“When the pandemic struck the US, we knew that the timeline of the virus will be the most important, and perhaps the only relevant variable determining the path of the economy and financial markets”, JPMorgan’s Marko Kolanovic writes, in a new piece out Wednesday.
That, he notes, is why he expended a considerable amount of energy in March and April forecasting the trajectory of the epidemic, calculating the likely true mortality rate and predicting inflection points for key hot spots, including and especially New York.
Kolanovic’s forecasts proved largely accurate. As he writes Wednesday, the series of notes penned over the course of the crisis generally led him to conclude “that by mid-April, conditions [would] be met to start re-opening economies”.
Read here for a summary of Kolanovic’s COVID-19 research
His outlook for the timeline on reopenings and also for the likely impact of unprecedented monetary and fiscal accommodation, informed his on-the-record call for a relatively swift recovery for risk assets versus consensus.
Some commentators took a derisive approach to covering Marko’s coronavirus research, if they covered it at all. Media outlets which normally rush to document Kolanovic’s every word, steered largely clear of the COVID-19 notes. Bloomberg Television did finally invite Kolanovic on (via phone interview), and CNBC took a half-hearted stab at documenting his rationale for US equities returning to pre-crisis levels, but generally speaking, the coverage was sparse.
Here’s the bottom line: For all the “armchair epidemiologist” banter you may have been subjected to in April, two things are indisputably true. First, Kolanovic’s projections for key virus metrics in New York were generally accurate, as was his timeline for reopening parts of the economy. Second, risk assets have recovered faster than virtually anyone dared to suggest at the lows in March.
What happens from here is, of course, up for debate, but this reminds me a bit of January 2019, when, following the worst December for US equities since the Great Depression, Kolanovic said stocks would be back to record highs within months. That prediction panned out, leaving critics either silenced or else grasping at straws.
But Kolanovic’s latest is not a victory lap. Instead, it’s a critique both of the current thinking around the reopenings, and, more poignantly, the prevailing political landscape, with an emphasis on how the crisis is being leverage for political points.
First, Marko says many of the lockdown measures implemented across the globe were “inefficient or late”. He cites recent studies which indicate total lockdowns implemented in European countries “did not produce any change [in] pandemic parameters”. Then, Kolanovic says this:
While our knowledge of the virus and lack of effectiveness of total lockdowns evolved, lockdowns remained in place and focus shifted to contact tracing, contemplating second wave outbreaks, and ideas about designing better educational, political and economic systems. At the same time, millions of livelihoods were being destroyed by these lockdowns. Unlike rigorous testing of potential new drugs, lockdowns were administered with little consideration that they might not only cause economic devastation but potentially more deaths than COVID-19 itself.
That will resonate with some readers. Other readers may find it distasteful. Whichever camp you fall in, remember that Marko is a data-driven individual. The cadence he employs in his notes is unapologetic, not because he means to be abrasive, but rather because he intends to state only facts, which means there’s nothing to apologize for. That cadence is reflected in the excerpt above.
Some readers may recall that Kolanovic predicted Donald Trump’s election. And yet, he has critiqued (but not necessarily “criticized”) some of the president’s policies for the extent to which the numbers simply did not add up. For example, Marko at one juncture calculated a rough measure of the cost of the trade war for the US equity market and compared that to what may have been gained via tariffs. When the former figure came back larger than the latter, the conclusion was simple: At least on that measure, the trade war was ill-conceived.
The point: Kolanovic speaks in numbers and facts. Of course, economics and political science are not physics or biology, which means the term “facts” can be somewhat elusive. I know that just as well as anyone. I started as a social “scientist”, after all. But you can be confident that when you read Marko, you’re reading what he at least believes to be an objective assessment.
And on that note, he says the data does not support the notion that the lifting of lockdowns is associated with higher infection rates.
“The data in Figure 2 shows a decrease in infection rates after countries eased national lockdowns with >99% statistical significance”, he writes. “Indeed, virtually everywhere, infection rates have declined after reopening even after allowing for an appropriate measurement lag”, Marko goes on to say.
(JPMorgan)
What accounts for that? Well, a lot of things, probably. The list of possible contributing factors is virtually limitless, but Kolanovic mentions “the elimination of the most effective spreaders, impact on the most vulnerable populations such as in nursing homes [and] common sense measures unrelated to full lockdowns, such as washing hands”.
The overarching point, though, is that “the pandemic and COVID-19 likely have its own dynamics unrelated to the often inconsistent lockdown measures that were being implemented”, he writes.
This brings us to what Marko correctly characterizes as the “question that has divided the country”. That question: Can stringent lockdown measures be justified any longer?
As regular readers are likely aware, my answer would be yes. But Kolanovic’s answers (plural) exhibit his ability to assess the situation more objectively than I can bring myself to do.
For instance, he notes that Democrats have an election year interest in focusing on perceived shortcomings in the administration’s virus response.
“Election logic and backtests would say, the worse the virus impacts the US, the lower the chances of an incumbent’s re-election given the economic pain, high unemployment and lack of health care during the pandemic”, Marko writes, before offering a pretty incisive (and concise) take on the evolution of Trump’s pandemic strategy, while simultaneously noting that Democratic states may be slow-walking things. To wit, from Kolanovic:
The initial response of the administration was to downplay the risk of the COVID-19 epidemic. However, since then, this simplistic thesis changed significantly. The administration shifted to forecasting a larger negative impact (setting the stage for them to ‘outperform’, and e.g. ‘hedging’ the Georgia reopening), shifting the pandemic blame to China and the WHO, and at the same time shifting the blame for economic pain to large blue states that are perceived to be slowing down the reopening of the economy. Indeed, allowed economic activity across the country is now largely following partisan lines.
Of course, this goes well beyond any one country or any one election. Indeed, we’re witnessing a similar setup to 2015/2016, when trends that had already gained significant traction globally (e.g., the rise of right-wing populism in Europe which itself piggybacked on fervent anti-immigrant sentiment accompanying the migrant crisis as refugees fled war-torn Syria) were accelerated by the successful campaign of a populist president in the US.
Kolanovic uses no names (not a single politician is mentioned). Rather, he offers this cautionary passage:
…demagogues and radicals across the world will be tempted to use COVID-19 to blame immigrants, people of different race, or use the pandemic as a pretext to intensify geopolitical tensions. Blaming the pandemic on an ethnic group or country can provide a convenient excuse for various failings at home, or may provide pretext to push a geopolitical or protectionist agenda. This is perhaps even more dangerous than using the pandemic to further domestic political outcomes.
What I would add is that due to the extraordinary nature of the 2016 US vote and, now, the equally extraordinary circumstances surrounding Trump’s bid for reelection, US domestic politics more than ever has the potential to both feed and feed off of some of the same issues at the heart of the 2015/2016 semi-global populist wave.
Now, on top of nationalism, protectionism and xenophobia, we have an increasingly inflammatory debate over big versus small government and, in the same vein, socialism versus capitalism.
“Another political fault line exposed by COVID-19 is the role and scope of government in everyday life, encompassing questions such as: Should lockdowns be recommended or mandated, how much of individual freedoms should be limited, etc.”, Kolanovic notes, adding that “these ideological fault lines… are to an extent replicated and exported to other countries in the west”.
For now, these are tail risks, he says, not near-term catalysts for a selloff.
As such, he maintains his positive outlook on markets, even as he emphasizes that “worrying populism related to the virus is putting at risk global cooperation and trade”.
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