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Generational Dynamics Web Log for 17-Mar-2020
17-Mar-20 World View -- Stock market plunges 13% on Monday, as investors begin to accept reality

Web Log - March, 2020

17-Mar-20 World View -- Stock market plunges 13% on Monday, as investors begin to accept reality

Some possible good news: The Real Economy

by John J. Xenakis

This morning's key headlines from

Stock market plunges 13% on Monday, as investors begin to accept reality

DJIA falls 2997 points on Monday
DJIA falls 2997 points on Monday

The Dow Jones Industrial Average (DJIA) fell 12.9% or 2,997 points, which was one of the sharpest declines in history.

The index had already fallen around 2000 when president Donald Trump gave his coronavirus press conference on Monday afternoon. As usual, he was trying to be realistic while, at the same time, being as optimistic as possible, when he made a remark that he expected the coronavirus crisis to "wash out" in July or August. He added that "it could be August, could be July, could be longer than that."

The background is that earlier in the day, I was watching one analyst after another on tv talk about the virus crisis ending in April or May, after which there would be a "V-shaped recovery." As I watched these so-called "experts," I couldn't get over the feeling that I was watching a Donald Duck cartoon show, with each "expert" quacking the same nonsense.

So when Trump made his remark, investors began to freak out because their April-May assumption was apparently wrong, and a July-August assumption meant that their V-shaped hopes were dashed. By the way, as I've said several times in the past, I don't expect the crisis to be over until a vaccine can be deployed, sometime in 2021. I'll discuss this more below.

As long-time Generational Dynamics readers are very well aware, the stock market is in a huge bubble that will have to implode at some point, and that could occur at any time.

The Federal Reserve made several major moves to pour money liquidity into banks on Sunday and Monday. Many commentators are complaining that it didn't help the stock market, but that wasn't the intention anyway. The problem being addressed was a "broken" bond market, with a "credit crunch" similar to the one in 2007-08. The Federal Reserve move helped the bond market, but not the stock market.

There's a conflict between governmental economic policy versus coronavirus policy. Economic policy -- monetary and fiscal -- has the goal of putting money in people's pockets so that they'll spend it and the economy will grow. But coronavirus policy is that people shouldn't be out shopping or attending events or traveling, but should be staying quietly at home to limit spreading of Covid-19. This is a conflict that shows how complicated the situation is.

The most pessimistic of the predictions that I've been posting since the beginning of February, in articles and in daily reports on the Generational Dynamics forum, are continuing to occur. We're still waiting for an event that hasn't occurred yet but must occur, as predicted by Generational Dynamics: A full-scale generational panic leading to a global financial crisis. It might occur soon, or it might not occur for weeks or months. But it will occur. ( "2-Mar-20 World View -- Coronavirus updates -- infections spread across the world")

Price/Earnings ratios - Trailing and Forward earnings

This is truly a remarkable time. I heard an analyst complain that stock prices have become "completely untethered" from earnings, because the only thing affecting stock prices now is the latest news headline.

In fact, stock prices have been "untethered" from earnings for a long time. As readers know, I focus on price/earnings ratio, to keep things simple. Prior to the 1990s, the core value of a stock was considered to be "tethered" to the P/E ratio, what today we would call P/E based on "trailing earnings." This means that the "earnings" are actual reported earnings for the previous year, also called "one year trailing earnings."

Starting with the 1990s tech bubble, that P/E ratio was producing results that stock salesmen disliked, so they started using "forward earnings" or "operating earnings." But unlike trailing earnings, which are solid values backed up by audited financial statements, forward and operating earnings are fantasy earnings, not backed by financial statements, but backed by wishful thinking from public relations departments.

An example of the fantasy is something that I hear frequently. Someone will say that stock X has a P/E ratio of 80, and stock Y has a P/E ratio of 40, and therefore stock Y is better. This is total nonsense, since both the 40 and 80 numbers are totally meaningless.

This has given rise to complete doublespeak. Analysts will talk about a historic average P/E ratio of 14, and say that if a stock's P/E ratio is less than 20, then it's close to the historic average. Actually, 14 is the historic average P/E ratio with trailing earnings. I've estimated that the historic average P/E ratio with forward earnings is around 8. So a stock with a P/E ratio of 20 is astronomically overpriced.

So stock prices have been untethered to trailing earnings since the 1990s, since analysts never talked about anything but their fantasy forward earnings, and ignored trailing earnings. Under the forward earning doublespeak, the stock market bubble has been growing to a huge size.

So the analyst complaint that stock prices have become "completely untethered" from earnings is particularly ironic, since they've been untethered from trailing earnings for years. What's ironic is that, in the last few months, stock prices have even become untethered to fantasy forward earnings. We might also say that they've become untethered to sanity.

Why experts are calling for 'Flattening the Curve'

Almost every news report these days contains the phrase "Flattening the curve." This refers to postponing Covid-19 infections for as long as possible, using such techniques as closing schools and stores, locking down cities and making everyone stay at home.

The idea is that if everyone gets sick at once, then hospitals will be overwhelmed. But if the infection rate can be slowed down, then hospitals will be able to keep up.

Here's a graph that illustrates the concept:

The first curve shows what happens if everyone gets sick at once.  The flattened curve shows how infections can be spread out over time (
The first curve shows what happens if everyone gets sick at once. The flattened curve shows how infections can be spread out over time (

The above graph illustrates the concept. If everyone gets sick at once, then the "Healthcare system capacity" will be exceeded, and hospitals will be overwhelmed. But if the same number of cases is spread over time, and the curve is flattened, then according to this graph, the healthcare system will be able to handle them.

It's worth mentioning that the entire concept is fantasy. There's no way to flatten the curve except through unacceptable draconian measures (as in China), and even then, the flattened curve will have to be years long.

The 'Herd Immunity' strategy

The two different curves in the chart above actually represent two different strategies that a government might use to deal with the Covid-19 crisis.

The first curve is associated with a strategy known as "Herd Immunity."

This strategy is being proposed by some officials in the UK: Let the entire population of a town become infected, and then the town is immune.

This strategy would seem to have a great deal of appeal, especially to young people who typically do not become seriously sick. Once you're over it, you can stop worrying about touching your face and washing your hands, and just get on with life. Even for old people like myself, it's tempting to get it over with one way or the other.

According to psychologist Dr David Halpern, this herd immunity strategy may become necessary, as more and more people become infected:

"There’s going to be a point, assuming the epidemic flows and grows, as we think it probably will do, where you’ll want to cocoon, you’ll want to protect those at-risk groups so that they basically don’t catch the disease and by the time they come out of their cocooning, herd immunity’s been achieved in the rest of the population."

So according to Halpern, the Herd Immunity strategy works as follows: Isolate the old people somewhere, let all the young people get infected, and after they recover, let all the old people out.

Can you be reinfected with Wuhan Coronavirus?

The herd immunity strategy is based on one huge assumption: If you get sick from coronavirus and recover, then you'll be immune from reinfection.

This assumption has not been proven, and it's being debated. It seems likely that a patient is immune from reinfection immediately after recovery. But how long does that immunity last? It might be years, but it might be only months or weeks or just days. Also, even if you remain immune, then there might be new strains to which you aren't immune. According to Anthony Costello, a pediatrician and former World Health Organization director:

Does coronavirus cause strong herd immunity or is it like [ordinary seasonal] flu where new strains emerge each year needing repeat vaccines? We have much to learn about Co-V immune response."

So the "herd immunity" debate is interesting and ongoing, and as Covid-19 continues to spread exponentially, a lot of places will have to use the herd immunity strategy whether they want to or not.

Containment and mitigation strategies

Referring to the graph above, the "politically correct" strategy is represented by the second curve, the flattened curve. The curve is flattened by means of containment and mitigation strategies, as I've described in a previous article. In the containment strategy, the country tracks and tests people and uses contact tracing, to identify infected people, and isolate them. When that fails, the mitigation strategy is used, where schools and stores are closed, and large gatherings are illegal, in order to reduce the number of infections. ( "2-Mar-20 World View -- Coronavirus updates -- infections spread across the world")

Both of those strategies should be quite familiar to almost everyone at this time. They're being implemented throughout Europe and the United States, as well as in many other countries. Cities, towns and provinces are being locked down, stores and schools are being closed, and borders are being closed.

Just to take one of many possible examples, France on Monday made it against the law for many people to leave their homes. In Africa, 20 countries now have coronavirus infections, but most people are too poor to be able to stop working and self-isolate, so mitigation will fail and the virus will continue to spread exponentially.

Here's the problem with the containment and mitigation strategies: They require stores and schools to be closed, and people to be isolated, for many months until the crisis ends. As long as people believe that the crisis will end in April or May, the restrictions may be tolerable. But when it becomes clear that the crisis will continue for many more months, then people will no longer tolerate the restrictions.

That's why, in my opinion, until a vaccine is deployed some time in 2021, the virus is going to continue to spread, until everyone is exposed to it sooner or later.

The China enigma

To my knowledge, there's only one country where the leaders claim that the mitigation strategy has been successful: China.

China is claiming that they've conquered the Wuhan coronavirus by means of extremely severe harsh mandatory mitigation measures. (They also claim that Wuhan coronavirus was a bioweapon installed in Wuhan by the US Army under the noses of the incompetent Chinese army, which is typical of the crap that comes from the CCP.)

Since the Chinese Communist Party (CCP) lies about everything, including enslaving Muslim Uighurs and annexing the South China Sea, there is no reason to believe any of their claims. Furthermore, the CCP is harshly censoring media, and punishing anyone who dares to describe what's actually going on. So if an outbreak of caronavirus breaks out in a rural area, a regional manager who reported the outbreak to Beijing could be harshly punished, so has no motivation to report it. So it seems quite likely that infections and outbreaks are being hidden, or reported as other kinds of illnesses.

Here's one analysis from Thailand:

"Doctors in provinces like Helionjang, Xinjiang, Henan and Shanxi are telling a different story. According to a stringer,there is an ever increasing amount of patients coming in with respiratory symptoms but doctors have been given guidelines as to what medications to prescribe and to admit them if serious but not to conduct any diagnostic tests directly involved with Covid-19! A check with hospitals in 4 provinces also showed that Covid-19 test kits are not available in any of these hospitals.

Health authorities and medical entities have been given strict warnings not to talk to the media and foreign entities while local media have been prohibited from reporting on any local health issues except official releases sent out to them." (Thailand Medical News)

So this means that the mitigation strategy isn't working in China either, and that many outbreaks are being covered up. Any one of these outbreaks could explode at any time.

Some possible good news: The Real Economy

There might be some good news. In analyzing how the crisis will unfold in the next few months, there are three related issues that everyone is conflating, but which are really quite separate:

Let's focus on the real economy. These are ordinary businesses, often private businesses completely unaffected by the stock market, that are scrambling to do everything possible to stay in business.

To show what I mean, here's what happened between 1929-33:

The GNP represents what I'm calling the "real economy." Owners of the businesses in the real economy take whatever steps are necessary to stay in business, irrespective of virus or stock market disasters.

If a restaurant or bar wants to stay open, then the owner will separate the tables and place screens between them to create compartments, and then sanitize each compartment after the people leave.

If a factory wants to stay open, and it depends on supply chains originating from one country whose factories can't supply them, then the owner will look for new suppliers in other countries.

Here are some examples of businesses that are likely to do well in the next few months:

Even in the worst case scenario, we can imagine a world that's as busy and bustling as it was until recently, but now people are protected by special clothing or compartmentalization or special safe modes of transportation. These are all technically within reach -- and in fact are really quite simple to implement -- but they just haven't been necessary until now.

I believe that the real economy is going to do a lot better than most people think, and possibly a lot better than the stock market, as it did during the Great Depression. In fact, there may actually be a "V-shaped recovery" in the real economy long before there's a recovery in the stock market.


Related Articles:

(Comments: For reader comments, questions and discussion, see the Generational Dynamics World View News thread of the Generational Dynamics forum. Comments may be posted anonymously.) (17-Mar-2020) Permanent Link
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