Reflection Week

By John Mauldin

I knew this letter’s topic months ago. It was going to be a review of the Strategic Investment Conference, which would have just concluded fabulously in sunny Scottsdale.

Well, something intervened. Coronavirus precautions kept us from having an in-person conference. No one was more disappointed than me. I often say SIC is the highlight of my year, and I’m not kidding. Being around so many brilliant minds, soaking up their knowledge, and all the while meeting and talking with so many loyal readers and close friends—it’s just an amazing experience.

Yet I have to say, the Virtual SIC we are now halfway through is amazing, too. It’s different, obviously. Instead of shaking hands, I’m sitting in front of a camera in my makeshift bedroom studio. There’s no applause or hallway chats or wonderful meals with friends. But we’ve made up for the missing elements with extra speakers and a stretched-out schedule. It’s a little less intense—and a lot more relaxed.

We have two days to go and you can still join us. More on that below. But first, I want to share some first-week highlights.

Week 1 Highlights

When people fly in from all corners of the world, as normally happens, we pack SIC into three-and-a-half days in order to respect everyone’s time. This year the whole concept of “time” is different, so we adapted a bit. The program is five days in total but we’ve split them up, and the days are shorter. This week it’s Monday-Wednesday-Friday, and next week Tuesday-Thursday.

I’m writing this letter on Thursday so we’ve completed only two days. At only 40% through, my brain is already jam-packed. I can’t possibly summarize everything we heard but I’ll give you a few nuggets.

  • Dave Rosenberg, our traditional lead-off hitter, started the event on a bearish note. Back at the 2009 SIC, if memory serves correctly, he turned from bearish to bullish. Not anymore. He thinks we are in an outright depression and won’t recover for a long time. He thinks those who expect recovery this year are delusional because many of the job losses will be permanent and probably half of small businesses will fail.

One of Dave’s points I found particularly compelling: The staggering amounts of money governments have already spent aren’t “stimulus” as we normally use the word. They are more like “life support.” They’re helping contain the damage, but they aren’t going to bring the economy back. That part hasn’t even started yet.

Dave distinguishes “depression” from a milder recession by the permanent behavioral changes it produces. He thinks consumer spending will change as people focus on needs rather than wants, and the savings rate will rise as they prepare for the unknown.

His best case is for recovery by 2023, and a slow grind from here to there.

But he also named several sectors he thinks can outperform along the way, so he’s not entirely despondent. He is not running for the hills, he’s just running to different hills.

  • Later Monday, Dr. Lacy Hunt amplified some of Dave’s points. He thinks we may initially see an impressive-looking recovery just because the economy will improve from such low levels. He doesn’t expect it to last long, or reverse the lost output and employment. The debt overhang he’s been describing is now even worse and will affect growth for years to come.

Like Dave, Lacy expects private savings to rise but he thinks government debt, which is actually “dis-saving,” will overwhelm private savings and leave the nation’s savings rate net negative. That hasn’t happened since the 1930s. Between falling debt productivity and unfavorable demographics (low population growth) he sees a dismal growth picture. But he also points out other economies are in even worse shape, so the US should still be the relative leader.

As is his usual style, Lacy illustrated his speech with powerful charts. Let me show two that I found particularly interesting. The first was a projection of the output gap: how much the economy is producing versus what it could produce. It is dropping us to the lowest level since World War II.

In the real world, that means much lower employment and productivity.

The next is per capita GDP, which is the lowest since 1946 and the Great Depression. That is just an estimate through first quarter and a little bit of this quarter. If Rosie (and Jim Bianco who we will talk about in a moment) are correct, per capita GDP could drop to the lowest levels ever.

And Then We Look at Politics

It is, after all, an election year. Normally, I try to stay out of the political arena. Elections have less effect on the economy than you might think. And to be fair, politics is a hobby for me, not a profession. I am certainly no expert. However, given the potential for a significantly different political climate, we would be remiss if we did not pay attention. We had two presentations from political analysts, and then a spirited panel discussion.

  • Historian Bruce Bartlett is known as a conservative, but after criticizing the GWB administration and then adopting Keynesianism quite publicly (in a book that was the opposite of everything he had written for the previous 20 years), I find him a fascinating thinker. I may not agree with him, but I do pay attention.

Bruce sees almost no chance Trump will be reelected. He argues that presidents who face this kind of economy in the last year of their term almost never fare well, and Trump has the virus issue on top of it.

He also had an interesting economic insight. Like Dave Rosenberg, he thinks we will see important behavioral change but he thinks in the opposite direction. People will take a more “live for today” attitude, similar to the Roaring ‘20s. This might be bullish for consumer spending.

  • Lobbyist Bruce Mehlman views this period as less of a radical change, and more an acceleration of change that was already underway. You know some of them: globalization, multilateralism, US-China tension, technology. Bruce thinks the political divide will widen, pressures will rise against “Big Tech,” and populist pressures will grow. He expects more resistance to immigration, suspicion of China, and greater emphasis on security and austerity. He thinks it is too early to make a reasonable prediction, but today he would give a potential edge to Trump, noting that could change easily.

  • Ben Hunt of Epsilon Theory participated on the political panel, but where he really caught fire was in the closing presentation, where he outlined three narratives on COVID-19, and then proceeded to systematically tear them apart because they are first and foremost political strategies, and not necessarily scientific.

I was struck as I listened to him about how criticism of the politicization of COVID-19 coincides with my own views on economists and politicians. I have said often that some economists are like witch doctors or shamans of the past. They would sacrifice sheep, look at the entrails, and predict the future. Politicians use economists to make models showing the correctness of whatever they want to do anyway. Too many economists are basically pets for politicians.

  • It is hard to say what my favorite presentation was that first day, but Viscount Matt Ridley, whose latest book How Innovation Works comes out next week, was certainly a highlight. He is perhaps the finest philosophical libertarian thinker of our time. I asked him to focus on the importance of innovation.

First of all, it will be innovation that gets us a vaccine against this virus.

And it will be the innovators, millions of entrepreneurs, who create a new economy afterward. While we are still only speculating about how severe the economic downturn will be, we know that business as usual in January 2020 won’t work anymore. Investors need to recognize where innovation is really happening.

As Matt pointed out, Joseph Schumpeter said, “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls.”

I will leave you with two selections from Matt’s 47-slide presentation. The first is a list of innovation’s essential elements.

The second is a good reminder for those who extrapolate the current crisis far into the future. T. B. Macaulay, writing in 1830 in reply to the pessimists of his day:

“We cannot absolutely prove that those are in error who tell us that society has reached a turning point—that we have seen our best days. But so said all who came before us, and with just as much apparent reason… On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?’’

Real world GDP, after inflation, is up over 15X since he wrote that. The cost of a candle in 1800 that would let you read, however dimly, for one hour, was six hours of labor. Today that same amount of light costs about 3/10 of a second of human labor.

The current crisis won’t slow down the Age of Transformation. As many of the speakers have already pointed out, and others will over the next week, the crisis usually has the potential, if not the probable likelihood, to actually accelerate transformation.

As my dad used to say, “Necessity is the mother of invention.” Or innovation.

Just for the record, and simply for space purposes, I haven’t mentioned all of the speakers—just a few. They were all excellent.

Then It Was Wednesday

We continued on Wednesday, starting with Gavekal’s three founders: Charles Gave, Louis Gave, and Anatole Kaletsky. Louis moderated the other two, who told us where they think the world economy is going in their own inimitable ways. (Getting these three together physically is very difficult. It was a privilege to assemble them virtually.)
  • Anatole started on dangerous ground, saying, “This time really is different.” We face not one, but two concurrent unprecedented events: a virus-induced economic collapse and a stimulus tidal wave.

Another interesting insight from Anatole: Markets bounced in recent weeks because better-than-expected public health news raised sentiment from the lows.

But he thinks investors are focused so much on that, they are missing the worse-than-expected economic news. When they notice, he expects another leg down and likely a retest of the lows. (Note: Anatole is normally the bull of this trio.)

  • Charles looked at the world through the prism of three primary currencies: the dollar, the euro, and the renminbi. All wealth is denominated in a currency so it matters a great deal which one you are in, and what its prospects are.

In his view, the dollar and euro both have serious problems. The euro is a currency without a country and so can’t be used to hedge risk. This makes it unwise to hold euro cash or bonds. The dollar, while stable for now, is vulnerable if oil starts trading in other currencies.

Meanwhile, with the US and Europe cutting back on imports from Asia, Charles sees Beijing trying to generate internal demand and make the region dependent on its currency. He thinks that, and not global reserve status, is China’s main goal. It will lead to a massive revaluation of Asian currencies. So he thinks they are better homes than either the dollar or euro.

  • Jim Bianco made a fascinating presentation he called “The 90% Recovery.” He emphasized we have to think in relative terms. Even if most business reopen and some semblance of normalcy returns, it’s still going to be significantly less than before. Even 90% recovery, which he thinks optimistic, will be a disaster relative to the recent past and even compared to the last recession.

Meanwhile, Jim said the Fed is effectively dictating bond yields and well on its way to full-scale “yield curve control” similar to Japan. That would mean we don’t really have a bond market anymore. With prices fixed, there’s no need to trade.

I liked that Jim ended with a hopeful suggestion. If everyone would simply wear masks and practice reasonable social distancing, consumers might regain enough confidence to spend. But that doesn’t seem to be happening and will get no easier as the weather warms up. So we may be stuck well below 90% for a long time.

  • Dr. Woody Brock made his usual authoritative presentation, noting that the major difference between the current crisis and any previous recession is the service sector job destruction.

In the 1920s, roughly 26% of the US population worked in the service sector. Manufacturing and agriculture were far more powerful. Factory shutdowns, while not good, no longer cause the kind of mass unemployment they once did.

Today, 86% of the country works in some form of the service sector. That has insulated us from the old-style inventory/manufacturing cycle recessions. We have recessions but they have been less severe, until now.
We have lost 30 million and counting service sector jobs. There will be new jobs that will eventually take their place, but it will take years. This is a different type of crisis than we have ever faced.

War of the Experts

I came across this early Friday morning before the conference started. It fits part and parcel with the themes that I have been hearing at the conference. Fareed Zakaria writes about Michael Lind’s book, The New Class War.

Explaining why so many people across the West have rejected the government establishment, Michael Lind writes, “The issue is not the issue. . .  The issue is power. Social power exists in three realms — government, the economy, and the culture. Each of these three realms of social power is the site of class conflict.” In all three, leaders tend to be urban, college-educated professionals, often with a postgraduate degree. That makes them quite distinct from much of the rest of the country. Only 36 percent of Americans have a bachelor’s degree, and only 13 percent have a master’s or more. And yet, the top echelons everywhere are filled with this “credentialed overclass.”

How does that relate to our current crisis? Fareed writes:

Imagine you are an American who works with his hands—a truck driver, a construction worker, an oil rig mechanic—and you have just lost your job because of the lockdowns, as have more than 36 million people. You turn on the television and hear medical experts, academics, technocrats, and journalists explain that we must keep the economy closed—in other words, keep you unemployed—because public health is important. All these people making the case have jobs, have maintained their standards of living and in fact are now in greater demand. They feel as though they are doing important work. You, on the other hand, have lost your job. You feel a sense of worthlessness, and you’re terrified about your family’s day-to-day survival. Is it so hard to understand why people like this might be skeptical of the experts?

George Friedman (whose SIC presentation was also a home run) talks about two geopolitical cycles: a 50-year cycle and an 80-year cycle, which for the first time will coincide in the late 2020s. These are historically times of great upheaval and change. One of those cycles always is about distrust of the elites and frustration. Together, it promises to be a complete reordering of society. And when we look back, we are going to have the prism of COVID-19 to understand part of the problem.

COVID-19 is not just pulling technology forward faster. It may also be pulling forward the societal transformation George expects. There is a lot to think about and there is certainly fodder for future letters.

As I said above, we still have two more days of presentations, and it’s not too late to jump in. You can do it now and still get almost the same experience, since your pass includes video of all the sessions. Register here. And of course, you can see the past presentations and transcripts and slide decks at the same SIC website.

I have already made my pitch in prior letters, so I’m going to leave it at that. You really do want to be there, watching the sessions at your leisure or reading the transcripts.

Puerto Rico and the World

It is not often that I can say this is my first rodeo. I have been on TV many times, often sitting alone in a studio looking at a camera. But doing a virtual conference was more than a little different. While we had a few hiccups, they were minor and some were funny. Let’s just say when you’re presenting from your home, stuff happens in the background.

And if someone who is on screen loses their connection, you can have dead space. That’s the worst thing in the world. As I was interviewing Woody Brock on Wednesday, he suddenly disappeared from my screen. To me, it looked like he was gone and we had dead space.

I floated in indecision for about 10 seconds, waiting for Ed or someone to jump in. I could see the questions people were asking Woody, so I just started answering them. Then I made some comments about what we had seen before. Then I started making up new questions to answer so we wouldn’t have that dreaded dead space. I was looking straight into the camera and I was passionate. Frankly, those were some of my best moments.

After about 10 minutes, with nothing coming in on my phone and still nobody showing on my screen, I reached over to my iPad and noticed the next panel had already started. I was simply talking to myself. It turned out that we have a limited number of dedicated lines and when it was time to switch over to the panel they simply took my line and kept Woody, since he was part of that panel. No one bothered to tell me.

Now I have solemn promises that someone will tell me if that ever happens again. It actually has me laughing and in a good mood to start the third day of SIC. We have a China panel, Neil Howe, Ian Bremmer, and so much more. It will be a good, good day. Have a great week and stay safe out there.

Your trying to drink it all in analyst,

John Mauldin
Co-Founder, Mauldin Economics

Xi Jinping and Vladimir Putin are the big losers from this pandemic

The relationship of unequals has seen both Beijing and Moscow wrongfooted by the crisis

Philip Stephens

web_Autocrats and pandemic © Ingram Pinn/Financial Times

Autocrats are not immune. Coronavirus is a globalist — what a former British prime minister called “a citizen of nowhere”. Blind to national frontiers, it is equally heedless of the nature of political systems. Democracy is no protection. Nor equally is tyranny.

A fashionable narrative says the pandemic marks another turn of the ratchet towards authoritarianism. Despots are seizing on the global emergency to harden repression at home and advance their interests abroad. Technology is being harnessed to surveillance.

The leaders of the world’s liberal democracies are left to confront societal and economic fractures inflicted by Covid-19. Take China, the story goes. With the west distracted, President Xi Jinping has grabbed an opportunity to tighten Beijing’s grip on disputed islands in the South China Sea, to arrest pro-democracy leaders in Hong Kong and to intimidate Taiwan.

Further afield, China has been building soft power by providing aid to nations struggling to get a grip on coronavirus. At the other end of the “strongman” spectrum, Hungary’s prime minister, Viktor Orban, has assumed emergency powers to sideline parliament. Autocratic-minded leaders elsewhere — Recep Tayyip Erdogan in Turkey, Narendra Modi in India — ride roughshod over civil rights.

The mistake is to misread such power-grabs as evidence that the pandemic naturally entrenches illiberal regimes. In most cases, it is easier to make the opposite case. Mr Xi has recovered his balance since the virus first swept like a fire through the Chinese city of Wuhan.

More striking than his recovery, however, was the fragility exposed by angry public protests over the authorities’ initial handling of the outbreak. It was more than two months before the Chinese president was confident enough to visit the epicentre of the outbreak. The backlash coincided with months of pro-democracy demonstrations in Hong Kong and a sweeping election victory for pro-independence politicians in Taiwan.

Mr Xi is often styled the most powerful Chinese leader since chairman Mao. Instead, the early response to the pandemic spoke to the brittleness of his power.

The fate of many Chinese emperors through the centuries shows their authority to have been absolute until the moment of their fall. Beyond Asia, coronavirus has also crystallised a shift that has left Beijing almost friendless in the west.

There is no need to swallow the myriad conspiracy theories promoted by US President Donald Trump’s supporters to consider that China’s first response to the virus was concealment. Its subsequent threatening diplomacy, aimed at absolving the regime of all responsibility, serves only to reinforce talk of a cover-up. Australia, at the head of calls for an international inquiry, accuses China of “economic coercion”.

The suspicions run with the grain. Predatory investment and trade policies and military operations in the South China Sea have transformed European attitudes. In the words of one senior EU diplomat, the starting point for European policy towards China was, until quite recently, an eagerness to engage. Now it begins with pushing back.

No more so than in Britain. David Cameron’s government lauded a new “golden era” in Sino-British relations. Now, Boris Johnson faces a backlash within his ruling Conservative party against China’s investment in communications and energy infrastructure.

Mr Xi’s ally Vladimir Putin is a still bigger loser.

The revanchist Russian president had marked out 2020 to solidify his own position and Russia’s great power status. A plan to extend his presidency for another dozen years beyond 2024 would win ringing endorsement in a national plebiscite.

Moscow would host a summit of world leaders. Coronavirus has forced the cancellation of both events. A failed price war with Saudi Arabia has seen a collapse in the oil price to levels far below the $40 a barrel assumed by the Russian government in setting its annual budget.

The result, as the Kremlin admits, is an economic crisis worse than that of 2009. Russia’s military entanglements in Syria and Ukraine now look very expensive.

All the while, China’s supposedly equal alliance with Moscow looks more like strategic encirclement. The Belt and Road Initiative has underscored Beijing’s claim on central Asia. Mr Xi’s long-term ambition to make China the pre-eminent Eurasian power would supplant Russia in Europe.

How long, one wonders, will Mr Putin be content to be so obviously the junior partner in such a relationship of unequals? He cannot expect any help from his admiring imitator Mr Orban.

Hungary is a shrinking state, advancing under Mr Orban’s leadership towards inexorable demographic decline.

None of the above should be taken as reassurance that liberal democracies will emerge fit and well from the pandemic. The crisis has tested to the limits, and sometimes beyond, the west’s rhetorical commitments to mutual support and collaboration.

Germany’s go-it-alone response to the virus has scarcely promoted confidence in European solidarity. Mr Trump has abandoned all pretence of US leadership.

If the global balance of power between despots and democrats does change in the aftermath of the crisis, it will be not because the pandemic favours the former, but because the latter has messed things up.

Anatomy of a Killer

What the Coronavirus Does Inside the Body

SARS-CoV-2 does much more damage to the human body than initially assumed. It can attack any number of organs and even penetrates the brain. But why do some people experience worse symptoms than others?

By Philip Bethge

The heart and its blood vessels can experience significant damage.
The heart and its blood vessels can experience significant damage. / K H Fung/ SciencePhotoLibrary

The pathogen has already done a fair bit of damage. It has only been five days since the patient began exhibiting typical COVID-19 symptoms, but already, menacing shadows can be seen in the CT scans of the lungs.

"It's like frosted glass," is how Christian Strassburg, a professor of internal medicine at the Bonn University Hospital, describes the changes made visible by the scan. "The lung tissue is saturated with fluid." Secretions and dead cells are gumming up the walls of the pulmonary alveoli "like Jell-O," he says.

"It is extremely difficult for oxygen to permeate a layer like that to get from the lung into the bloodstream," the professor explains. It is a phenomenon he has been seeing frequently in recent weeks and it is caused by the novel coronavirus, SARS-CoV-2. The number of confirmed COVID-19 patients worldwide is now well over 4.2 million and the number of deaths is approaching 300,000. Meanwhile, doctors and biologists are doing all they can to gain a better understanding of the pathogen behind the pandemic.

SARS-CoV-2 behaves differently than almost any other virus that humans have faced before, and even now, several months into the pandemic, there is disagreement as to what percent of COVID-19 patients experience severe symptoms. Estimates tend to come in at around 5 percent of all infections. And in those cases, the virus unfolds unfathomable destructive power.

The epicenter of such infections is almost always the lungs. But as medical professionals now realize, the virus can also affect other organs and tissues - including the heart, the brain, the kidneys and the bowels. In the worst case, the body begins attacking itself. When the immune system spins out of control like that, doctors call it a "cytokine storm," and when patients die as a result, multiple organ failure tends to be the cause.

Over 100 vaccine candidates are currently being developed worldwide to combat SARS-CoV-2, but in the worst-case scenario, it could take years before a vaccine is available. Until it is, the virus will still be with us. Even if the pandemic does weaken a bit, experts believe a second wave is just around the corner.

Early talk of COVID-19 as being mostly a mild illness has been proven to be "dangerously false," Richard Horton, editor-in-chief of the medical journal The Lancet, has written. At the bedside, he says, it is "a story of terrible suffering, distress and utter bewilderment."

U.S. cardiologist Harlan Krumholz described the ferocity of COVID-19 in the magazine Science as "breathtaking and humbling." The disease, he continued, "can attack almost anything in the body with devastating consequences."

The best way to learn more about SARS-CoV-2 is to start small. Coronaviruses are a mere 160 nanometers in size. In order to multiply, the tiny pathogens are reliant on the cells belonging to a different organism.

The novel coronavirus likely comes from bat viruses, and it is thought that, even before it made the jump to humans, it developed the mechanism allowing it to bind with human cells. Some bat viruses are able to bind to a receptor called ACE2. This molecule can be found on the surface of human cells and helps regulate blood pressure. But it also functions as a kind of doorway to the interstices of the cell, and viruses that have the key can get inside.

Researchers believe that bats carry around 3,200 different coronaviruses. Chance, time and opportunity fueled the creations of the SARS-CoV-2 virus, which ultimately managed to jump to humans.

The Attack

But how exactly does the virus find its way into the human body? Internal medicine professor Strassburg is quite familiar with the process. At the Bonn University Hospital, he is currently in charge of between 10 and 20 COVID-19 patients. On one day recently, eight of them were intubated, having become so ill that they were forced to rely on ventilators. "Luckily, that is the minority," Strassburg says. "Most of those infected by the virus get away with only mild symptoms."

Early on, virologists thought that the novel coronavirus would spread only slowly, in part due to the similarities between SARS-CoV-2 and the SARS coronavirus that appeared in China in 2002. From November 2002 and July 2003, almost 800 people died of the disease, the full name of which is Severe Acute Respiratory Syndrome.

But then, the epidemic disappeared. It was a stroke of luck for humanity: That pathogen appears to have been more deadly than SARS-CoV-2, but it focused its attentions on the lungs. The virus multiplied deep within the body, making it less contagious. Furthermore, it was easy to identify and isolate those who had fallen ill from the virus.

Experts initially hoped that the same would hold true of SARS-CoV-2, but they were mistaken. The novel coronavirus doesn't just attack the lungs. Throat swabs from patients revealed early on that the pathogen first goes after the mucous membrane in the upper respiratory tract.

That is advantageous for the virus. The distance from one throat to another throat is much shorter than the distance from one person's lung to another.

"That means that those carrying the virus are highly contagious," says Strassburg. A huge number of the viruses are found in the nasal cavity and pharynx, "even in people who aren't yet experiencing symptoms," he adds, "which is why the pathogen was able to circle the globe so quickly."

There are three stages in the attack on the human body. Initially, the coronavirus binds with club-shaped protein complexes on the ACE2 receptors of human cells. That opens up the host cell and allows genetic material from the pathogen to enter. The virus then converts the cell into a virus factory. Huge numbers of viruses thus produced then leave the host cell and attack other cells.

The SARS-CoV-2 Virus focuses its attack on the lungs. The delicate alveoli are most at risk.
The SARS-CoV-2 Virus focuses its attack on the lungs. The delicate alveoli are most at risk.
George Washington University Hospital/ ddp images/Ferrari Press

The resulting viral load is enormous, particularly in the first week following infection. And initially, there are hardly any symptoms. Often, there is merely a dry cough, says Strassburg, with the body's temperature hardly rising at all.

"Even patients who are more severely affected generally have a temperature below 38 degrees Celsius (100.4 degrees Fahrenheit)." That is a significant difference to the flu: "For influenza, a sudden rise in temperature is typical, along with a distinctive feeling of being sick. But that's not the case here."

In this initial phase of the illness, much depends on the patient's immune system. Immune cells attack the invaders, but because the body isn't yet familiar with the virus, the weapons at their disposal are relatively basic.

A battle of attrition ensues, one that determines whether the patient will quickly recover or whether the disease will get the upper hand. Will the immune system stop the attack in the upper respiratory tract? Or will the pathogen be able to find its way into the lungs? The answers to those questions determine whether the illness becomes life threatening or not.

Researchers are still trying to figure out why the virus is able to reach the lungs of some patients but is stopped short in others. One of the factors appears to be the number of pathogens that attack the body at the beginning. More than anything, though, patients with underlying medical conditions seem to have the most to fear from SARS-CoV-2. According to estimates, about a quarter of the population in Central Europe has such an underlying condition.

Those at risk include people suffering from obesity, diabetes and high blood pressure. And smokers: "Their mucous membranes and lung ventilation are already impaired," says Strassburg. Tiny hair-like projections known as cilia, which normally help keep pathogens and mucous out of the lungs and respiratory tract, no longer function appropriately.

In such cases, there are hardly any hurdles for the virus on the way to the lungs. Gravity is sufficient for the tiny pathogens to reach their target. Once the virus advances into the smaller, branch-like bronchioles, it meets a particularly vulnerable layer of cells, the membranes of which are also covered with ACE2 receptors. Directly in the pulmonary alveoli, the tiny sacs where oxygen is transferred into the bloodstream, SARS-CoV-2 finds perfect conditions.

The Defensive Battle

To depict the precise damage the virus does in the lungs, thoracic surgeon Keith Mortman of George Washington University Hospital in Washington, D.C., turned to computer modelling. The 3-D imagery from the clinic shows the lungs of a man in his late 50s. Yellow-tinged deposits can be seen in many areas within the organ.

"The damage we are seeing is not isolated to any one part of the lung," says Mortman. Initially, he says, the patient experienced a fever and a cough, before then developing serious breathing difficulties. He was intubated and attached to a ventilator, but when that proved insufficient, he was hooked up to a so-called ECMO machine.

The machine infuses blood with oxygen outside of the body before pumping it back inside. The hope is that the procedure will give the lungs the time they need to recover.

Doctors now have a deeper understanding of how SARS-CoV-2 damages lung tissue. White blood cells discover the virus and attract other immune cells to the site, which attack the infected lung cells and kill them. They leave behind cell detritus, which clog up the alveoli. If the body isn't able to gain control over the reaction to the infection, acute lung failure looms.

But other organs can also be damaged as a result of the infection. The more SARS-CoV-2 patients are treated around the world, the clearer it has become just how comprehensive the attack staged by the virus is.

According to data from China, around 20 percent of patients requiring hospitalization suffer damage to the heart. It remains unclear whether the virus goes after heart muscle cells directly or if damage to the coronary blood vessels is to blame. The blood clotting function is also disrupted, leading to clumps that could result in heart attacks, lung embolisms and strokes.

The kidneys of some hospitalized patients also come under attack, as evidenced by blood or protein in urine samples. As a result, dialysis machines have had to join ventilators in ICUs devoted to treating COVID-19 patients.

Doctors have likewise observed brain inflammation and seizures in some patients. The virus apparently advances all the way into the brain stem, where important control centers are located, such as the one responsible for breathing. The virus likely gets to the brain via the mucous membrane inside the nose and the olfactory nerve. This could also be the reason that many patients temporarily lose their sense of smell.

SARS-CoV-2 can also attack the digestive tract, with patients complaining of bloody diarrhea, nausea and abdominal pain.

Doctors have also reported a possible link between COVID-19 and a rare blood vessel syndrome in children called Kawasaki Disease. In Britain, the disease has even killed a few children who became infected with SARS-CoV-2. The disease involves the inflammation of blood vessels throughout the body and can damage the heart.

Doctors now believe that SARS-CoV-2 attacks tissue and organs virtually everywhere in the body. And the disease can also apparently leave behind long-term damage. Chinese researchers have examined the blood of patients and found that even after the infection has passed, certain blood values remain abnormal for an extended period. Despite the virus no longer being present in the body, for example, their livers still don't exhibit normal functionality.

The virus can make it all the way into the brain, triggering seizures and inflammation.
The virus can make it all the way into the brain, triggering seizures and inflammation.

The lungs, too, likely suffer lasting damage in severe cases. "When inflammation does not subside with time, then it becomes essentially scarring in the lungs, creating long-term damage," says Mortman, the doctor from George Washington University Hospital.

It is still too early for a comprehensive understanding of the long-term consequences of COVID-19. But doctors are familiar with cytokine storms and acute lung failure from other severe infections. Some of the survivors of the first SARS epidemic, for example, experienced limited lung functionality for up to 15 years after the illness.

Life or Death?

But why do some people emerge virtually unscathed from this multifaceted attack while others do not? Thus far, researchers do not have an answer to this question. There are indications that the virus - similar to the pathogen that causes AIDS – is able to attack certain white blood cells, thus damaging precisely that line of defense that is supposed to stop the infection.

Are some patients more susceptible than others to that phenomenon for genetic reasons? The biotechnology company 23andMe intends to comb through the DNA of its 10 million customers in the search for sequences that could be predictive of their susceptibility to severe COVID-19.

Until the question is answered for sure, however, most patients can continue to rely on hope. After all, most people do not experience severe symptoms from the disease. "Among patients without underlying conditions, even severe cases have an 80 percent survival rate," estimates Christian Strassburg, the internal medicine specialist. Still, it is by no means time to let down our guard, he says, particularly now that restrictions on public life are increasingly being lifted. "The danger remains extremely high that a large number of patients will soon have to be treated in hospitals."

That will heap even more pressure on doctors and nurses. The condition of some patients, after all, can worsen dramatically within just a few days.

Should death be the ultimate result, it is often not the virus itself that causes it, but the immune system of the infected patient, which can disastrously overreact and attack the body.

In such instances, huge numbers of so-called cytokines are released. These chemical signaling molecules produced by the body trigger a cascade of biochemical reactions that affect the immune system. The development of a fever accelerates the metabolism and helps kill the virus. Blood vessel walls are made more permeable, allowing easier access for immune cells, such as phagocytes, to attack the virus. The heartrate speeds up.

"The reaction is actually quite sensible," says Strassburg. But in cases of severe infection, the immune system can overreact and trigger a cytokine storm.

"The result is a reaction that looks like a massive blood infection, but isn't one," says Strassburg. It can lead, however, to multiple organ failure. "If the immune system overreaction to the pathogen continues for too long or is too severe, it will kill the body."

Vast destruction is the result, as pathologists can attest. Johannes Friedmann is a professor at Lüdenscheid Hospital just south of Dortmund and has examined the bodies of several patients who succumbed to COVID-19. In the alveoli of these patients, he has found epithelial cells in the lung that have been "scaled off" in addition to protein "deposits" in the blood resulting from blood vessels that have become permeable. He has also discovered cells with multiple or enlarged nuclei, a phenomenon that is typical of viral illnesses.

The walls of the vast majority of the alveoli in the lungs are "widened to many times their normal thickness," Friemann says, adding that the lungs of many COVID-19 casualties are "insufficiently inflated." That impedes oxygen transfer.

Friemann's findings have been consistent with those of medical professionals in Hamburg, the United States, Switzerland and elsewhere: Most of those who died were sick before they came into contact with SARS-CoV-2. Friemann has found cases of liver cirrhosis, severe arterial sclerosis and extremely high blood pressure.

Did these patients die of SARS-CoV-2 or from other maladies? "You can't live with such a lung, so I would point to the virus as being the cause of death," says Friemann. "Many of these people would still be alive without the infection."

Indeed, a recent calculation by British epidemiologists casts significant doubt on claims that most COVID-19 victims would have died soon anyway. They found that female victims of the disease lose an average of 11 years of life. For men, the number was 13 years.

Averting nightmare on Main Street

Politicians in America and Europe scramble to help small firms

But their schemes are meeting with mixed success

RANDY HATHCOCK appeared to be out of options. The time had come for the owner of H&T Truss Mill, a construction company in Arkadelphia, Arkansas, to decide how many of his 16 employees to sack. The pandemic had led to orders drying up.

Then a lifeline appeared. The Paycheck Protection Programme (PPP), a scheme administered by America’s Small Business Administration, promised enough to cover two-and-a-half months of wages. It was “an answer to our prayers”, says Mr Hathcock. If he retains his staff for two years, the $161,200 loan turns into a grant.

Voters abhor bail-outs when they involve airlines and Wall Street, but seem altogether happier to provide succour to the likes of Mr Hathcock and Main Street. Politicians in America and Europe have all the more reason to help: small and medium-sized businesses (SMEs) have been clobbered by the pandemic, even more so than their larger peers.

Fully 60% of people who worked for businesses with fewer than ten employees in America at the start of the year have since been fired, according to one study. In Britain, seven in ten firms managed by their owners say they have lost over half their revenue.

Even as the share prices of listed titans have perked up—the S&P 500 index of large American stocks is up by 31% since its nadir on March 23rd—small firms are becoming ever more uncertain about their prospects. Most have cash buffers that stretch to weeks, not years. Roughly half of American entrepreneurs do not expect business to recover within two years, according to a survey by academics at Oxford, Princeton and Yale universities (see chart 1).

Schemes like the PPP should help. But rich-country bail-out schemes that were put together in a rush are experiencing sharp teething pains. As a result, lifelines that are generous on paper have been less so in practice. Aid has not reached the most distressed firms, and has been hogged by larger SMEs savvy enough to navigate the bail-out bureaucracy, if not by even bigger businesses.

America and Europe have adopted similar strategies to preserve the fabric of their economies. First help SMEs cut cash outgoings quickly, for example by delaying tax deadlines or even reversing past payments. Then find ways to lend or grant cash so that companies make it through the lockdown.

In Europe, the fastest way for businesses to cut costs has been to lay off workers temporarily. Britain and all members of the European Union now have temporary-unemployment schemes that allow firms to cut staff hours, sometimes to zero. Workers receive benefits in lieu of most of their salary. When lockdowns are lifted, they will go back to their old jobs. That limits the disruption to both their livelihoods and their employers’ prospects.

Such short-time working schemes, which originated in Germany and spread continent-wide after the global financial crisis, were once the purview of big firms, says Stefano Scarpetta of the OECD, a policy adviser to rich countries. Now they have been opened to SMEs. The take-up has been rapid. Nearly 11m French workers, or roughly half the salaried workforce, are temporarily unemployed. In Germany, more than 700,000 firms have applied.

America has no such federal scheme (though some states have smaller programmes in place). Hence the PPP. But the $349bn originally allocated to the programme ran out just 13 days after it was launched on April 3rd.

On April 27th a further $310bn approved by Congress became available; the demand crashed the Small Business Administration’s systems. “It’s been all hands on deck trying to get the loans approved,” says Darrin Williams, the boss of Southern Bancorp, a Mississippi-delta lender, which helped unlock the PPP riches for Mr Hathcock. Even once firms’ applications have been approved, delays in receiving the cash are common.

European countries have also looked to direct cash to small firms—and faced similar delays. In Britain, Germany and Italy, among others, the smallest firms (or self-employed workers) have received handouts reasonably promptly. Bigger SMEs are entitled to low-interest loans, typically covering three months of payroll. Doling these out has proved tricky.

To ensure the money did not end up going to businesses with no hope of paying it back, bankers were roped in to assess potential recipients. Governments agreed to shoulder 70-90% of potential loan losses, limiting the downside for banks.

Still, lending figures have underwhelmed. In Spain after five weeks only €13.4bn ($14.6bn) out of €100bn in state guarantees earmarked for SMEs have been tapped. Britain managed to allocate a meagre £4.1bn ($5.1bn) by April 28th. From early May it will join Germany in offering some loans that are completely underwritten by the state. Bankers can distribute cash without having to worry about the creditworthiness of the borrower.

There will still be suspicions that the money is flowing into the wrong pockets. A study by researchers at the University of Chicago finds that SMEs in the bits of America where activity had fallen most were only half as likely to receive PPP funds as those in the least-disrupted places. 

In Europe, finding ways to help SMEs is economically essential. Nearly half of workers toil in firms with fewer than 50 employees (see chart 2). But many of the most troubled companies are in Spain or Italy, which have been hit especially hard by covid-19, and where governments have little fiscal space to fund large-scale bail-outs. That imbalance has raised complaints that firms in the European Union do not really compete in a single market.

Given the rush, it is perhaps not much of a surprise that neither America’s nor Europe’s schemes have achieved all that policymakers hoped. Europe’s short-timework schemes will preserve employment—but at huge cost, and at the risk of keeping employees in jobs that ought to disappear.

America is now dishing out money more decisively, but unemployment there has soared, in no small part owing to Main Street’s woes.

Back in January, roughly half of all small firms had at least three employees on their books. By April, a similar share had none.

After the Market Panic, the Drip, Drip, Drip of Bad News

Stocks are slowly starting to price in the post-lockdown economic malaise. This could be a painful process for investors.

By Jon Sindreu

Back in March, the fastest bear market in history triggered widespread panic among investors.

This week’s wobbles are far less dramatic, but perhaps no less worrying.

The MSCI World index of developed countries’ stocks is on track to clock its worst weekly performance since the week through March 20, driven by mounting signs that lifting lockdowns won’t end the damage to the global economy.

European indexes are suffering more, in part because they lack big technology leaders like Amazon.comand Microsoftthat are reaping rewards from an increase in online shopping and working.

The “Fearless Girl” statue s shown with a surgical mask across from the New York Stock Exchange. / Photo: Spencer Platt/Getty Images .

Yet even in the U.S. market confidence is fraying, particularly for smaller stocks that aren’t in the headline S&P 500. The Russell 2000 index of medium-size companies is down 7% this week.

On top of the risk of a second wave of Covid-19 infections that are now starting to materialize in Asia, last year’s geopolitical issues are back. These include U.S.-China tensions and the European Union’s post-Brexit negotiations with the U.K.

This puts even more emphasis on the question that investors have been asking themselves for almost two months now: How could it be rational that the stock market is doing so well when the economy gets weaker every day?

When the S&P 500 bottomed out on March 23, it had fallen 34% from its February peak in less than five weeks, driven in part by overconfident investors being forced to rush out of earlier bets.

This prompted odd market moves, such as safe-haven assets like the U.S. dollar and Treasurys initially selling off. By early April, though, the market had rebounded so strongly that it technically entered a bull market—defined as a 20% gain in the S&P 500.

Such rapid moves are very unusual. With the exception of the 1987 Black Monday crash, past bear markets didn’t start with steep selloffs, but a steady trickle of losses. This makes sense: Sudden moves aren’t usually driven by well-grounded decision making.

The deterioration in reliable economic and corporate data that ends up justifying bear markets often comes in successive doses.

Right now, despite high headline valuations, sentiment indicators suggest that stock pickers, and individual investors, in particular, aren’t exuberant. Because assessing the magnitude of a post-lockdown recession is simply impossible—unlike in 2008, this crisis is caused by factors outside the economy itself—markets have mostly just priced in the direct impact of shutdowns.

Where longer-term outcomes are easier to gauge, such as in aviation, the initial bounceback didn’t last. The Dow Jones U.S. Airlines Index is down 65% this year because travel demand is sure to be depressed for years, regardless of how the broader economy fares. 

Investors have rightly overlooked the dismal economic data released in recent weeks, which contains little relevant information about the all-important post-lockdown period.  

Now, though, the news is starting to become meaningful, and much of it isn’t good: Manufacturing giants Caterpillar and Polaris saying that they won’t reopen some furloughed factories is more concerning than any gross domestic product number.

At the moment, it is difficult for investors to know whether history offers a useful template for the future.

But a drip, drip, drip of bad news isn’t a good prospect for stocks.

Amazon’s Battle for the Air Just Got Easier

Airlines are dumping old planes, giving the e-commerce giant the perfect opportunity to expand its cargo fleet at a time of constrained supply

By Jon Sindreu

Dominating the skies has been the key to winning many wars. The time is right for Amazon AMZN 4.27%▲ to build up its air force.

The e-commerce behemoth is among the select companies benefiting from the Covid-19 crisis. While pandemic-related expenses meant investors were somewhat disappointed with Thursday’s first-quarter results, its shares are still up 34% this year, on the back of rising sales as consumers get more used to working and shopping from home.

Another winner, surprisingly, is an airline: Atlas Air’sstock is up 19% this year, compared with a 54% decline for the broader Dow Jones U.S. Airlines index. One of Atlas’s strengths is that it operates and leases cargo jets. It turns out that owning winged freighters is a great business right now.

At the start of the year, commercial aviation was still flying high after an unprecedented decade of profitability, whereas airfreight yields were depressed by all the extra cargo-hold space—which automatically increased as carriers bought more planes to meet passenger demand—and a China-led slowdown in global trade.

Travel bans and lockdowns have turned the tables. Carriers such as Germany’s Lufthansaare removing seats from some parked planes to fit more goods—the only thing that now flies. Freight demand is down 16%, according to the International Air Transport Association, but supply has fallen by a full 25%.

This may matter for Amazon’s ambitions to become a major player in the logistics business, which are hitting snags.

The tech giant has spent years trying to shed its reliance on FedExand UPS,due to rising shipping costs and its need for tighter control over delivery speeds—a key selling point of its Prime service. Its Amazon Air fleet, which is set to grow to 70 aircraft by 2021, includes small Boeing 737s and midsize 767s. All of them are leased from and operated by others, including Atlas and its peer Air Transport Services Group.

But Amazon’s fleet still pales in comparison with those of competitors: FedEx has 396 planes—excluding small feeder aircraft—and UPS more than 260, many of them larger Boeing 777s.

Due to Covid-19, airlines are now dumping older planes. According to international advisory firm Ishka, lease rates are down: Renting a Boeing 747-8 freighter is 13% cheaper than in January. Amazon might even consider using some of its vast cash holdings—$27 billion at the end of March—to start owning its own fleet. The market value of five-year-old 777s and Airbus 330s is down almost 10% this year, Ishka said.

An Amazon Prime delivery plane taxis past a hangar before taking off at Chicago-Rockford International Airport. Photo: Scott P. Yates/Associated Press .

“We’ve sometimes been the only company that airlines can talk to, because nobody else will touch wide-body aircraft right now,” said James Moon, chief executive of plane-leasing company AerMoon. “If I were Amazon I’d be looking at a range of planes.”

To be sure, converting a passenger plane into a freighter can cost about $15 million a piece. Rising cargo yields help make the deal math work, though. And Amazon could also buy its logistics suppliers: As part of its plane-leasing deals, it has warrants that give it the option of taking majority stakes in Atlas and ATSG.

FedEx and UPS are on the back foot because the pandemic has hit their lucrative business of shipping goods to offices and stores. In the skies, as on the ground of America’s consumer economy, this is Amazon’s moment to seize.

American Carnage

Throughout Donald Trump's presidency, it has been obvious that the American political system and public sphere are broken. But only with the federal government's embarrassingly incompetent response to the COVID-19 pandemic has that breakdown translated into a significant loss of life.

J. Bradford DeLong

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BERKELEY – On April 23, 2020, the United States crossed the threshold of 50,000 confirmed COVID-19 deaths, making it the world’s worst-hit region. The US has half the population of continental Europe, but three-quarters as many daily deaths.

I am not an epidemiologist. But if I had to guess, I would say that after correcting for undercounting, the true number of US deaths that can be attributed to the coronavirus is closer to 75,000. Meanwhile, other countries have managed to put the daily number of new cases on a downward trajectory. If they keep it up, within a few months, they will reach the point where they can keep the virus more or less contained through vigilant testing, contact tracing, and isolation measures.

As of April 28, the daily COVID-19 death toll in Italy and Spain had fallen from above 700 to around 350. Germany, Canada, and Turkey appear to be turning the corner, with less than 200 deaths per day. Ireland’s daily toll looks unlikely to exceed 60 for now. Japan is at around 20 per day, Austria is at 12, and Denmark is at 10. Countries with single-digit daily death tolls include Norway and Greece (four), Australia (three), and New Zealand and South Korea. And no one is dying in Hong Kong.

As for the US, new confirmed cases per day have remained at around 30,000 for three weeks now, while COVID-19 tests administered per day have hovered at around 150,000 (with roughly 20% consistently coming back positive). The US thus appears to have stopped the epidemic’s acceleration within its borders: the average number of new cases stemming from each infected individual (R[t]) is no longer much greater than one.

But the ratio is not yet less than one. So, rather than fading away, the epidemic is chugging along at a steady pace.

In the absence of a vaccine, epidemiologists estimate that around 70% of Americans (230 million people) would need to be infected before the population has achieved herd immunity. If the virus turns out to have a 1% mortality rate, the eventual death toll would not be 50,000-75,000, but rather 2.3 million.

And that is assuming that the US health-care system holds up under the strain of new cases. If it doesn’t, the death rate will rise from 1%, but to what? 2%? 3%? 5%? If it were 3%, the final nationwide death toll would be nearly seven million.

By contrast, if the epidemic was on the decline, we could begin to plan for what follows society-wide lockdowns: mass testing for the virus and its antibodies to determine who may already be immune. Those who are deemed resistant to the virus could perhaps receive green wristbands or some kind of digital token.

They could be put to work doing essential jobs that involve human contact, while those who are still susceptible to infection would stay at home, wear face masks in public and keep six feet apart from others, wash their hands and wipe down surfaces frequently, and so on.

In this next stage, employment and the economy could begin to recover, and new cases would be kept down. The coronavirus will always represent a tragedy for the loved ones of the deceased, but in aggregate terms, it would become more of an annoyance – a risk to minimize until a vaccine arrives.

Unfortunately, America is nowhere near this more hopeful scenario. The epidemic in the US is not on the decline, and the Trump administration has given no indication that it will have the crisis under control within the foreseeable future. Instead, US President Donald Trump’s confidant and bagman, Rudy Giuliani, has dismissed the necessary testing-and-tracing protocol as “ridiculous.”

Worse, at a recent press conference, Trump himself suggested that the virus might by treated by injecting poisonous household chemicals, or by irradiating oneself with ultraviolet light (which happens to be how the behavior-altering parasites are killed in the 1967 Star Trek episode “Operation – Annihilate!”).

In response to these absurd utterances, mainstream media outlets such as the New York Times initially continued to abet Trump’s deadly rumor-mongering by implying that only “some experts” consider his quack musings to be dangerous. The Times later felt compelled to clarify that, in fact, no experts would argue otherwise.

Trump also reportedly greenlit a plan proposed by Georgia’s Republican governor to reopen that state’s economy. He has since backpedaled, arguing that it is “too soon” for a reopening, but the message to his political base has already sunk in.

Republican Governor Kristi Noem of South Dakota, a state that is quickly rising in the rankings of COVID-19 cases per million, claims that social distancing does not work, because “99% of infections” are happening not in workplaces but in people’s homes. Noem has denounced those in other states who would “give up their liberties for just a little bit of security.”

Like the US political system, the American public sphere is broken. Sadly, with Senate Republicans having already decided this past February that Trump’s high crimes and misdemeanors do not warrant removal from office, the US lost the last chance it had for sound, rational policymaking.

For now, the epidemic will grind on, claiming around 4,000 lives per day and sending the unemployment rate up to an unprecedented 20%. With a 1% mortality rate, 4,000 deaths each day means 400,000 new people per day encounter the virus and begin developing at least temporary resistance to it, which means that we will come 0.2% closer to herd immunity each day.

In the meantime, things could change, perhaps for the better, but more likely for the worse

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.