Apr 2, 2020

Axios Capital

Felix Salmon

Situational awareness: 10 million Americans successfully filed for unemployment in the two weeks ending on March 28. This is what an "off" switch looks like.

  • Congratulations to everybody who got all six "Withnail & I" references at the top of last week's newsletter.
  • Many thanks this week to Jacob Weisberg, CEO of Pushkin Industries, with whom Axios is developing a new podcast. (We're hiring, if you want to host or produce it.) Jacob's eponymous law, cited in item 4, has been very helpful to me in thinking through the epistemics of this crisis.
  • This week's newsletter is 1,679 words long, which will take about 6.5 minutes to read. If you like it, tell your friends! The sign-up link is here.
1 big thing: How pandemics are worse than wars

Illustration: Aïda Amer/Axios

What happens after a war? Two weeks ago, I asked that question and came away cautiously optimistic about America's ability to bounce back from its current crisis. Now, I'm not so sure.

Why it matters: Wars are (generally) over when they're over; then the post-war rebuilding can begin. Pandemics don't work that way; their effects reverberate for decades.

What's happening: Billions of people around the world are living in fear of a lethal and invisible enemy. They're sequestering themselves inside their homes and avoiding other human contact not just because they are being told to do so by their governments, but also because they have internalized the need to do so out of simple self-preservation.

  • Extreme measures are popular. 74% of Jordanians approve of their government's measures, which started with a round-the-clock curfew. (The curfew now lasts from 6 pm until 10 am, and driving is banned during the day.)
  • New Zealand's very strict lockdown is also popular.

Between the lines: "Getting righteous about other people’s inadequate social distancing is how we manage our fear," Leslie Jamison writes in the NYRB. (That, too, is visible in New Zealand, as well as all over Twitter.)

  • Righteousness requires self-certainty. Once people are certain of something, it takes years for those heuristics to decay. A mistrust of mingling with strangers — or even with friends — is likely to linger for a generation.
  • That's going to have long-lasting economic repercussions in entertainment, sports, hospitality, travel (including mass transit), and myriad other sectors.
  • Even a vaccine won't end the fear. Vaccines aren't 100% effective, viruses mutate, and fear is not governed by rational calculation.

The big picture: Americans who lived through the Great Depression were scarred for life by the experience, and exhibited a level of caution and frugality that only their boomer children would eventually overcome.

  • After the coronavirus crisis, we're similarly likely to enter what Allianz economic adviser Mohamed El-Erian characterizes as a "greater emphasis on resilience and a move away from efficiency."
  • Economically speaking, that's likely to weigh on any recovery, making it risk-averse and sluggish.
  • Unlike a war's V-Day, the end of the pandemic won't be greeted with euphoria. It won't even be possible to pinpoint when the end arrives.

The bottom line: It's easier to switch an economy off than to switch it on.

Bonus: The lesson of history
Reproduced from Jordà et. al, 2020, "Longer-run economic consequences of pandemics"; Chart: Axios Visuals

Look at Europe to see the difference in how economies react to wars and pandemics.

  • A magnificent Bank of England database has European interest rates going back to the 14th Century — enough time to encompass a statistically significant number of both wars and pandemics.
  • A new paper uses that database to look at real interest rates in Europe following both wars and pandemics. The starkest difference takes place not in the immediate aftermath but rather 20–30 years later.

What they found: Pandemics are associated with lower real interest rates, which means a lower demand for capital and subdued economic growth.

  • Pandemics have extremely long-term public health effects. A 2006 paper found that individuals who were in utero during the 1918–19 flu pandemic "displayed reduced educational attainment, increased rates of physical disability, and lower income" compared with other cohorts.
2. When open-plan offices meet the virus

Illustration: Sarah Grillo/Axios

Over the last four decades, Americans' personal space at work has steadily shrunk, Axios' Erica Pandey writes.

Why it matters: Companies around the country were able to abruptly send their employees home to curb the spread of the coronavirus, but bringing those panicked employees back after the pandemic won't be so easy — especially to increasingly cramped, open-plan offices.

What to watch: Those long shared desks and communal phone booths will be downright panic-inducing to millions of Americans coming back to the office after months of isolation and social distancing.

  • Firms might be forced to redesign their offices to give nervous employees more personal space — within the confines of their often decades-long leases.

The bottom line: The dreaded greige office cubicle looks pretty good right now.

Bonus: Office workers' shrinking space
Data: CoStar; Chart: Axios Visuals

The average number of square feet of office space per U.S. worker has been declining since 1990, from around 260 square feet to 214 now, according to data from commercial real estate firm CoStar.

  • The uptick between 2008 and 2010 was due to companies laying workers off but keeping their office leases during the financial crash.
  • The square-footage numbers are even smaller when looking just at cities, says Paul Leonard, a managing consultant at CoStar. Average space per worker is around 180 square feet in the country's 20 largest metro areas.
3. WeWork collapses
Data: FactSet; Chart: Axios Visuals
"Office occupants are realizing they kind of like being around people and they don’t mind having less space."

That was the thinking in 2018, when WeWork was raising money at a $20 billion valuation.

  • WeWork's value proposition was simple: It was amazing at optimizing space, and was able to squeeze the number of square feet per worker down to a borderline-claustrophobic 75.
  • The 75 square feet includes all the seemingly spacious communal areas, which means the actual offices are even more tightly packed.

Driving the news: WeWork is desperately trying to renegotiate its leases, while its controlling shareholder, SoftBank, is reneging on its promise to spend $3 billion buying back shares from ousted founding CEO Adam Neumann and others.

The big picture: The bond market is sending a strong signal that the true value of WeWork's equity is exactly $0. The company's bonds are trading at severely distressed levels, meaning that after default and bankruptcy, there's likely to be very little value in the company for bondholders to be able to recover.

4. The era of uncertainty

Illustration: Sarah Grillo/Axios

Never have the known unknowns been bigger.

At a time of crisis, we tend to crave certainty — the one thing we have less of than ever.

The markets, of course, are full of uncertainty. Record-high volatility (just look at the oil price today) indicates that price discovery is breaking down.

  • No one has a clue what may or may not be "priced in" to the market in terms of how the virus is going to progress or how the economy is going to behave.
  • Some forecasters see second-quarter earnings declining by 10%; others see a decline of 120%. And we're already in the second quarter!

The virus comes with even bigger error bars. (I could be totally wrong, for instance, about our future willingness to mingle.)

  • The number of undetected cases, the fatality rate, how likely asymptomatic individuals transmit the virus, how dangerous it is to touch an infected surface or to pass within 6 feet of others, how family members in close quarters don't get infected, how long the incubation period is, whether recovery implies immunity and for how long, whether the virus is seasonal — all these and many more basic facts remain unknown.
  • Social questions have even bigger unknowns. What is the correct public-health strategy? How strict should lockdowns be? Should wearing masks be encouraged or mandated? Do masks remind people not to touch their face or make them touch their face more? How much certainty should national authorities evince, given the unknowns?
  • National infection rates are equally unknown. The 95% confidence interval for the proportion of Swedes infected by the virus is 0.8% to 8.4%; in Spain, the number infected is estimated to be somewhere between 1.8 million and 19 million.

Why it matters: It's unnatural to live with such uncertainty, so we all cobble together our own set of beliefs about what is true. Then, because we all have different beliefs, finding common ground becomes very hard.

  • Weisberg's Law states that "Any Jew more religious than you are is mentally insane, while any Jew less religious is a self-hater."
  • Something similar can be said about virus paranoia. Everybody more paranoid than you has gone way overboard, while everybody less paranoid is not only putting themselves at risk but is acting in a deeply socially irresponsible manner.

The bottom line: The virus is eroding the shared norms and beliefs that underpin both markets and societies. The consequences are unforeseeable, but unlikely to be good.

Bonus: Guess Domestic Product
Data: FactSet; Note: Includes GDP forecasts submitted by firms to FactSet; Chart: Andrew Witherspoon/Axios

In normal times, the range of forecasts for U.S. GDP in the current year is very small. A 1% rise is bad, a 4% rise is good, and forecasts generally sit well within that range. These are not normal times.

  • By the numbers: Forecasters can't come close to agreeing what first-quarter GDP was, let alone what the current quarter will end up looking like. The range of estimates is almost unfathomably huge, going from -42% at the low end to a drop of less than 1% at the high end.
  • For the third quarter, some are predicting continued GDP shrinkage; others are predicting a massive rebound.

Why it matters: Business and finance can't operate with this level of uncertainty. But we're going to have to find a way to do so. It's not going away any time soon.

5. How coronavirus has changed personal finance

Illustration: Aïda Amer/Axios

Your personal finances have changed drastically in the past few weeks. You might have lost all or most of your income, your net worth has probably declined, and your monthly expenses have probably gone down too.

The big picture: This is exactly the kind of emergency that savings were designed for. If you're struggling financially, then it's fine to dip into whatever savings you have, or to take advantage of that credit score you've been working on.

  • If you have to fall behind on rent or utilities, take reassurance that you're not alone. Millions of Americans are in the same boat, which makes it more likely that there will be some organized way of helping you get out of this hole.

The other side: If you haven't lost income, then now is not the time to be stingy. If anybody delivers anything to you, tip them generously. Give what you can to nonprofits trying hard to catch those falling through the cracks.

  • It's even fine to go shopping (from home, of course) for luxury goods, especially if they come from struggling small businesses who have been forced to close their retail stores.
6. Building of the week: St. Basil's Cathedral, Moscow
Photo: Valery Sharifulin/TASS via Getty Images

St. Basil's Cathedral dominates Moscow's Red Square, normally the country's biggest tourist trap.

  • Completed in 1588, the cathedral contains 10 separate churches. No other cathedral is remotely similar, even in Russia.
  • Postnik Yakovlev designed the cathedral, but — contrary to legend — was probably not blinded so that he could never build anything as beautiful again.

Muscovites who violate the city's home isolation order face fines ranging from 1,000 to 50,000 rubles ($13 to $650).

Felix Salmon