Note: This was drafted alt least a month before and posted on 23rd May 2020, two days before the Floyd killing occurred (25th May 2020). I have pointedly left off the US, because it was inevitable. In other countries mentioned, instability ranged from possible to probable.
Is this the Big One as they say for Economy, Finance and Society
Since 1998 was working in Wall Street. A lot of my work involved Risk in billion dollar portfolios. Most people, look at the upside, but because of my work started looking at the downside and its effects. By 2003 or so there was some focus on what is called fat tail risk, a higher than normal probability of the downside. By about 2005 or the chatter was about a collapse of the housing market, i.e. Mortgage Backed Securities (MBS). Then 2008 Financial collapse happened. However, the underlying economic structural issues were not fixed. The Too Big to Fail Bankers (TBTF) and oligarchs were bailed out and the average joe hung out to dry. Those who predicted the 2008 Financial crash, once again warned of a knock on on Finance/Economy would make the dominoes fall and much bigger financial crash. The Covid-19 Pandemic is a sledge hammer, shattering the dominoes.
As seen financial collapse was expected and predicted. Even the pandemic was not unexpected. These are not Black Swans, i.e. unexpected events.
To quote from 2011 article by Matt Stoller
And while this may not be hitting the elite segments of the economy right now, there will be no escape from a flu pandemic or significant food shortage. The re-engineering of our global supply chain needs to happen—and it will happen, either through good leadership or through collapse.
Couple of Points/Factors to think About
The Virus War: Make no mistake, this is the real war on Terror. The enemy is invisible, insidious and within. Normally wars have some breathing space, bombs fall and then a few days of respite. This war is like water torture a continuous drip drip of sickness and death. Eventually fatigue sets in, and many become immune to the daily numbers of sickness and death. The Stalinist “A single death is a tragedy, a million deaths is a statistic” becomes the reality, with the death of humanity.
Nation State: Democracy, mature or not is not a panacea in this kind of crisis. The nation state with the population vested in sacrifices for their common good and destiny is the most well placed to ride out this crisis (eg Korea, Taiwan). Unhappily, globalization has eroded the common purpose of a nation state. At the upper end of society, the educated and high wealth are vested in the nation coming together. The fault lines are at the lower end of society. Semi-skilled and unskilled are pitted against immigrants. The poor are divided by racial lines. This part of society has no vested interest in a democracy or a nation state.
eg. Singapore Fault Lines: The unskilled immigrant low paid labor (1.1 million, 20% of the population) were out of sight, and out of mind. Singapore seemed to have stopped the spread as of March 23, 509 cases and 2 death. The numbers started then exploding, April 23 a single day, the new cases were 1,037. 55 Singaporeans and 982 low skilled immigrants.
Supply Lines: As the unskilled and semi-skilled, low wage workers start to fall sick, expect supply line disruption. That is food and essentials delivery from warehouse to the local grocery store or supermarket. Maybe an essential pin to fix your motor is no longer available. Workers in distant Banana Republics, working for multinationals like Dole are going to fall sick and no longer work.
City vs Rural: Cities are dependent on food supply lines, power and water to name the least. Resources are dependent on City/Local govt. Sense of community, is questionable. Rural communities on the other hand for the most part can be self sufficient assuming they have one critical resource, water available locally. Obviously, suburban are intermediate, once again the critical factor being locally available water.
Now to look at a few countries, and their strengths or vulnerabilities based on the above four factors.
NOTE: These are NOT PREDICTIONS. Factors and issues to think about,
Sri Lanka (my Home country)
80% Rural with most rural having locally available water. Even meat, i.e. hunting (against the law) is becoming quite common (supply lines). Older generation (over 60’s) has been thru this in 70-77 i.e. Economy collapsed, and we had to be self reliant.
Nation State: In 2009 a nationalistic govt ended a 30 year separatist war. After loosing elections in 2015, the nationalistic govt is back in power in Nov 2019. I think they will ensure Nation State, by jack boot if necessary.
City dwellers, specially in the high rises (6 -10 floors I think) for former slum dwellers. Will there be power to supply water to the overhead tanks. Will this part of society fracture.
To me the biggest threat is nearby India. not as in the Govt sponsored invasion. What is to prevent a couple of hundreds of fishing boat making a concerted rush to Sri Lanka. This not without historical precedent, in the 50’s to 70’s there were many illegal immigrants from India.
An economy and reserves, with right policies can mitigate the economic downsides.
Suburban towns that border large estates. i.e sheep and other food sources.
The cities with immigrants and non English citizens not buying into the nation state
The perfect place to wait out the Pandemic
Far away from the rest of the world. Self sufficient in food. More sheep and cattle than people.
The Maori (15% of population) + Pacific Islanders (5% ?). The Haka is the cool dance of NZ/Maori and the All Blacks. But many forget that Maori are warlike, and the Haka peruperu is a war dance.
If things go bad, are the Maori going to buy into a Nation state run by the Pakeah. (The cracks are there already)
Hedging Your Risk
Since 2005 I have advised friend and family specially in the US not to rely on house value, 401K, but to go for gold and rural property with own water source.
It is still not too late for gold as a hedge. That is even with the price of USD 1,800/oz (May 23 2020). Not much can be done with house, unless you are able to get a home equity loan. The same with a 401K, take out a loan. Buy gold, maybe if nothing really happens, sell the gold and pay back loans. At worst, a small loss. If the economy collapses, declare bankruptcy and hang onto/sell the gold.
Tried to keep this short as possible. Once again much is what I have been reading since 2005. Most or all predicted the 2008 Financial Crisis. Post 2008 they have been warning of a much larger financial crisis, possibly caused by pandemics or break in global supply lines. To name most Nouriel Roubini, Raguram Ranjan, Satyajit Das, Matt Stoller, Matt Tabibi, The blogs, CalculatedRisk (pre 2008 with Tanta. From Tanta’s posts learnt more about MBS than from text books), NakedCapitalism and ZeroHedge often highlighted these authors/finance analysts giving an alternate view of finance and economy. Much of their predictions are in play now.
To conclude, as I started.
Is this the Big One as they say for Economic, Finance and Society
Too many references. So just two.
The Big Cycles Over The Last 500 Years, Ray Dalio May 21, 2020
The Collapse of Complex Societies: Joseph Tainter 1988
Tainter lays out his theory of decline: as societies become more complex, the costs of meeting new challenges increase, until there comes a point where extra resources devoted to meeting new challenges produce diminishing and then negative returns. At this point, societies become less complex (they collapse into smaller societies). For Tainter, social problems are always (ultimately) a problem of recruiting enough energy to “fuel” the increasing social complexity which is necessary to solve ever-newer problems.
I had not read this prior to the current chaos in the US or when I wrote above.
For the uninitiated, Nature is the top most science journal. If you can get even a letter published, equivalent to 10 peer reviewed journal articles
Peter Turchin in Nature* 2010, predicting instability in the US by 2020
May 2020, WilpattuHouse.com
13 thoughts on “Covid-19 Fault Lines and Consequences”
Interesting article, but you are underestimating the power of the government and overestimating the power of the individual. Trust me if the nation state falls apart, then gold or anything will be of no use (unless you are affiliated to a warlord).
All these doomsday analysis seem enticing, but are not realistic.
Again, I agree that COVID or other pandemics/war can completely shake our system and re-order the ranks, but few tanks/assault helicopters can easily quell any major unrest.
“Since 2005 I have advised friend and family specially in the US not to rely on house value, 401K, but to go for gold and rural property with own water source.”
That’s a remarkable admission. Depending on the precise time, you may have prevented some friends from getting some very handsome returns on investment.
Investing in gold in 2005 would have been a vg idea. Gold prices has gone up from about $500 per ounce in 2005 to about $1800 now.
S&P went from about 1600 in 2005 to 850 at the bottom of bear market in 2009 , going to about 3200 in Feb , from there the bear market has started. There are few bear market rallies and it sinks more and more after the rally fizzles out. So, I won’t be surprised if the S&P reaches 1800 within next 18 months and even more. Gold has just started another bull market.
All told, in 2005-2023 run, gold would be a winner by a long shot compared to equities.
Trump , and Fed are just massaging the stock markets with more liquidity, unheard of liquidity. This is all to help Trump’s re election in November. It is just not going to work. Us gov’s printing money and showering it from helicopters is a bad idea and it is going to bite soon.
28% of the US workforce has become unemployed in 6 weeks and in that period stock markets have risen by govt driven liquidity. This is strange and unreal .World is facing a crisis similar to 1929. Even then , the rate of unemployment was not so sudden . Supply chains are broken and demands are also falling. Equity markets can’t defy economic gravity for too long .
VV, it is certainly the case that if one was *required* to invest in a single thing over the entire period then real estate would not be the best choice. (which is why I qualified my comment with “depending on the precise time”.)
Real estate was a fantastic investment opportunity in some parts of the US from approximately 2010 for the next 5-6 years. Advising against it consistently for the entire period was not correct.
VijayVan and Arjun
When I say have gold (and rural land) for the following reasons
a) From the Jewish playbook, very liquid asset and 20kg at current prices enough to start life. If the SHTF then plenty.
b) Cant be taxed or confiscated (unless you had it in bank security box) eg 1933 in the US.
Basically, I am looking at when things go bad, and we have had those experiences in Sri Lanka. July 1983 pogrom against Tamils, Expulsion of Muslims* from North and East.
House value was useless. If sold when fleeing country or area, pennies on the dollar, or cents on the rupees.
*Even gold worn by Muslim Women were confiscated by the LTTE. So something to keep in mind when fleeing.
Diamonds used to be a good, store of wealth. No longer. Plenty of it all over the world and price just because of the De Beers cartel.
BTW, along with gold, US$ gains more and more against other currencies. Holding US$ is a good idea. US treasuries Even bitcoin may see a phenomenal growth in the next few years.
What do you think of Inflation Protected Securities, seem a bit pricey rn but seems increasingly risky to hold cash given how they seem to be pulling out all the stops to increase money supply.
Sobering write up based on interview with Dr. Doom – https://nymag.com/intelligencer/2020/05/why-the-economy-is-headed-for-a-post-coronavirus-depression-nouriel-roubini.html
While there are inexorable trends in history, sometimes it is an (lack of) action on the part of a single individual that can changes the course of history. In the absence of leadership from the US, we are bound to see a period of chaos in the extremely intertwined global economy.
The future looks very bleak and unpredictable for South Asia. I imagined that the current scenario would eventually come about as climate change started to really bite. We are seeing a rehearsal with millions on the move and many millions unable to move.
The current crisis should be grounds for re-examining so many of the basic assumptions of the current nation states of South Asia. Will the Kashmir conflict matter if economies simply implode, food supply is disrupted and law and order breaks down in India and Pakistan? Will the Pakistani army continue to wield power in such a scenario? Will the BJP be forced to turn away from its ideological underpinnings? With the two major political parties in Bangladesh be willing to bury the hatchet? Are we simply condemned by the baggage of history?
This crisis is truly a terrible thing to waste.
if i am not mistaken, pak and b’desh didnt impose a stringent lockdown like india. yet the death rate in these two countries are similar to india. same goes for sub-saharan africa or SE asia, which have been left relatively unscathed from the virus.
so what did indian govt achieve with this historical lockdown except running the economy to ground. talk about a self goal!
modi is consistently proving himself as a reckless leader who cares two hoots about the lives he controls. a gujju version of quick-gun murugan. shoot first and ask questions later.
The death rate in India shot up as the lockdown was too porous. First there was Tablighi jammat in Delhi. Then lakhs of migrants gathered in railway stations and bus stops to go home . One large vegetable wholesale market in Chennai was allowed to operate and that has become a super spreader.
Social distancing and lockdown to be effective must be efficient and that was lacking in India. Only good thing that be said about Indian lockdown is that it has saved may more lives by preventing COVID escalating and about 25000 deaths from traffic deaths by closing all traffic.
This sounds like congratulating the guy who just played and won a round of Russian Roulette. And egging him on to play the next round.
Even with well designed statistical extrapolations from Brookings (Shamika) and ICMR , India looks to have dodged about 800k to 900k cases over the past 2 months because of the lockdown.
I am hearing similar things from Germany, where protesters are questioning the Merkelś logic with plaintive cries of “Nothing happened”. Exactly……nothing happened. That is the whole point!!!
Modi govt has lost control of the lockdown. Lakhs of migrant workers gathering and milling around in busstops and railway stations, and perhaps travelling in tightly packed bus/trains completely nullifies lock down. Can’t they plan 3 or 4 steps ahead ?
This has been happening for the last few weeks
This is what makes people think Hindutva can’t be taken seriously in nation building
Wow, an Author I have not read. Peter Turchin in Nature 2010, predicting instability in 2020.
Sri Lankans, please read the Nature article, much of what is said sounds like the lead up to the lost 3 decade, post 1983.
In the United States, we have stagnating or declining real wages, a growing gap between rich and poor, overproduction of young graduates with advanced degrees, and exploding public debt.
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