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This Is Not A Drill

According to a traditional Native American story, a white-haired Cherokee is teaching his grandchildren about life. He tells them: ‘A fight is going on inside me. A terrible fight, and it is a fight between two wolves. One wolf represents fear, greed, hatred, anger and selfishness. The other wolf stands for peace, love, wisdom, truth, humility, integrity, generosity and empathy. The same fight is going on inside you, and in every other person too. The children thought about this for a while. Then one little girl asked her grandfather, ‘Which wolf will win?’ The old Cherokee held a long silence. Then simply said, ‘Whichever one you feed.’

An unexpected, exogenous shock instantaneously feeds the ‘bad’ wolf with the support of the media and amplifies the conflict with the ‘good’ one within each individual, institution and nation. A violent fight was in plain view this week as the Coronavirus news dramatically worsened. The OPEC+ dispute and its dire implications for oil prices and corporate credit quickly became a side-show. The result was extreme market volatility, typical of an environment in which nobody has an information advantage. The flashbacks from the 1987 crash made this week a generational event.

Many refer to unprecedented uncertainty caused by COVID-19. This is not exactly right. The world has had the opportunity to learn from certain countries’ experience(important hyperlink), including that of China and then Italy. What is currently happening could be almost perfectly foreseen weeks ago. Watching the highly informative daily videos from John Campbell over the last couple of weeks factually supports this statement since he predicted the pandemic in January. But for some reason, little of what should have been done to limit the damage has been done in many Western countries, as if China and Italy were isolated cases occurring on an alien planet. There are underlying traces of ‘macho nationalism’ and incompetence. South Korea and Singapore show that it could have been different.

If there are uncertainties, they are essentially fueled by central bankers and politicians. The emergency 50bps cut by the Fed last week is a contender for one of the most damning monetary moves in history: two out of six 25bps bullets were unnecessarily shot in the dark, and with a ‘bang’ scaring investors. The ECB analysis of the situation was poorly communicated, leading to confusion. When it comes to fiscal policy, some commitments are being made or actively contemplated although many measures remain vague. The lack of coherence is apparent in health and safety measures too: For example, the absence of any bans of large gatherings in certain countries is incomprehensible.

Conceptualizing the situation is admittedly difficult since there are no living memories from the 1918 pandemic. Still, it is striking to see private citizens and institutions including corporates behave in a more responsible and proactive manner than many public officials and authorities. Thankfully, there are tentative signs that governments are getting their act together at a time when the health situation is set to significantly deteriorate.

The final outcome will depend upon the scale and coherence of the policy response. Without any visibility on it, there is no point in discussing any economic scenarios. In any event, this is a ‘Whatever-It-Takes’ moment not only for fiscal and monetary but also for health and safety policies. The coming days will hopefully see a raft of appropriately aggressive and coherent global containment (testing) and delaying (social distancing) measures designed to flatten the peak of hospitalizations expected over the summer. Every single day counts. The objectives are clear: to minimize the death toll and the economic disruption worldwide. If COVID-19 proves seasonal it will be a blessing.

For now, financial transactions including M&A will be hard to engineer as the large bid-ask spread will remain elevated in highly volatile stock and bond markets for a few weeks at a minimum. Practically, conducting full due diligence will be impossible. There will of course be particular circumstances and opportunities, but for the vast majority of economic actors, this is a time for hedging… and caring. As Dr. Campbell reminds his audience: ‘Healthcare must be of the people, by the people, for the people.’ A deep sense of civic duty by well-informed citizens is vital. The good wolf must be continuously and abundantly fed.

Stay safe.

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