12 April 2020
Each Sunday, a friend organises a two-hour call for friends (many of whom are senior figures from finance, industry, and academia) to hear 10-15 experts talk about the COVID-19 crisis. This has now grown to hundreds of attendees, with a consistently all-star cast of speakers drawn from many different fields.
Tonight’s installment, the fourth in four weeks, was quite simply outstanding — the best so far. Speakers included a half a dozen household names, including economists, psychologists, social scientists, doctors, a CEO of a testing lab, a fashion brand CEO, a leading Private Equity investor, a political scientist, and famous authors. I was particularly delighted to hear from several personal intellectual heroes.
As with past conversations, it was held under the Chatham House Rule, meaning I can share a summary of the content but not the names of the participants. As with each of these, the notes are as near-verbatim as I can make them, and almost real-time (apologies for typos).
Topic: Pandemic Challenges for Economy, Industry and Sports Management
Bio: Co-Founder of a major private equity firm, sports investor
- The massive US stimulus isn’t going to propel the economy; it’s not enough. $20 trillion US economy, $2 trillion stimulus, economy down 25-30% in Q2. Global GDP down around 5%, $5 trillion. This fiscal stimulus won’t get far.
- We need to get people back to work.
- No one thinks a vaccine is ready in the next 12 months though there will be treatments.
- Massive testing will be critical.
- Think gov’t will try to get people back to work between May and July 4th. But people are nervous. Hard to see how this will work.
- Looking at the markets and credit markets, the technicals have gone way ahead of fundamentals. We don’t think the markets are fathoming the depth and severity of the problem and how hard it is going to be to get people back to work.
- We aren’t very active right now; watching the markets. Don’t think the fundamentals are there. Need to be cautious.
- We’ve been involved in the Fed’s actions. It’s helping.
- But for non-investment grade companies, middle market, smaller companies: it’s going to be much harder to reach them.
- In PE, we invested early and now we are more muted. The alternative space is holding together well. We think most companies will be down the same amount as the S&P.
- LP are still funding capital calls. Money for branding players is still being raised. So our space is in reasonable shape.
- As the Q2 and Q3 numbers roll in, it could put a damper on PE.
- Looking at sports, everyone is focused about whether we can play this season, and how. It would be a big lift to the country. Decisions are being deferred through May.
- Leagues need to be sensitive.
- Lots of incentives to play and desires to play. But quite complicated to play even without fans. Health & safety of players and coaches is paramount. There’s a large entourage around the players who have to travel with them, so it’s complicated & unclear. A lot will depend on the next few months.
- With our players, the massive media footprints of the players have allowed us to give back to the community in an effective way. It’s helped via charitable giving for example.
Q: From your portfolio companies, what are you hearing?
A: Businesses that are based on in-person crowds are completely dark. E.g,. big hospitals: elective surgeries are gone. Energy (sector) is uninvestable. The economy being down is going to impact companies with leverage. Some companies (<25%) are not paying their leases anymore. It’s company by company. Our companies had a lot of liquidity and had debt structures to give them flexibilty.
Topic: A perspective from positive psychology: the psychology of growth through adversity, how this could be the best thing to happen to gen Z, and how the sources of happiness change in quarantine.
Bio: Well known professor in social psychology.
Two powerful concepts are important: re-appraisal, and anti-fragility
Corovirus might be the best thing to happen to humanity in the 21st century!
Chinese folk table: Favourite stallion ran away. Neighbors came to comfort him. He said, too soon to know. Horse came back with a mare. Still: too soon to tell. Son rides mare and hurts his leg. Still: too soon to tell. (Etc.)
When you look at the things that could wipe out humanity, it’s bioterrorism or a pandemic respiratory virus. Now they are much less likely because we’re learning from our mistakes in this situation; we’ll have better systems. Looks like a disaster now, but might be too soon to tell.
Re-Appraisal: “There’s nothing good or bad but thinking makes it so.” (Shakespeare) “Life itself is what we deem it.” (Marcus Aurelius) We see things through mental filters. This is the biggest opportunity in our lifetime to reframe and lower our expectations.
When we grow accustomed to a situation we feel entitled, lose a sense of gratitude, etc. Now we can realize how much our success depends on many other people. We can cultivate a sense of gratitude.
Recommend two practices. (1) keep a gratitude journal. (2) read the Stoics, esp. Marcus Aurelius.
Anti-fragility: here’s how to think about it. A wine glass is fragile so we don’t give it to toddlers, so we give them plastic cups. Taleb made up this concept. E.g., “viral dose” — small amount causes immune system to respond and develop antibodies.
For children under 18, opportunity for them to become stronger.
Need to get these two principals working for us and then this will turn out to be great.
Topic: The politics of the pandemic
Bio: Professor of Political Science at a major university.
3 things are chronic features of politics.
- Few incentives for politicians to engage in long-term planning. Read Andrew Healy: Myopic voters and natural disaster policy. Spending for disasters is not rewarded by voters. Disaster relief spending is rewarded. More than 10:1 ratio of rewarding the latter than the former. You see this in climate change, pension planning,etc. This is another example (COVID).
- American federalism. Challenge in coordinating action in response to a pandemic. National, state, local gov’ts share power. Useful experimentation, but a challenge when states are asked to coordinate on a national problem. Competition among states. Probably what it was like 250 years ago under the Articles of Confederation. Each state’s policy creates externalities for other states — e.g., if I don’t do social distancing, people can cross state boundaries and infect other people. Federal gov’t not coordinating, deliberate decision?
- Political polarization in US politics. Mixed messages by party. Equivocation by president & republicans on this topic. When states adopt social distancing is a function of party & closeness to Trump. Republicans are less concerned about the virus than Democrats; and they are distancing less. Their communications make it harder for governors to take a stand. Famous article from 1956 from Charles Lindblum: policymaking is the “science of muddling through.”
Topic: the nature of the bias including the inability to understand exponential growth of COVID19
Bio: Professor or Risk Management at major business school.
Why do politicians and the general public not pay attention to risk of pandemics?
- Failure to understand exponential growth
- Experiments in 1975 by William Wagenaar. People do not focus on these risks and misinterpret what will happen with something like coronavirus. Article by Megan McArdle about this: a lilly pond where you would see how quickly would be filled if you doubled leaves each day. After 47 days, assume half filled. On 48th day will be fully filled. On 40% day only 0.4% of pond is filled.
- Risk perception: Paul Slovic has done a lot of work on this. Features of risk perception that get people to pay attention were not there in the first months. No dread, no worry about catastrophic potential.
- Cognitive bias and heuristics. Myopia, focus on short-term horizons. Politicians don’t pay attention and we don’t either. We forget lessons of the past, no one thinks about 1918 until now.. Optimism: we estimate the future based on current data.
[Lost the line for one minute]
How can we adapt to avoid this in the future?
- We need to listen to the scientists early in the game. They were worried about this ealry.
- Look at countries like SK that have done a good job: testing, contact tracing, quarantine
- Impose strict regulations at the national level based on success in other countries.
Topic: Covid19 Forecasting
Bio: Professor of Psychology, expert on forecasting.
- Human judgement under uncertainty is topic.
- Who are good forecasters? Self-critical, Bayesian belief updaters.
- Bad forecasters: opinionated twits, blur judgement of facts & probabilities with values.
- Good forecasters: the heroes are the microbiologies. They applied base risks and updated from there. Science journal in 2007: presence of a large reservoir of virus in bats + culture of eating exotic mammals is a time bomb. They put probabilities of 1-7%. But over years that adds up.
- Others are in the intelligence community, eg CIA in Nov ‘19 who talked to president about what was happening in Wuhan. President did not move, but some in Congress sold stock!
- This was a predictable surprise: a chronic low-probability event. Minor outbreaks over the years. But also many false positives, which makes it hard to hold policy makers perspectives.
- Forecasting tournaments
- Historical counterfactuals and looking forward. We are testing this idea. If you answer quickly questions that are highly political (e.g., if Hillary were president fewer people would be dead) then you are probably not a good forecaster.
- Cognitive reflection test: measure of cognitive impulsivity. COVID19 forecasting looks like forecasting in other areas; the correlates of better & worse judgements are similar here as in elsewhere.
Topic: Challenges of being a mayor of a city at the center of the storm
Bio: Mayor in the Greater NY area.
- We have 2,500 active cases, > 100 fatalities
- Enforcement of shelter in place? Same as every other city. Things you won’t read about in the paper because we are making decisions about policing. Of 900 police officers, ⅓ are home because they or a colleague are COVID positive. Hard to enforce. We have limited choices; we won’t put someone in jail because counterproductive. Poor populations are less responsive to summonses or tickets. And every time we have a close contact with someone we have a risk that they ID themselves as positive and we lose 1-2 officers. Very hard to police.
- Municipal budget? We have $600M usually. We expect $70M gap because of COVID. We have no taxes from hotels, payroll taxes are low, we don’t know what receivables will be from property taxes, we lose $1-1.5M per week from tickets, permits, etc. Will be big gap come August/Sept. Not getting any help yet from State or Fed.
- Q: You’re a very diverse city. How do behaviours vary?
- A: Hard to do outreach in some ethnic communities. Not so much a racial disparity as an economic one. Where there is more poverty, much more COVID19-postivei and fatalities. Probably 20-30% of “DOA”, someone dead in their house, not necessarily suspicious. Probably COVID but not counted that way.
- Q: Opening economy? A: No good plan yet that we could implement. How to persuade challenging communities? Use conduits, leaders, religious leaders ,etc. Not everyone from tough backgrounds is afraid of Coronavirus.
Topic: Covid19 and the South Korean Response
Bio: Professor of Government
- If US wants to open economy, needs mass social testing and distancing even if it infringes on privacy. Has been shown to work in SK.
- SK is the model for flattening the curve.
- From outset, only 10K cases with slowing rate of infection around 1st week of march. US and SK discovered first cases around the same day.
- Per capita SK is 2-3x the testing rate of the US.
- The real question is whether testnig is available on demand. In SK, yes — there is a phone app that will take you to the closest place. Not in the US.
- Moved early. From Jan 20th first detected case, less than 1 week to have a meeting with 20 medical companies for response including test kits and rapid regulatory approval. Feb 23rd was declared national emergency — US was 3 weeks later.
- Premium on speed, 9 days after first case, established national call centers. 10 days provided masks to vulnerable cases. 22 days after first case, self-diagnosis mobile app available. Also ramped manufacturing of masks.
- Gov’t led from the front. Brought together public and private to produce kits and to grant regulatory approval quickly.
- DS system = designated covid and non-covid health facilities to reduce incidental spread.
- Mask shortage; when there was hoarding and price gouging, the gov’t bought 80% of national production and held prices constant. Distribution system through pharmacies, agricultural cooperatives, etc. Depending on your birth year you could buy masks on certain days. Held prices around $1.xx per mask.
- To reopen, need a phone app. Absent a vaccine or universal testing, no other way to get effective social distancing. Privacy is a concern. SK is a democracy too.
Topic: How to Reopen the Economy
Bio: Professor of Economics
- Dark days are ahead.
- At our university, technical developments:
- First test: We have FDA approval for an antigen test, hoping to have it done within a week. We will make 100K per day but can scale up to 4M/day. Test costs $10, done at bedside, does not need lab, get result in 15 minutes — a pregnancy test for COVID19. Everyone should take this test every day before going to work. Project is fully funded, first 1M sold, dep’t of homeland security trying to buy everything we can produce. This has been key in SK
- Track and trace systems? Lots of competition. Project coming out of one of our labs on this.
- Problem is adoption. Like Facebook, you need large network of people using it. How drive adoption? Give the rapid antigen test away for free if they opt in.
- Third piece: IGM/IGG test (antibody tests). This is some weeks away … not too many. Fully funded. We don’t know how long you are going to be immune but should be at least a few months, and almost certainly you are not currently positive or shedding virus. Will make it easier to figure out who can work in critical roles like food services.
- Look at Germany. We are level 5 lockdown, they are level 3. How do they do it so selectively? Many shops are closed, but white collar workers go to work with some distancing and some warnings about hotspots — “selective social distancing”. Cannot be done at a federal level but can be done at a state level, or even regional. Maybe New England? The federal government isn’t going to solve this.
- We have the capital we need.
- If you want to buy the tests, get in touch … we might be able to help. Not private firms for now but the private sector will lead the country back to reopening.
Topic: The pandemic and the macroeconomic implications
Bio: Professor of Economics and Law
- Projections that US federal deficit will reach levels not seen since WW2 — maybe 20% of GDP. In 1943-45 we had larger.
- Many ways in which current situation is more like WW2 than a recession.
- Not a typical recession: bigger employment drop, faster. But there are other differences.
- Different: In WW2 we had high employment. But think of soldiers as not being employed but doing something else not for consumption or export — something like the industries that can’t function right now. During war we had no new cars, homes, white goods. Then autoworkers made tanks not ventilators, but still not cars.
- Service industries are hit, that’s a difference.
- Think of a soldier of unemployed and then you have unemployment at more like 25% than 0%.
- Then as now we couldn’t use stimulus to create demand of services that are not happening.
- When we return to normal, as with war, we expect transition period to normality. May even be booms in certain activities like auto and house purchases, family formation, fertility.
- Different than WW2: now it depends on how much gov’t support.
- Fiscal contraction at state and local level is severe.
- Debt to publicly held GDP ratio was 106% at end of WW2, highest ever. We will reach or surpass that.
- Gov’t yields are very low now. Were higher (not high) and rising in the1940s.
- Our federal gov’t picture is very different today. Social security etc will be 12% of GDP and rising. High deficits. We will need to make serious adjustments to the budget.
- Low interest rates are not always a good thing . State and local governments will have trouble covering unfunded liabilities like public employee pensions. These are already way underfunded. Low interest rates make this worse.
- Finally, inflation. We had price controls at WW2, the inflation as pent-up demand was released. Some worry about this now. But I think unless we have strong income replacement for industries that are hit, not obvious that we will have a concern about inflation.
Topic: The Pandemic and US Labor Markets and Labor Statistics
Bio: Professor Public Policy and Economics
- Two sources of data on the labor market: initial claims for unemployment insurance, and data on first half of March.
- Last two weeks on insurance claims of 6.6 and 6.9 million. This tells us about the limits of our processing capacity in the system. Prior to that was 200K/week. Impressive that system ramped up as fast as it did.
- 16.8M applicants in 3 weeks so far. Compared to 2008, 2 years of claims at 500K/week — an excess of 300K/week. Vastly lower. But over 2 years, 2008-2009, 30M more people applied than usual. So I expect to see over a few more weeks we will work through the backlog.
- Employment report in March, unemployment higher than I expected. Employers told us 700K fewer people on payroll. Households said 3.1M people became unemployed. But 3M fewer people were employed. Not only are people losing their jobs, but we’ve frozen their ability to start new jobs. Usually lots of people start new jobs every day. This will add up.
- We might see 20-30% unemployment rate. But we care about the number of jobs preserved that people can go back to. And we don’t have this data. Most employers don’t know what their “recall rate” will be . The idea that we’ve just hit pause and people will go back to jobs, that’s just wrong. We will see massive sectoral re-alignment. Some jobs will be destroyed. It will be like a regular recession in that way.
- 9-10% unemployment rates are on the horizon for a while.
- Biggest warning: as we see job growth start to surge as people move off of temporary layoff, realize that that is not real job growth; it’s people restarting their old jobs.
- To return to 2019 level of GDP and production will be what the unemployment rate after that surge. What will be the sectoral realignment? (Dining out less, fewer concerts, live life differently …)
- Maybe we will recover faster, but I fear that the permanent job destruction will be higher than people expect.
Topic: Medical Treatment and Testing of Covid19
Bio: Works on Allergy and Asthma Research at a major university
- Our focus right now is on outpatients.
- People are doing very well with social distancing, hand sanitizer.
- Once shelter in place was in place, look at CA. We are seeing a decrease in numbers. It did what it was supposed to do.
- We’re careful because that could change.
- We’re only as good as our data and tools.
- We think the plateau is real because at our university we are testing people with and without exposure, tested 7K people randomly. We try to quarantine immediately.
- Developing an immunity test, very important for the workforce.
- We need data rather than opinions on the science around the testing.
- Our university is doing 3K tests including those known to have been tested. We will learn from this.
- If we can get to this at the home level, microsampling — we are doing 2-3K this weekend! — hopefully this data will help inform when people can go back to work.
- New paper this week saying we need randomized control trials.
- FDA doing a great job fast-tracking diagnostic and therapeutic tests.
- One drug might not work but we need a combination of therapies.
- Those with vascular disease are often hit the hardest — smokers, vapers, etc.
Topic: Issues related to testing for Covid19
Bio: Many years in the clinical laboratory industry, currently CEO of a diagnostics company.
- Rapid antigen test that is low-cost? Would have said before this call that we are weeks away but this call makes me think we are closer than I thought.
- Where did things go wrong in the lab industry? Why do we have shortages?
- Hundreds of high-complexity labs across the country.
- A well coordinated rollout could have created enough capacity.
- Planning for pandemics was going on for years.
- Was always assumed that we would have a high quality lab test available in sufficient quantities, but was not the case.
- The CDC put out a bad test at the start.
- Gov’t did not marshall the full capacity of the labs at the start.
- We thought the large labs would be able to ramp and they have not.
- Individual labs like mine assumed that and it was wrong, so we fell behind and have been playing catch-up.
- Backlog is mounting at the national labs
- Capacity is finally growing daily by the 1000s.
- Governors are still saying not enough capacity.
- One challenge: no effective way to understand capacity at a national level. No centralized place to find out availability. So a wild west of matching supply and demand.
- We could have used better coordination at a federal level early on.
- Antibody testing: need to understand how the disease confers immunity. We need studies to answer this. There is some presumed immunity, perhaps 6 months to 2 years — antibody tests will help.
- Caution: there are issues with accuracy. PCR test (ID the virus) is the most accurate, but even that has 20-25% false negative rate. That is because of the challenge of working with the specimen types; mucus and sputum, collecting a good sample, is important.
- Antibody tests will likely be blood tests. Blood is the best specimen type. But antibody tests can have widely varying accuracy levels.
- Q: You say hard to get good specimen. How will it be done in the future? Self-service? A: FDA allows for self-collection for nasal samples (think Q-Tip). Our lab is running a study where we take health care worker collected specimens and we compare it to those collected by patient (PCR test), happening this week. Blood-based antigen test, also an antibody test, those will be important. If rapid, cheap, and self-administered, that will help a lot.
Topic: How will the pandemic impact retail and the clothing business
Bio: CEO of several retail and apparel brands over the years.
- We are a major apparel brand in a number of countries.
- Majority of sales have been in brick & mortar, shut down for one month.
- Initially we were worried about supply chain since 90% of manufacturing comes from China.
- We are solely focused on getting through this crisis.
- Ecommerce continues to be strong and has picked up some drop. But it is at a discount — typically 25% off. Affluent customer will shop with a discount.
- Work from home / video, people are focused on topics not on bottoms!
- Warehouse & fulfillment centers, needed these deemed
- Most brands are not paying rent while stores are closed. Initially landlords asked for this even though centres were closed. Now landlords are looking to defer rather than abate rent; not realistic, but at least shares burden. Long-term perhaps we will share the cost or add on more months at the end of the lease.
- Typically we would get monthly deliveries. Now we are scrambling for whatever deliveries we can get.
- Most cancellations are around August- January receipts.
- Maybe there will be a small holiday collection.
- We will be selling summer collections through Thanksgiving — hope for a long fall!
- Long lead times in supply chain are a problem. Our teams are working remotely and that is hard for some roles.
- We had no choice but to do mass furlows. All store employees and half of corporate, 75% in total. We are protecting their benefits. The rest of us have taken salary reduciton sand deferments.
- Don’t think it changes our long-term path but will accelerate the move to ecommerce.
- Will there be as many stores? Must increase direct-to-consumer.
- Will people return to malls? Restaurants are an important source of foot traffic.
- Our space is about emotional relationship to clothing, not functional need.
- Rental could become more important. We have our own site which is doing well.
- Will people have the disposable income to shop? Important question for low-price space. Luxury has been resilient through last crises.
- Will be less competition.
- Most important leadership lessons: be honest, and empathetic.
Q: For apparel CEO. How will people be rehired?
A: We hope to bring them all back, that’s a openly stated goal. But things will evolve, we may need to reallocate resources.
Q: For economist. You used to work at a federal statistics agency. Given the difference in this recession vs prior ones, does it change what data we collect? How hard is that to change to find out the questions we want to know?
A: Would be great to get a survey into the field; but they will not be able to change it quickly – -not this week or next month. Maybe there could be some private efforts to add to the baseline questions. What do we need to know? What are people’s expectations as to their future jobs, as to whether they will go back to the same thing, their financial situation. Some we will get from public data but not enough.
Q: Small business loan to stop hemorrhaging of jobs. Will it work?
A: Unemployment system is good way to get money in people’s hands. But won’t make a big difference either way in terms of whether people will be recalled. Paycheck Protection Act — will be helpful for some businesses, those which do not see revenues go to zero, where this help will let them maintain payroll. But for a business that has to go without revenue for 6-8 months, what do they do after two months? They don’t think this is enough. Works better for those businesses that have a decline but not a stop to revenue.
Q: Asymptomatic population, how large is it? How will we know?
A: Our testing at our university — data will be published soon — that are asymptomatic in the community. It’s a pandemic in CA. We’ve traced immune system of individuals over time. It’s true, many people were asymptomatic. Young and without vascular disease yes, but even some people with immunodeficiency. Shelter in place helped California a lot.
Q: If it turns out that the death rate for the pandemic was not that much from the flu, but much more contagious?
A: Diagnostics that can be done quickly, especially at home. The PCR test: people were questioning it. Depending on the primer used, the kit — if it’s used well, the data is that it is over 90% accurate. But if you don’t go deep enough in airway you might not find virus.
Q: Worried about the behavior. Say you take the test, negative, but it’s a false negative. What if you then take risks? What should the social norms be?
A: Think the PCR test and the serology tests in conjunction will be important. This is what will let people get back to work. We are already doing it. 40% of our workforce (hospital) had to stay at home, now coming back. But we don’t know enough about viral shedding. We see it in saliva up to 6 weeks after infection, in stools as well. More work to be done.
Q: Reasonable to quarantine people at risk and the elderly and allow kids to go back to school?
A: Some countries are trying something like that. Need to look at the data to see the extent to which closing schools helped plateau the curve. Shelter in place, not school closure, looks to have been critical.
Q: Treatments — what is working, what isn’t?
A: Lots of different possible approaches. One is prophylactic — try to keep it from becoming symptomatic. But Tamiflu didn’t really work for flu. Lots of investigations under way. Duke is testing 15K people on chloroquine. Probably combination therapies will be needed, we’ve seen this in other viruses.
Q: We have to make tradeoffs. Given large deficits, what will have to give? E.g., social programmes like Social Security — we could defer 12 months?
A: You answered yourself, not politically feasible near-term. Generational justice has come up: how older cohorts are more at risk. Social distancing has a generational aspect. The young are being asked to sacrifice to help the old. One could argue that once this is past, the old have disproportionately benefited and the young will have suffered. That could be a political argument for attacking infeasible entitlements. But in our current political climate? I don’t know, but it can’t happen now.
Q: Success and failure of policies in China. What do you believe?
A: I have the same scepticism as most people about death rates and about the infection rate. Are they counting asymptomatic cases? It’s a problem. Korea has been fairly transparent. They learned after the MERS outbreak where the gov’t was not as transparent at the start.
Q: North Korea? What are you hearing?
A: They won’t be able to handle it. They have reported zero infections but that’s impossible, since they are sandwiched between China and SK. `they allow border travel with China. They were reported to be locking down and quarantining where they suspect that there are cluster outbreaks. Very little information about Pyongyang. An outbreak there could cause instability. They are requesting test kits from NGOs.
Q: How should we speak to children?
A: There’s a sensitive period during which adversity is maximally beneficial. Very young and middle-aged, no. But teenagers (for example) can benefit from adversity. Short-term stress is very good for kids, chronic stress is very bad. I haven’t seen data about what is happening at home. Are kids anxious or is it like a snow day? If they feel less entitled, many will grow from it.
Q: What did we get right and wrong in this situation?
A: We got things right but too late in the US. The South Korean model was better. Biggest challenge has been on testing side. We don’t know the denominator. Will make it harder to reopen the economy.