pass legislation Monday clearing the way for more action from the Fed.  Might allow them to purchase corporate bonds.

  • Q: Will Fed buy individual companies?
  • A: Fed would just be a counterpart to a bank.

  • Q: The Judge was suggesting that there were limitations on the ability to use the military in civil disturbances.  If we did have riots or other disturbances, as unlikely as that seems right now, what would the political limitations be on using federal troops?
  • A: Depends on circumstances.  A spike in gun sales suggests some people worried about stability; but you’d have to get to extreme scenarios to consider anything like that. A: Can’t imagine the election being cancelled.

  • Q: What are the next triggers for politicians?  Will it be when hospitals get overrun and we see it on TV?  What will the government do when they are overrun?
  • A: The real question is the extent to which our system can redirect resources from one part of the country to another.  Will doctors come from (eg) Texas to NY to help out?  Difficult.  Everyone understands that we’re in this together, a medical problem not a political problem.

  • Q: Can options tell us about what the expectations are for the duration of impact?
  • A: No, they are most liquid only 1-2 months out, can’t predict further out with any confidence.

  • Q: What happens with e-commerce?  Are there capacity constraints, can they scale?
  • A: Big acceleration of mix changes that were already under way — from physical to online — in many markets.  Ecommerce, new releases move from movie theatres to Netflix, restaurant meals to DoorDash and Deliveroo. On capacity, limitations are on deliver and on supply chain, but on the former no problem because can scale to peak capacity as long as they can get drivers; supply chain is the ultimate limitation — can they get the goods?.  

  • Q: How will retail investors behave vs institutional?
  • A: Investors who think over the very long-term (e.g., retirement, estate planning) don’t change plans much because of high volatility.  The fact that equities can go down 50% is not a big surprise to long-term equity investors.
  • A: Do investors really know that?  Does the actuality of it happening shock them?  In theory with a high VIX we could touch 1500 S&P.
  • A: Average daily move in March has been 6% per day!  10% moves some days.  Most clients think it goes lower.  (But why don’t they sell if they think it’s going lower?). They have been selling. 

  • Q: What are you optimistic about?
  • A: G20 meeting this week might agree special drawing rights for the IMF to provide liquidity for low-income countries.  They might agree to accelerate funding to IMF.  In EU, might agree to allow the European Stability Mechanism to increase its war chest. 
  • A: We will get fast innovation on testing.
  • A: Asian countries — they were not that early, and some were not that aggressive.  Each country that did strong controls brought it under control, both infections and death rate. 
  • A: Germans, French, Washington — a lot of the shackles and constraints on policy are being thrown away.  
  • A: We’re all adapting really quickly; e.g., working from home is working.  
  • A: Expected returns in the equity markets are much higher than they were relative to the risk-free rate of return.
  • A: We can reallocate resources to solve problems.

Q: To the investors, are you putting risk on or risk off?
A: This is temporary, economy will come back together.  But we’ve never shut 1/3 of the economy down before for 3+ months.  Hard to guess what the interruptions will be and how they will be solved.  Logistics are much more advanced today, science will move forward.  It’s a liquidity problem short term.

Q: What about food distribution?  Will we have food shortages?
A: No, it’ll be fine.  

Speaker: Christopher North

Topic: How should we think about COVID-19?

I’m going to give you my sense of what our Bayesian priors should be in this situation.  Let’s consider three outcomes: an expected case, a better case, and a worse case.  

1. Expected case. 

  • In many countries (including most of Europe, UK, US) we face 6-12 weeks of severe and potentially escalating control measures.  After an initial peak that stresses emergency services, this works to bring the rate of spread down and allows health services time to build capacity.  
  • Countries like China, South Korea, Taiwan, Singapore, and Hong Kong who got it under control early may be successful at keeping most new cases out with aggressive track/trace/quarantine and extremely tight border controls.
  • But many countries won’t be able to implement or sustain sufficient control measures; in particular, poorer countries risk runaway rates of infection and becoming reservoirs for the virus.  
  • For those reasons, the virus persists beyond the first wave, and even countries that successfully managed the first wave face a further 6-15 month period with an acute tension between relaxing control measures to permit resumption of economic activity, vs maintaining tight controls to keep the spread at a slow rate.    
  • In my expected case we may well get helpful therapeutics soon, and will certainly ramp testing and health care capacity quickly.  But it’s unlikely we get an effective vaccine anytime soon — certainly not this year and quite likely not next year either — since an implausible number of things would have to go right.
  • .Quite plausible that we get to 25-40% global attack rates with infection fatality ratios (IFRs, which unlike CFRs are based on the actual rate of infection, not the confirmed rate) of 0.5-1.0%.
  • So that’s the expected case which since the publication of Neil Ferguson’s Imperial College paper seem to have become the received wisdom that many governments are now acting against.

2. What are the main ways it could turn out to be better than the expected case?  Here are the ones that seem most salient to me.

  • Several Asian countries’ measures have worked really well.  The effective reproductive number dropped from around 3 to around 1 within a week of control measures in Wuhan, and then down to 0.3 within 5-6 weeks.  If enough countries are willing to take harsh medicine quickly and follow it up with strict track, trace & quarantine, and strict border controls, we might see more substantial easing of controls and resumption of economic activity possible earlier than three months from now.  This is the most promising path in my mind to a better outcome.
  • We could get really lucky with the virus through mutation or weather.  I wouldn’t count on that.  
  • There’s a fringe theory that there may be several orders of magnitude more people infected with very mild cases than we think, which could mean very low IFRs and faster herd immunity.  .While we think that underreporting of 10-30x is common, and IFRs may well be lower as a result, no epidemiologist I know of thinks it could be 1000x underreporting.  .  We won’t know until we get a serological test. 
  • A different reason for optimism is that some really smart people think that we will get through this better and faster than the expected case.  Bill Gates and Elon Musk are two prominent examples, but there are a fair number of epidemiologists who disagree with Ferguson.
  • Finally, as we’ve learned from domains ranging from Malthus to shale oil , it’s never a good idea to bet against human ingenuity.

3.How could it turn out to be worse than the expected case?

  • The big risk is that many countries’ measures are insufficient.  European countries are not yet meaningfully bending the curve  despite severe control measures, and US, UK and other countries are not implementing strict controls fast enough..  Yes, we should expect something like 6-8 days latency between control measures and a slowing of confirmed cases given time lag from infections to symptoms to testing to reporting.  Yes, countries are ramping testing so confirmed cases may be growing faster than actual new cases.  But we should be scared until we see many countries bending that curve.  
  • It could turn out that recovered patients have limited or temporary immunity; while that is unlikely for a number of reasons, until we have a serological test and more time, we don’t know.
  • Many health care systems are not ramping fast enough, so the death toll could be higher than it would have been.
  • We could relax control measures too quickly and, like the Spanish flu, have later waves that are much deadlier than the first. 
  • We should expect an RNA virus to mutate easily, and it could mutate to become deadlier.

4. Probabilities.  

My probabilities are evolving quickly.   Even four days ago I had the expected case at 60%, better case at 20%, and worse case at 20%.  Today, I’m probably closer to expected 50%, better case 30%, and worse case 20%.


2 thoughts on “A private conversation with 15 experts and 100+ investors

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