17 March 2020
COVID-19: The World Awoken
Vital information for the investor.
COVID-19 represents a historic crisis, speaking to so many challenges. Much will be written by experts across critical disciplines. It is of little value that we speak about those perspectives, but it is important... vital... that we address this crisis from our specific expertise. The key questions are:
1. Is COVID-19 an outlying event?
2. Focusing on wellbeing, what are the implications of new behaviour?
3. What does this mean for our livelihoods?
4. As investors how should we respond?
Corona is not an outlier.
Profound concern is a given. Panic and hysteria are to be expected and are possibly even healthy. The idea of hoping things can get back to “normal” is understandable – but not constructive. One of the striking elements of the crisis is rather than feeling like a dream, it feels like a jolt awake. The potential cost to many close to us is in stark contrast to day-to-day routines. It is a cold awakening after a prolonged sleep where we found comfort in not facing truths.
Black swans are NOT outliers or anomalies. They are just inconvenient possibilities our system has not been built to deal with. Are we really surprised? No.
One or more pandemics have been expected for decades. Antibiotic resistant bacteria are already critical risks in our medical facilities. Our ageing demographics have been placing mounting pressure. Despite these challenges, we have not seen significant shifts in our thinking or resourcing of health and wellbeing strategies. Short–term thinking, blame- shifting, and gridlock are endemic versus action.
The inadequacy of our broken systems and obvious inaction are highlighted by this pandemic, and bleedingly obvious across many recent crises faced by our institutions. We saw the same thing with bushfires across the planet over the past 12 months.
We are still learning the full dimension of how this virus works and how it will impact us.
People are anxious and understandably so, finding their own strategies to cope.
The rush to stockpile toilet paper in Australia is not a joke. It is stark evidence of the loss of trust in public data and old “reliable” solutions. The public is seeing the healthcare system in Italy as totally overwhelmed, and those concerns go global. The public is aware that the most effective means to protect both their own health and that of their communities and loved ones is to adopt some form of social distancing to the extent they can. People have intuitively started to self-isolate before any leadership from government; they are a step ahead, cancelling dinner parties and travel, avoiding crowds. Leading businesses and institutions are instituting work from home strategies as best they can.
Governments are responding at differing paces in how they support this behavioural change.
This raises a number of questions;
- How quickly and to what extent will distancing/isolation strategies take place
- How will they impact the spread of the virus and the functioning of our health systems one estimate is that they “halve the death rate”.
- How long people need to/will behave like this?
- What are the changes in how our society and culture operate going forward?
- What is the economic impact?
From the human to the economic, Covid-19, will impact how we live and earn.
Much like the impact on the medical system, the Covid-19 Black Swan will disrupt our economy and businesses. It will hit the most vulnerable hardest, including some elements that are fragile from cumulative stresses that have been bandaged over. This is the stark truth.
It is relevant to note that zero real interest rates currently being seen around the world were the response to another recent ‘Black swan’ event, the Subprime Debt triggered GFC. These interest rates have supported and inflated the value of old assets and behaviours, increased the amount of debt we are carrying, exacerbating income inequality, destabilising political consensus, distorting new investment and behaviour. Many of our businesses are currently configured around that inflated economic framework, rather than having been restructured to the significant shifts taking place in our underlying economies.
A very significant economic contraction is now expected. It will be offset to an extent by government policy intervention. The GFC was a liquidity crunch event. The challenge with Covid-19 is much more than a credit squeeze, though it will create one.
Unlike the GFC government fiscal stimulus, transferring money to individuals does NOT mean people will go out and spend that money at many businesses. Social isolation will drive behavioural change.
General Electric has been the poster child for for the past 40 years of globalisation and short term financial returns. This focus has long term consequences.
What does this mean for investment?
The system will adapt. How long this will take and what path it will take is difficult to forecast. However, certain elements are very clear.
Government and central banks response will be huge. Fiscal and monetary policy was a blunt, inevitable, response to the GFC. This postponed the required adjustments. Fiscal and monetary response to THIS crisis risks being superficially effective but cannot address the structural problems around capital allocation to rapidly shifting local needs.
It is now obvious that centralised large-scale institutions have struggled to deploy resources at the human level. This is THE reason for zero interest rates. see our Meteorites and the Death of the Dinosaurs
Banks around the world are now trading at crisis valuations. They have created little value for their shareholders over an extended period.
Zombie assets MIGHT be supported by these policies, as per the last crisis, but personal and financial well-being will not be built by them.
What is needed to deliver sustainable returns and build value is investment in enterprises and projects that create positive IMPACT in people’s lives – at the local level. These will NOT be identified and accessible by centralised large-scale processes. Governments role is to support the broad environment, not micro allocation. It requires new processes and a new approach delivered at a local level.
Just as the Pandemic has made people aware that we share responsibility for our own health and wellbeing, the same is true of investment. The world is now wide awake. Beckon Capital sees this as the essential moment to invest.
A man in Milan plays a guitar on the balcony of his home as part of a flash 'non-mob' launched throughout Italy to help people cope with being in lockdown.