The Modern-Day Bank Run

Doug Nolan

Pondering the shallowness of the analysis being espoused by the vast majority of market pundits, I’m compelled to frame a thesis to help explain today’s most extraordinary backdrop.

The coronavirus outbreak will eventually pass, though I have serious doubts contemporary finance will pass this test.

Suggesting history’s greatest Bubble - that is today in serious jeopardy – is still considered crazy talk. Yet this is the reality so few are willing to contemplate. I expected the Russian Bubble to burst in 1998 with serious ramifications for the leveraged speculating community. I was flabbergasted by the reckless leverage employed by Long Term Capital Management (that nearly brought down the global financial system). They were the smart guys (two Nobel laureates).

The Credit Bubble Bulletin was launched in 1999 when I was convinced finance had fundamentally changed – and that this ongoing transformation was appreciated neither by policymakers nor market participants. It was out with bank-dominated lending and in with market-based Credit – securitizations, the government-sponsored enterprises (GSEs), “Wall Street finance,” the “repos” market, derivatives and highly-levered hedge funds. Throughout history, Credit has proved inherently unstable. This new Credit was instability on steroids – spawning serial booms and busts at home and abroad.

I argued for an update to old banking “deposit multiplier” analysis – where one bank creates a deposit as it makes a new loan; with this new money then deposited in a second bank; where bank B then has funds for a new loan (the amount of their new deposit less reserve requirements); where this new money makes its way to Bank C to fund yet another loan (the newest deposit less reserve requirements). For centuries, post-Bubble post-mortem would invariably fault the instability of “fractional reserve banking.” The booms were magical, while the subsequent busts spawned panics and calamitous bank runs.

I argued back in 1999 of a dangerous new “infinite multiplier effect” – where contemporary “money” (electronic debits and Credits) moves around the system creating unfettered “money” and Credit expansion and associated Bubbles. This analysis, of course, was fiercely rebuked. It was not until Paul McCulley in 2007 coined the term “shadow banking” that people began to take notice. By then it was too late.

More than a decade ago, I began warning of the risks of an inflating “global government finance Bubble”. Policy makers had resorted to an unprecedented expansion of central bank Credit and sovereign debt to reflate global finance (and economies). And for years policymakers have administered near zero rates and egregious “money printing” operations to sustain history’s greatest Bubble, in the process extending a dangerous cycle. The unprecedented inflation of government finance has been alarming enough. Yet I worry most about this “infinite multiplier effect” and how leveraged speculation infiltrated all nooks and crannies – as well as the very foundation - of global finance.

As I have stated repeatedly over the years, contemporary finance appears miraculous so long as it is expanding/flourishing – so long as new “money”/liquidity is created through the process of financing additional speculative holdings of financial assets. The new securities-related Credit fuels asset inflation, self-reinforcing speculation and more powerful Bubbles. Importantly, credit growth associated with global securities and derivatives speculation expanded to the point of becoming the marginal source of liquidity throughout international financial markets. After first ignoring it ascending role, central banks moved to accommodate, nurture and, finally, to assertively promote financial speculation. The risk today is that this unwieldy Bubble inflated beyond the capacity of central bank control.

Bubbles and resulting manias take on lives of their own. They cannot, however, escape harsh realities: Fragilities only build up over time, and Bubbles don’t work in reverse.

Collapse becomes unavoidable, with any serious de-risking/deleveraging dynamic leading to a contraction of marketplace liquidity, a spike in risk premiums, illiquidity, panic and dislocation. It’s the modern form of the old-fashioned bank run.

That’s where we are today.

I was naive back in the nineties. I actually thought once policymakers understood the instability unleashed by unfettered “money,” Credit and leveraged speculation, they would take responsible steps to contain this new financial structure.

They instead fully embraced market-based Credit and speculative finance as a powerful mechanism they could manipulate to stimulate markets and economies. What began with the Federal Reserve took the world by storm. Even as the years passed and the global economy boomed, rates were kept near zero.

In rough terms, balance sheets at the Fed, ECB, BOJ and PBOC each inflated from about one to $5 Trillion.

Then came 2019, where aggressive monetary stimulus “insurance” was administered in the face of wildly speculative global securities and derivatives markets. The global Bubble inflated to unimaginable extremes, with fragilities turning only more acute. It is difficult to imagine a more inopportune time for a global pandemic.

I point to the June 2007 collapse of two Bear Stearns structured Credit mutual funds as the beginning of the end for the “mortgage finance Bubble.” But it was the $1 Trillion of subprime CDOs (collateralized debt obligations) in 2006 that sealed the fate for historic financial and economic dislocation. I believe the Fed’s “emergency” 50 bps rate cut in September 2007 – and resulting record stock prices that November – exacerbated underlying fragilities and ensured a more devastating crash.

For the current global Bubble, 2018 was key. Fragilities were exposed, and policymakers attempted to sustain the unsustainable. China belatedly moved in 2018 to rein in egregious Credit excess, leading to faltering growth and heightened financial stress. The deteriorating backdrop hit U.S. markets in 2018’s fourth quarter – and Chairman Powell instigated his dramatic policy “U-turn” on January 4, 2019. Policymakers around the globe followed with aggressive stimulus measures.

Importantly, with its economy faltering, banking system and money market instability escalating, and U.S. trade negotiations struggling, Beijing reversed course and again promoted aggressive fiscal and monetary stimulus. Money market instability hit U.S. shores in September, whereby the Fed reinstituted QE and rapidly expanded its balance sheet $400 billion. In the end, it was a fateful year of record Chinese and global Credit expansion, record U.S. money supply growth, all-time high stock prices, all-time low sovereign yields, and the thinnest Credit market risk premiums since before the crisis. It was euphoria and near complete disregard for mounting risks.

As far as I’m concerned, the evidence is indisputable: We have been witnesses to history’s greatest – and most precarious – globalized Bubble. If traders want to play for “oversold” bounces and the inevitability of more QE, it’s their money. But Bubbles invariably burst – and there is now a clear and present catalyst. The world is at the cusp of momentous change.

Everyone has tried to remain convinced that risk can be ignored, with central bankers having everything under control. Yet the scope of global financial excess, myriad imbalances and structural impairment now dwarfs the capacity of central bankers to sustain market confidence, speculative excess and economic growth.

The Fed Tuesday orchestrated an emergency 50 bps rate cut and the S&P500 sank 2.8%. At this point, rate cuts are not going to cut it. The Fed’s current QE program calls for $60 billion monthly liquidity injections at least through the end of the first half. In the grand scheme of things, it’s a drop in the bucket. If not sooner, I expect the Fed to significantly increase the scope of liquidity operations. Expect more oversubscribed Federal Reserve overnight “repo” auctions, as deleveraging (paying down securities borrowings) destroys liquidity.

If the unfolding de-risking/deleveraging dynamic is as large and systemic as I anticipate, the Fed and global central bank balance sheets are about to commence another major expansion.

Markets could very well rally on QE announcements. But akin to QE1 back during the crisis, the additional QE will not provide new marketplace liquidity as much as it will accommodate speculative de-leveraging (holdings shifting from the speculators to central bank balance sheets).

Ten-year Treasury yields collapsed 39 bps this week (15 bps on Friday!) to an unprecedented 0.76%, with a two-week drop of 71 bps. Two-year yields were down 40 bps this week (to 0.51%) and 85 bps in two weeks.

This stunning move corroborates the analysis: A faltering historic Bubble will leave the Federal Reserve (and global central bankers) with no alternative other than employing massive and ongoing QE.

For those assuming this is equities bullish, I would offer some caveats. The Fed will be initially hesitant to open the flood gates, one reason being fear of spooking the markets. I could see the FOMC boosting their QE operations to $100 billion monthly at their meeting on the 18th.

If, as I suspect, this operation has minimal impact on marketplace liquidity, markets will really begin to fret central bank impotence.

And I’ll assume the Fed is pressed at some point to raise monthly QE operations to, say, $200 billion. Surly that’s equities positive, most would assume. But even such massive buying will before long be largely matched by ballooning fiscal deficits (and Treasury issuance).

Ominously, the dollar index dropped 2.2% this week, while gold surged 5.6% to $1,674.

I recall how the late-nineties “king dollar” morphed into a faltering dollar Bubble. With such global instability, it has been rational for the leveraged speculating community to position for a stronger dollar. And all the speculative flows into U.S. securities markets easily outweighed never-ending U.S. fiscal and Current Account Deficits. Prospects are murky.

Fiscal deficits of about 5% of GDP are about to balloon larger. Yield differentials are disappearing before our eyes. And the Fed is about to unleash QE it will have a difficult time controlling. Moreover, the interplay between the coronavirus and politics has the potential to make for remarkably unpredictable November elections.

March 6 – ABC7 News (Julian Glover): “A Santa Clara couple on the Grand Princess Cruise ship to Mexico with a coronavirus-positive man is ill and now getting tested for COVID-19. Leanne and Robert Cummins of Santa Clara were on board the Grand Princess Cruise ship to Mexico that departed on Feb. 11. A man on board that ship was infected with coronavirus and later died... After being notified of the man's death by the cruise line, Mrs. Leanne Cummins said they started looking to be tested for the virus - especially since they are filling ill… Cummins said her husband has been very ill in recent days with no appetite, trouble breathing, and a fever at one point as high as 103 degrees. …They have been self-quarantining at their Santa Clara home. Mrs. Cummins also said at one point she felt weak and fainted. On Wednesday Cummins said she called the Sutter Health Urgent Care facility in Mountain View looking to be tested for the virus. She was told to go to the emergency room at her local hospital. She reached out to the emergency room at El Camino Hospital in Mountain View which then told her to call her doctor. She said her doctor then told her to go to Santa Clara Valley Medical Center to get tested. She said she called Valley Medical Center and was told that the hospital did not have any test kits and would not be conducting any testing… She was told to call the CDC. On Thursday, Mrs. Cummins said she did exactly that and a CDC representative told her to call the California Department of Public Health. She did and was told to call the Santa Clara County Health Department. She made that call and reached an answering machine. ABC7 News has also tried several times to speak to a public information officer at Santa Clara County Health Department in reference to where someone concerned about exposure to the virus should go for testing and was unsuccessful. After numerous calls a non-public health employee who was assigned to answer phones told ABC7 News that Mrs. Cummins should call her primary care physician back and have the doctor call the public health provider intake line. Again, still no answer as to where the couple should go to get tested.”

Almost 700 passengers and employees of the Diamond Princess were infected with the coronavirus. Now there’s the Grand Princess moored off the coast of San Francisco with 3,500 passengers (21 of 46 tested positive today). How many of last week’s departing passengers were infected (at least one death) - and where are they and where have they been? Having learned from the terrible experience in Japan, all passengers are to be tested. But don’t those passengers need to be removed from that ship as quickly as possible?

It’s stunning. Coronavirus cases are up to 6,800 in South Korea, 4,800 in Iran, 4,600 in Italy, 670 in Germany, 650 in France, 420 in Japan, 400 in Spain and 330 in the U.S. The pandemic is here. Now it is only a matter of the scope of the unfolding disaster.

The outbreak appears to have somewhat stabilized in China, and the Chinese economy is trying to get back to work. I have serious doubts that China’s Bubble economy can be so easily reflated. As an indicator of global economic prospects, crude oil (WTI) sank 7.8% (“worst drop since 2008”) this week to $41.28.

With the energy sector under pressure, U.S. high-yield Credit default swap prices surged 73 bps this week. After trading near multi-year lows at 280 bps on February 12th, high-yield CDS closed today at 443 bps – the high since (Powell U-turn) January 4th, 2019. Investment-grade CDS jumped 17 bps this week to a 14-month high 83 bps. The big financial institutions saw their CDS surge. Goldman Sachs CDS jumped 20 this week to 91 bps (14-month high). JPMorgan CDS rose seven to 60 bps (14-month high). Financial conditions are tightening dramatically.

The torrential rain has begun, and all those that have been making such easy money selling flood insurance are beginning to panic. And I don’t think the prospect for zero rates and massive QE is about to instill calm and confidence. Indeed, the entire notion of open-ended QE and fiscal deficits creates acute market uncertainty.

How does this melt-up in Treasury prices impact “carry trade” speculation in corporate Credit?

Could dollar prospects be murkier in such a policy backdrop? How does such uncertainty play in global leveraged speculation? It is difficult to envisage a scenario where myriad global risks (i.e. coronavirus, financial, economic, policy, geopolitical) don’t incite a momentous de-risking/deleveraging dynamic.

The odds of the dreadful global “seizing up” scenario are rising.

The Modern-Day Bank Run.

Black Monday

How market panic can feed back to the world economy

In short: via tighter credit for companies already at risk

FINANCIAL MARKETS have not endured a day as brutal as March 9th since the global financial crisis of 2007-09.

Stockmarkets were a sea of red ink. The S&P 500 index fell by 7.6%.

The FTSE 100—laden with oil firms, such as Shell and BP, and other natural-resource companies—suffered a similar drop. Investors rushed for the safety of government bonds.

The yield on ten-year American Treasuries dipped below 0.5% for the first time ever.

Investors sought other havens, such as the yen.

Gold rose above $1,700 an ounce for the first time in seven years.

The backdrop, present for the past fortnight or more, is growing anxiety about global recession as covid-19 spreads. But the trigger for the latest burst of panic was a collapse in the oil price, following a meeting of OPEC ministers and other oil producers on March 6th. Russia (not an OPEC member) balked at cutting production to stabilise the price of crude.

The response from Saudi Arabia, OPEC’s largest producer, was unexpected. It offered discounts to its customers and announced an increase in its output from next month. In effect, it launched a price war. Early on March 9th the price of a barrel of the Brent benchmark blend slumped by around a third, almost touching $31, before recovering a few dollars.

But why the panic? Cheaper oil ought to be a balm to the world economy. The oil-price spikes of the 1970s and early 1990s led to recessions because they transferred income from oil-consuming countries in the West to oil-producing countries in the Middle East.

The consumers were forced to cut spending, but the producers saved much of their windfall.

The net effect was to squash aggregate demand. So a sharp drop should act as a stimulus.

The logic these days is partly reversed. For a start, rich economies are a lot less dependent on oil; it takes far less oil to produce a dollar of GDP today than it once did. Still, the benefits of cheaper oil to consumers are not to be sniffed at. Next, America is once again a big producer of oil, so its economy suffers as well as gains when prices fall.

The equation for other oil producers has also changed. Many of them spend freely when the oil price is high. So when prices fall, that element of global aggregate demand falls too.

Russia—the tactical target of Saudi Arabia’s price war—is different. Since 2014 it has run orderly monetary and fiscal policies. It has been a net provider of credit to the world, not a net borrower. And it has saved a lot of its surplus oil revenue for a rainy day, by basing its budget on an oil price of $40 a barrel. Middle Eastern and African producers (and never mind Venezuela) have not been as disciplined. Saudi Arabia itself needs $80 a barrel to balance the books.

Listed oil companies in America and Europe will endure a direct hit to profits if the oil price stays where it is. Much of the red ink on March 9th was spilled in listed oil stocks—which were out of favour even before the spread of covid-19. Yet what worries a lot of investors is the indirect impact of the latest market gyrations.

Oil producers account for a big chunk of America’s high-yield (“junk”) bond market: as a method of squeezing high-cost American shale-oil producers out of the market, there is some logic to the Saudis’ move.

An immediate effect of lower oil prices was a further tightening of corporate-credit conditions for the riskiest borrowers (see chart). A slug of investment-grade issuers—hoteliers and carmakers as well as airlines and oil firms—must also be at risk. Already there has been a trickle of ratings downgrades to junk. The more stressed markets become, the more credit will be withheld from those companies most desperate for cash to tide them over.

Few foresaw the Saudis reacting as they have to the collapse in oil demand induced by covid-19 and the failure to strike a deal with the Russians. Other surprises are surely lurking. Big falls in equity markets may beget yet further falls, as certain kinds of investors try to limit the volatility of their portfolios by switching into safer government bonds.

Another worry is that offshore borrowers of dollars may find it hard to secure funding in future. Japanese banks and insurance firms have been voracious buyers of bonds in America and Europe. Were they to back away, credit markets would come under further strain. Much depends on measures to keep credit flowing.

The Federal Reserve has already acted: on March 9th it offered to increase its lending to overnight money markets from $100bn to $150bn.

No end to the market turmoil is in sight yet. For things to stabilise, two things are required.

First is a sign that the worst is past—clear evidence that virus infection rates in rich economies are peaking.

Second, the price of risky assets, such as stocks and corporate bonds, must become cheap enough to attract bottom-fishing investors.

Even to an optimist, these pre-conditions are weeks away. For now, panic reigns.

How this market crash is different from 2008, and the same

The global economy’s banking nerve centre is not under threat

Mohamed El-Erian

Traders work on the floor of the New York Stock Exchange, December 1, 2008. U.S stocks stayed near session lows on Monday after Federal Reserve Chairman Ben Bernanke said that the U.S. economy remained under considerable stress. REUTERS/Brendan McDermid (UNITED STATES) - GM1E4C20JMT01
Elevated asset prices have begun to fall back to where fundamentals suggest they should trade © Brendan McDermid/Reuters

Unlike the global financial crisis, this is not a crippling crunch in the banking or payments and settlements systems.

Instead, the world economy and markets are going through a rough patch that has been years in the making. The tough times are also being amplified because governments have fewer ways to respond to them.

The immediate cause of the turbulence is the erosion of three anchors that had kept markets steady, or even rising, despite deteriorating fundamentals.

First, the actual and feared impact of the coronavirus is destroying supply and demand simultaneously. This has undermined the momentum of global economic growth.

Second, central banks are no longer seen as able to repress financial volatility through injections of liquidity and ever-lower interest rates. Policy interest rates are already negative in Europe.

Third, Saudi Arabia’s decision to launch an oil price war, which has sent the price of crude down more than 20 per cent, has imperilled the viability of small oil companies and undermined parts of the corporate bond market.

As a result, elevated asset prices have begun to fall back to where fundamentals suggest they should trade (even as fundamentals are also deteriorating). Because this correction is happening in a disorderly manner, there is a risk of collateral damage to the financial world and the real economy.

Today’s turbulent markets recall how they behaved in the financial crisis 12 years ago. So does the growing likelihood of recession among a lengthening list of countries that already includes Germany, Italy and Japan. Even so, today’s situation, as unsettling as it is, differs in an important way.

Because it did not originate among banks, it does not endanger the nerve centre of all modern market-based economies, namely their payments and settlements systems.

Unfortunately, today is also different from 2008 in less reassuring ways.

Governments are starting their race to address today’s turmoil from a lagging position. For too long, they pursued an unbalanced economic policy mix that relied on monetary policy to support growth. Too much policy ammunition has also been fired inefficiently — such as last week’s 50 basis point rate cut by the US Federal Reserve, which was ill-received by markets.

To stop what could become a vicious cycle, where a worsening real economy drags down markets and markets then drag down the economy, governments must now do several things.

They must use laser-targeted measures to create a sustainable economic floor. These could include medical measures that help contain the virus, such as free coronavirus testing; policies to protect society’s most vulnerable, such as free treatment to Americans without health insurance; and ways to ease specific financial market malfunctions, such as illiquidity.

These measures must also use a co-ordinated “whole of government” approach. There has been too much reliance on central bank action to boost growth; governments must now pursue true productivity-enhancing reforms.

Lastly, there must be supplementary international co-ordination to establish what collective actions can be deployed.

The faster this is done, the stronger the economic turnround will be.

That eventual recovery will be turbocharged by extremely low mortgage rates and energy prices, both of which boost consumer purchasing power. The quicker that markets see this coming, the faster they will snap back.

And this time, unlike in 2008, that snap back and economic recovery will rest on more genuine and lasting underpinnings.

The writer is Allianz’s chief economic adviser and president-elect of Queens’ College, University of Cambridge

The Markets Are Awful, But at Least They Work—for Now

Selloff has triggered stress in financial plumbing, but measures of market disruption suggest this hasn’t yet become anything like 2008

By James Mackintosh

A man watched stock action in the viewing gallery at the Australian Stock Exchange in Sydney on Monday. / Photo: Rick Rycroft/Associated Press .

You know things are bad when the good news in markets is that the financial system seems to be working well enough that people can dump their stocks in a reasonably orderly way.

With oil prices falling by the most in three decades, circuit-breakers triggered to pause the decline in U.S. stocks, and northern Italy, one of Europe’s major manufacturing regions, in quarantine, there’s no shortage of disastrous news for investors.

The oil shock of 2015-16 showed that even the silver lining of lower oil prices—cheaper fuel helping U.S. consumers—no longer supports the economy, as it was offset by sharply reduced shale-oil investment.

Worse, those leveraged shale companies are now in the front line of what could be another wave of defaults on junk bonds, where yields have jumped. In 2016, a swath of junk-rated energy companies filed for bankruptcy, with a default rate of 21% globally for the energy and commodities sector, according to S&P Global.

Back then the troubles were isolated to energy, with a junk default rate excluding energy and commodities of just 2.3%. This time the stress on the oil sector comes on top of a global supply and demand shock from coronavirus that threatens recession and serious financial consequences.

Here’s where we get what passes for good news: Banks are in decent shape, especially in the U.S., and the plumbing of the markets has been functioning pretty well so far. There’s more stress, but crisis measures such as spreads in foreign-exchange swaps, the onshore versus offshore dollar markets and bank creditworthiness suggest this is nothing like 2008—so far. Markets are harder to trade than they were, but even junk bond trading hasn’t dried up entirely.

Regulators are also more alert to the dangers now than in past crises, and likely to act more quickly. The New York Federal Reserve added $50 billion to its overnight lending on Monday.

Yet, market moves of this scale usually flush out the weakest and most highly leveraged. The danger is that the prospect of defaults and possible recession scares investors and banks enough to stop them lending even to better-quality companies. Such financial contagion multiplies the impact on the real economy as decent businesses fail because they can’t refinance debt, as in 2008 and 2009.

In the post-Lehman financial crisis, the credit crunch froze even the money markets, leading to a global shortage of dollars and accelerating bank failures. There is no sign of such problems today. Indeed, the dollar fell on Monday in spite of a widespread rush to buy havens such as Treasury bonds and the yen.

In part, the dollar’s decline was because panicked traders are paying back cheap loans in euros they had used to buy higher-yielding currencies. This was helped by the expectation that the Federal Reserve will slash rates again at its meeting next week, perhaps to zero.

The stress point in the U.S. this time isn’t an overleveraged financial system—although some traders are sure to be in trouble—but overleveraged companies. If they can’t refinance debt when it matures, they will fail.

Even if they can refinance, they will have to pay more, as junk bond yields have risen sharply. Luckily, they tend to be much less reliant than banks on short-term financing, so can wait until their bonds mature. In the next six months, only $98 billion of junk bonds mature globally, according to Refinitiv data; rating agency Fitch Group says just $10 billion of U.S. junk is due to mature by the end of June.

The stress points are different in other parts of the world. Italian bond yields leapt on Monday and Spanish and Portuguese yields were up even as German yields fell. Divergences within the euro region remain a worry.

India’s rupee and Turkey’s lira both fell against the dollar, in spite of the benefit that cheap oil should bring to the import-reliant countries. Currencies of countries that depend on commodity exports fell hard, while there was a flash crash in the Australian dollar.

Meanwhile, oil exporters will support their budgets by dipping into their sovereign-wealth funds, which could add to the downward pressure on global asset prices.

It is far too early to say that financial failures won’t multiply the troubles investors face, and the market plumbing requires close monitoring. But for now its continued functioning is one of the few bright spots in the gloom.

The Most Important Coronavirus Question

By: Alex Berezow

The first person to die from coronavirus on American soil passed away on Feb. 29 at a Seattle area hospital – incidentally, the same hospital where my daughter was born just ten and a half months ago.

For epidemiologists, the most important unanswered question about the Wuhan coronavirus, or COVID-19, is the case-fatality rate. But for the general public, the question is much more personal: “Might I – or anyone I love – get sick and die?” When faced with uncertainty, people make decisions cautiously, and they base them on emotion and personal experience instead of statistics.

If enough people answer “Yes,” there could be major repercussions as panic sets in around the world. Small behavioral modifications, such as telecommuting or reducing factory activity to avoid spreading the disease, made by millions of people can have a large impact.

The United Nations already estimated $50 billion worth of exports worldwide will be affected, excluding non-trade economic activities such as travel tourism, as manufacturing slows and governments impose measures like port restrictions. This is why it is necessary to develop a “risk of death” profile for COVID-19.

The first substantial effort to do just that was published by the Chinese Center for Disease Control and Prevention. Though these numbers should be thought of as preliminary (and perhaps specific to only China), they allow us to begin to comprehend the risk that our global society is facing.

After analyzing 44,672 confirmed cases, Chinese health officials estimated the case-fatality rates by age group:

Of the 416 children aged 0 to 9 who contracted COVID-19, precisely zero died. This is unusual for most infectious diseases, but not for coronaviruses; the SARS coronavirus outbreak also had minimal impact on children. For patients aged 10 to 39, the case-fatality rate is 0.2 percent.

The case-fatality rate doubles for people in their 40s, then triples again for people in their 50s, and nearly triples yet again for people in their 60s. A person who contracts COVID-19 in their 70s has an 8 percent chance of dying, and a person in their 80s a nearly 15 percent chance of dying.

The virus can be lethal in a variety of ways. Viral infections in the lungs can trigger an immune response so strong that it fatally damages the lungs. In others, a systemic immune response, called a “cytokine storm,” can cause multiple organ failure.

This could explain why some young, healthy people are killed by the virus, such as Dr. Li Wenliang, the 34-year-old doctor who died shortly after alerting the world to this new strain of coronavirus. An older person’s immune system may not be able to fight a respiratory virus. Underlying conditions such as high blood pressure or diabetes can worsen outcomes.

The above statistics are no doubt frightening numbers. But there are at least three major mitigating factors. First, the number of mild or asymptomatic cases is unknown and probably substantial.

Second, China is still a poor country with low-quality health care and, at the epicenter of the outbreak in Hubei province, was overwhelmed by the virus. (The case-fatality rate in Chinese provinces outside Hubei, where hospitals aren’t overloaded, is much lower.)

Third, smoking is much more prevalent in China than America, especially among men (52 percent in China versus 16 percent in the U.S.), and smoking is a risk factor for poor responses to respiratory infections. Together, this means the case-fatality rate is likely inflated, and it would be a mistake to apply these figures to the United States or other advanced nations.

The real question, then, is how inflated the case-fatality rates are. At this point, it’s impossible to determine because scientists are still collecting data on how widespread the virus is. But to get a sense of how exaggerated these numbers might be, it is useful to examine the case-fatality rate for seasonal influenza.

For the 2018-19 influenza season, the U.S. Center for Disease Control and Prevention provides estimates for the number of cases (defined here as “symptomatic illnesses”) and deaths. From these, we can derive case-fatality rate estimates by age group.

If COVID-19 ends up being similar to seasonal influenza, then the case-fatality rates for COVID-19 are inflated by a factor of 20 to 100. Dr. Anthony Fauci, head of the U.S. NIAID, co-authored an editorial for the New England Journal of Medicine in which he wrote:

“If one assumes that the number of asymptomatic or minimally symptomatic cases is several times as high as the number of reported cases, the case fatality rate may be considerably less than 1%. This suggests that the overall clinical consequences of Covid-19 may ultimately be more akin to those of a severe seasonal influenza (which has a case fatality rate of approximately 0.1%) or a pandemic influenza (similar to those in 1957 and 1968) rather than a disease similar to SARS or MERS, which have had case fatality rates of 9 to 10% and 36%, respectively [emphasis added].”

We have reason to believe this view is closest to reality. In South Korea, public health officials screened about 100,000 people and detected over 7,300 cases. So far, the death toll is 50, which translates to a case-fatality rate of 0.7 percent. That’s still seven times worse than seasonal flu, but it’s far lower than the initial reports from China.

The Future of COVID-19

Stat News describes two possible scenarios that epidemiologists envision for the future of COVID-19. In the first, COVID-19 becomes just another cold virus, and possibly evolves to become less lethal as well.

What we call the “common cold” is actually caused by roughly 200 different viruses. Each year, about 25 percent of common colds are due to four coronaviruses, and some scientists think COVID-19 could eventually join this group as its fifth member. In the second scenario, COVID-19 behaves more like a severe seasonal flu, vanishing in the summer and returning to hit us hard in the winter.

In neither scenario does COVID-19 resemble the Spanish flu of 1918, which disproportionately killed young people. In neither scenario does the virus mutate to become more lethal. Most likely, the opposite will be true. There is an inverse relationship between lethality and contagiousness; that is, the most contagious viruses tend to be less lethal. Evolutionary pressures – namely, the biological imperative to reproduce as far and wide as possible (which means not killing people) – may push COVID-19 down this path.

For now, influenza remains the far bigger global public health threat. Each year, about 1 billion people become infected with seasonal flu, killing some 300,000 to 500,000. This season alone (2019-20), about 20,000 Americans have died from flu, including 136 children. Yet, very few people fear the flu. Society has accepted it as part of reality, and people carry about their daily lives without excessive concern over influenza. This is the likely future for COVID-19.

Until then, perhaps the last word should be given to virologist Dr. Lisa Gralinski, who told The Scientist, “If you’re over fifty or sixty and you have some other health issues and if you’re unlucky enough to be exposed to this virus, it could be very bad.” While everyone else should remain vigilant and take proper precautions (e.g., washing hands and avoiding crowds) until more data comes in, from a scientific perspective the public alarm is disproportionate to the risk.

The Market Has Lost Faith in Banks

It wasn’t too long ago that investors were lauding banks for their ability to withstand the effects of low rates. Not anymore.

By Telis Demos

American banks’ shares are performing twice as poorly as the market. So much for diversification.

As banks continued to rise throughout 2019, even as interest rates tumbled, the talk was of their success in diversifying their businesses. Falling interest rates certainly hurt, but banks seemed to always have something to offset it, ranging from a boost to trading desks, mortgage-refinancing volumes, buoyant credit cards or a shift from cash into securities.

One way to measure this confidence was to see banks’ forward price-to-earnings ratio advance relative to the S&P 500 in the latter part of 2019. They grew from 0.57 times the multiple of the S&P 500 overall in August to 0.67 times by December, according to FactSet. “Rates schmates,” the market seemed to say.

But now that faith has evaporated with the coronavirus-inspired yield collapse. S&P 500 banks’ relative forward multiple has collapsed, falling to its lowest level relative to the broader index since 2000. In price terms, S&P 500 banks are down 22.9% in the past month; the index is down 12.4%.

Despite banks’ higher capital levels and efforts to shift into steadier businesses, the lesson appears to be that markets still judge them to be much more at risk than other companies in an economic downturn.

These risks should have been more on investors’ minds last year. A quick inventory of banks’ challenges in a low-rate and slow-growth scenario reveals little upside. Yes, trading desks can benefit from volatility when rates change.

Yet in a truly wild market, sometimes called “bad volatility,” banks more often lose out. Take December 2018, the last correction: It was a horrible quarter for banks’ trading desks.

Stronger banks like JPMorgan Chase may have the resources to take advantage of others’ struggles to ride out the storm and grab market share.
Photo: Bess Adler/Bloomberg News . 

Lower rates will spark more people to refinance mortgages or buy homes, generating mortgage-banking fees. Banks also tend to hedge out mortgage-rate risk in various ways.

But associated fees may be offset by rising prepayment speeds and the resulting impact on the accounting value of mortgage-servicing rights and mortgage-backed securities.

The coronavirus offers some unique additional challenges. Cash might flee to banks in the form of deposits, keeping funding cheap. That is good when low rates are helping spark loan growth.

But if companies and consumers also stop borrowing, or are only borrowing to stave off liquidity problems, banks face the prospect of either adding low-quality assets or pushing yields further down by buying bonds instead of lending.

A slowdown in business and travel spending may hit credit-card revenue for banks hard; many have key card partnerships with airlines and hotels. Cross-border business payments may also be in for a rough time as companies halt activity. Revenue from financing shipping and trade already looks vulnerable.

None of this is to say that banks are necessarily doing a bad job at being banks. The risk of bank failure remains remote, and stronger banks like JPMorgan Chase JPM -5.17%▲ may have the resources to take advantage of others’ struggles to ride out the storm and grab market share to boost future returns.
But banks are still banks. Despite the many things that have changed about the industry, the fact remains that, over a full cycle, bad times can be especially bad for them.

Trump’s “Currency Manipulation” Con

The long-awaited "phase one" deal between the United States and China has not ended US trade warfare. Instead, President Donald Trump's administration has devised yet another tool with which to tilt the playing field against foreign competitors, all but ensuring that damaging and unnecessary trade conflicts will continue.

Anne O. Krueger

krueger24_AN MING  Barcroft Media via Getty Images_renminbi

WASHINGTON, DC – Would you believe the following story if you heard it? Imagine a small, rural town with one general store that sells to, and buys from, the farmers living in the surrounding area. Owing to their large families, the farmers have been running up a tab at the store, and they now owe the store a great deal of money. So, they organize a protest to demand that the store raise its prices on seed, fertilizer, and the like, while reducing the price it will pay for the farmers’ grains.

Obviously, the scenario is absurd. Paying even higher prices for agricultural supplies and receiving less for what they produce will not help the farmers pay off their tab. Indeed, either change would probably result in higher profits for the store, and greater losses for the farmers and their families.

In this nonsensical parable, US President Donald Trump’s administration represents the farmers. By accusing China (or any other country) of “currency manipulation,” the administration is effectively demanding that the Chinese appreciate their currency – that is, make each renminbi cost more in dollars.

To be sure, many politicians over the years have argued that China and other developing and emerging economies “manipulate their currency” to gain a competitive edge. By reducing the purchasing power of their own currencies, they can make their exports cost less to foreign buyers, while rendering imports more expensive to domestic buyers.

To account for such concerns, the United States has a law mandating that the Department of the Treasury prepare a biannual report for Congress specifying whether any currencies are being “manipulated.” If the Treasury does so specify, the administration is then expected to carry on “talks” with the accused country. But, even then, the law mandates no penalties.

Congress has established three criteria to determine whether manipulation has occurred. The offending country must have a current-account surplus above 3% of GDP; it must have intervened in the foreign-exchange market to make its currency cheaper; and it must have a bilateral surplus with the US in excess of $20 billion.

In August 2019, China’s current-account surplus fell below 3% of GDP, and the Chinese government had previously been intervening not to devalue the renminbi but rather to prevent further depreciation following Trump’s threats of additional tariffs. In the event, the US declared China a currency manipulator anyway, only to remove the designation as a part of the “phase one” trade deal agreed in January.

But, in the meantime, the Trump administration has discovered a new tool with which to bludgeon foreign competitors. The Department of Commerce this month issued a rule that allows for additional levies on imports from countries deemed to be currency manipulators, with the percentage increase in the tariff (in addition to the statutory tariff and the anti-dumping or countervailing duty margin) being equal to the estimated percentage by which the currency is deemed undervalued. Worse, under the new rule, there is no legal process that the department must follow when determining whether “manipulation” has occurred.

Accordingly, an American company that believes it is losing sales to a foreign company may now appeal to the Commerce Department (and the International Trade Administration) for special treatment. Even if a (profitable) German exporter charges the same prices for the goods it sells domestically as it does for the goods it sells in the US, an American firm can demand additional levies by citing “currency manipulation.” And if no US firm acts, the Commerce Department can simply initiate such appeals on its own.

The US has long had one of the world’s strongest economies, owing in no small part to its respect for the rule of law and its efforts to maintain a level playing field for competition – both foreign and domestic – within the US market. Given this tradition, it is puzzling that so many American politicians and businessmen are now terrified of other countries’ economic strengths.

True, the US has also long championed extraordinarily loose criteria to justify anti-dumping measures and countervailing duties, and it has secured rules and procedures for determining such offenses within the World Trade Organization. But a finding of “currency manipulation” has never been among the relevant criteria. Most likely, the Trump administration’s unilateral decision to add currency manipulation to the list will be contested in court and at the WTO.

More broadly, the Trump administration’s currency politics will be felt everywhere. Trump has complained that both Argentina and Brazil are manipulating their currencies, even though those countries’ exchange-rate depreciation is obviously a response to high inflation. The International Monetary Fund and others have recommended that both pursue devaluation in order to restore macroeconomic balance.

Meanwhile, Trump continues to call on the US Federal Reserve to lower interest rates and ease its monetary policy so that the dollar will depreciate. Apparently, the US is free to manipulate its currency – just so long as no one else does.

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University

After A Decade, Investors Are Finally Back To Even

by: Lance Roberts


- During strongly advancing, and very long bull markets, investors become overly complacent about the potential risks of investing.

- Under-saving is one of the primary problems which leaves investors well short of their financial goals by retirement.

- While there is a case to be made for "buy and hold" investing during rising markets, the opposite is true in falling markets.

I recently discussed putting market corrections into perspective, in which we looked at the financial impact of a 10-60% correction. But what happens afterward?
During strongly advancing, and very long bull markets, investors become overly complacent about the potential risks of investing. This "complacency" shows up in the resurgence of "couch potato," "buy and hold," and "passive indexing" portfolios. While such ideas work as long as markets are relentlessly rising, when the inevitable reversion occurs, things go "sideways" very quickly.

"While the current belief is that such declines are no longer a possibility, due to Central Bank interventions, we had two 50% declines just since the turn of the century. The cause was different, but the result was the same. The next major market decline will be fueled by the massive levels of corporate debt, underfunded pensions, and evaporation of 'stock buybacks,' which have accounted for almost 100% of net purchases since 2018. 
Market downturns are a historical constant for the financial markets. Whether they are minor or major, the impacts go beyond just the price decline when it comes to investors."
It is the last sentence I want to focus on today, as it is one of the most important and overlooked consequences of market corrections as it relates to long-term investment goals.
There are a litany of articles touting the massive bull market advance from the 2009 lows, and that, if investors had just held onto the portfolios during the 2008 decline, or better yet, bought the March 2009 low, you would have hit the "bull market jackpot."
Unfortunately, a vast majority of investors sold out of the markets during the tail end of the financial crisis, and then compounded their financial problems by not reinvesting until years later. It is still not uncommon to find individuals who are still out of the market entirely, even after a decade long advance.
This is what brutal bear markets due to investors psychologically.
"Bear markets" push investors into making critical mistakes:
  1. They paid premium prices, or rather excessive prices, for the companies they are investing in during the "bull market." Ultimately, overpaying for value has a cost of lower future returns, as "buying high" inevitably turns into "selling low."
  2. Investors Panic as market values decline. It is easy to forget during sharply rising markets the money we invest is the "savings" we are dependent on for our family's future. Many investors who claim to be "buy and hold" change their mind after large losses. There is a point, for every investor, where they are willing to "get out at any price."
  3. Volatility is ignored. Volatility is not always a bad word, but rising volatility coupled with large declines, eventually feeds into investor "fear and panic."
  4. Ignoring Market Analysis. When markets are trending strongly upwards, investors start to "rationalize" why they are overpaying for value in the market. By looking for "confirmation bias," they tend to ignore any "market analysis" which contradicts their "hope" for higher prices. The phrase "this time is different" is typically a hallmark.
"The underlying theory of buy and hold investing denies that stocks are ever expensive, or inexpensive for that matter, investors are encouraged to always buy stocks, no matter what the value characteristics of the stock market happen to be at the time." - Ken Solow
The primary problem with "buy and hold" investing is ultimately, YOU!
The Pension Problem
During raging bull markets, individuals do two things which ultimately lead to their financial distress.
  1. Start treating the market like a casino in hopes to "getting rich quick," and
  2. Reduce their "contributions" given expectations that high returns will "fill the gap."
Unfortunately, this is the same problem that plagues pension funds all across America today.
As I discussed in "Pension Crisis Is Worse Than You Think," it has been unrealistic return assumptions used by pension managers over the last 30 years, which has become problematic.

"Pension computations are performed by actuaries using assumptions regarding current and future demographics, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries, among other variables. The biggest problem, following two major bear markets, and sub-par annualized returns since the turn of the century, is the expected investment return rate. 
Using faulty assumptions is the linchpin to the inability to meet future obligations. By over-estimating returns, it has artificially inflated future pension values and reduced the required contribution amounts by individuals and governments paying into the pension system 
Pensions STILL have annual investment return assumptions ranging between 7-8% even after years of underperformance."
However, why do pension funds continue to have high investment return assumptions despite years of underperformance? It is only for one reason:
To reduce the contribution (savings) requirement by their members.
This is the same problem for the average American faces when planning for 6-8% average annual returns on their investment strategy. Why should you save money if the market can do the work for you? Right?
This is a common theme in much of the mainstream advice. To wit:
"Suze Orman explained that if a 25-year-old puts $100 into a Roth IRA each month, they could have $1 million by retirement."
The problem with Ms. Orman's statement is that it requires the 25-year old to achieve an 11.25% annual rate of return (adjusting for inflation) every single year for the next 40 years.
That certainly isn't very realistic.
However, under-saving is one of the primary problems which leaves investors well short of their financial goals by retirement. The other problem, as noted above, is the most important part of the analysis overlooked by promoters of "buy and hold" investing.
Let me explain.
Getting Back To Even, Isn't Even
Here is the common mainstream advice.
"If you had invested $100,000 at the market at the peak of the market in 2000, or in 2007, your portfolio would have gotten back to even in 2013. Since then, your portfolio would have grown to more than $200,000.

Here is the relative chart proving that statement is correct. (Real, inflation-adjusted, total return of a $100,000 investment.)
No one talks much about investors who have been in the market since the turn of the century, but it is one of the problems why so many Americans are underfunded for retirement. While Wall Street claims the market delivers 6% annual returns, or more, the annual rate of return since 2000, on an inflation-adjusted, total return basis, is just shy of 4%.
However, since most analysis used to support the "buy and hold" thesis starts with the peak of the market in 2007, that average return does indeed come in at 6.64%.
Here is the problem.
While your portfolio got back to even, on a total return basis, 6 or 13 years after your initial investment, depending on your start date, you DID NOT get back to even.
Remember your investment plan? Yes, that plan touted by the mainstream media, which says to assume a return of 6% annually?
The chart below shows $100,000 invested at 6% annually from 2000 or 2007.
So, what's wrong with that?
An investor tripled their money from 2000 and doubled it from 2007.
Unfortunately, you didn't get that.
Let's overlay our two charts.
If your financial plan was based on reduced saving rates and high rates of return, you are well short of you goals for retirement if you started in 2000. Fortunately, for investors who started in 2007, congratulations, you are now back to even.
Unfortunately, there are few investors who actually saw market returns over the last 12 years.
As noted, a vast majority of investors, who were fully invested into the market in 2007, were out of the market by the end of 2008. After such a brutal beating, it took years before they returned to the markets. Their returns are vastly different than what the mainstream media claims.
While there is a case to be made for "buy and hold" investing during rising markets, the opposite is true in falling markets. The destruction of capital eventually pushes all investors into making critical investment mistakes, which impairs the ability to obtain long-term financial goals.
You may think you have the fortitude to ride it out. You probably don't.
But even if you do, getting back to even isn't really an investment strategy to reach your retirement goals.
Unfortunately, for many investors today who have now reached their financial goals, it may be worth revisiting what happened in 2000 and 2007. We are exceedingly in the current bull market, valuations are elevated, and there is a rising belief "this time is different."
It may be worth analyzing the risk you are taking today, and the cost it may have on "your tomorrow."

New US Strategy and Technology

By: George Friedman

The world is facing a fundamental strategic and technical shift in both the geopolitics of war and its dynamic. The shift is being driven by the United States’ decision to change its global strategic posture and the maturation of new classes of weaponry that change how wars will be fought.

U.S. Posture

The U.S. has publicly announced a change in American strategy consisting of two parts. The first is abandoning the focus on jihadists that began with al-Qaida’s attack on the U.S. in 2001.

The second is reshaping and redefining forces to confront China and Russia. For a while, it had been assumed that there would no longer be peer-to-peer conflicts but rather extended combat against light infantry and covert forces such as was taking place in Afghanistan.

After every international confrontation, including the Cold War, the absence of immediate peer threats leads strategists to assume that none will emerge, and that the future engagements will involve managing instability rather than defeating peers. This illusion is the reward of comfort to the victorious powers. Immediately after the fall of the Soviet Union, the belief was that the only issue facing the world was economic, and that military strategy was archaic. The events of 9/11 changed that, but the idea of national conflicts was still seen as farfetched.

The United States is now shifting its strategy to focus on peer-to-peer conflict. Peer-to-peer conflict is not about two equal powers fighting; it’s about two powers that field similar forces.

So the war in Afghanistan was between a combined arms force and a totally different, light infantry force. As we saw in Vietnam, the latter can defeat a far more advanced force by understanding the political dimension more clearly than its opponent. Peer-to-peer conflict involves two forces conceiving of war in the same way. Germany invaded Poland and was by far the more powerful force, but Poland conceived of war the same way the Germans did. In this sense, they were peers.

The United States is a global power. Russia cannot wage war in the Atlantic or Pacific. China cannot project decisive power into Europe. The United States can do both. It is not nearly as geographically limited in its warfighting as the other two are. But were the United States to confront them within the areas where they can operate, the question then is the quality of forces, in terms of command and technology.

China’s national interest pivots on its ability to use sea lanes to sustain international trade. Its ability to project land power is limited by terrain; to its south are hills, jungles and the Himalayas, and to its north is Siberia. It could attack westward through Kazakhstan, but the logistical challenges are enormous and the benefits dubious. For China, then, the fundamental problem is naval, deriving from the threat that the U.S. could use its forces to blockade and cripple China.

Russia’s strategic interest rests in regaining the buffer zone from Latvia to Romania. The loss of these states in 1991 eroded the main defense line of an attack from the west. Russia’s primary goal, therefore, is to recover these buffers. Of secondary but still significant importance is holding the North Caucasus south of the Russian agricultural heartland. The threat to this region is insurgency in areas like Chechnya and Dagestan, or an American move from the South Caucasus.

Neither a U.S. naval blockade of China nor an attack on Russia proper from the west are likely scenarios. But national strategy must take into account implausible but catastrophic scenarios, because common sense can evaporate rapidly. Thus the Russians must maintain sustained pressure primarily to the west but also to the south. China must press eastward, in the South and East China seas, to demonstrate the costs a blockade would impose.

The focus for each is not necessarily action but creating the possibility of action and thereby shaping the political relationship. The danger is that the gesture will trigger what had been seen as an unreasonable response. The problem for the United States is that it cannot be sure of Russia’s or China’s reading of American intentions, and therefore, it must be prepared to counter both. War is rarely about hunger for conquest; it is about the fear of being conquered.

For Russia, it is fear that the U.S. will try to achieve what Napoleon and Hitler failed to achieve, given the loss of its buffers. For China, it is a fear of strangulation by American naval forces.

For the United States, it is fear that Russia will return with force to Central Europe, or that China will surge into the Western Pacific. All such fears are preposterous until they mount to such a point that doing nothing appears imprudent.

A New Class of Weapons

World War II was first waged between German armor and Soviet infantry, and then it became a war of armor against armor. In the Pacific, the decisive war was not of battleships against battleships, but of aircraft against naval vessels and, toward the end, airpower. Much of the battles on islands like Saipan and Guadalcanal were intended by both sides to secure them for air bases. The Cold War, had it turned hot, was conceived of as an upgraded World War II, of armor and air power against armor and air power.

From World War II until the end of the Cold War, peer-to-peer conflict focused on three classes of weapons: armored vehicles, aircraft carriers and manned bombers. After 1967 and the introduction of precision-guided weapons, the survivability of these weapons declined, and massive resources had to be allocated to allow them to survive. Armor had to be constantly upgraded to defeat far cheaper projectiles that were unlikely to miss.

Aircraft carriers had to be surrounded by carrier battle groups consisting of anti-air cruisers, anti-submarine destroyers and attack submarines, all integrated into complex computer systems that could counter attacks by precision-guided weapons. Manned bombers flying into enemy airspace could be confronted by sophisticated surface-to-air missiles. The solution was to try to build bombers invisible to enemy radar. The cost of defending these systems that emerged in World War II surged as the cost of destroying them began to decline.

Counters to precision-guided weapons inevitably emerged, and we have reached the threshold of a new class of weapons: hypersonic missiles. These munitions, which can travel at five to 10 times the speed of sound, maneuver in flight and carry sufficient explosives, including sub munitions (smaller projectiles designed to hit multiple targets), make the survival of tanks, surface vessels and manned bombers increasingly problematic.

Their speed, maneuverability and defenses against detection decrease the probability that all incoming hypersonic missiles can be destroyed, while they retain the precision of previous generations of weapons.

Russia, China and the U.S. are all working on these weapons. Sometimes they exaggerate their limited capabilities; sometimes they minimize their substantial capabilities. But all have them and are developing better ones if they can. And this changes war from the way it was conceived in World War II and the Cold War. A new system of weapons is beginning to emerge.

The key to the development of hypersonics is range. The shorter their range, the closer the attacker must come. The longer the range, the more uncertainty there is over its location and the more likely it is to survive and be fired, maneuvering in excess of the ability of defending system. So in the South China Sea, it will not be carriers facing carriers.

They will be neutralized by hypersonic missiles. Nor will it be armored brigades engaging. The tanks will be neutralized long before they engage. The goal will be to locate and destroy an enemy’s missiles before they are launched and before they can approach their target.

The key will be the ability to locate and track hypersonic missiles and then destroy them. The solution to this is systems in space. The Chinese will not engage the U.S. Navy with its carriers.

It will try to destroy them with well camouflaged missiles from land bases. To do this, they must locate the target, which is mobile. Its own platforms being vulnerable, they will rely on space-based reconnaissance. The United States’ primary mission therefore will be to destroy Chinese satellites, find the location of Chinese launchers and launch saturated attacks on them, likely from space.

Modern war, like all war, depends on intelligence and targeting information. Precision-guided munitions move older platforms toward obsolescence, and hypersonics closes the door. The battle must be at a longer range than most missiles have now, and will be dependent on a space-based system for targeting. This means that victory in war will depend on command of space.

Note that the U.S. has now established the U.S. Space Force, which integrated the space fighting capabilities of other services into one. This represents the realization that dealing with peer powers now depends on the command of space. Therefore, the United States’ strategic turn away from jihadists toward Russia and China also constitutes a shift away from the primacy of older platforms.

A new strategy and the recognition of the importance of space mean that the decisive battle will not be fought on Earth’s surface.

Have Zombies Eaten Bloomberg’s and Buttigieg’s Brains?

Beware the Democrats of the living dead.

By Paul Krugman

Credit...Getty Images

MADRID — I’m in Spain right now, talking about zombie ideas — ideas that should have been killed by evidence, but just keep lurching along. In the modern United States, most important zombie ideas are on the right, kept undead by big money from billionaires who have a financial interest in getting people to believe things that aren’t true.

But sometimes zombie ideas also manage to eat centrists’ brains. Sure enough, some of the most destructive zombies of the past dozen years have shambled their way into the Democratic primary fight, where a couple of centrists are repeating ideas that were thoroughly debunked years ago.

And as it happens, the experience of Europe, and Spain in particular, provides some of the bullets we should be using to shoot these particular zombies in the head.

So let’s start with the origins of the 2008 financial crisis, a topic that remains relevant if we want to avoid repeating past mistakes.

Although few saw 2008 coming, in retrospect it was a classic banking panic, the type of thing that happened frequently before the 1930s. First, lenders got caught up in a gigantic housing bubble; then, when the bubble burst, much of the financial system just froze up.

What made this panic possible, after two generations of relative financial calm? The answer, clearly, was the erosion of effective financial regulation over the previous few decades.

But right-wingers refused to accept the obvious. Instead, they pushed an alternative narrative in which liberals somehow caused the crisis by forcing poor innocent bankers to lend money to people of color (they weren’t usually that explicit, but that was the clear message). This narrative was so nakedly self-serving that it’s hard to believe that anyone took it seriously; but some influential people bought it. And among those people was Michael Bloomberg.

At this point the evidence against the liberals-did-it story is overwhelming. The surge in bad loans came neither from government-sponsored agencies nor from regulated banks, but from unregulated mortgage originators. The fallout was so severe because investors believed, wrongly, that fancy financial instruments protected them from risk.

And, crucially, the housing bubble was an international phenomenon: Spain had a bigger bubble than we did, followed by a worse slump. Did U.S. liberals force Spanish banks to make bad loans?

But zombie ideas can’t be killed by evidence. Perpetrators of the liberals-did-it lie are still out there, still getting space to spread their disinformation in mainstream media.

Elizabeth Warren argues that Bloomberg’s embrace of a false right-wing narrative about the financial crisis should disqualify him for the Democratic nomination. But I’d be willing to cut him some slack if he’d admit that he was taken in by right-wing disinformation. If he isn’t willing to make that admission, she’s right.

At the same time that Bloomberg is being called out on his housing bubble zombie, Pete Buttigieg is facing justified criticism for buying into another zombie idea — the obsession with government debt. That obsession did much to hobble recovery from the financial crisis.

To be fair, deficit panic wasn’t as naked a scam as the claim that do-gooders caused the financial crisis, although some of the loudest voices decrying the evils of deficits were obvious phonies. What happened instead was that many important people imagined that inveighing against the dangers of debt made them sound serious, because that’s what all the other serious people were doing.

At this point, however, the debt obsession has been thoroughly debunked by both economic research and experience. We live in a world awash in private savings looking for someplace to go, with investors willing to lend money to governments at incredibly low interest rates. It’s actually irresponsible not to put this money to work investing in the future, both by building physical infrastructure and through programs that help children develop their potential.

Now, the Trump administration is doing it wrong — borrowing large sums, but squandering the money on tax cuts for corporations and the wealthy. But even bad deficit spending boosts the economy to some extent, and it is the reason America is still growing reasonably fast while Europe, still in the grip of austerity ideology, is stagnating.

Look: It’s easy to make the political case that Democrats should nominate a centrist, rather than someone from the party’s left wing. Candidates who are perceived as ideologically extreme usually pay an electoral penalty; this is especially true if, like Bernie Sanders, they actually pose as more radical than they really are.

But a key part of centrism’s appeal is the belief that centrists are realists, who understand how the world works. It’s much harder to make the case for centrists who repeat manifestly false claims, especially if those claims were essentially right-wing propaganda.

As I said, you can make a good case for the proposition that Democrats should, in the end, nominate a centrist. But a centrist whose brain has been eaten by zombie ideas? Not so much.