Remember Brexit? Covid-19 Has Just Changed the Stakes

Domestic policy announcements may be more important than trade deals in the post-coronavirus world

By Jon Sindreu


Covid-19 has made investors forget about Brexit, with some justification. But it is worth watching an economy that could provide a test case for a world after peak globalization.

Britain left the bloc in January, but remains in the European Union’s single market and customs union until the end of the year. Earlier this week, British Prime Minister Boris Johnson and EU officials agreed not to extend this transition period, which means that any trade agreement for next year needs to be negotiated before Oct. 31.

This deadline was tight even before the coronavirus pandemic. With little progress in video talks since, the risk of a “no deal” outcome has crept up. The pound, which is down 6% against the euro since the start of the year, may be in for a bumpy few months.



Meanwhile, Covid-19 could reduce U.K. economic output by as much as 14% this year, according to Organization for Economic Cooperation and Development estimates. Whether this makes the search for a deal that preserves existing ties more urgent—or gives the euroskeptic Mr. Johnson cover to pursue a more disruptive course—is debatable. The pandemic has depleted many of the supplies, notably of pharmaceuticals, that British companies had accumulated to cope with a no-deal scenario.

In any case, long-term investors don’t need to base U.K. allocation decisions on the type of deal achieved this year—not least because the best they can hope for is probably a bare-bones trade agreement. They should pay more attention instead to Britain’s domestic policies: Covid-19 has given governments more power to reshape their economies.




Fiscal policy is playing a huge role in containing the damage of the lockdowns. The U.K.’s fiscal package relative to its cyclically-adjusted output already far surpasses all its neighbors’ in size, UBSestimates show. The freedom to use this kind of financial muscle could also take on an outsize importance in the post-pandemic recovery, particularly at a time when more European governments are embracing the idea of supporting industrial champions.

The U.K. Treasury has long been reluctant to get involved in industrial strategy. But the times may be changing. It has drafted plans to save strategic firms, though for now this remains a short-term response.

The pandemic and the political backlash against globalization also may prompt more firms to bring supply chains closer to home. Pharma companies in particular have found themselves too dependent on Chinese ingredients during this crisis. A report by the University of Warwick found that being close to research and development spending—for which the U.K. is a hub—is one of the main reasons why some key industries decide to reshore production.

This trend may end up reducing the relative importance of Britain leaving the EU and increasing the power of U.K. policy to offset the problems caused by Brexit. For example, in the auto sector—often seen as having much to lose from a breakdown in trade relations—the transition to electric vehicles may require a lot more public funds, and the U.K. has the potential to deploy them. Despite Brexit, Japanese car maker Nissanlast month decided to retrench in Europe by closing its Spanish plant, not its British one.

The flip side, of course, is that British officials also have more leeway to fall short by stinting on recovery spending or making the wrong bets. Either way, domestic policy announcements, rather than trade deals, may be the news to watch in the post-coronavirus world.

One Crisis Is Manageable. Five Might Not Be

World War One was the most destructive conflict in human history. But before it ended, the Spanish flu came along and claimed an even greater number of victims.

A decade later the Great Depression bankrupted millions. But before our grandparents could dig their way out, World War II dragged them into something even worse.

Why bring up these past examples of multi-part crises? Because the universe seems to like them. And we seem to be entering another one.

Though it’s been largely forgotten in all the recent turmoil, the US financial system was already in crisis last year, as the repo market – where banks lend money to each other – locked up, forcing the Fed to reinstitute quantitative easing. The following chart screams “emergency!”.




Then came the pandemic, which sent the global economy into freefall. The Atlanta Fed’s GDPNow reading currently shows the US contracting at an annual rate of over 45%.




Then riots – initiated by the latest police brutality video but sustained by the frustration of a three-month lockdown in which millions lost their livelihoods while under house arrest — erupted in US cities. Now fully reopening the economy is both more complicated and a lot less certain.

Too much of a bad thing

One of these problems would have been manageable (note in retrospect how smoothly the Fed handled the repo thing in late 2019). Two would have been tougher but doable, with the right combination of focus and humility. Three at the same time might test the system’s tolerance.


So here we are. The Fed can’t print new small businesses once the existing ones die. The police can’t stop riots without shooting the rioters. Corporate profits are cratering with no obvious path to recovery. Stock markets are up, but only because financial asset prices are the sole part of the current mess that monetary policy can influence.

Most Americans are no doubt praying that this is it for a while because really, our plate is more than full and we don’t deserve any more abuse. But the universe, don’t forget, has a nasty sense of humor. 

So it might have a few more surprises up its sleeve. Consider:

Indian and Chinese troops are pouring into a disputed border region and are now apparently killing each other in hand-to-hand combat. Why? One plausible explanation is that China views the US and India (along with Hong Kong and Taiwan) as hobbled by the pandemic and therefore less able than usual to defend their interests, and is taking the opportunity to settle some scores.

This might be an issue for the US because 1) China and India are nuclear powers, and 2) the neocon psychos who still wield influence in the US deep state have never seen a foreign conflict they didn’t want to exploit. Watch them demand that we get involved.

But wait, there’s more. China vs India is the most newsworthy current conflict, but not the only one. See Rumors Of Wars: China, India, North Korea, South Korea, Israel And Turkey All Move Toward War.

And last but not least, the US is now entering its hurricane/wildfire season, which raises the prospect of mass-evacuations during a pandemic:

Hurricane season combined with COVID-19 pandemic could create perfect storm

(Phys.org) – When extreme climate conditions interact with stressors to social systems, such as the COVID-19 pandemic, the consequences could be severe.
The authors focused on four main sectors—food, water, health and infrastructure—where connected extremes often lead to unforeseen impacts. 
A present example could be the COVID-19 pandemic and the current hurricane season, says Thomas Wahl, an assistant professor in UCF’s Department of Civil, Environmental and Construction Engineering. 
“The COVID-19 crisis will very likely increase the impacts associated with the climatic extreme events that will inevitably occur somewhere across the globe over the next weeks or months or already have occurred,” Wahl says. 
“For example, shelters cannot operate at full capacity, health care systems are already under pressure, and emergency funds are depleted.”


Imagine the West Coast battling monster fires like last year’s while a Cat-5 hurricane bears down on Miami — at a time when pandemic, depression, and civil unrest still rage. And toss in a presidential election just for fun. The result will be more complicated than even the past few months.

Now, a reasonable response to this seeming obsession with future threats would be to quote the Biblical verse “Sufficient unto the day is the evil thereof” and then go back to focusing on health, safety, and peace.

But this is a financial site and a flock of black swans still on approach vector has investment implications. 

Put simply, how can anyone be buying growth stocks and ignoring gold in this world?

Investing Legend Jeremy Grantham Is "Amazed" At This Unprecedented Stock Bubble

by Tyler Durden



Two weeks ago, the generally cheerful investing icon Jeremy Grantham unleashed fire and brimstone, taking his $7.5BN portfolio to a net short position for the first time since the financial crisis, and summarizing his dire assessment of the current unprecedented situation simply by saying "this will end badly."

Turns out, Grantham was only getting started.

Doubling down on his apocalyptic message, the one-time value investing guru told CNBC that the US stock market is in a unprecedented bubble and investing in it is "simply playing with fire."

"I have been completely amazed," the veteran bearish investor said in an interview Wednesday on CNBC. "It is a rally without precedent - the fastest in this time ever and the only one in the history books that takes place against a background of undeniable economic problems."

His advice to an entire generation of young daytraders jumping into the market now should sell U.S. stocks, buy emerging market equities and “throw the key away” for a few years, he said, adding "this is becoming the fourth real McCoy bubble of my career."

He also had some bad news for those fighting the Fed: "The great bubbles can go on for a long time and inflict a lot of pain.” The previous three bubbles Grantham referred to were Japan in 1989, the tech bubble in 2000 and the housing crisis of 2008.

Commenting on the insanity in Hertz, which today was mercifully stopped by the SEC before even more young Robinhood traders would take their lives - like Alexander E. Kearns, facing a $730,000 negative cash balance - Grantham said events like firms trying to sell stock in bankrupt companies should make "any bear feel better."

Refusing to buy the V-shaped recovery narrative, Grantham also said that it’s difficult to imagine when the broad economy will completely recover from the effects of the pandemic.

Where does Grantham's unprecedented bearishness come from? Simple: as he wrote in his latest investor letter, which we recapped last week, "the market and the economy have never been more disconnected" and while "the current P/E on the U.S. market is in the top 10% of its history... the U.S. economy in contrast is in its worst 10%, perhaps even the worst 1%.... This is apparently one of the most impressive mismatches in history."

For those who missed it, here is the rest of our observations:

As a result of this total loss of coherence driven by trillions in central bank liquidity that have propelled a massive wedge between fundamentals and stock prices, GMO, the Boston fund manager Mr Grantham co-founded in 1977, cut its net exposure to global equities in its biggest fund from 55% to just 25%, near the lowest levels it reported during the global financial crisis, according to a separate update from GMO's head of asset allocation, Ben Inker.

That decision, according to the FT, slashed GMO's Benchmark-Free Allocation Fund exposure to US equities from a net 3-4% to a net short position worth about 5% of the $7.5bn portfolio, said Inker, perhaps the first time the fund has turned net short US stocks since the crisis. This, after GMO loaded up on stocks during the sell-off but has since cut offloaded its exposure to the US market following the unprecedented 40% rally in the past 2 months.

"The Covid-19 pandemic “should have generated enhanced respect for risk and it hasn’t. It has caused quite the reverse,” Grantham told the Financial Times. He noted that trailing price-earnings multiples in the US stock market were “in the top 10 per cent of its history” while the US economy “is in its worst 10 per cent, perhaps even the worst 1 per cent”, echoing what he said in his quarterly letter.

And while markets seem to be taking all the negative news in stride, Grantham is worried that the wave of devastation that is coming is unlike anything experienced before:


At GMO we dealt with three major events prior to this crisis, and rightly or wrongly, we felt “nearly certain” that sooner or later we would be right. We exited Japan 100% in 1987 at 45x and watched it go to 65x (for a second, bigger than the U.S.) before a downward readjustment of 30 years and counting. In early 1998 we fought the Tech bubble from 21x (equal to the previous record high in 1929) to 35x before a 50% decline, losing many clients and then regaining even more on the round trip. In 2007 we led our clients relatively painlessly through the housing bust. In all three we felt we were nearly certain to be right. Japan, the Tech bubbles, and 1929, which sadly I missed, were not new types of events. They were merely extreme cases akin to South Sea Bubble investor euphoria and madness. The 2008 event also was easier if you focused on the U.S. housing euphoria, which was a 3-sigma, 100-year event or, simply, unique. We calculated that a return trip to the old price trend and a typical overrun in those extreme house prices would remove $10 trillion of perceived wealth from U.S. consumers and guarantee the worst recession for decades.All these events echoed historical precedents. And from these precedents we drew confidence.

But this event is unlike all those. It is totally new and there can be no near certainties, merely strong possibilities. This is why Ben Inker, our Head of Asset Allocation, is nervous and this is why you are nervous, or should be.


While the uncertainties are indeed large, one can triangulate a sufficiently material dose of "certainty" about what is coming, and as Grantham explains further, it is not pretty, especially with the US economy already on the back foot heading into the crisis:

We had U.S. and global problems looming before the virus: an increasingly disturbed climate causing global floods, droughts, and farming problems; slowing population growth, in the developed world, soon to be negative; and steadily slowing productivity gains, especially in the developed world, and therefore a slowing GDP trend. In the U.S., our 3%+ a year trend is down to, at best, 1.5% in my opinion. It is closer to a 1% maximum in Europe. We had, as mentioned, top 10% historical P/Es in the U.S. and much the highest debt level ever in the U.S. for both corporations and peacetime government. So, after a 10-year economic recovery, this would have been a perfectly normal time historically for a setback.

And then the virus hit.

Simultaneously, it is causing supply and demand shocks unlike anything before. Ever. It is generating a much faster economic contraction than that of the Great Depression. And unlike 1989 Japan, 2000 Tech (U.S.), and 2008 (U.S. and Europe), it is truly global. The drop in GDP and rise in unemployment in four weeks have equaled what took one to four years to reach in the Great Depression and were never reached in the other events. Rogoff & Reinhart, Harvard Professors who wrote the definitive analysis of the 2008 bust, agree that this event is indeed completely different and suggest it will take at least 5 years to regain 2019 levels of activity. But this is a guess. We really don’t know how long it will take. Nearly certain is that a V-shaped recovery looks like a lost hope. The best possible outcome would be that there will be, almost miraculously, billions of doses of effective vaccine by year-end. But most viruses have never had a useful vaccine and most useful vaccines have taken well over five years to develop and when developed have been only partially successful. Yes, this time there will be an enormous effort with unprecedented spending. But still, a leading vaccine expert says quick success would be like “drawing successfully to several inside straights in a row.” And even if all works out well with a vaccine there will remain deep economic wounds.


Meanwhile, as the world waits for a vaccine, and buys stocks confident one is imminent, the "bankruptcies have already started (Hertz on May 22nd) and by year-end thousands of them will arrive into a peak of already existing corporate debt. It will need spectacular management, which it may get. But it may not. Throwing money – paper and electronic impulses – at the problem can help psychology and, particularly, the stock market, where extra stimulus money can end up but does not necessarily put people back to work; there will be up to 20% unemployment for at least a moment."

In response to this historic economic collapse, central banks' unprecedented stimulus efforts have "temporarily overwhelmed" underlying economic realities but "it’s hard to believe that will continue."

And when it stops, watch out below: Grantham told the FT in an interview that after seeing markets price in “total recovery” over recent weeks, "my confidence that this will end badly is increasing."

Speaking as protests against police brutality and racism filled the streets of US cities, Grantham said previous outbreaks of social instability had had few lasting effects on the US economy, but "there are more things going wrong than normal".

However, the value investing legend's most dire prediction was that "if you look back in two to three years and this market turns around and drops 50%, the history books will say ‘That looked like one of the great warnings of all time. It was pretty obvious it was destined to end badly," Grantham said, adding: "If it does end badly the history books are going to be very unkind to the bulls." For the sake of an entire generation of Robinhooders who will lose everything if there is a 50% crash, one hopes Grantham is wrong.

Finally, Grantham also chimed in on the "most important question in finance right now", revealing that he was proud of not having "made a fuss about inflation" in 20 years of writing his widely followed letters, but said that record amounts of monetary easing from central banks had now created the possibility of inflationary pressures.

"With a generous stimulus program in many countries you can just about daydream about inflation for the first time in 30 years."

To this, all we can add is that in the very near future that daydream will become a nightmare.

United States of Despair

America finds itself in the grips of two epidemics, each of which has exposed deep inequalities across races and levels of educational attainment. Between rising "deaths of despair" among working-class whites and higher COVID-19 mortality rates among African-Americans, the stunning secular decline in US life expectancy will continue.

Anne Case, Angus Deaton

 deaton11_CHANDAN KHANNAAFP via Getty Images_usprotestcoronavirus


PRINCETON – Well before COVID-19 struck, there was another epidemic running rampant in the United States, killing more Americans in 2018 than the coronavirus has killed so far. What we call “deaths of despair” – deaths by suicide, alcohol-related liver disease, and drug overdose – have risen rapidly since the mid-1990s, increasing from about 65,000 per year in 1995 to 158,000 in 2018.

The increase in deaths from this other epidemic is almost entirely confined to Americans without a four-year college degree. While overall mortality rates have fallen for those with a four-year degree, they have risen for less-educated Americans. Life expectancy at birth for all Americans fell between 2014 and 2017. That was the first three-year drop in life expectancy since the Spanish flu pandemic of 1918-19; with two epidemics now raging at once, life expectancy is set to fall again.

Behind these mortality figures are equally gloomy economic data. As we document in our book, real (inflation-adjusted) wages for US men without a college degree have fallen for 50 years. At the same time, college graduates’ earnings premium over those without a degree has risen to an astonishing 80%. With less-educated Americans becoming increasingly less likely to have jobs, the share of prime-age men in the labor force has trended downward for decades, as has the labor-force participation rate for women since 2000.

Educated Americans are pulling away from the less-educated majority not only in terms of income, but also in health outcomes. Pain, loneliness, and disability have become more common among those without a degree.

Such was the US on the eve of the COVID-19 pandemic. Now, the virus has newly exposed the pre-existing inequalities.

Historically, pandemics have arguably brought greater equality. Most famously, the Black Death killed so many people in fourteenth-century Europe that it created a labor scarcity, which improved workers’ bargaining position. Later, in the nineteenth century, cholera epidemics inspired the germ theory of disease, setting the stage for the modern increase in longevity, first in the rich countries, and then, after World War II, in the rest of the world. A great divergence in lifespans across the world gave way to a great convergence.

But the US has been experiencing a great divergence at home for two generations, and COVID-19 promises to widen the country’s already vast inequalities in health and income. The effects of the virus are stratified by educational attainment, because those with more education are likelier to be able to continue working and earning from home. Unless they are among the highly educated workers in health care and other front-line sectors, they can sit back and watch the stock market propel the value of their retirement funds ever higher.

By contrast, the two-thirds of workers who lack a four-year college degree are either nonessential, and thus risk losing their earnings, or essential, and thus at risk of infection. Whereas college graduates have largely been able to safeguard both their health and their wealth, less-educated workers must risk one or the other.

For this reason, the income and longevity gaps that the trend in deaths of despair has revealed are now widening further. But while less-educated whites have borne the brunt of the first epidemic, African-Americans and Hispanics have been disproportionately killed by COVID-19. As a result, the previous convergence of white and black mortality rates has been derailed.

There are many reasons for these racial disparities, including residential segregation, crowded living conditions, and commuting patterns. While these factors have been especially important in New York City, they have played less of a role in other places. In New Jersey, for example, neither African-Americans nor Hispanics have disproportionately higher COVID-19 mortality rates.

America’s costly health-care system will continue to compound the pandemic’s effects. Many among the tens of millions of Americans who lost their jobs this spring also lost their employer-provided health insurance, and many will not be able to secure alternative coverage.

While no one presenting with COVID-19 symptoms has been denied treatment, some of the uninsured may not have sought it. As of this writing, the virus’s death toll in the US is at least 113,000, and more than 200,000 have been hospitalized, incurring potentially unpayable medical bills (even for many with insurance) that will ruin their credit for life. The federal government has given pharmaceutical companies billions of public dollars to develop a vaccine and, thanks to lobbyists, did not attach conditions on pricing or impose public claims on patents.

In addition, the pandemic is fueling further industry consolidation by favoring already dominant e-commerce giants at the expense of struggling brick-and-mortar firms. Labor’s share of GDP – long thought to have been an immutable constant – has fallen in recent years, and market power in both product and labor markets may be one reason. If the unemployment rate remains high in the coming years, the terms of trade between labor and capital will be pushed even further toward the latter, inverting the Black Death analogy and justifying the stock market’s optimism in the face of catastrophe.


That said, we do not believe that the post-COVID economy will provoke a spike in deaths of despair. The fundamental cause of that epidemic, our analysis suggests, was not economic fluctuations, but rather the long-term loss of a way of life among white working-class Americans. Notably, deaths of despair were rising before the 2008 financial crisis and Great Recession, when US unemployment rose from 4.5% to 10%, and they continued to rise as unemployment gradually fell to 3.5% in the days before the pandemic. If there once was a relationship between suicide and unemployment, it is no longer apparent in the US.

Nonetheless, past episodes suggest that those entering the labor market in 2020 will have a lower earnings path throughout their working lives, possibly creating the despair that brings death from suicide, alcohol, or drug overdoses. In other words, the most likely post-COVID America will be the same as pre-COVID America, only with even more inequality and dysfunction.

True, public anger over police violence or outrageously expensive health care could create a structural break. If that happens, we might see a better society. Or, we might not. It is not always a phoenix that rises from the ashes.



Anne Case is Professor Emeritus of Economics and Public Affairs at Princeton University. She is the co-author of Deaths of Despair and the Future of Capitalism (Princeton University Press, 2020).

Angus Deaton, the 2015 Nobel laureate in economics, is Professor Emeritus of Economics and International Affairs at Princeton’s Woodrow Wilson School of Public and International Affairs and Presidential Professor of Economics at the University of Southern California. He is the co-author of Deaths of Despair and the Future of Capitalism (Princeton University Press, 2020).