It’s clear to me at least that investors do watch the Covid 19 stats and do take notice of government policies such as lockdowns. Generally, investors regard lockdowns as a bad thing – which they indisputably are – because they have an obvious impact on the wider economy, especially more cyclical sectors. There is also I think some basis for arguing that investors reward sensible policies even though they don’t always penalize poor policy choices.
Many of the countries and markets with ‘sensible’ and ‘adept’ state policy have done well in stockmarket (and economic) terms, whereas many of those who are perceived as more ‘inept’ have been marked down. The great exception to this is the US which has by and large boasted ‘inept’ COVID-19 policies but whose stock market has continued to outperform. The US is an exception in the context of stock markets because of its size, breadth, and liquidity. It’s also jampacked full of big global tech players who have done well out of the emergency. But what is also true is that many value oriented, cyclical stocks in the US market keep getting hammered every time worries about the pandemic emerge. So, although the US in aggregate is an exception – it has rewarded poor policy – large bits of the US market does fit the pattern.
Anyway, I wanted to labour the point about rewarding policy because I think investors need to think long and hard about what might happen after we exit the second lockdown in a few weeks/months. The competence of state policy will really matter and that I think forces investors to judge whether individual states have reacted sensibly. This is an echo of the state capacity argument made by the likes of libertarian inclined economist Tyler Cowen. In simple terms the winners’, post-Covid will be those states whose governments are perceived as being competent, agile, and able to mobilize to deal with emergencies. This thus forces us to consider how a ‘sensible’ government might react in December and the new year.
Which brings me to the two elephants in the room – international travel and quarantine/isolation.
There are many investors who think we should go down the herd immunity route and have embraced the Great Barrington declaration. I have some personal sympathy for this agenda, but I also think it’s a state policy nonstarter. The Swedes, for instance, are NOT embracing this approach and have stepped up their countermeasures in recent weeks, whereas the US Federal government has in effect adopted this approach by stealth and it has cost President Trump anything between 5 to 10% of the popular vote, notably amongst older voters. Accepting that hundreds of thousands of UK citizens will die and many more suffer from Long Covid doesn’t seem to me to be a risk-free policy choice, despite what Farage now says in his preamble to reforming his Reform party. The polls consistently in the UK, and around the world, suggest that most voters – especially older ones – want this pandemic managed and ideally controlled. You and I may be intellectually drawn to these ideas but back in the real world, I think they are political suicide, which suggests to me that we’re stuck in this terrible lockdown limbo situation!
So, after this second lockdown what needs to happen? Two essential building blocks are slowly solidifying, at least in the UK: massive testing and more a localized track and trace ability, managed not by hugely over paid consultants but by local public health agencies. If, and it’s a big if, this lockdown is used to mobilize these two policies then it may have been worth it. If not, we are just kicking the can down the road. Again. And again in the new year!
But I would argue that there are two additional building blocks that we need to actively debate: proper quarantine and a massive increase in border control. The first is already appearing in public debate here in the UK – stats suggest that far too few of us are properly self-isolating at home. Quelle surprise. A step-change increase in sick pay is probably needed but in reality, we need some proper enforcement it pains me to say. We simply can’t have travelers coming back with the virus post-second lockdown, spreading the virus everywhere, and especially if they are one of the small band of super spreaders. We could go down the Chinese – and Australian – route of just locking people up in hotels/hostels/camps or we could accept a proper telephone (or tag) based home monitoring approach as adopted in many Far Eastern democracies. Every bit of my liberal loving brain screams blue bloody murder at this approach but frankly, I would much rather suffer this terrible intrusion than a third or fourth lockdown which destroys people’s livelihoods. We are into trade-off territory and some form of electronic monitoring is arguably the least bad option.
Which brings us to air travel. I hope that various industry associations working on new airport-based testing and control procedures work – test before you go on a flight, test at the airport and then test again a week later. That seems to me to be a sensible approach married to tougher isolation. But if it doesn’t work then we have to contemplate simply saying no to non-essential air travel for the foreseeable future. Again, every bit of me screams no to this approach but we need proper border control and without it, it seems to me we’ll just import the virus from whatever country is the next weakest link. I hate this next step profoundly, but it seems to me that we might have no choice. And its implications for the likes of Ryanair and Easyjet are nothing short of catastrophic.
But unless we have all four building blocks in place (massive testing, localized intensive track & trace, monitored isolation plus tough border controls), we’ll come out of the second lockdown and then go back in again a few months later with a third lockdown. And on and on until the vaccines eventually start pushing community level immunity levels to a sensible point (between 40 and 70% depending on which scientist you talk to). The damage to our economies of this stop-start approach will be unbearable and investors will punish those nations and governments who can’t get this bloody virus under control. On a side note, the failure to get on top of this challenge will also constantly enable those public health busybodies to keep demanding lockdowns and circuit breakers whilst ignoring the huge human and economic damage. Am I the only observer who despairs of the constant stream of criticizing, backbiting, blame-shifting, and finger-pointing coming from too many of our leading public health scientists?
By contrast, those countries who states react quickly to this challenge and who preserve their domestic consumption economies will prosper. Investors will buy into their cyclically exposed, consumer stocks and at some point, in 2021 or 2022 we’ll get back to some semblance of normality, but with much larger government debts. The good news is that here in the UK there is some evidence that our battered state – which hasn’t covered itself with glory to date – is getting a grip. Mass testing is imminent and track and trace will improve (fingers crossed). There is talk of a more thought-through approach to isolation and quarantine and hopefully, the UK government will ditch its daft aviation policies (with all those countries moving in and out of the red list) and embrace a more holistic approach being suggested by some airline industry participants.