March 12, 2020
There are decades where nothing happens; and there are weeks where decades happen. — V.I. Lenin
One of the most momentous political and economic decisions of the current century took place last weekend, with tumultuous consequences for markets, industries and entire economies. And yet amid the craziness of the past week's news, you could easily have been forgiven for missing it.
- In this week's issue I'll remind you about that decision, and look at a number of other angles to the current virus crisis. All in 1,510 words, which will take you less than 6 minutes to read.
- Heads-up: We have a special report about coronavirus coming this weekend. As a subscriber to Axios Edge, you'll see that in your inbox from Mike Allen on Saturday.
- 📺 And “Axios on HBO” on Sunday at 6 p.m. ET/PT features an exclusive interview with DNC chair Tom Perez, who said on Monday he's "not contemplating" an online convention (clip).
1 big thing: It's the politicians, stupid.
The fate of countries around the world lies in a very few individual politicians' hands — more so than at any other time in half a century or more.
- Two politicians in particular, Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin, wiped about $20 trillion off the value of the world's oil reserves this week when they failed to come to an agreement on cutting oil production. That's more than $2,500 per human being on the planet.
The spread of the novel coronavirus is similarly a function of decisive action by heads of state, or the lack thereof. Governments alone determine whether the number of new cases increases exponentially, or whether it is brought under control within days.
Why it matters: The Chinese government, through inaction, allowed COVID-19 to grow to the degree that global infections were inevitable. Subsequent Chinese actions, however, were decisive and effective.
- South Korea has also been effective in combating the coronavirus and has managed to do so through "openness and transparency" rather than lockdowns.
- Italian Prime Minister Giuseppe Conte has locked down the entire country, imposing severe restrictions on travel and shuttering all stores except groceries and pharmacies.
- Donald Trump, by contrast, sent markets into a series of tailspins by talking about the virus as a political attack rather than as an epidemiological emergency. His plan for minimizing the domestic spread of COVID-19 is notable mainly for its nonexistence.
The big picture: It's generally very difficult to determine the amount of credit or blame for economic conditions that can be laid at the feet of any individual politician. Heads of state tend to inherit an economic system and stick with that system. But a global pandemic is exactly the kind of shock that only government action can address.
- Russia and Saudi Arabia have already failed the test. Faced with a significant decline in demand from the coronavirus, they failed to agree to cut supply by a similar amount. Instead, they both decided to increase production, sending oil (and stock market) prices plunging.
- The United States is also failing. Its official count of 1,281 coronavirus cases is much lower than the reality, given that testing kits have been extremely scarce and that the country had tested fewer than 5,000 people as of Monday. (South Korea, by contrast, with only 15% of the U.S. population, has tested almost 200,000 people.)
The bottom line: In normal day-to-day life, someone with the novel coronavirus will infect more than 3 other individuals. That's a simple recipe for exponential growth. Effective heads of state have shown that they have the ability to change individual behavior across their country so that the number gets reduced to less than 1.
- Normally, the health of a country is a function of the strength of its economy. That correlation has now temporarily been upended. Politicians need to slow down economic activity to save their countries.
2. The bear market in macro trends
Three major long-term trends have just been thrown violently into reverse: The rise of cities, the rise of global just-in-time supply chains and the rise of the sharing economy.
- Conditions in all three cases are almost certainly going to get significantly worse before they get better.
Cities are victims of the virus, but they're also a key vector for its spread. By their nature, they involve hundreds of thousands of humans living and working in close proximity to one another and relying on myriad shared services. Without cities the coronavirus would find it much harder to spread.
The sharing economy is built on a simple and powerful premise: that items from scooters to cars to homes can be put to most effective use if they're shared among multiple individuals. But sharing, now, is exactly what the world is trying to minimize.
Global supply chains are similarly being hurt by the virus. They're often based on the hyper-efficient movement of parts and components among dozens of different countries, in a complex dance in which a single missing piece can mean no end product at all.
- Go deeper: My colleagues Dion Rabouin, Joann Muller, Bob Herman and Courtenay Brown had a great piece on supply shocks this morning.
The bottom line: All three trends maximize the efficiency of an economic system. The downside of that is becoming clear: Fragility and efficiency are two sides of the same coin. The more efficient a system is, the more easily it can break.
Bonus: How affected countries differ
China and Korea show that it's possible not only to slow the spread of the virus, but to significantly decrease the number of new daily cases. Italy is the most worrying counterexample.
- Italian Prime Minister Giuseppe Conte has said that the benefits of the country's current lockdown will not be seen for weeks.
3. Retail's iron stomach
The stock market is down significantly, but insofar as that market-reporting cliché the "wave of selling" is anywhere to be seen, it isn't coming from mom-and-pop investors.
By the numbers: As stocks plunged on Monday, more than twice as many Fidelity customers were buyers than sellers. “Customers are using the market volatility to add equities to their portfolio,” Fidelity’s Robert Beauregard told Yahoo Finance.
- At Vanguard, customers were even more sanguine, with less than 0.3% of retirement accounts making any trades at all in the past month.
4. Why stocks might look cheap
One reason people rotate into stocks is when they pay out much more in dividends than a Treasury note does in interest payments.
- That's not normally the case. The dividend yield on the S&P 500 is generally lower than the yield on the 10-year Treasury note because investors expect to make money not only from stock dividends but also from price appreciation.
Earlier this week, however, the dividend yield on the S&P 500, at 2.09%, was more than 4 times the yield on the 10-year Treasury note. That easily marked an all-time high for the ratio.
- Be smart: There are limits to how informative this ratio can be. If 10-year bond yields head negative, for instance, as they have done in Germany and many other countries around the world, the ratio would first spike up to ∞ and would then go negative itself.
Why it matters: This ratio doesn't help you time the market — stocks can always fall further. But it's easy to see how investors in Treasury bonds might start worrying that their money is no longer working hard for them.
5. The Dow's biggest dog
The broad U.S. stock market was not (quite) in an official bear market as of the close of trade on Wednesday — but the Dow Jones Industrial Average was. Thank Boeing for that.
By the numbers: Boeing's share price has fallen from $440 in March last year to $162 in early trade today. That's a drop of $278 per share.
- Because the Dow is an average and not an index, it measures changes in nominal share price rather than changes in market capitalization.
The bottom line: The fall in Boeing's share price alone has wiped more than 1,885 points off the Dow.
6. Fear that there's not enough fear
The World Health Organization finally declared COVID-19 to be a pandemic on Wednesday.
- What they're saying: "Pandemic is not a word to use lightly or carelessly. It is a word that, if misused, can cause unreasonable fear, or unjustified acceptance that the fight is over, leading to unnecessary suffering and death," said WHO Director-General Dr. Tedros Adhanom Ghebreyesus.
The other side: At a time like this, the WHO has to also be worried about unreasonable lack of fear. Fear, after all, is a very useful social distancing mechanism.
Between the lines: The WHO's announcement on Twitter was hardly sober and contained. It has two siren emoji, abundant ALL CAPS and a glaring red-on-blue color scheme.
- The message: Up until now, we've been worried that you might panic. Now, we're worried that you're not panicking enough.
My thought bubble: The WHO has an ally in the stock market. The plunge in stock prices is helping many Americans understand the gravity of the current situation.
7. Runs on paper
During the global financial crisis, we experienced run-like dynamics in commercial paper markets. This time around, the run-like dynamics on commercial paper are a bit more literal.
Why it matters: People aren't buying toilet paper because they need toilet paper. They're buying toilet paper because everybody else is buying toilet paper. Runs can happen in just about anything and tend to be self-fulfilling. That's true whether they happen in the debt markets or the supermarkets.
8. The global picture
9. Coming up: Another rate cut
The Federal Reserve is expected to cut interest rates again on Wednesday, writes Axios' Courtenay Brown.
Why it matters: Wall Street is expecting another big move lower. 50 basis points seems to be the bare minimum; quite possibly we'll see a full percentage point lopped off rates, bringing them all the way to zero.
- Few — with the exception of President Trump — believe that lower interest rates are really the solution to the virus crisis. Most economists are looking to the government for fiscal stimulus that could shore up the U.S. economy.
10. Building of the week: WHO headquarters, Geneva
The great Swiss architect Jean Tschumi, famous for his swooping Nestlé headquarters in Vevey, also designed the World Health Organization's Geneva headquarters, which was completed in 1966. (Architect Bernard Tschumi is his son.)
- In front of the building is a bronze statue by Welsh sculptor Martin Williams to commemorate the 30th anniversary of the eradication of smallpox.
- A major expansion of the WHO campus is keeping the existing Tschumi building intact, while adding a new structure next door by Zurich-based architectural firm Berrel Berrel Kräutler.