The Blacker Swan

By John Mauldin

“A similar effect is taking place in economic life. I spoke about globalization in Chapter 3; it is here, but it is not all for the good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability.

In other words, it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So, the financial ecology is swelling into gigantic, incestuous, bureaucratic banks (often Gaussianized [bell curve] in their risk measurement)—when one falls, they all fall.

The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another.

True, we now have fewer failures, but when they occur... I shiver at the thought. I rephrase here: we will have fewer but more severe crises. The rarer the event, the less we know about its odds. It means that we know less and less about the possibility of a crisis.”

—Nicholas Nassim Taleb, The Black Swan, presciently written 2006ish

Happy Fourth of July, when we in the United States celebrate independence from England.
This year ironically proves independence has limits. It didn’t protect us from a virus that originated elsewhere.

In a further irony, the same virus has compelled every government on the planet to, in various ways, declare independence from allies and trading partners.
Similarly, consumers and businesses have also declared a kind of “independence” from each other because close contact is suddenly risky.

We knew pandemics happen and can have big consequences. No one knew in 2019 one was coming in 2020. It was what my friend Nassim Taleb called a “Black Swan” in his 2007 book with that title. (That book, along with Antifragile, are his two best. You only need to read the first half of Antifragile to get the point, making it a short but very important read.)

I read The Black Swan shortly after it came out. The financial crisis and Great Recession were brewing, and I was already beginning to predict a recession.
We sensed something big was coming but didn’t know the details.

Rereading my September 2007 review of Taleb’s book is an eerie glimpse into the past. It’s also a good reminder that more big events lie ahead.

This week I’m giving my staff (and myself) some much-needed time off. This letter will just be some excerpts from that 2007 Black Swan review. You can read the whole letter in our archives.
It is excellent food for thought as we try to discern what lies ahead.

Think of the future as The Blacker Swan.

I’ll be back at the end with some closing comments.

The Black Swan

Note: The following was originally published September 14, 2007. Comments in [brackets] were added this week.

Last week, seemingly so long ago and so far away, I was wandering through St. James Park in London. It was a perfect afternoon in a perfect park, with willow trees reflecting on the pond and the Eye of London in the distant background.
And then there it was. It swam into my vision. A Black Swan. A rather inelegant bird when compared to its august white brethren, but recognizable as a swan nonetheless. Seeing a Black Swan seemed to cap off the day, as I had just finished reading a book whose title was inspired by the dark fowl.

Just because all the data says that there are only white swans does not prove that Black Swans do not exist. All we can confidently assert is that no one has seen one—yet.
To prove that a Black Swan does not exist would take an infinite number of observations, and yet only one observation is needed to prove they exist.
And thus philosophers debated the Black Swan issue and showed that by induction you could reason they did not exist.

And that was the case until explorers did indeed find a Black Swan in Australia.
The term "Black Swan" has come to mean an event or discovery whose existence was not predictable from the available data, and whose effect on society or the markets yields surprising and unexpected results.


Taleb attacks (the correct word) the social sciences (in particular economics) which uses standard Gaussian bell curves to "prove" their points. Everything has to fit within the curve.
There is little room in the neat world of the bell curve for events that are far from the center. He creates a world he calls Mediocristan which is the world of white swans, bell curves, and predictability.
He contrasts this with Extremistan which is the world of chaos, fractal geometry, power laws, Black Swans, and where the unpredictable happens.

There are parts of our lives which inhabit Mediocristan and parts which dwell in Extremistan. Not knowing the difference can be problematic, if not fatal. And it is difficult to know where one country starts and the other ends.
If you are in Mediocristan, then you can use your bell curve assumptions without fear.
But if you wander into the murky border areas, you are no longer safe in your assumptions. And yet, the longer and deeper you go into Extremistan without a problem, thinking you are safe in Mediocristan, the larger the disruption is likely to be.

"To summarize, in this (personal) essay, I stick my neck out and make a claim, against many of our habits of thought, that our world is dominated by the extreme, the unknown, and the very improbable (improbable according our current knowledge)—and all the while we spend our time engaged in small talk, focusing on the known, and the repeated.
This implies the need to use the extreme event as a starting point and not treat it as an exception to be pushed under the rug. I also make the bolder (and more annoying) claim that in spite of our progress and the growth, the future will be increasingly less predictable, while both human nature and social ‘science’ seem to conspire to hide the idea from us. (Prologue xxvii)

"When I ask people to name three recently implemented technologies that most impact our world today, they usually propose the computer, the Internet, and the laser. All three were unplanned, unpredicted, and unappreciated upon their discovery, and remained unappreciated well after their initial use.
They were consequential. They were Black Swans. Of course, we have this retrospective illusion of their partaking in some master plan. You can create your own lists with similar results, whether you use political events, wars, or intellectual epidemics.

"You would expect our record of prediction to be horrible: the world is far, far more complicated than we think, which is not a problem, except when most of us don't know it.
We tend to ‘tunnel’ while looking into the future, making it business as usual, Black Swan-free, when in fact there is nothing usual about the future. It is not a Platonic category!" (p. 135)


I think there is a physical reason Taleb is right in that we will see more unpredictability in the future than we saw only a few hundred years ago, or even last century, as wild as that century was.
I wrote a few years ago of Ray Kurzweil's book, The Singularity is Near. (Also very highly recommended.)
Ray wrote (in 2000) that the pace of change as encompassed by technology is accelerating.

"The first technological steps—sharp edges, fire, the wheel—took tens of thousands of years. For people living in this era, there was little noticeable technological change in even a thousand years. By 1000 A.D., progress was much faster and a paradigm shift required only a century or two.
In the nineteenth century, we saw more technological change than in the nine centuries preceding it. Then in the first twenty years of the twentieth century, we saw more advancement than in all of the nineteenth century. Now, paradigm shifts occur in only a few years’ time. The World Wide Web did not exist in anything like its present form just a few years ago; it didn't exist at all a decade ago.

"The paradigm shift rate (i.e., the overall rate of technical progress) is currently doubling (approximately) every decade; that is, paradigm shift times are halving every decade (and the rate of acceleration is itself growing exponentially).
So, the technological progress in the twenty-first century will be equivalent to what would require (in the linear view) on the order of 200 centuries. In contrast, the twentieth century saw only about 25 years of progress (again at today's rate of progress) since we have been speeding up to current rates.
So the twenty-first century will see almost a thousand times greater technological change than its predecessor."

Ray is saying most people project future growth in technology at today's rate of change. But the rate of change is accelerating, so that more and more change is packed into smaller and smaller amounts of time.
While the vast majority of the thousand times greater technological change Ray is talking about happens in the last part of this century, some of it happens in the next twenty years. How much change are we talking about?
Well, from when he first penned those words, the pace of change has picked up.
At current levels, that means the 20th century was equivalent to about 20 years of progress at today's rate of change. That pace will continue to increase the amount of innovation we pack into just a few years. [That is even more true today than it was 20 years ago when he wrote it or 13 years ago when I quoted it.]

When "Because" Isn't Enough

Having seven kids, I have answered more than a few hundred questions with the brilliant "because such and such." The younger kids will sometimes even accept such answers, when a true skepticism would be more in order.

I admit to sometimes giving in to such a rationale today. I, along with my fellow humans, like causality. B happens because of A.
And it is tempting to ascribe a simple “because” to today's Black Swan in the credit markets. It is all the fault of the subprime mortgage lenders. If they had not made bad loans we would not have the problem.

I would suggest the problem is more systemic than that. Assume we had the rational laws in place five years ago that we will enact next year preventing bad mortgage underwriting. Then there would have been excess and a bubble in some other part of the markets at some other point in time. As humans, that is what we do. We push the limits of greed, especially when accompanied by the illusion of stability, until the bubble bursts.

Sometimes the "because" is a synergy of multiple events. The internet is not possible without multiple inventions. It was around for 20 years before it began its rather meteoric rise in the late ‘80s. There is no simple because, but the implications and the unpredictability of the results were not clear in 1987 to all but a few wild-eyed, and generally considered crazy, individuals.

"This in itself greatly weakens the notion of ‘because’ that is often propounded by scientists, and almost always misused by historians. We have to accept the fuzziness of the familiar ‘because’ no matter how queasy it makes us feel (and it does make us queasy to remove the analgesic illusion of causality).
I repeat that we are explanation-seeking animals who tend to think that everything has an identifiable cause and grab the most apparent one as the explanation. Yet there may not be a visible because; to the contrary, frequently there is nothing, not even a spectrum of possible explanations.” (p. 119)

Gliding into Disorder

We tend to think of Black Swans as bad events.
But as noted above, there are good Black Swans which positively impact human existence.
And Taleb himself sees a glimmer of the positive:

"We are gliding into disorder, but not necessarily bad disorder. This implies that we will see more periods of calm and stability, with most problems concentrated into a small number of Black Swans." (p. 225)

It is easy to take the credit disruptions of today and straight line the present into the future. But it might be more useful to see how the previous Black Swans of financial disruptions were dealt with.

Let's look at 1987, 1998, and 2000 [and now 2008]. Each period had rather solid US economies preceding them. All had rather significant disruptions.
And each one saw the Fed open the liquidity flood gates.

You can expect the same today. As I have often written, when the Fed embarks upon a new course, they will go further and the course will last longer than anyone thought at the beginning of the process.
Who thought when the Fed began to loosen monetary policy in early 2001, when rates were 6.25%, that we would see 1% within a short period of time?
And who thought it would stay that way for so long? And when they began tightening again? Who thought it would get to 5.25%? Back then, 4% seemed like a very high rate.

Right now, the market is pricing in rate cuts of 75 basis points by the end of the year and another 25 basis points within 12 months. I think that is low. If the Fed is cutting, it is because they see the economy weakening. And I think that means they will cut more than anyone expects.
What is the end number? I don't know. But I bet it is a lot lower than 4.5%. [Turns out I was right on target.]

Why? Because the credit markets are going to take a lot longer to sort out the mortgage problems than we might think.

And that means that a lot of homes are not going to move for some time, which is not good for consumer sentiment or spending.
And there will be substantially less mortgage equity withdrawal. As home prices drop 10% and then 15% and then 20% [I was such an optimist], Boomers are going to realize that a large part of what they thought they had for retirement in the equity of their homes is not there.
That means they need to spend less and save more. While that is good as an individual policy, it is rough on the economy at large. I still think this process ends in a recession.

But John, (I hear you ask) if the Fed cuts rates, won't that make mortgages cheaper?
The answer is that for conforming loans it will. But right now, if you want a home with a loan larger than $417,000, you are looking at interest rates as high as 9%, even with excellent credit. And if you have poor credit? There are no subprime loans for you, without substantial down payments.

The problem, as I repeat, is not the availability of liquidity. It is the lack of credibility. No one is buying paper they are not absolutely 100% sure about…

It will take some time, but the current disorder will again become order and the process will begin again, with a bubble happening in some other market which will eventually come undone and create a new Black Swan event.

[End 2007 quote]

Big Dreams

All right, back to 2020, where we are facing “a new Black Swan event” like the one I referenced back in 2007. It turns out Black Swans are everywhere.
Some are more powerful than others. And they’re not always bad, though this one certainly is.

I keep saying, and still believe, we will not see any kind of quick recovery.
The damage is just too great.

But our economy will recover and, slowly but surely, the good will outweigh the bad.

We have many challenges ahead. We also have big dreams, as they did back in 1776. They fought for their dream because they thought it was worth the effort. We can honor their spirit by doing the same.

Birthdays, Anniversaries, and the 4th of July

Last weekend Shane and I celebrated her birthday and our third wedding anniversary. After three years together, Shane and I were visiting our good friends Meredith and George Friedman down in Austin on her birthday. I made the extremely wise decision to ask her to marry me on her birthday while we were eating barbecue with Meredith and George. We were married exactly one year later.

Shane and I had four years together before marriage, not because I had any doubts, but I wanted her to have “full disclosure” on your humble analyst. Let’s just say that I might not be the easiest person to live with. I travel a lot (or used to) and I tend to sit in front of the computer or iPad for long periods. And I tend to get caught up in binge reading when I obsess on a topic. Weird hours and all that.

She actually seems to love all that about me, which I find remarkable. We are now living in a Caribbean paradise that truly has become our own personal paradise. Yes, we will have to deal with the occasional hurricane.
But Texas was no picnic, weather-wise. I have personally seen more than my fair share of tornadoes. Every geographic rose seems to have a few thorns.

For those of us who are celebrating 244 years of declared independence, happy Fourth of July! And an early happy Canada Day and Bastille Day to my Canadian and French readers. And since each country has its own special day, let me wish everyone the best.

It is good to remember our history and where we came from, especially when many want to erase that history instead of learn from it. Context matters. It is easy to grab for simple slogans, but nations are not built on slogans but on hard work, cooperation, and progress.

And while the Founding Fathers might be somewhat horrified at where we have taken some of their ideas, I think they would also be proud of our progress. The great trade of our time will be long humanity, short government.

But that is a topic for another letter, or maybe even a book. Have a great week, and be careful out there!

Your truly independent analyst,

John Mauldin
Co-Founder, Mauldin Economics

The problem with Big Food

Coronavirus is forcing us to rethink our approach to agricultural production

Rana Foroohar

Matt Kenyon illustration of Rana Foroohar column ‘The Problem With Big Food’
© Matt Kenyon

Big Food is fast on its way to surpassing Big Tech as the world's most politicised business.

There is little that is more essential to life than agricultural production. But food security is a term that was, until recently, used only in developing countries.

Now, the coronavirus pandemic has exposed the vulnerability of highly concentrated food supply chains. In the US, this has led to calls for antitrust action. A federal judge filed a big warning shot last week, by giving Bumble Bee Food's former chief executive a rare prison sentence for his role in an antitrust conspiracy to fix the price of canned tuna.

The Department of Justice is also investigating Tyson Foods, Cargill, National Beef and JBS SA. The meat industry, a hotspot in the spread of Covid-19, has not felt this much heat since Upton Sinclair wrote The Jungle.

Food has also become a focal point for concerns about US-China decoupling and the broader deglobalisation of supply chains. China recently threatened to boycott imported salmon after allegations that it could be linked to new cases of Covid-19. European countries including Italy and France are doubling down on protections for local producers.

In the US, there are calls to support local agriculture and small farmers, not just for health and national security but also economic reasons. This reflects a crisis-driven shift in focus from efficiency to resilience. Agriculture has become incredibly efficient.

US farmers have nearly tripled their per acre production over the past 70 years.

But this has come with tremendous consolidation in most areas of the industry, so that a handful of companies now control everything from meat processing to grain production.

There are also two entirely separate supply chains — one supporting supermarkets, the other restaurants and institutions such as schools and hospitals.

When demand in the second supply chain collapsed thanks to pandemic-related shutdowns, grocery prices in the first supply chain surged on higher demand, even as farmers destroyed crops that could not be easily funnelled from restaurants to retail outlets. That is the downside of efficiency and specialisation.

Efficiency is also responsible for iceberg lettuce, one of the most ubiquitous (and tasteless) vegetables ever created. I cannot believe that anybody really wants to eat it, except as a vehicle for scooping up blue cheese in a wedge salad.

But it has been a major cash crop in America for most of the last 50 years because the lettuce heads travel well and survive in long supply chains for months. Yet iceberg is mostly water and has few nutrients. That underscores the fact that while productivity has increased, US farmers are encouraged to plant commodity crops rather than fruits and vegetables needed for the country to have a healthy diet — the kind that provides better immunity from diseases such as Covid-19.

Instead, Americans waste fuel shipping items like iceberg lettuce all over the country.

This sort of senseless industrial farming is why the EU has been promoting a “farm to fork strategy” that seeks to make agriculture more sustainable and protect a diverse group of producers.

Before the pandemic, US Democrats had begun to complain about Big Food, partly as a way to attract votes in Midwestern swing states where many small farmers have gone bankrupt.

But, in the face of Covid-19, resiliency and localisation in agriculture has become a bipartisan issue.Latest Coronavirus news

The question is how to make it affordable. Smaller producers who supply high-end restaurants in big cities with premium goods have taken a huge hit during the shutdowns. They are also largely boutique businesses, as anyone who has bought a $20 wedge of cheese on a weekend jaunt to the country knows.

Most of America’s fruits and vegetables come from places like California and Florida, where it is much easier to grow them year round. The rest of the country’s inability to fill winter demand is a big reason food imports have risen sharply in recent years.

Basically, we need to find a middle ground between 19th-century agriculture and modern industrial farming — between efficient and resilient.

That is where a new crop of high-tech agricultural start-ups could help. I spoke recently to an interesting one, called Plenty, founded by a third generation Illinois farmer, with funding from SoftBank, in what could be one of the Japanese group’s decent bets. The company builds vertical indoor farms in “food deserts”.

The farms grow fruits and vegetables on giant walls that can be placed anywhere, since light and water are controlled by technology. That allows families in urban neighbourhoods, such as Compton or Oakland, California, to access fresh produce.

Unlike most farm labourers, Plenty’s workers are mainly highly skilled technicians.

According to chief executive Matt Barnard, the company uses 99 per cent less land and 95 per cent less water to grow pesticide-free crops that are not genetically modified.

The results are also similar to the best of what a shopper might find in a local farmers market. “Our shipments since Covid-19 have tripled,” he told me.

“The pandemic has really changed the conversation about where and how people get their food.”

Better food, higher paying jobs, less concentration — this is the kind of localism we need.

Oil crash piles pressure on bloated refining sector

Overcapacity leaves operators facing dwindling profits, particularly in Europe

Derek Brower and David Sheppard in London

Demand for fuel is depressed and stockpiles are large, squeezing margins for refiners © FT montage; Bloomberg

Oil refineries are struggling as the worst demand-crash in decades cascades through the industry, leaving plants around the world at risk of closure.

Demand for fuel remains depressed and stockpiles are bulging, while the crude refiners’ process has become more expensive following deep Opec-led supply cuts. That is squeezing margins for the plants, which convert the crude into products such as diesel, jet fuel and petrol.

Europe is considered most at risk because facilities are generally older and governments have embarked on initiatives to phase out some fossil fuels from transport. But analysts at UBS said almost 3m barrels a day of refining capacity — equivalent to about twice as much as the UK consumes or roughly 3 per cent of the global total — needs to be removed from the global market by the end of 2021 to restore the sector’s profitability. Small US refineries and some capacity in Asia-Pacific could also be forced out, the analysts add.

Newer refineries tend to be more complex and efficient, allowing them to process a wider variety of crude oils at a lower cost. But plants built in the 1950s and 1960s, as mass-market adoption of motor vehicles took off, look vulnerable — especially in the context of a lot of new capacity coming on stream in developing countries, from Nigeria to Kuwait.

“We had too much refinery capacity before Covid,” said Robert Campbell, head of global oil products for Energy Aspects, a consultancy. “We’ve certainly got too much now.”

Demand for fuel has started to recover from the depths of lockdowns in April and May — when global consumption was down by more than 20 per cent — but few see it reaching pre-outbreak levels before late 2021. Some plants are already losing money, once total costs of operating are factored in.

Analysts say the outlook for the industry is reminiscent of the period after the financial crisis, when profit margins recovered only after a number of facilities shut for good.

Predicting which refineries could close is difficult, as governments often place plants on life support owing to concerns over security of supply and job losses. But industry figures say plants such as Essar’s refinery in Stanlow in the north-west of England and Eni’s Milazzo in Sicily may struggle, along with Grangemouth, Scotland’s sole motor fuel refinery. Commodity trader Gunvor is already looking to mothball its plant in Antwerp.

Essar said its Stanlow refinery was a “profitable and sustainable” business. Eni declined to comment on the Milazzo plant, which it jointly owns with Kuwait Petroleum Italia. Petroineos, owner of Grangemouth, did not respond to requests for comment.

Even before coronavirus, the industry was under pressure from long-term plans to move away from petroleum fuels and competition from newer plants in Asia. HollyFrontier, a refiner in the US, recently converted its plant in Wyoming to biodiesel. Eni and Total may do the same with plants in Europe, said UBS.

“There will be a shakeout in the refining sector,” said John Auers, executive vice-president of Turner, Mason & Company, a consultancy.

Margins have plunged in recent weeks as oil prices rose faster than the price of finished fuel. Richard Joswick, head of refining analysis at S&P Global, said that in an average year refiners net roughly $10 a barrel — and are now getting about half that.

Line chart of $ per barrel showing Refining oil in Europe has become less profitable

Certain plants are earning even less. Par Pacific, a US refiner, reported margins of just $0.24 a barrel in the first quarter from its operations in Hawaii — a 93 per cent drop from a year earlier.

Despite weakening margins, the US refining sector has been relatively resilient, partly because it throttled back processing operations as demand dropped earlier this year. About a third of the country’s capacity was idle in April, according to the US Energy Information Administration.

US refiners have begun to process more crude in recent weeks, but as big petrol-consuming states such as Texas reimpose Covid-19 lockdowns, consumption may stall. US petrol inventories are near historic seasonal highs, despite the onset of the summer driving months, when demand tends to peak.

Line chart of Thousands of barrels  showing US petrol stocks remain well above historical norms

One UK refining executive said there were about 10 plants around the world considered “at risk” over the next few years. Moreover, with countries such as the UK expected to ban the sale of new petrol or diesel cars in the 2030s, fuel makers may be running out of road.

Capital investments to boost plants’ longer-term profitability appear risky, in that context.

Alan Gelder, head of refining at consultancy Wood Mackenzie, compared the industry’s traditional mentality to being “chased by a bear”.

“As long as you keep running and the rival beside you falls over you’d be OK,” Mr Gelder said.

“But now they’re running downhill towards water and it’s not clear any of them can swim.”

Don’t bet on the silver boom

The industrial metal will not be dragged up by gold

John Dizard

500g silver bars
There are billions of ounces of silver that has already been mined and then stored as bullion or turned into retail artefacts which can easily be melted down © Kerem Uzel/Bloomberg

If gold was the metal that drove the conquistadors mad, in recent decades silver has had the power to induce near-psychotic states among its holders. I almost wrote “investors”, but that is too dispassionate a term for the true believers in silver.

In recent months, gold has become a respectable part of institutional core strategies, providing a useful anchor to windward in the post-coronavirus markets.

The price of silver, though, has been left behind by the now fashionable cohort of gold bugs. Silver is still up for the year in dollar terms at just above $18 per troy ounce. The gold/silver ratio reached its all-time peak on March 18, when the silver price collapsed to $11.94. At that point the spot price of a troy ounce of gold was worth 126.5 ounces of silver.

Since then the “GSR”, as silverados would put it, has drifted down to below 100, where it has been bouncing gently since the end of May. For the silver people, the relative strength in the price of gold is a buy signal. But they believe almost anything is a buy signal.

Most non-US metals people think of silver in terms of its utility for tableware, jewellery, or superior electrical conductivity. For a certain kind of American silver is part of an ideology.

It goes along with owning a semi-automatic rifle with lots of spare ammunition. Canned goods. Conspiracy theories. Contempt for urban liberals. They are way past voting Republican. The most committed are “silver stackers” who squirrel away stacks of silver coins to trade for essentials after societal collapse.

Do not argue with these people. Just back off, without making any sudden or threatening movements.

Your true silver believer thinks the GSR should be much, much lower than 96 or 98 to one.

And, to be fair to them, Isaac Newton would agree, if he was around today. Newton believed the GSR should be fixed at 16 to 1.

Metal markets professionals do not share that view. CPM, an industry advisory firm that does not trade or sell the metals or related securities, has a house view that silver prices will not sink as they did in March, but are likely to trade above $16 and below $20.

That is not enough to spark a silver mining boom. The newest significant silver mine, at Sotkamo in Finland, has not been a runaway success since it opened last year. The management, which had not, reportedly, fully price-hedged its production, has recently changed.

Mining investors are more enthusiastic about the prospects for other metals, such as nickel, copper and cobalt. As one of them says: “There is much more emphasis on capital spending discipline. With silver, you have significant above ground stocks.”

And that is the problem for the silver enthusiasts. Yes, the world’s mine output runs short of industrial, investment and jewellery demand.

But there are billions of ounces of silver that has already been mined and then stored as bullion or turned into retail artefacts which can easily be melted down. That probably explains the apparent price resistance when the metal trades near $20.

The good news is that unlike gold, silver is really too cheap to be worth faking. On the other hand, it is also too cheap to be of much interest to major banks. Forty or fifty years ago, there were rafts of precious metal groups at major banks, shuttling tonnes of metal through their vaults.

In recent years, the physical trade in precious metals has attracted too many compliance costs and scandals to be interesting to most banks. Even first-rank hedge funds have difficulty getting ready access to the physical market for gold. Silver? They’ll call back later.

If you ignore these cautions and are still intrigued by silver, you could be haunted by the ghost of Nelson Bunker Hunt. Almost 40 years to the day before the March crash in silver, he was forced to meet billion-dollar-bank-crisis-triggering margin calls for his silver positions. From the peak of Texas rich, he became bankrupt.

Coronavirus Races Across Brazil and Latin America, a Warning to Poor Nations

Continent accounted for nearly half the world’s Covid-19 deaths in past two weeks; millions falling back into poverty

By Luciana Magalhaes and Juan Forero

Rio de Janeiro’s densely populated favelas like Rocinha are among the communities hardest hit by the coronavirus. Leonardo Carrato for The Wall Street Journal

RIO DE JANEIRO—In early May, the new coronavirus swept through the crowded homes in Alley 24 of Rocinha, one of the largest of Brazil’s favelas, or slum communities.

Twenty of the 35 members of Ivanete Dias de Carvalho’s extended family who live crammed together here came down with symptoms of Covid-19, from high fevers to fluid-filled lungs. Few were able to get a test. Her 65-year-old aunt died.

And the disease rolls on. Across Rio, the official number of deaths is approaching 6,000. For Brazil, with a population of 210 million, that number is more than 51,000, with 1.1 million people infected—a toll second only to the U.S. The real tally of dead is almost certainly much higher, public-health experts say.

Ivanete Dias de Carvalho’s extended family live in Rocinha, one of Brazil’s biggest favelas. Twenty of the 35 members of her extended family came down with Covid-19 symptoms.
Photo: Leonardo Carrato for The Wall Street Journal .

Her 65-year-old aunt, Sonia, died last month after showing symptoms consistent with Covid-19. / Photo: Leonardo Carrato for The Wall Street Journal

Latin America is the grim new center of the pandemic, with more than two million people infected and 100,000 deaths. The region, with more than 30 countries from the Rio Grande in the north to Tierra del Fuego in the south, has 8% of the world’s population, but accounted for 47% of coronavirus deaths recorded in the past two weeks.

Infectious-disease experts fear Latin America is a harbinger of things to come in India and other developing countries, as deaths decline in much of the developed world. The pandemic is also taking a huge toll on the economies of poorer nations, sending poverty rates skyrocketing and eroding the social gains made in the past two decades, particularly in regions like Latin America.

Mexico’s antipoverty agency predicts up to 10 million people will have fallen into poverty by the end of June, and in Peru the figure will likely be 2.5 million by year’s end, says the country’s central bank.

The coronavirus preys on the weaknesses in many poorer countries. It spreads rapidly in densely packed neighborhoods where hygiene is a challenge. People working as day laborers and in the informal sector can’t stay home if they want to feed their families.

On top of that, in Latin America, there is widespread distrust of the government, which has led many people to doubt official warnings about the dangers of Covid-19 and avoid hospitals. And unlike some rich countries, testing is spotty and hospital care is uneven and difficult to access. Mexico tests the least of any major nation, with just 3.3 tests per 1,000 people, Colombia is at 12.2 and Argentina is at 6.5, according to Our World in Data. In the U.S., the figure is 83.

Governments are reeling as they face the challenges of the pandemic with limited resources, while being pressured by millions of people and businesses to abandon lockdowns and reopen economies.

Lenin Moreno, president of hard-hit Ecuador, said the ravages of the disease have been worse than war. “In a war you can flee somewhere else,” he said in a videoconference call with The Wall Street Journal. “Here, you can’t flee anywhere.”

Workers bury a victim of Covid-19 at San Efren Municipal Cemetery in Ecatepec de Morelos, on the outskirts of Mexico City, on Friday. / Henry Romero/Reuters

A municipal worker disinfects a trolleybus in northern Quito, Ecuador, on June 3. / RODRIGO BUENDIA/AFP/Getty Images

People lined up to receive government aid in Puno, Peru, on Thursday. / CARLOS MAMANI/AFP/Getty Images

The number of Covid-19 cases are rising so fast in Chile that hospitals and their intensive-care units are strained. A morgue in Santiago, Chile, on Monday. / MARTIN BERNETTI/AFP/Getty Images

The disease has walloped Latin America’s two giants, Brazil and Mexico. Both are led by presidents—Jair Bolsonaro in Brazil and Andrés Manuel López Obrador in Mexico—who have played down the dangers of the virus, been skeptical of scientific advice and pushed for economies to reopen.

Health experts say their laid-back approach has confused citizens, with some sticking to self-isolation measures while others go about life as if there were no pandemic.

“In Brazil and Mexico there was an executive decision to not control this,” said Irene Bosch, an MIT scientist who does work in Latin America for the Atlanta-based Centers for Disease Control and Prevention. “You end up getting yourself in a situation where nothing works to control the pandemic. The result is death.”

Mr. Bolsonaro has defended his approach, saying that lives are priceless but that the economy and employment must return to normal. Mexico’s president has repeatedly said his government managed to “tame the pandemic.”

Here in Rocinha, where 100,000 people live in cinder-block dwellings packed on steep hillsides, the homes are small and many residents are heavily dependent on a day’s wages. Many working-age people can’t shelter inside.

Ms. de Carvalho, whose aunt died, said she had worried for months that if the virus came to Rocinha, she and her relatives would be defenseless. “I was neurotic, I was telling everyone, ‘Take care,’” said Ms. de Carvalho, 36, who started using a mask before others in her family.

“People thought I was going crazy.”

Elizabete Gomes da Silva, 55, a mother of six and a member of the extended Dias clan, now does what she can, like constantly cleaning her home on Alley 24. But she holds no illusions.

“In the communities, we always pay a higher price for everything,” she said, speaking of her favela. “There’s a chance everyone here is going to get sick.”

Brazil regularly logs more than 1,000 deaths on any given day. In the past week, it averaged 31,000 positive results a day for Covid-19 tests, according to government figures—about twice the level of any country except the U.S. at its peak.

Projections by various Brazilian universities estimate the country is on track to overtake the U.S. in total deaths sometime over the summer. The University of Washington in the U.S. projects 165,960 deaths in Brazil by early August, compared with 145,728 for the U.S.

Mexico, with more than 22,000 deaths, is seeing the disease rip through towns on the country’s border with the U.S., where hundreds of thousands of factory workers returned to their jobs after voluntary lockdowns were lifted at the start of June.

The city of Mexicali, which has roughly 700,000 people and is home to American plants, has 3,826 confirmed cases and 664 deaths from Covid-19 and is experiencing what health officials call a “period of intensive transmission.” Mexicali’s general hospital is at 92% of capacity, according to the state of Baja California Health Department.

“Returning comes with a certain amount of worry, because you don’t want to make a mistake and put yourself or your family at risk of infection,” said Martín Estupiñan, 44, who supervises a team of workers at one plant. But he said that workers also need their jobs and have to “learn to live with the disease.”

In Mexico, people are so wary of public health care that many families of Covid patients avoid taking them to the hospital until they are critically ill—at which point it is often too late, doctors say.

Elizabete Gomes da Silva, a member of the extended Dias clan, constantly cleans her home in the Rocinha favela but fears the virus will spread widely in her community. / Photo: Leonardo Carrato for The Wall Street Journal .

“I tell everyone I meet: Avoid the public hospitals,” said Jannete Rojas, whose father died in a public hospital with Covid-like symptoms. She reeled off a conspiracy theory she had heard, based on nothing more than hearsay, that hospitals are purposefully killing people.

“The people in my neighborhood all say it’s part of a global agreement to lower the population level,” she said, “especially of the poor, because governments can no longer afford to pay our pensions.”

Distrust also runs high in Peru, but that country’s government instituted a stringent lockdown and followed international protocol. It didn’t matter. People flocked to markets, creating dangerous clusters that spread. Peru now has more than 8,200 deaths and 257,000 cases, more than Italy and Spain.

There are success stories in the region. In Medellín, Colombia’s second-largest city, the mayor is using a smartphone app in which residents provide information to officials so they can more easily track and check the spread of the virus. Only seven have died.

Argentina, with 44 million people, has recorded fewer than 1,100 deaths, while Spain, only slightly larger in population, has more than 28,000. Health officials have feted tiny Uruguay and Costa Rica—both with well-functioning health systems and lower inequality than other countries—for their handling of the crisis.

But even in countries where overall numbers appear low, there are troubling spikes. That is particularly worrisome to health officials because while the pandemic isn’t under control, economies are reopening under pressure from the very people who are most vulnerable—those who work hand-to-mouth, usually without any kind of a social-safety net. 

The Rio favela of Rocinha, foreground, is home to 100,000 residents who are heavily dependent on a day’s wages and can't shelter at home. / Photo: Leonardo Carrato for The Wall Street Journal .

“They tell us not to go out but how do we eat,” said María Herrara, who lives in the Chilean capital and whose husband works in a supermarket.

“I’m unemployed. My husband is the only one who works. And we’re afraid he could lose his job,” she said. “All the neighbors have coronavirus, many people do, but we are also afraid of hunger.”

Chile initially broke with convention in much of the region, holding off on a national lockdown. President Sebastian Piñera’s government instead carried out rolling quarantines by district, testing and reacting to outbreaks. But the caseload is rising so fast now that hospitals and their intensive-care units are strained.

Criticized for his handling of the crisis, the health minister, Jaime Manalich, recently resigned but not before telling his countrymen that the worst was yet to come.

“I dare say the stress on the health network will be greater,” he said. “And the pressure on the citizenry will be very, very severe to comply with the quarantine and the self-isolation measures.”

—Ryan Dube in Lima, Peru, and Robbie Whelan and David Luhnow in Mexico City contributed to this article.

Will the Coronavirus Forge a Brave New World?

Lockdowns and social distancing are unlikely to survive for long.

By: Alex Berezow

Of all the major geopolitical players on the planet, Mother Nature may be the toughest adversary. Nature has neither imperatives nor constraints to guide its behavior.

Rather, it operates off general patterns that occur under various conditions. While the patterns provide broad strokes of expected behavior, it strikes mostly randomly.

Even predictable phenomena, such as the Atlantic hurricane season, tell us nothing about the magnitude and target of, or potential for, economic damage. A catastrophic Category 5 hurricane that misses major population centers is quickly forgotten; a milder Category 3 hurricane that decimates New Orleans has long-lasting consequences.

Similarly, the COVID-19 pandemic, caused by a novel coronavirus known as SARS-CoV-2, was a predictable phenomenon. Modern disease outbreaks allow scientists to detect patterns, even if they cannot precisely predict what, when, where and how an outbreak might occur.

For decades, microbiologists and epidemiologists have warned about an influenza pandemic.

These occur with some regularity; the previous four were in 1918, 1957, 1968 and 2009. But while public health officials were fixated on the flu, a deadly new virus was percolating in China. By the time the biomedical community fully grasped the severity of the disease, it was too late. It had already circled the globe.

But scientists are neither fortunetellers nor miracle workers. The seasonal flu infects up to 1 billion people every year, despite the fact that we all know it’s coming and a vaccine and antiviral exist.

The scientific method is also inherently conservative – that is, it operates deliberately and is slow to adopt a new consensus. Typically, this serves the scientific enterprise well, as exciting new findings often end up being wrong after they undergo further scrutiny.

Prematurely declaring the coronavirus to be a global threat if it turned out not to be one would have damaged the credibility of public health officials. It seems that, having failed to identify the threat in time, they subsequently over-compensated by endorsing harsh social distancing measures – which, ironically, ended up damaging their credibility anyway.

In an attempt to keep abreast of the ever-changing data on coronavirus infections, public health officials then began providing contradictory advice – which often changed by the week if not the day – and further exacerbated their credibility problem. In the U.K., a prominent scientist who endorsed the lockdown was caught breaking quarantine, cavorting with his lover; in the U.S., public health officials condemned anti-lockdown protests, only to then support anti-racism protests.

Such contradictions are bad in and of themselves, but in these cases, they carried the extra burden of hypocrisy: Lockdown is for thee, but not for me. By this point, much of the public had concluded that biomedical professionals were no longer behaving like objective scientific advisers and instead were behaving like political actors.

Worse, by declaring that “the science” demands a strict lockdown – and that anyone who raises concerns about unintended side effects on the economy, mental health or social cohesion is a COVID-denying scourge on the public good – scientists eagerly prioritized severe coronavirus containment measures with little regard for collateral damage.

The result was the suppression of debate and dissent as millions of people were put out of work.

The damage all this has done to the credibility of the public health profession is incalculable.

Whither the Second Wave?

Knowledge of previous pandemics combined with infectious disease modeling allow scientists to make very credible predictions about the coming of a second wave. Though the coronavirus is biologically distinct from influenza, they share many epidemiological similarities, which in turn allows for comparisons in behavior.

A study published by the University of Minnesota’s Center for Infectious Disease Research and Policy found that, in seven of eight previous influenza pandemics, the virus returned about six months later, and the second wave was often worse than the first. There are already reports that the coronavirus is making a comeback, from Beijing to California. Once again, we may not know the exact timing or scope of the second wave, but Mother Nature’s patterns tell us that we should be planning for one.

Assuming, then, that a second wave will hit sometime in the fall, what should we expect to happen? One large segment of the population will have grown weary of the lockdown and will be disinclined to adhere to further restrictions. Besides, in the wake of the economic damage caused by the first lockdown, many national and local economies will be hesitant to impose such strict measures again.

Another large segment of the population – namely, the elderly and immunocompromised – will be fearful and may choose to voluntarily self-isolate.

Governments will be in the unenviable position of deciding if they must enforce a second lockdown and, if so, to what extent. These decisions will be complicated by the fact that governments will be facing political battles and economic questions that emerged from the first round of the pandemic. These battles may get extreme, most notably in the United States, which will hold elections in November.

Regardless of what governments ultimately decide to do, economic activity and all that it entails – including the unemployment rate – will not fully return to pre-pandemic levels. A quick bounce-back or “V-shaped” recovery is the least likely scenario because the vast amount of economic damage in the past three months cannot be repaired in the same amount of time, especially if a substantial portion of the population remains partially inactive.

Will a Medical Solution Matter?

Those placing their hope in a medical solution in the short term will be disappointed. The antiviral drug remdesivir and the anti-inflammatory drug dexamethasone are legitimate medical advances, but they are hardly game-changers.

For instance, the latter has generated some excitement because it decreases the death rate of patients on ventilators to 28 percent from 40 percent.
That’s good news, but the death rate is still quite high. (To put these numbers into perspective, the overall infection fatality rate from the coronavirus is debated but thought to be roughly 0.28 percent, which is about three times worse than the rate for the seasonal flu.)
The drug also cannot be taken prophylactically or given too early in the course of an infection because, as an immunosuppressant, it could just make a person more vulnerable. Though an apple a day might keep the doctor away, as of now, there is no pill that will keep the coronavirus away – and it’s likely there never will be.
The best prophylactic hope we have is a vaccine. These have the highest success rate of all drugs that enter clinical trials, so it is extremely likely that at least one vaccine (if not several) will earn regulatory approval.
But there are two caveats. First, as is the case with antiviral or anti-inflammatory drugs, approval doesn’t mean that the vaccines will be particularly effective. Second, approval standards have been relaxed, which may come at the expense of not just efficacy but safety.
Also, regulatory bodies routinely give the nod to drugs that are only minimally effective if there is nothing better on the market, a possible outcome given the immense pressure on pharmaceutical companies to develop a vaccine as quickly as possible. And even if a drug is highly effective, it still takes time to develop, test and distribute it.
The British pharmaceutical company AstraZeneca says that it will start shipping its vaccine to the U.S. and U.K. by around September. It plans to have distributed 400 million doses by the end of the year and a total of 2 billion by early next year.
As impressive and likely record-breaking as this accomplishment is, its timing does little to solve the economic dilemmas posed by the approaching second wave. Besides, the CEO says the vaccine will protect a person for only one year.

The Post-COVID World

Are those who claim, then, that life will never go back to normal after the coronavirus correct?

Are we condemned to live in a Brave New World, governed by social distancing and disinfection protocols, in which perfect hygiene is the greatest good? Surely not, for three reasons. Humans are social animals. Humans like to be entertained.
And humans are inclined to choose the path of least resistance. These three facts will shape the post-COVID world far more than the virus will. Because we like to spend time with others, like to maximize fun and prefer to do whatever is easiest (such as eat out rather than cook at home, provided one can afford it), restaurants and sporting events will return to normal eventually.

The only question is when.
What won’t return to normal are the things we don’t really like doing, such as commuting, going to the office or buying supplies at the supermarket. It’s much easier to work from home and to click a button on Amazon, so we should expect a decline in the value of commercial real estate as office space and traditional brick-and-mortar retail are no longer in high demand. But these trends were already occurring prior to the pandemic. The coronavirus simply accelerated them.
Global geopolitics will also be affected. The manufacture of certain products deemed essential to national security, like medicine and personal protective equipment, will be repatriated, at least in part.

For the next pandemic, many countries will not want to be so heavily dependent on a single supplier like China. Politicians will have an extra incentive to endorse this policy as it involves repatriating some manufacturing and economic activity.
So yes, things will change. The ultimate long-term legacy of the coronavirus will be a more sanitized world of more self-reliant countries.