Are we heading into another Depression?

Economists and analysts give their views on the global economy as countries relax coronavirus lockdowns


© Ingram Pinn/Financial Times


The Covid-19 lockdowns have led to the largest rises in unemployment since the 1930s.

The Financial Times asked leading economists and market analysts what to expect and what might be done to avert turmoil.


A fumbling fragmentation looks more likely than another Depression

Robert Zoellick, former World Bank president and author of ‘America in the World’


The deep economic dive has shocked people.

The pace and extent of recovery depends on the discovery and availability of treatments and vaccines.

I suspect we will see slow revivals, episodic setbacks and costly adjustments — but not a decade of economic disaster.

Many small businesses and some storied brands will not survive, while skilful adaptors and disrupters, especially in the digital economy, will emerge stronger. I will be watching for signals of confidence from consumers, businesses, and societies.

The Depression caused more than economic pain. It metastasised to a loss of faith in democracies, the triumph of ideologies of hate, a turn to demagogues, a breakdown of international trade and finance and, ultimately, the second world war.

Robert Zoellick, former president of the World Bank Group, delivers a keynote speech at the annual Diggers & Dealers Mining Forum in Kalgoorlie, Australia, on Monday, Aug. 7, 2017. The key for China's economic outlook will be any move toward new reforms after its twice-a-decade leadership reshuffle later this year, Zoellick said. Photographer: Carla Gottgens/Bloomberg
Robert Zoellick: 'This picture of fragmentation reveals spectres of dangers, old and new' © Carla Gottgens/Bloomberg


Today, the US, the innovator and guarantor of the late 20th-century order, is recklessly deconstructing its own framework. China, which rose successfully within this supportive international system, threatens it from within while exploring an alternative design based on tributary states.

Ageing Japan, fearful of China and uncertain of America’s reliability, treads cautiously. India drifts back to the diplomacy of “strategic autonomy”.

Russia manipulates for external advantage while withering internally.

The EU struggles to preserve internal coherence while waking painfully to dashed dreams of a postmodernist international legal order.

Britain debates with itself. Middle-weight economies struggle to calculate where they will fit within the fractious new world.

Billions of people in developing countries do the best they can.

This picture of fragmentation reveals spectres of dangers, old and new. The world needs biological security and advances in biotechnology. People demand inclusive economic growth.

Environmental and energy challenges loom. We are just beginning a huge digital transformation. Would-be regional hegemons still seek weapons of mass destruction and terrorists want to wreak devastation and fear.

Democracies wonder about the future of freedom.

The world weighs the future of China.

Gloom is not, however, destiny.

Crises test the resilience of nations. Leaders in key countries — and officials and entrepreneurs working across states to achieve practical results — will set the course.

These actors require public support. Speaking for the US, Abraham Lincoln said long ago that “public opinion in this country is everything”. It still is.


A V-shaped recovery is on track

Mike Wilson, Morgan Stanley’s chief investment officer


While 2020 has been an unusual year to say the least, I would argue that financial market behaviour has been quite predictable.

The pandemic led to a sharp drop in the market, record unemployment and, tragically, 100,000 deaths thus far in the US.

But it also prompted policymakers to respond with unprecedented support.

The US Federal Reserve is now on track to expand its balance sheet by 38 per cent of gross domestic product over the next 18 months to $12tn, or twice as much as it did after the 2008 financial crisis.

We project that fiscal spending plans will result in US deficits this year approaching 25 per cent of GDP, a level not witnessed since the second world war. Though Covid-19 came out of the blue, recessions are never caused by a single event.

Instead, they are the result of excesses that have built up in the real economy. With the prior expansion lasting a record 10 years, there were plenty of excesses by the time 2020 rolled around.

The pandemic was just the trigger for a recession that was already approaching. In fact, markets had already been trading defensively for years, with most individual stocks in a bear market. As usual, when the downturn finally arrived, the bear market ended with a sell-off in March.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., February 25, 2020. REUTERS/Brendan McDermid
The S&P 500 has risen 35% from its March lows © Brendan McDermid/Reuters



Historically, economies frequently experience a V-shaped recovery after a recession.

The severity of this particular recession, combined with the unprecedented policy response, makes it unlikely we will see anything but a V-shaped recovery this time. Equity markets thus have recovered appropriately, with the S&P 500 up 35 per cent from its March lows.

In fact, on many metrics we track, the market recovery looks almost identical to what happened after the collapse of Lehman Brothers. Just as in 2009, most investors naturally remain very sceptical.

It appears that the US economy is reopening without significant increases in Covid-19 cases.

This is encouraging and if cases do rise again in a second wave, the healthcare system should be better prepared to respond, making another lockdown less likely. Such an outcome should mean the unprecedented fiscal and monetary stimulus boosts the economy rather than just making up for lost ground.

With this framework and the past as prologue, we expect the rally to continue and broaden out to the more cyclical parts of the equity market, where valuations remain inexpensive.

Without a global recovery plan, demand will stagnate and inequality will increase

Mariana Mazzucato, professor and director of the Institute for Innovation and Public Purpose, University College London


Covid-19 has brought economies to their knees. The question is how long and how severe the resulting recession will be.

The answer depends on the quality and quantity of global stimulus packages.

To work, they must address both demand and supply, delivering income to the most vulnerable through well-structured universal basic income policies or national job guarantee schemes, and assistance to companies to get back on their feet as well as providing a bold, green direction for investment.

Economic growth will also depend heavily on the speed at which we can find a vaccine, manufacture it at scale and make it globally accessible.

The World Health Organization initiative to ensure worldwide sharing of all Covid-19-related knowledge, data and technologies by making a pool of Covid-19 patent licences freely available to all countries is a great move in this direction. The virus can only be defeated with truly collective intelligence.
epa07317916 Mariana Mazzucato, Professor of Economics of Innovation and Public Value, University College London (UCL), attends a plenary session in the Congress Hall at the 49th annual meeting of the World Economic Forum (WEF) in Davos, Switzerland, 25 January 2019. The meeting brings together entrepreneurs, scientists, corporate and political leaders in Davos under the topic 'Globalization 4.0' from 22 to 25 January 2019. EPA-EFE/GIAN EHRENZELLERMariana Mazzucato: 'We need policies that are not only reactive but also strategic, bringing us closer to an investment-led global Green New Deal' © Gian Ehrenzeller/EPA/Shutterstock


In developed economies such as Japan, the EU and the UK, government stimulus has been large but mainly reactive and the same levels have not been matched elsewhere, especially in developing countries.

Given the global nature of the economy, without a truly global recovery plan, demand will stagnate. Even worse, inequality, which has made the crisis worse than it had to be, will only increase.

While assisting citizens and businesses is the right thing to do, the structure of that aid matters.

Loans and mortgage holidays, which only delay interest payments, risk increasing private debt, already at record levels.

True debt relief for the most vulnerable individuals and families could avoid this. We need policies that are not only reactive but also strategic, bringing us closer to an investment-led global Green New Deal.

Bold plans to create carbon-neutral cities and regions could foster creativity and innovation — especially now that many have rediscovered the joys of walking and biking.

Social, organisational and technological innovation could help change how we eat, how we move, and how we build, spurring a green transformation.

Conditions attached to bailouts of the most polluting industries, from steel to airlines, can make this happen quicker.

Let’s remember 2020 as the year we rediscovered the need for strong global health systems and the world avoided a new Depression with a Green New Deal and an investment-led recovery.

Expect Europe’s biggest peacetime recession in nearly 100 years

Erik Nielsen, UniCredit’s chief global economist


Attempting to forecast the economic effects of the lockdown is truly a fool’s game. Never before have we seen a man-made recession of this scale, nor have we seen policy responses of this magnitude to cushion the impact on people’s livelihood. On balance, however, I expect the biggest peacetime recession in almost 100 years.

The initial collapse in economic activity appears to be coming to an end. Depending on the severity of the lockdown in individual countries, preliminary indicators suggest that we are now some 15 to 30 per cent below GDP levels at the beginning of the year.

Southern Europe and France have suffered most; northern and central Europe somewhat less — and countries such as Russia and Turkey still less so far, as the virus spread there later.

A doctor from the medical staff leaves the Intensive Care Unit tent on April 2, 2020 at the operative field hospital for coronavirus patients, financed by US evangelical Christian disaster relief NGO Samaritans Purse, outside the Cremona hospital, Lombardy. - Fully operational, the structure consist of 15 tents, 60 beds, 8 of which in intensive care. (Photo by MIGUEL MEDINA / AFP) (Photo by MIGUEL MEDINA/AFP via Getty Images)
A doctor at an intensive care unit in Lombardy, Italy, in April © Miguel Medina/AFP/Getty


The next three months will see an easing of lockdowns throughout western Europe, first leading to a stabilisation of activity — at very depressed levels — followed by some growth and areas of strong rebound.

The biggest risk is a flare-up of new infections as rules are eased, and another round of lockdowns. This would then change the base case of a “Nike logo-shaped” GDP growth trajectory into a “W-shaped” one.

Following the bounce off a deep trough, I expect a long, gradual recovery as we learn to live with the virus. Until an effective vaccine becomes widely available it is difficult to imagine a return to normality or to pre-crisis GDP levels.

In aggregate, I expect eurozone GDP to contract by about 13 per cent this year. Even though 2021 will probably see impressive growth rates, the GDP level at the end of next year will still be some 4 per cent below the pre-crisis level.

Central Europe will probably suffer slightly less and pre-crisis GDP levels could be broadly restored by the end of 2021.

While Turkish and Russian GDP will drop by about 5.5 per cent this year, assuming the external financing picture does not deteriorate further, Turkey will probably bounce back stronger in 2021, while Russia will take considerably longer.

Once we are through the crisis, I suspect we will have suffered a GDP drop on the same scale as during the 1930s, but followed by a faster and more robust recovery.


For Asia, at least, this is not the Depression

Trinh Nguyen, senior economist for emerging Asia at Natixis


Economic data is frightful right now — from retail sales to exports, growth engines are sputtering sharply. After a supply shock from China’s factory closures in February, Asia is confronting both domestic and external demand shocks in the second quarter.

Mobility restrictions, especially in economies dependent on domestic demand such as India, Indonesia and the Philippines, have suppressed already shy spenders.

Even in countries with “normalised” mobility, self-restraint has left shopkeepers wanting.

Missing tourists, falling export sales, weakening remittances and cautious foreign investors have put income pressure on current account deficit economies, and even excess-saving ones such as China, Singapore and Thailand.

It is easy to feel depressed. Asia’s GDP contracted in the first quarter, led by China’s sharp fall, and Q2 will be worse as many economies extend lockdowns.

China scrapping its GDP target means we should not count on the country to stimulate regional demand. At the same time, Asia’s high dependency on small and medium-sized enterprises for employment will probably result in worse labour market conditions and therefore purchasing power.



A worker wearing a face masks packages toy cars at the Mendiss toy factory in Shantou, southern China's Guangdong province on May 20, 2020. - Chinese factory activity continued to expand in April, data showed on April 30, but analysts warned that the outlook remained clouded by battered overseas demand as the rest of the world struggles to overcome the coronavirus pandemic. (Photo by NOEL CELIS / AFP) (Photo by NOEL CELIS/AFP via Getty Images)
China should not be counted on to stimulate regional demand © Noel Cellis/AFP/Getty


After a slow start, some Asian economies are stepping up support. India increased fiscal support by 2.7 per cent of GDP with funds for lower-income households.

The Philippines is proposing an additional $26bn stimulus. Indonesia is adding $43bn to soften the impact on SMEs. South Korea’s New Deal will create jobs and foster industries such as 5G and artificial intelligence.

Beyond rate cuts, Asian central banks have done more to ease liquidity shocks, from Bank Indonesia buying government bonds to the Bank of Thailand creating a corporate bond fund.

The US Fed has flooded all markets with dollar liquidity through repo and swap lines.

While regional growth will probably contract in 2020, worse than the 1997 Asian financial crisis, this is not the beginning of another Depression.

Asia’s flexible response, such as allowing foreign exchange rates to absorb shocks, will stabilise funding conditions.

Economies with current account deficits are likely to require less external funding as import demand falls. I expect the region to recover in 2021.

Worsening demographics and risingdebt as well as deglobalisation are key risks but also opportunities. Companies looking for diversification, growth and lower prices will be attracted to India, Indonesia, the Philippines and Vietnam.

The growing need for infrastructure in countries with demographic booms will attract foreign investors.

It could be the 1930s all over again for Latin America

Andrés Velasco, dean of the school of public policy at the London School of Economics


During the Depression, Latin America was buffeted by a collapse in commodity prices, a slowdown in world trade and a massive capital outflow.

The same shocks are hitting the region today, but this time one has to add a decline in remittances (crucial for Central America and the Caribbean) and a productivity freeze, due to having much of the labour force under lockdown.

Back then, the economic contraction was brutal.

Between 1929 and 1933, output fell by 10 per cent in Argentina and Mexico and by an eye-popping 37 per cent in Chile.

Brazil and Colombia also suffered sharp initial drops, but by 1933 had recovered pre-Depression income levels.

In the era of Covid-19, Latin America is well on its way to replicating that dismal performance.

Back in mid-April the IMF predicted the region’s economy would shrink by 5.2 per cent in 2020 alone, with particularly sharp drops of 6.6 per cent in Mexico and 5.7 per cent in Argentina.

Those forecasts are already outdated. Actual 2020 contractions will probably be much larger.

1933 - (Original Caption) Panning For Gold to Solve the Depression! Andacollo, Chile: These Chileans are panning for gold in the neighborhood of the sacred village of Andacollo, near the port of Coquimbo, searching for the gold which the governmnet says will rescue the country from its economic depression. One hundred-thousand jobless, with their families, have been set to work throughout Chile, searching for gold in the scores of streams that flow down to the sea from the snow-clad Andean mountains.
Panning for gold in Chile in the 1930s © Bettmann/Getty



In the alphabet soup of alternative economic paths, a V-shaped recovery for Latin America looks farfetched — unless, that is, a vaccine arrives quickly and, with it, a worldwide resumption of growth.

The virus came late to the region and some countries — Brazil, Ecuador and Mexico — have been remarkably inept at containing it.

In others, high public debt and spotty access to international capital limit what governments can do to counteract the effects of the pandemic.

Only Chile and Peru have the fiscal space to finance aggressive containment policies.

Even there, new cases of contagion and Covid-19-related deaths are up sharply in the past two weeks.

Under the Inter-American Development Bank’s mildest scenario, Latin America’s economy contracts by 6.3 per cent in 2020-22.

In the most extreme case, the cumulative contraction reaches 14.4 per cent — not too different from what the region experienced in the Depression. In the 1930s, the countries that recovered quickly were those, mostly in South America, that adopted unorthodox measures.

They cut interest rates and allowed their currencies to depreciate after leaving the gold standard. Most also defaulted on their foreign debts — except in the Caribbean, where platoons of US Marines guaranteed repayment.

Today, flexible exchange rates are the new orthodoxy, so that is not a constraint. But availability of dollar finance is.

Unless institutions such as the IMF and the IADB sharply step up their lending, a new wave of debt defaults could make it the 1930s all over again.

Redefining National Security for the Post-Pandemic World

Three decades of efforts to broaden the definition of “national security” have largely failed, and it is time to try a new approach. Thinking instead in terms of global security would expand policy discussions beyond national governments and lead to a stronger emphasis on making societies more resilient.

Anne-Marie Slaughter

slaughter75_Westend61Getty Images_worldconnectionglobe


WASHINGTON, DC – The world has spent the last 30 years trying to redefine “national security” in ways that will allow nation-states to prepare for and tackle a wider range of threats to our existence and wellbeing.

Alternatively, national security has been juxtaposed with “human security,” again in an effort to focus money and energy on dangers to humanity as much as to national sovereignty.

But those efforts have largely failed, and it is time to try a new approach. Instead of widening our definition of national security, we need to start narrowing it.

That means distinguishing national security from global security and putting military security in its place alongside many other equally important but distinct priorities.

We must begin by asking four essential questions: What or who is being protected? What threat or threats are they being protected against? Who is doing the protecting? And how is protection being provided?

In its classic form, national security involves protecting nation-states from military aggression. More precisely, as Article 2(4) of the United Nations Charter states, it is about preventing or countering “the threat or use of force against the territorial integrity or political independence of any state.”

Nation-states now face other threats, including cyberattacks and terrorism, although such attacks generally must be sponsored by one state against another to threaten a country’s territorial integrity or political independence. Hence, these threats really qualify as subsets of military security.

Climate change, on the other hand, poses an existential threat to many island states as a result of rising sea levels, and similarly endangers already arid countries by contributing to desertification and water scarcity.

Moreover, whereas the world of 1945 was almost entirely defined by nation-states, today’s security experts must also focus on threats that transcend national borders. Unlike military aggression, phenomena such as terrorism, pandemics, global criminal networks, disinformation campaigns, unregulated migration, and shortages of food, water, and energy do not necessarily threaten the political independence or territorial integrity of a particular state. But they do endanger the safety and wellbeing of the world’s people.

The distinction between national and global security is not just semantic. It goes to the heart of the third question: who is doing the protecting? National security is the province of national governments, and of a fairly small group of homogeneous people within them who traditionally have focused almost entirely on military security. Those establishments have expanded in recent years to take account of issues like cybersecurity, health security, and environmental security, but only at the margins.

Thinking in terms of global security, by contrast, opens the door to participation by a far wider group of people – starting with mayors and governors, who are directly responsible for the safety and welfare of the residents of their states, provinces, and cities. Since the September 11, 2001, terrorist attacks on the United States, for example, US city and state officials have been actively engaged in preventing and protecting against future attacks. They are as likely to talk to their counterparts around the world as national diplomats or defense officials are.

Even more broadly, global security has no official designees. CEOs, civic groups, philanthropists, professors, and self-appointed leaders of every description can launch and join efforts to keep all of us safe. Indeed, the COVID-19 crisis has provided many instances of effective leadership from sources other than national governments.

For example, while the US and Chinese governments have used the pandemic to ratchet up bilateral tensions, myriad international networks of researchers, foundations, businesses, and government agencies have been working together to develop treatments and vaccines for COVID-19, with little concern for nationality.

Broader participation in global-security efforts will also increasingly dissolve the boundary between “domestic” and “international” affairs and policy. Health, environment, energy, cybersecurity, and criminal justice have all traditionally been seen as domestic matters, with foreign-policy and security experts regarding defense, diplomacy, and development as entirely separate realms involving relations between countries and international organizations. But this distinction will progressively crumble.

These shifts will in turn create opportunities for a vastly more diverse range of people to sit at the table on global security issues. Despite some gradual changes in conventional military domains in recent years, far more women and people of color occupy prominent positions in city governments, and in fields like health and environmental protection, including environmental justice.

The final piece of the puzzle is how to provide global security. Traditional military security is ultimately focused on winning. But many global threats primarily call for greater resilience – that is, less winning than withstanding. As Sharon Burke of New America has argued, the goal is more to build security at home than to destroy enemies abroad.

We certainly still want to “win,” if winning means prevailing over a virus, or eradicating a terrorist cell or disinformation network. But the deep nature of global threats means they can be reduced, but almost never eliminated. Arming people with the means to recognize and avoid danger, survive trauma, and adapt to new circumstances is a better long-term strategy.

Nearly twice as many Americans have now died of COVID-19 than died in the Vietnam War.

But many national leaders in the US and elsewhere remain focused on great-power competition, and appear less concerned with the pandemic’s mounting death toll than with distracting domestic publics by pointing fingers at other countries. And yet the lessons of this crisis will loom large in how we think about and provide for our security in the future.

That will be particularly true for younger generations. New America’s Alexandra Stark, for example, argues that COVID-19 is her generation’s 9/11. Instead of the highly militarized anti-terrorism response that the US adopted in the wake of those attacks, she calls for a new grand strategy “fundamentally oriented around human wellbeing,” refocusing on human health, prosperity, and opportunity. That sounds like security to me.


Anne-Marie Slaughter, a former director of policy planning in the US State Department (2009-2011), is CEO of the think tank New America, Professor Emerita of Politics and International Affairs at Princeton University, and the author of Unfinished Business: Women Men Work Family.

Four Steps to Ka-Boom!

By Bill Bonner


– Week 15 of the Quarantine


SALTA, ARGENTINA – We drove up to the capital city to take care of business. Argentina has the toughest lockdown in the world. Regular airline travel to Europe or America, for example, is not expected to resume until September.

But there are no cases of the virus in Salta. So it has been allowed to return to normal… almost.
It is not a pretty city. The sidewalks are broken and disorderly; we stumble down the streets as if we have a drinking problem.


A traditional Salta house

Shops are open. Restaurants, too. But there are few shoppers and fewer diners. Last night, at a neighborhood eatery, we were the only customers. As for the tourist shops – selling mostly gaucho regalia – they are almost empty.

And even though there is no evidence of active infection in the city, we are required to wear a face mask whenever we go out in public.

Alarming

Salta has nearly twice the population of our hometown, Baltimore. And people here are much poorer – with an average wage that is probably only about $15 a day. Still, we see no beggars, no panhandlers, no layabouts or derelicts. In Baltimore, they are as common as rats.

Baltimore also has about one killing per day, for a homicide rate (per 100,000) of 56. In Salta, the homicide rate is just 7 per 100,000, which the newspapers here say is “alarming.”

But in both Argentina and America, the feds are destroying their economies… even faster here than in the U.S., probably because the gauchos have had more practice at it.

Here, employers are required to continue paying their employees during the lockdown, even though they may not be working. This has not been a burden in the agricultural sector – where cows still need to be fed and fields planted. But in many other industries – notably tourism, travel, and hospitality – it is devastating.

Already, three of the five airlines servicing Salta have announced that they are either giving up the route, or going out of business entirely. LATAM Airlines, which we normally take from Panama to Salta, has done both.

Intentional Damage

“It may be intentional,” says a friend, speaking of the damage caused to the Argentine economy by the severe lockdown. “The idea may be to completely wipe out the economy, and blame it on COVID-19. And then, the feds here will nationalize some industries and be able to show improvement as the economy opens up again.”

That may be true. But it is more likely that they just don’t know any better. Politicians and government health experts have no idea how an economy works. They think it is just a vehicle to take the deciders where they want to go.

This mechanical metaphor leads the simpletons to believe that an economy is something that can be turned on and turned off… sped up… or slowed down. They think they can steer it, or “fine tune” it… and “fix” it when it breaks down.

But a real economy is not mechanical at all. It is more like a living thing… made up of billions of other living things, each with its own ideas, skills, and ambitions.

The parts are separate, but they work together like the parts of the body. The liver cannot exist without the heart. But neither wants the thyroid to tell it what to do.

Trying to fiddle with… or improve… such a complex organism is futile and conceited. We can only improve our little piece of it – say, by repairing the sidewalk in front of our house… or smiling at a grumpy neighbor. We can never improve the whole thing.

Corrupt and Unstable

And yet, here come the quacks with their opium and arsenic. They are poisoning the whole of civilization – the economy, the government, and the society, too.

In order for people to live together peacefully, they need to share a common understanding – a “social contract” – that the majority at the center believe is fair.

But today’s center wobbles. Because America’s “two-tiered” fake-money system is corrupt and unstable. It rewards some and punishes others. It pushes up prices in the financial economy.

This top financial expert just returned from a private meeting with members of the Senate Financial Services Committee…

But it slows down the real Main Street economy under the burden of more than $78 trillion in debt, fake money giveaways (including $1.4 billion in COVID-19 checks that the Government Accountability Office says were sent to dead people… marked, conveniently, as “DECD”… in case the shades had any doubt about it), and false financial signals.

The Argentines lived through a similar period in the 1970s and 1980s… when inflation went to 20,000%. Violence increased and the military seized control.

Then, it got worse, as the generals “disappeared” anyone who dared to protest.

Long Way to Go

But in America, we have a long way to go…

First, the Federal Reserve needs to step up its money-printing.

This is almost guaranteed.

Because if they back off now, the stock market will fall again.

Second, the feds need to “stimulate” the Main Street economy, too.

They’ve already made a big effort – including the above-mentioned $1,200 checks and a $4 trillion deficit.

But they are just getting started.

There will be no V-shaped, rocket-ship recovery.

This will cause the feds to spend more.

Third, the dollar must fall. Eventually, this, too, is almost a sure thing. But it can take time.

Fourth, consumer prices need to rise.

This will happen slowly, at first.

Then, Americans will see prices rising and realize that their dollars are not as valuable as they thought they were.

Suddenly, dollars will begin to change hands more quickly.

The “velocity of money” will shoot up, as people will no longer be willing to hold dollars in their bank accounts.

Then, prices will rise much more rapidly.


Ka-Boom!

Meanwhile, the masses must get restless… sensing that something is very wrong, but not knowing what it is.

Rabble rousers on one side will point at “greedy capitalists,” “racists,” and “fascists.”

On the other, they will want to call in the troops to restore “law and order”… even if it means giving up on the Bill of Rights.

At that point, the center no longer exists.

Morons on the Left.

Imbeciles on the Right.

And nothing left in the middle.

The feds will print more and more money… just to try to keep the lid on.

But it will go Ka-Boom! anyway.

Don’t forget to duck.

BS, accusations, plots, and conspiracies – shrapnel will fly in every direction…

And then, the results are completely unpredictable.

Have a nice weekend…

Buttonwood

Is there a role for options insurance in equity portfolios?

Nassim Taleb and Cliff Asness, two high-level thinkers on finance, disagree





In 1993 Nigel Short, a British chess player, became an unlikely tv star. This was a consequence of the staging in London of a chess match between Mr Short and Garry Kasparov, the world’s best player. Channel 4 carried highlights.

Sustaining interest was a challenge, though. Two men hunched over a board is not a great spectacle. A bigger problem was the baffling complexity of top-level chess. Even a club-level player could not easily work out who was winning.

This brings us to a more recent battle of the brainboxes. Nassim Nicholas Taleb and Cliff Asness, two high-level thinkers on finance, had a forthright exchange of views on social media about the efficacy of buying options to hedge a portfolio of risky shares. Mr Taleb, author of “The Black Swan” and adviser to Universa Investments, an options specialist, says it is the only robust way. Mr Asness, founder of aqr Capital Management, says there are better methods.

Mr Asness’s case is backed by empirical work by aqr eggheads, the gist of which is that people overpay for insurance in the long haul. Not yet proven, is the judgment on Mr Taleb’s view. Everybody loves a highbrow Twitter row. The grandmasters will debate the subtleties. But even the club-level investor can take something away. It is a spur to thinking about how to build sturdier portfolios.
 
Start, as even grandmasters must, with an opening: you buy a broad index of shares. You are now exposed to the volatility of equity prices. Stocks may fall sharply in downturns. You might usefully balance your portfolio with government bonds. When recession hits, these tend to rise in price as interest rates fall. Bonds are thus a form of insurance. And normally, at least, they pay the insurance-holder a small return: the yield.



A recent paper* from aqr looked at the worst periods for a “60/40 portfolio” (60% equities; 40% bonds) since 1971 to see if options-based insurance did any better. Unsurprisingly, options-protection pays off handsomely in crashes, like the one in February-March this year. Indeed an options-protected portfolio did better than 60/40 in bad periods lasting up to three years. But equity prices tend to recover from crashes eventually.

And over time the insurance premiums demanded by options sellers add up to a drag on performance. By the ten-year horizon, 60/40 trumps the options-based portfolio. Other risk-mitigation strategies did even better than 60/40 over time.

On aqr’s reckoning, then, passively buying equity options has been a relatively dear way of mitigating risk over long periods. This is valuable knowledge. It also makes intuitive sense. When you buy home insurance, you know the odds are stacked in the insurer’s favour. The firms are in it to make a profit. Yet that does not make buying insurance foolish: it allows you to take on the risk of a big mortgage.

So might financial-options insurance sometimes make sense, too? In some cases, only a direct form of insurance will do. Take a hypothetical producer of beef. He might expect an annual return of 10% on his business over ten years. But those returns are volatile. Their sequence matters. If beef prices were to slump for two straight years, say, it would mean bankruptcy.

The cost of insuring his output using options might lower his average yearly return to, say, 6%.

But he might judge that worthwhile to be sure he would stay in business. A similar logic applies to a retiree living off a lump sum. A big drop in share prices would cut deeply into her income.

She might not be able to wait for other risk-mitigation methods to come good. Nor is there a guarantee that they would work as well as in the past. Bond yields are close to all-time lows, for instance, implying less scope for them to pay off if the stockmarket takes another lurch downwards.

The price of equity options varies greatly over time. It can make sense to use them when they are relatively cheap, says Vineer Bhansali of LongTail Alpha, a firm that specialises in risk mitigation. In principle, more judicious options buying—finding those with the best potential payoff for the price, including options on other financial assets—could lower the cost of insurance. It is a big ask for the club-level investor, though it may be possible for grandmasters.

Complex situations can befuddle even the best minds. After a few dozen moves in one of the Kasparov-Short games, the grandmaster pundits agreed that Mr Short had lost. As he rose from the board, they thought he had conceded. But no: the game was a draw.


*“Portfolio Protection? It’s a Long (Term) Story”.

COVID-19 Could Cause a Manufacturing Renaissance

By Jeff Brown, editor, The Bleeding Edge


The world spent the last three decades focused on globalization…

We built global supply chains and prioritized the lowest cost of production. Manufacturing became centralized in many industries. Oftentimes, that meant manufacturing was centralized in mainland China.

And for a time, it worked reasonably well…

The world experienced an unprecedented period of growth, improvement in quality of life, and access to goods and services at lower prices. This ultimately brought more than a billion people out of poverty. And the world became more interconnected and interdependent than ever before.

But society also began to recognize the practical and ideological issues with the global manufacturing architecture that the world spent three decades building.

Western countries and companies recognized severe issues with child labor, lack of environmental regulations, and “dirty” energy used for production. And intellectual property theft has been an issue for the last two decades.

But there was an even bigger issue with this system. The system is fragile. Very fragile.

When the world is functioning normally, it’s hard to see it. And without a catalyst, the world may never have realized it. COVID-19 was that catalyst.

Overnight, supply chains were disrupted. Shipments of critical supplies coming out of China were delayed, sometimes indefinitely.

And this is not just an economic problem. It could be a matter of national security.

National Security Risk

Last October, Janet Woodcock went before Congress.

Woodcock is a medical doctor and director of the Center for Drug Evaluation and Research, part of the Food and Drug Administration (FDA). She presented to the Subcommittee on Health within the Committee on Energy and Commerce in the U.S. House of Representatives.

Woodcock’s presentation outlined a critical perspective on national security with regard to drugs (pharmaceuticals) on the U.S. market. Specifically, she showed where drugs are manufactured around the world.




She highlighted the distribution of manufacturing facilities for active pharmaceutical ingredients (APIs) around the world. The U.S. and Europe maintain 28% and 26%, respectively. China and India are also well-represented, with 13% and 18%.

Digging deeper, Woodcock revealed a far more interesting reality.

When considering only the drugs deemed essential by the World Health Organization (WHO), the presence of China is more strongly felt.




The U.S. remains on top with 221 facilities. China is a close second at 166.

But where Woodcock’s revelation was striking was when the analysis turned to drugs on the medical countermeasures (MCM) list.

MCM drugs are used to counter biological, chemical, nuclear, or radiation threats. They also include drugs to combat influenza and airborne viruses like a coronavirus.




In the case of the biological drug category, the U.S. only has 19 facilities, and China currently has 37.

And about 80% of all of the world’s antibiotics manufacturing is located in China. Almost all of the world’s supply of penicillin comes from China.

China also has a large market share of the active ingredients in most generic medicines.

But the most surprising part of Woodcock’s testimony wasn’t what she said. It was what she couldn’t say.

The biggest risk to the U.S. and its access to its critical drug supply was this: The FDA simply doesn’t know exactly which APIs are being produced by which manufacturing facilities.

More importantly, it doesn’t know what the volume of production of API production is, either.

The key is not the number of API manufacturing facilities but the volume of production. And the U.S. and Europe simply do not know.

Can we see why a fragile global supply chain might be a risk, especially during a pandemic?

Earlier this year, supply chain problems contributed to shortages of equipment like hand sanitizer and surgical masks. But what if medical facilities were unable to get the lifesaving drugs their patients need because the global supply chain was disrupted? We can imagine the consequences of that.

Governments and corporations are making that calculation right now. And they will take action to address the problem.

A Return of Manufacturing

I predict the U.S. will migrate to advanced manufacturing of APIs. Manufacturing will return onshore, and the country will reduce its heavy dependence on foreign sources of drug ingredients.

This will reinvigorate U.S.-based manufacturing. It will also bring new jobs and a dramatic increase in API quality, which can be a problem with active ingredients manufactured in China and India.

And it won’t just be APIs that return onshore. I predict manufacturing from several industries will move back to the U.S. COVID-19 has shown that the supply chain risks are too great.

Critics might say that the costs of production will be too high to bring manufacturing back onshore. But that’s not the case.

Take a look at this… It’s a manufacturing cost competitiveness index at a country level.




The Boston Consulting Group puts together a global manufacturing cost competitiveness index every year that analyzes the cost of manufacturing around the world. It does this country by country, indexed against the U.S. market.

And the results from 2019 are striking.

The cost of manufacturing in China is almost on par with the U.S. Its index range is 95–97 compared to the U.S., which is indexed at 100.

That means, on average, the advantages of manufacturing in China are less than 5% compared to the cost of manufacturing in the U.S. And the index doesn’t consider factors like supply chain risk, tariffs, intellectual property theft, quality problems, or logistics costs.

What does this mean? It tells us that the competitive advantage of manufacturing in China is not nearly as large as we might think. Very likely, it’s negative.

How is this all possible? Simple.

Due to advanced manufacturing technologies, America’s productivity has risen far faster than its wages have. And the opposite is true in China. China’s manufacturing wages have risen far faster than its productivity.

Bottom line: COVID-19 has taught the world a painful lesson. The global supply chain is far more fragile than many realized. The world – and the U.S. in particular – is going to migrate manufacturing back onshore.

And bolstered by technology like advanced robotics and 3D printing, the country will experience a “manufacturing renaissance.”

It’s happening right now.