Global Bubbles are Deflating

Doug Nolan

“Bubble” is commonly understood to describe a divergence between overvalued market prices and underlying asset values. And while price anomalies are a typical consequence, they are generally not among the critical aspects of Bubbles. I’ll start with my basic definition: A Bubble is a self-reinforcing but inevitably unsustainable inflation.

Bubbles, at their core, are fueled by Credit – or “Credit inflation.” Asset inflation and speculative asset price Bubbles are a common upshot. At their core, Bubbles are mechanisms of wealth redistribution and destruction.

The more protracted the Bubble period, the greater the maladjustment to underlying financial and economic structures. And the longer the Bubble inflation, the greater the wealth disparities and underlying social and political strain. While Bubble-related inequalities reveal themselves more prominently later in the up-cycle, the scope of wealth destruction only becomes apparent as the Bubble finally succumbs.

As Dr. Richebacher always stressed, there’s no cure for Bubbles other than not allowing them to inflate. The catastrophic policy failure over the past 20 years has been the determination to aggressively inflate out of post-Bubble stagnation.

Bubbles can have profound geopolitical impacts as well. The inflation of Bubbles and corresponding booming economies promote the view of an expanding global economic “pie”.

The inflating Bubble phase is associated with cooperation, integration and solidarity. The backdrop shifts late in the Bubble phase, as inequities and maladjustment become more discernible. Bursting Bubbles mark a radical redrawing of the geopolitical landscape.

The insecurities and animosities associated with a shrinking economic pie see a rise of nationalism and “strongman” leadership. The backdrop drifts toward fragmentation, disintegration and conflict.

Regular CBB readers are familiar with this analytical framework. It is being reiterated this week because of the value I believe it provides in understanding this most extraordinary of environments. To disregard that the world was late in a historic Bubble period prior to COVID leaves analysts disadvantaged. Whether in the markets, real economies, politics or geopolitics, Bubble Dynamics these days play a profound role. This is becoming clearer by the week.

Let’s start with the markets. So, U.S. equities have diverged dramatically from underlying fundamentals. Most believe this is simply the marketplace peering over the valley to the reemergence of growth once the economy moves past the pandemic. More plausible analysis focuses on the securities price impact from unprecedented monetary inflation.

Federal Reserve Assets surged $213bn last week to a record $6.934 TN, pushing the 10-week gain to $2.693 TN. M2 “money supply” (with a week’s lag) expanded another $199bn, with a 10-week rise of $2.257 TN. Institutional Money Fund Assets (not included in M2) added $15bn, boosting its 10-week expansion to $961bn.

There is clearly ample monetary fuel to push equities higher in the short-term. Yet our analysis must also factor in the Market Structure that evolved over a most protracted Bubble period. In particular, powerful speculative Bubble Dynamics fundamentally altered market perceptions and mechanisms. Assorted trend-following strategies supplanted traditional investment analysis. Algorithmic trading changed market behavior.

The massive ETF complex fostered trend-following and performance chasing strategies. Negative fundamentals notwithstanding, “FOMO” (Fear of Missing Out) plays a profound role in today’s highly speculative market backdrop. Sustaining a vigorous speculative market dynamic was one cost of the Fed’s hasty and massive market bailout.

Derivatives are also playing a momentous role in market dynamics. During the boom, faith in central bank backstops promoted risk-taking. Why not revel in risk so long as derivative market “insurance” is so cheap and readily available? This whole notion of hedging market risk is a dangerous case of “fallacy of composition.”

Individual market participants can hedge market risk, offloading exposure to a counter-party in the event of a significant market decline. However, it is not possible for much of the market to offload risk. There will be no one within the marketplace with the wherewithal to absorb such losses in a crisis environment.

Much of the market protection these days is offered by sellers using dynamically-traded (“delta”) hedging strategies. If an institution purchases put options that strike below current market levels, the sellers of those puts will short futures or ETFs to hedge their rising exposures in the event of a declining market.

As was witnessed in March, a market fall can quickly spiral into illiquidity and self-reinforcing dislocation - as writers of market protection flood the marketplace with sell orders (to hedge put option exposures that rise parabolically as strike prices are reached and these options trade “in the money”).

This problem was identified with the popularity of “portfolio insurance” strategies leading up to the 1987 stock market crash. But the benefits of cheap market “insurance” (i.e. risk-taking, loosened financial conditions, higher asset prices, wealth effects and associated economic stimulus) ensured policymakers were willing to ignore this risk.

As I’ve highlighted over the years, much of the massive derivatives complex operates on the assumption of liquid and continuous markets, a specious premise made credible only with central bank liquidity backstops. Keeping this backstop viable during a period of expanding Bubbles has required increasingly egregious policy measures and market interventions.

I’ll posit that we’re witnessing the overarching risk associated with this scheme coming to fruition. Derivative-related hedging strategies became a commanding aspect of late-cycle speculative market dynamics. Derivatives then played prominently as markets collapsed into illiquidity in March, only to see the Fed resort to unprecedented monetary inflation ($2.7 TN and counting).

Egregious “money printing” operations provoked a sharp market reversal. This spurred a major unwind of hedges and bearish bets instrumental in fueling a dramatic market recovery.

And as the market rallied, targeting stocks with large short (or put) positions became a quite rewarding speculative endeavor. A major short squeeze unfolded, powering the market higher.

A surging market in the face of a faltering Bubble recalls the period August to October 2007.

Watching the big tech stocks going into melt-up recalls the final derivative-induced Q1 2000 speculative blow-off (at the precipice of a major down-cycle).

After fomenting risk-taking during the Bubble period, the marketplace for market “insurance” has turned hopelessly dysfunctional. It now ensures bouts of “risk off” liquidation quickly risk escalating into illiquidity and dislocation. And during “risk on,” the unwind of hedges will stoke upside dislocation and speculative excess.

Importantly, these dynamics negate traditional market adjustment and correction dynamics.

The resulting extreme divergences between securities prices and economic prospects raise the odds of a market crash – along with Trillions more Federal Reserve stimulus.

The U.S. was a “Bubble Economy” - having suffered from years of structural maladjustment.

There was ongoing proliferation of enterprises that would prove uneconomic in a post-Bubble backdrop of tighter financial conditions, negative wealth effects and altered spending and investing patterns.

A meaningful segment of the economy was driven by boom-time discretionary spending, creating latent vulnerabilities. Moreover, such an economic structure (over-indebted, savings deficient and replete with negative cashflow entities) becomes a Credit glutton. We’re beginning to see how Trillions of federal fiscal spending will be absorbed like a huge dry sponge.

May 15 – Bloomberg (Erik Wasson and Billy House): “The House passed a $3 trillion Democratic economic stimulus bill Friday that Republicans and President Donald Trump have already rejected and isn’t likely to trigger bipartisan negotiations any time soon. The measure, passed 208-199, would give cash-strapped states and local governments more than $1 trillion while providing most Americans with a new round of $1,200 checks. House Speaker Nancy Pelosi said it should be the basis of talks with the GOP-controlled Senate and White House, which have called for a ‘pause’ to allow earlier coronavirus recovery spending to work.”

On the other side of the globe, China faces the consequences of historic Bubble Economy maladjustment. New Chinese credit data this week corroborates Bubble analysis. Total Chinese Aggregate Financing jumped $435 billion for the month of April, a typically slow month for lending (compared to April 2019’s $240bn).

This pushed system Credit growth to an alarming $2.0 TN for just the first four months of 2020, 38% ahead of comparable 2019 growth (then a record). Bank Loans rose $240 billion in April, with one-year growth of $2.669 TN, or 13.1%. Aggregate Financing surged $4.156 TN, or 12.0%, over a year of historic Credit growth.

China’s M2 “money supply” expanded another $177 billion during April. M2 expanded $2.09 TN, or 15.1% annualized, over the past six months. M2 gained $2.95 TN, or 11.1%, over the past year. Over two years, M2 ballooned $5.018 TN, or 20%.

If the scope of monetary inflation isn’t alarming enough, the parabolic rise in Chinese Credit comes in the face of a major economic contraction. Enormous state-directed lending has supported the economy and markets, while holding Credit losses at bay. Beijing is gambling that stimulus will return China’s growth to its pre-COVID trajectory.

But with China’s consumers remaining cautious and global depression becoming a major problem for the nation’s colossal export sector (and banking system), odds of disappointing growth are high.

May 10 – Bloomberg: “The People’s Bank of China said it’ll resort to ‘more powerful’ policies to counter unprecedented economic challenges from the coronavirus pandemic… The central bank will ‘work to offset the virus impact with more powerful policies,’ paying more attention to economic growth and jobs while it balances multiple policy targets… It reiterated that prudent monetary policy will be more flexible and appropriate and it’ll keep liquidity at a reasonable level. The remarks reflect the PBOC’s growing concern over the unprecedented economic downturn and the risk of a second quarter of contraction, given sluggish domestic demand and the collapsing global economy.”

Relative Chinese stability masks mounting risk. It is difficult to see how this doesn’t manifest into a crisis of confidence in Chinese finance. Systemic risk is in a parabolic rise (rapid growth of Credit of deteriorating quality). I expect wary households to hold back on discretionary spending, while overcapacity will haunt the business sector for years to come. We can assume fraud is commonplace throughout China’s financial sector.

I suspect enormous speculative leverage has accumulated over this protracted cycle, buoyed by China’s managed currency regime and the perception of PBOC and “national team” market liquidity backstops. I believe the vulnerable renminbi much remains a global crisis Fault Line.

May 13 – Financial Times (Tom Mitchell and Don Weinland): “Donald Trump’s order to stop the US government’s main pension fund from investing in Chinese equities will only hurt US investors, Beijing has warned as trade tensions between the countries threatened to turn into a ‘financial fight’. Beijing officials have been worried since late last year that Mr Trump would follow up his two-year China trade battle with action in financial markets. The latest shot in that conflict was fired… by the US president.”

The so-called “financial fight” was inevitable - and appears to have commenced in earnest.

When do they invoke the threat of liquidating Treasury holdings?

The unfolding U.S. vs. China cold war has entered a dangerous phase. The U.S. is less than six months from elections, while China is facing acute Bubble fragility.

But as serious as the threat of this escalating “war” is to global finance, growth and the “world order” more generally, U.S. markets remain short-term focused. The assumption is President Trump will not risk pushing this confrontation too far ahead of November – all bark, no bite. Markets further assume vulnerabilities in China will restrain Beijing’s reaction to Trump’s animus.

Yet faltering Bubbles ensure great uncertainty. I’ve always believed a bursting Bubble would see China directing blame at the U.S. (along with Japan). Beijing has employed significant stimulus in repeated moves to hold crisis at bay. Bubbles only inflated larger. At this juncture, it’s doubtful such measures will work, while the Trump administration has really ratcheted up hostilities.

Fanning anti-U.S. public vitriol throughout China requires minimal effort. So, it’s not a completely inopportune juncture for Beijing to take some tough medicine and begin focusing on financial and economic restructuring. It would be painful, but communist party leadership can deflect blame upon the global pandemic and America.

The Trump administration’s tough approach with trade negotiations created animosity and a breakdown of trust. There are indications that Beijing’s “hawks” have gained influence. I would anticipate an increasing amount of intransigence out of Beijing.

The move to a bipolar world will accelerate. And don’t expect Beijing to sit back and watch the Trump administration work to shift global supply chains to the U.S. without adopting strong countermeasures.

If the direct consequences of the global pandemic weren’t enough, this crisis comes at such a critical juncture. The unstable geopolitical backdrop is turning increasingly problematic.

The Brazilian real dropped another 2.1% this week, as a troubling economic and financial backdrop is compounded by Brazil becoming a global COVID hot spot. EM currencies were again under pressure, with the Czech koruna declining 2.1%, the Hungarian forint 1.8%, the South African rand 1.3%, and the Mexican peso 1.3%. Asian currency weakness saw the Singapore dollar and South Korean won lose 1.0% and 0.9%. Declining 0.4%, China’s renminbi is nearing March lows versus the dollar.

Global bank stocks were under notable pressure again this week. U.S. banks were clobbered 9.8%, trading Thursday to the lows since April 2nd. European banks (STOXX 600) were smashed 6.8%, trading back to March lows. The Hang Seng China Financials Index dropped 2.6% this week, trading Friday at the low since April 2nd. Japan’s TOPIX Bank Index fell 2.7%, trading to a three-week low.

Global bank Credit default swap (CDS) prices moved meaningfully higher this week. Goldman Sachs (5yr) CDS jumped 15 bps to 116, a six-week high. JPMorgan CDS rose 14 bps to a six-week high 87. BofA CDS rose 14 bps (to 90), and Citigroup 9 bps (to 105). Other notable increases included Wells Fargo up 21 bps (to 101), Morgan Stanley 14 bps (104), Commerzbank 17 bps (to 97), UniCredit 14 bps (to 192) and Intesa Sanpaolo 14 bps (to 190). I would take the signal being provided by bank stocks (corroborated by safe haven bond yields) over that from Nasdaq.

May 15 – Bloomberg (Jesse Hamilton and Rich Miller): “The Federal Reserve issued a stark warning Friday that stock and other asset prices could suffer significant declines should the coronavirus pandemic deepen… The Fed made the assertion in its twice-yearly financial stability report, in which it flags risks to the U.S. banking system and broader economy. The document highlighted the central bank’s race to intervene in markets and temporarily dial back regulations on financial firms in response to the Covid-19 crisis. ‘Asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains reemerge,’ the Fed said…”

It would appear probabilities have increased for COVID-related risks remaining elevated for months to come. From the Bubble analysis perspective, this would seem to ensure a scenario where economic fallout proves more adverse than generally expected. Securities and asset prices are acutely vulnerable.

And I would argue the Fed-induced market rally over recent weeks has only exacerbated systemic fragilities. Global Bubbles are Deflating, with far-reaching consequences.

Building a Post-Pandemic World Will Not Be Easy

Both the COVID-19 crisis and the climate crisis highlight the limits of humanity’s power over nature. But while both remind us that the Anthropocene epoch may jeopardize our continued existence, and that benign everyday behavior can result in catastrophic outcomes, such similarities must not obscure crucial differences.

Jean Pisani-Ferry

pisaniferry109_Kay Nietfeldpicture alliance via Getty Images_climatechangecoronavirusprotestgermany

PARIS – Die-hard green militants regard it as obvious: the COVID-19 crisis only strengthens the urgent need for climate action. But die-hard industrialists are equally convinced: there should be no higher priority than to repair a ravaged economy, postponing stricter environmental regulations if necessary.

The battle has started. Its outcome will define the post-pandemic world.

Both the public-health crisis and the climate crisis highlight the limits of humanity’s power over nature. Both remind us that the Anthropocene epoch may end badly. And both teach us that benign everyday behavior can result in catastrophic outcomes.

Defying linear reasoning, the pandemic and climate change both force us to adapt to situations where a little more leeway results in a lot more damage. As the climate economist Gernot Wagner has noted, the pandemic in a sense replicates climate change at warp speed.

This may explain why public opinion overwhelmingly considers global warming as serious a threat as COVID-19 and wants governments to emphasize climate action in the recovery.

The pandemic has also provided a crash course on the collective implications of individual behavior. Each of us has been compelled to recognize that our responsibilities vis-à-vis the community are more profound and cannot be fulfilled merely by paying taxes and making a few donations. This “pay and forget” attitude is clearly inappropriate in a public-health crisis – and in a climate crisis.

Moreover, the last few weeks have highlighted the narrowness of the state-versus-markets perspective on the challenge we face. As the economists Samuel Bowles and Wendy Carlin have argued, the solution will not come from some combination of government decrees and market incentives. Communities whose members behave responsibly and gratefully toward one another are an indispensable part of the response.

Even though the fundamental contribution of social capital and norms is not recorded in national accounts, we acknowledge it every time we applaud health-care and other essential workers. And, again, this applies to climate change as well.

But while we must recognize these strong commonalities, we must also not overlook the obstacles to a transformation of our economic model created by the COVID-19 crisis. If anything, impediments to climate action will be even more formidable in the post-pandemic era than they were a few weeks ago.

For starters, climate action is inherently global, whereas the fight against a pandemic has a much more local character. To burn a ton of carbon has exactly the same effect on Earth’s temperature wherever it is burned – which is why fighting climate change requires global agreements.

The same does not apply to the pandemic. Prudent individual behavior benefits relatives more than neighbors, neighbors more than residents of the same city, and compatriots more than foreigners.

Climate protection and public-health protection thus tap fundamentally different impulses. One leads us to regard ourselves as responsible citizens of the world, the other takes us back to our local roots and the (often imaginary) shelter provided by national borders.

For example, some 84% of French citizens nowadays support keeping the country’s borders closed to foreigners. It is by no means certain that after the COVID-19 trauma, people will display more readiness to change their behavior for the benefit of mankind and future generations. This is a first source of tension.

The second, acute tension will emerge on the economic front. As the lockdown ends, policymakers will increasingly emphasize reviving economic growth and employment. The overriding priority of all governments will understandably be to minimize the socioeconomic scars left by the crisis by ensuring that every business that can restart will restart.

To the great dismay of those who would wish to rebuild rather than repair, this is an undisputable priority. In an emergency, credit guarantees and income support for furloughed workers can be provided only across the board, rather than conditioned on commitments regarding future behavior.

As planes are stranded and passengers have vanished, no government is willing to condition financial support for airlines on fundamental changes by them. Today is for firefighters, not architects.

The right moment to influence the course of economic development will come later, when investment resumes and the horizon lengthens. Companies will presumably be willing to listen to the voice of those who helped them survive.1

But a third tension will arise when people realize how much poorer the crisis has made them.

Many firms will have failed and many workers will have lost their jobs. More resources will need to be devoted to strengthening health systems and industries, at the expense of current consumption. And public debt – also known as future taxes (or, alternatively, future inflation) – will have increased by 20-30 percentage points of GDP.

Poorer citizens will likely be more reluctant to bear the cost of replacing obsolete “brown” capital embedded in heating systems, cars, and machines with greener but costly capital, because this would destroy even more of the old jobs and leave even less income available for short-term consumption. If anything, the division between those who care about the end of the world and those who care about the end of the month will widen.2

The green advocates are right: Once the immediate crisis repair is complete, the opportunity to build on heightened collective awareness to transform our economies and change our way of life should not be missed. But they should neither hide the magnitude of the obstacles on the way nor pretend that some new school of voodoo economics will circumvent trade-offs. It is only by recognizing the significance of the challenge that we will bolster our chances to succeed.

Jean Pisani-Ferry, a senior fellow at Brussels-based think tank Bruegel and a senior non-resident fellow at the Peterson Institute for International Economics, holds the Tommaso Padoa-Schioppa chair at the European University Institute.


How to detect business fraud

Carson Block, a short-seller, on uncovering false accounting

LIKE A LOT of people, Carson Block found his vocation by accident. In 2010 he was living in China and trying to set up a business. His father asked him to look at Orient Paper, a Chinese firm listed in New York.

He scoured the company’s filings and became doubtful of its claims. That scepticism grew when he visited a factory. He decided to publish a damning report. But first he would bet against the stock to cover his costs.

The report went viral. The share price collapsed. Lawsuits were soon flying.

It has been like that ever since. Mr Block is an activist short-seller.

His firm, Muddy Waters, borrows shares in a shifty-looking company and then sells them. That allows it to profit from a fall in their value.

There is something of the gumshoe about him—imagine Philip Marlowe, the private eye created by Raymond Chandler, but with coarser language. (Example: XYZ Corporation is a “predatory shit-bag”).

Instead of pounding the mean streets, Mr Block ploughs through reams of company documents.

He makes his findings freely available. He then shows up on CNBC’s “Squawk Box” to denounce the bad guys.

More appearances seem assured. The stock of covert embezzlement—what John Kenneth Galbraith, a quotable economist, called “the bezzle”—varies with the business cycle. It grows during booms.

Tell people that XYZ Corporation is a fraud, and they won’t listen. Short-sellers get short shrift. But the cycle always turns. The bezzle peaks just as boom turns to bust. For short-sellers, these are the good times.

Mr Block made his name angling for Chinese scams. His company’s name derives from a Chinese proverb: muddy waters make it easy to catch fish. China is to stock fraud what Silicon Valley is to technology, he says. But there is plenty of dodgy accounting, albeit of a less blatant kind, outside it. Muddy Waters has evolved into a short-seller with a global purview.

The art of the bezzle is to inflate profits, pump up the stock price and quietly sell your shareholdings to credulous outsiders. But money is not the only incentive. Vanity is also a factor.

Jeff Skilling, the boss of Enron, a book-cooking firm that went bust spectacularly in 2001, had an unshakable belief in his own acumen.

Executives of his kind tend to serve up the financial results that bolster their own delusions.

“Once you’ve been put on a pedestal, once you’re on the cover of Business Genius Monthly, it becomes hard to believe you are fallible,” says Mr Block.

Each stock fraud is fraudulent in its own way. But there are common elements. One is a breach between earnings as defined by Generally Accepted Accounting Principles (GAAP) and non-GAAP measures. Another is an increase in “days payable outstanding”, a yardstick of how long it takes a company to settle bills with suppliers.

Delay boosts cashflow, at least for a while. So does gathering more quickly payments you are owed. Firms with dressed-up earnings also tend to pile on debt because they lack strong underlying cashflow.

And there are grounds to suspect the worst of companies that engage in a lot of acquisitions.

Aligning the accounts of acquirer and acquired gives ample scope for fiddling.

But looking only at numbers is not enough. They need to be cross-checked with other information. Finding it is gumshoe work. There may be clues in the firm’s risk disclosures.

Lawyers are skilled at writing these in ways that put readers to sleep, says Mr Block. Stay awake, though, because they occasionally slip something important in between all the guff. Transcripts of conference calls with stock analysts can also be revealing. If the company keeps moving the goalposts, then be on alert.

Muddy Waters has built a reputation for diligent research. A pronouncement by Mr Block has the power to move prices. That worries regulators. Like Chandler’s detective, Mr Block seems to take as many beatings from cops as from bad guys.

Even admirers worry about possible errors and lapses. But he is refreshingly candid about his flaws. A sense of alienation from his “postcard-perfect” surroundings as a youth bred an urge to expose the shallow, the vapid and the fake. “When I discovered there were all these frauds in China, it was a form of therapy,” he says.

There are easier ways to earn a living. A few years after shorting Orient Paper, Mr Block totted up the numbers and found that he had lost $600. No matter.

He sees no shortage of firms with accounting that distorts reality.

“There are real excesses out there.”

The bezzle has only grown fatter.

Four Coronavirus Lessons That We Will (or Won’t) Learn

By: Alex Berezow

When a patient dies in a hospital, it’s not uncommon for doctors to convene what is known as a morbidity and mortality conference, the goal of which is to determine what went wrong and why.

In the months and years following a national crisis, we engage in a somewhat similar process.

Over time, official investigations are carried out, and political leaders, the media and the public initiate ad hoc debates meant to arrive at a general understanding of the primary cause of the crisis and what steps need to be taken to prevent something like it from ever happening again.

After 9/11, we learned that the American homeland was vulnerable to direct attack by actors from the Middle East.

After the Great Recession of 2008, we learned that mortgage-backed securities are not automatic moneymakers and that subprime mortgages are a potential disaster-in-waiting if real estate values don’t go up.

Similarly, the COVID-19 pandemic will offer several lessons.

Lesson #1: There is an optimal balance in response to a pandemic that is somewhere between the two extremes of “total lockdown” and “totally open society.” The most important question is: Were lockdowns necessary to stop the spread of the coronavirus?

From a scientific perspective, this is unanswerable because there were no consistent control (i.e., no lockdown) and experimental (i.e., total lockdown) groups. There was no alternative universe in which we didn’t implement lockdowns to compare to our own.

Largely for domestic political reasons, both sides of the debate will claim to have been correct.

Those believing the worst-case scenario COVID-19 models that predicted hundreds of thousands or millions of American deaths will say that lockdowns and extreme social distancing prevented a complete catastrophe.

Those who do not believe the worst-case scenario was inevitable without a lockdown will claim that the models were exaggerated or, at the very least, that the ends did not justify the means.

Status of Coronavirus Lockdowns

From a scientific approach, the only conceivable way to resolve this dispute will be to rely on yet more models – the very same models whose validity is under question.

Beyond the sophisticated speculation provided by models, science tells us that we can never have a certain answer to the most important question raised by the pandemic.

From a geopolitical standpoint, this poses a substantial problem. Governments will want to know how to act the next time a pandemic occurs, and the public could get angry if it perceives that no lessons were learned.

Lesson #2: Putting the recommendations of scientists, public health officials and academics into practice often clashes with other geopolitical realities. Whenever there is a crisis, there is a strong tendency to turn toward experts or technocrats for solutions.

The trouble with experts is that they often struggle to place their important work into a bigger picture. In this case, those favoring harsh lockdowns claimed to be “following the science.”

Indeed, one scientist from Imperial College said that the U.K. would need to maintain “a significant level of social distancing, probably indefinitely until we have a vaccine available.”

While such a statement may be scientifically sound, it is not feasible since it fails to incorporate the realities of everyday life.

Another problem is that “the science” does not provide unambiguous guidance. For instance, there is good reason to believe that there may never be a particularly effective vaccine against COVID-19.

The reason is fundamentally biological: Coronaviruses might not induce lifelong immunity in humans.

Additionally, there are other factors than science involved in a government’s response to a pandemic, such as legal, ethical and economic considerations. Allowing any one factor to dominate policymaking can produce an undesirable outcome.

The COVID-19 pandemic morphed into a major geopolitical event and, therefore, the tools of geopolitical analysis became ever more relevant. That is likely why Winston Churchill famously said, “Scientists should be on tap, but not on top.”

Rightly or wrongly, in this case, many in the public will perceive that the science factor was prioritized, to such an extent that economic health was subordinated to public health.

Therefore, the scientific community, like politicians, will be held accountable for their actions and recommendations. Almost inevitably, this will erode public faith in the medical establishment.

Lesson #3: The general public must face the price of life-or-death trade-offs. When government officials evaluate the pros and cons of their proposed actions, they often do so through the lens of opportunity cost.

Resources are not unlimited, and each action comes at a cost. Often, the best way to measure these costs is to first convert whatever is being measured – time, productivity, opportunities – into dollars and cents. This can even be done with human health and life itself.

Many people say that one cannot put a price tag on human life. This is true from a moral or philosophical perspective. In the eyes of God, all of us are equal and intrinsically invaluable. (Even atheists are unlikely to question that conclusion, though they obviously don’t agree that God is the source of our intrinsic value.)

In the eyes of an economist, however, we are neither equal nor invaluable.

Coronavirus Opinion Polls in Selected Countries

How does one begin to put a price tag on a human life? A simple thought experiment demonstrates how easy it is. Pretend that you’re the mayor of a small town. There’s a dangerous intersection that results in one car crash fatality every year.

A company approaches you with a solution: By redesigning and rebuilding the intersection, it can guarantee no more car crashes. The only problem is that the infrastructure project costs $100 million.

Considering that your small town’s budget is far less than that, the city couldn’t afford it without a massive tax increase. You propose that tax increase to your citizens, who reject it overwhelmingly.

The citizens have spoken: The lives of those who will be killed in accidents at the intersection are not worth $100 million.

Even though we don’t like to admit it, we make personal decisions like this all the time. A family would likely spend itself into bankruptcy to save the life of a child but not the life of their 95-year-old grandfather. Why?

Because we know that a child potentially has a long, bright and prosperous future ahead of her, but grandpa does not. Life insurance companies make calculations like this on a daily basis. (A website run by the non-profit organization Life Happens features a human life value calculator that determines how much your life is worth to your family, strictly in financial terms.)

For what it’s worth, various U.S. government agencies value a life between $9 million and $10 million.

The key is to remember that we are talking about economic value rather than moral value. There is always space for a moral consideration in geopolitics, but it too must be considered along with other factors. This must be kept in mind in regard to the coming debate over whether the COVID-19 lockdown was worth it.

One way that society is wrestling with that question is by comparing the costs of the lockdown (e.g., the decrease in gross domestic product) to its benefits (e.g., the economic value of the lives saved).

Simultaneously, we must also consider that the lockdown itself may be directly or indirectly responsible for excess deaths due to suicide or cardiovascular events, cancer and other causes, some of which may be due to fear of going to the hospital. While governments have regularly confronted these dilemmas when pondering military action, doing so from a public health perspective was in many ways uncharted territory.

Lesson #4: The global supply chain requires redundancies because interdependence is not enough. Of all the lessons on offer from COVID-19, this one is the most obvious. Over the past few months, we learned that a domino effect, beginning with the halting of China’s economy, can trigger logistical nightmares that can collapse supply chains and ruin economies.

Nations also received a wake-up call on just how much they depend on foreign countries for products vitally important to their populations’ well-being. Even products that are a national security interest, such as pharmaceuticals and medical devices, are at least partially manufactured abroad.

Finally, we learned that our allies will hoard resources in a crisis. Italy, in particular, learned that lesson the hard way about the EU.

There will be tremendous pressure on governments to create national stockpiles of vital materials, create redundancies in their supply chains and be more self-sufficient wherever possible. That could require onshoring some manufacturing capabilities that are deemed vital to the national interest.

If that proves too impractical or economically inefficient, another possibility would be to create global supply chain alliances between trusted countries. Of course, any such alliance must be constructed in a way that precludes the fiasco that briefly played out in the EU.

Thus, as countries and multinational corporations prioritize self-reliance after COVID-19, they will look to increase their production capacity for crucial supplies and medicine and will be more selective in building trade affiliations with the countries they trust the most. In other words, supply chains increasingly will be based on security and resilience.

Bolsonaro Fights for Survival, Turning to Empowered Military Elders

A flailing leader has given Brazil’s generals an opening to insert themselves onto the front lines of politics.

By Ernesto Londoño, Letícia Casado and Manuela Andreoni

President Jair Bolsonaro at the Planalto Palace in the capital. His presidency has been flailing for weeks as the virus has swept across Brazil.Credit...Ueslei Marcelino/Reuters

RIO DE JANEIRO — Jair Bolsonaro ascended to Brazil’s presidency with a sweeping set of promises, like cutting out the rot of corruption, firing up the economy and doing away with the country’s notorious pork-barrel politics.
What a difference 16 months make.

Battered by a torrent of investigations into him and his family, an economy in free-fall and criticism of his cavalier handling of one of the world’s fastest growing coronavirus epidemics, Mr. Bolsonaro is fighting for political survival.
Now, with calls for his impeachment intensifying, he is being shored up by a narrowing band of leaders who are gaining outsize power as his troubles multiply.
Mr. Bolsonaro has become increasingly reliant on a cadre of military elders, entrusting them with the most power they have had since the military dictatorship ended in the 1980s.
And despite his early vows to clean up politics, he has become highly dependent on career politicians, including several marred by corruption allegations, who are eager to extract favors from a floundering leader. That could give them control over billions of dollars in public spending as the country enters a severe recession.
The pandemic has left Mr. Bolsonaro especially vulnerable. Brazil is quickly becoming a global hot spot, and this week surpassed the number of deaths reported by China. Yet the president has continued to resist calls for stricter quarantines and displayed little empathy for the more than 6,300 Brazilians who have died, setting off widespread criticism that he has been reckless and callous.
“So what? Sorry, but what do you want me to do?” he said this week of the mounting death toll, before making a joke about his middle name. “My name is Messiah, but I can’t work miracles.”
His troubles extend well beyond the virus. Mr. Bolsonaro’s presidency had already been flailing for weeks — and then he set off an unexpected political crisis last week.
He fired the federal police chief, and the reaction was fierce. Justice Minister Sergio Moro, the most popular member of the cabinet, resigned in protest. In an extraordinary parting shot, Mr. Moro accused the president of seeking to obstruct justice by putting a subservient official at the helm of an agency investigating several of his allies, including one of Mr. Bolsonaro’s sons.
That led the Supreme Court to open an investigation into Mr. Bolsonaro’s actions and block his appointment of a new federal police chief. Mr. Bolsonaro reacted defiantly, saying he had not abandoned the “dream” of having a family friend at the helm of the police force, raising the prospect of an institutional Clash.

Demands for the president’s resignation and impeachment are gaining traction in Congress, where a leaderless and disparate opposition lacks a clear plan to bring him down. Even so, lawmakers and the Supreme Court are leaving Mr. Bolsonaro with little room to maneuver.

“He’s delusional in thinking he’s unbound by the Constitution,” said Randolfe Rodrigues, a prominent opposition senator. “I hope he starts discovering that he’s subject to the rule of law.”

The president’s office declined interviews this week. But as Mr. Bolsonaro has become radioactive for much of the political establishment in the capital, Brasília, diplomats and political scientists have begun to game out how much upheaval the generals who serve in senior positions will tolerate.

The Bolsonaro era has given Brazil’s generals an opening to insert themselves back into the front lines of politics, a role they last played during the country’s 21-year military dictatorship, which ended in 1985.

Active and former military officials currently hold nine of the 22 cabinet positions, including three that operate out of the presidential palace. Those perches have given Brazil’s military broad authority over issues like fiscal policy, development in the Amazon and the response to the pandemic.

“I think this is the best government team we’ve had in the last 30 years, by far,” retired Gen. Paulo Chagas, who has run for office but is not in the government, said in an interview. “However, the vulnerability of the government is its own leader, who is perpetually giving ammunition to his adversaries.”

As chaos engulfs Mr. Bolsonaro’s presidency, speculation that his vice president, retired Gen. Hamilton Mourão, is readying to take over has been rife in memes and back door conversations. Mr. Mourão at times has appeared to relish the pandemonium.

Shortly after Mr. Bolsonaro fired his health minister on April 17 — after complaining about the minister’s strong endorsement of social distancing measures — the vice president smirked as he told journalists, “Everything is under control: We just don’t know whose.”

Amy Erica Smith, a political scientist at Iowa State University who specializes in Brazil, said the generals who have tied their lot to Mr. Bolsonaro must now be worried about their personal reputations and the military’s image as a guarantor of order.

“The crisis we’re entering raises the threat that the military might decide that civilian leadership isn’t effective and decide to take over,” she said. “It seems clear that the military continues to have this idea of itself as a tutelary force in politics.”

Political analysts say a conventional military takeover is unthinkable in today’s Brazil, given the strength of Congress, the courts, civil society and the press. But Ms. Smith said the generals could turn an embattled Mr. Bolsonaro into a figurehead leader or tacitly support efforts to impeach him, which would leave Mr. Mourão in control.

The sudden prospect of a new presidential ouster four years after the tumultuous impeachment of President Dilma Rousseff has scrambled politics in Brasília, where lawmakers have submitted at least 29 impeachment petitions against Mr. Bolsonaro.

Mr. Bolsonaro is the rare president without a political party, having broken ranks with the one that brought him to power last November. Despite having spent nearly three decades in Congress, he has not made an effort to build a governing coalition in Brazil’s multiparty legislature.

That has led a cluster of center and center-right parties informally known as the centrão to demand lucrative and influential government posts in exchange for shielding him from impeachment.

Roberto Jefferson, a former member of Congress from the centrão who admitted to playing a leading role in a kickbacks scheme in 2005, said Mr. Bolsonaro’s political survival now depends on cutting deals with power brokers in the centrão, several of whom have also been tainted by corruption allegations.

“Every party has its sinners,” Mr. Jefferson said in an interview. “Who’s a saint in that realm?”

The jobs that centrão leaders are angling for would give their parties discretion over billions of dollars.

The centrão’s emerging alliance with Mr. Bolsonaro would also give its members significant sway over an enormous public infrastructure spending plan announced by a military member of the government in an effort to generate jobs. The economy is expected to contract by between 5 percent and 9 percent this year.

Political analysts see those plans as anathema to Mr. Bolsonaro’s austerity goals and his pledge to break with the kind of back-room horse-trading that spawned staggering levels of corruption in the past.

Mr. Moro, a former federal judge who became the most visible figure of a national crackdown on corruption that began in 2014, says he no longer believes the government is committed to rooting out graft.

“I agreed to join the Bolsonaro government to strengthen the fight against corruption,” he said in a text message to The New York Times. “I gave up when I concluded I would not have the ability to make headway in that area.”

The president’s handling of the coronavirus crisis and Mr. Moro’s departure has disappointed some of his wealthier and better-educated supporters. But a recent public opinion poll conducted by Datafolha, a leading Brazilian research company, showed 33 percent of respondents continued to support him, suggesting his overall approval rate has remained relatively steady.

Throughout his campaign and presidency, Mr. Bolsonaro has benefited from well-organized and nimble propaganda and disinformation campaigns that have bypassed the mainstream press by relying on social media platforms and text messaging apps.

“The political right in Brazil has the most sophisticated system to rely on supporters to spread misinformation to the public,” said Marco Ruediger, a researcher at Fundação Getulio Vargas University who studies political disinformation online.

But that strategic advantage has become a liability as the federal police and a congressional committee investigate the structure and workings of shadowy online communities that support the president. Among those under investigation are two of the president’s sons, Eduardo and Carlos Bolsonaro.

The president’s erratic handling of the coronavirus, which he has called a “measly cold,” has tested the resilience of his online supporters, Mr. Ruediger said.

But one base that appears to be steadfast is Evangelical Christians, who supported Mr. Bolsonaro staunchly during the campaign.

Mr. Bolsonaro in recent days has nodded to the issues that animate that constituency by reminding them of his opposition to abortion and by falsely claiming that the World Health Organization promotes homosexuality and encourages toddlers to masturbate.

“All the major leaders of Evangelical churches in Brazil, all of them continue supporting him in the same way,” Silas Malafaia, the leader of one of the country’s megachurches, said in an interview. “Bolsonaro will only lose our support if he ends up being personally embroiled in corruption.”