The world just changed narrative is bullshit

COVID-19 has been an issue for weeks. The bond market realised it. Forex markets realised it. So don’t give me the “Italy changes everything” bullshit. And spare me your “black swan” nonsense*.

The reality is that very little has changed with the growth of COVID-19 over the last few days. If we look only at cases caught outside of China:

  • three weeks ago, cases were doubling every five days
  • two weeks ago, cases were doubling every five days
  • now, cases are doubling every five days
COVID-19 Cases doubling every few days

That is what a contagious disease does. The growth in cases transmitted outside of China is following the kind of pattern you would expect:

We know the disease is incredibly virulent – the Diamond Princess showed that. We also know that a vast number of patients show little or no symptoms, which means that it spreads easily. We have enough evidence to suspect that the disease is airborne.

We also know the key risk of an epidemic is when hospitals are over-run with patients and can’t properly treat the patients. That is why the mortality rate in Hubei is 5x higher than in the rest of China. And that is why China has put strict quarantines and bans. And that is why Italy has followed suit.

The best hope for countries is to dramatically limit human interaction. This will save lives. It will also have a significant effect on the economy.


The most common bullish argument is:

  • COVID-19 is just a bad version of the flu
  • There will be so much fiscal and monetary stimulus that stock markets will go higher

The risk is that China can’t stimulate much harder – they are already building at incredible levels:

Chinese floor space construction

And so it is likely the stimulus won’t be enough to replace the lost demand. After being through a complete quarantine/lockdown, my expectation is consumer spending will be muted for months and maybe even years.

If a gigantic government stimulus eventuates, then we will reconsider based on how expensive the market is and how targetted the stimulus is.

Going to ground

Our portfolios “went to ground” at the start of February, selling stocks and investing in bonds/cash/international currencies. Our tactical growth fund has been close to 50% underweight equities for a number of weeks. This is a significant deviation and one that we have not undertaken lightly.

On a stock basis, we cleared out of travel and oil stocks, bought up global consumer staples (in particular health and hygiene), global healthcare, and opted for defensive holdings.

Trading going forward

But that is in the past. The question is what to do from here. Our plan at the moment is:

  • Stay focussed on the virus statistics (see here for latest data or here for a more analytical series) to look for changes
  • Hold onto cash, foreign currencies and bonds. Patience, patience, patience. Build up our shopping list. We are looking for high-quality stocks are leveraged to the economic cycle that will become cheap. But, we are in no need to rush out and spend.
  • Make relative trades. When markets get smashed, relative valuations change, and often good quality stocks become cheap relative to other shares. We like to use market volatility to increase the quality of the remaining shares in our portfolio.

If markets shoot higher, then we will underperform, but we think the trade-off is justified. Downside protection is more important at this point in the cycle than chasing stock markets higher.


* Black Swan Footnote: I hate when people talk about these sorts of events as black swans. A black swan is an event that is not just unlikely but presumed not to be possible. Say you are playing roulette. There are 18 red numbers, 18 black numbers and one green. If the ball lands on green, that is not a black swan! You knew the green number was there, it was unlikely, but the ball clearly could land on green. If the ball somehow got perfectly balanced on the strip between two numbers and the house decided to take everyone’s money, that is a black swan – i.e. you didn’t even realise that the ball could do that (or the house would do that!). 

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  1. That chart on infections says it all. In a year everyone on earth will be infected and most will be dead before the next Rolling Stones World Tour.
    The only solution is to crack open our neighbors skulls and feast on the goo inside.

    • I can’t bear my neighbour so I wouldn’t feast on anything he has to offer but I don’t object to cracking open his skull and taking a look.

        • Home. You can’t believe that c0cks like this exist – or haven’t, to this point, been bludgeoned to death.

      • Dominic, Its clearly end of days so everyone has to make their own choices here, tough as it is. But if you decide to crack open his skull and don’t feast be sure to offer up the Goo on Gumtree. You could trade for two stroke fuel, bandages and possibly even infant formula depending on the Bid/Offer Spread.

  2. Italy was the 2nd plane hitting the WTC.

    Nothing really changed in that moment from the one before, but it’s what made people realise what was going on.

  3. Good post, Damo.

    My feeling is that this going to be like the Spanish Flu, but better managed. Medical science is better, services are better and the developed world is not in the last year of a World War.

    Prepare for self-quarantine and an economic downturn.

    • desmodromicMEMBER

      The case fatality rate for COVID-19 is about 20x higher than Spanish flu, higher again in some countries The 1918 pandemic killed so many because there was vast number of infections. Spanish flu was also a novel virus, unusually passing directly from birds to humans. The unknown here is whether COVID-19 is more or less infectious than Spanish flu and whether the infection can be contained. The evidence is starting to suggest it will be difficult to contain and WHO is far too sanguine given the evidence.

  4. “Patience, patience, patience.”
    That’s the hard bit, isn’t it! FOMO is still hard at work; it’s ingrained in ‘our’ financial DNA now. We are certain ‘they’ will come to the rescue, and stocks will look back and laugh in the face of those who had patience.
    But, maybe not this time?
    Time will tell if those with patience become economic patients themselves or live to reap the fruits of their self control.

  5. The problem is that there is no real good news on the horizon in relation to Covid-19. Everyone is waiting around for the inevitable next piece of bad news. You need to be crazy brave to invest in those circumstances.

  6. This correction has nothing to do with covid 19. If bernie gets beaten at the primaries on the weekend the market will launch into outerspace. If he wins bigly it will tank like a mofo just as it has done after he got 50% of the vote in Nevada Primaries

    • If Bernie gets the nomination Trump’s a shoe-in … either that or he meets with an unfortunate accident.

      This market was primed for a correction anyway – it was just looking for an excuse.

    • That would be the people who’ve been saying for weeks:
      “We aren’t ready to call it a pandemic yet”
      And then turned around and said:
      “We no longer use the term pandemic”
      But also:
      “We should prepare for a pandemic”

      Those people?

      Mmmm very credible.

  7. ha ha Ben Bernakie said 1 week ago Lehman collapsed our fundamentals are strong 🙂 yet what happens.

  8. Its no worse than the ordinary flu, so why not just let it run? The flu kills 400,000 people a year, the same type of people that this coronavirus targets – the elderly. Does it really matter if its the flu or coronavirus that kills them? According to the 2% death rate, 14 people on the cruise ship should be dead by now, but no-one has died. So its not even as deadly as the Chinese stats make it out to be.

  9. Locus of ControlMEMBER

    “The best hope for countries is to dramatically limit human interaction.”

    Well, life won’t change for us, the 58 shut-ins who patronise this site (h/t to MB for coining the ‘shut-in’ thing).

    Great analysis Damien.

    • Yeah slightly over the top…If all these Fundies are permanently Shut In. Pornhub will crash then we will see a serious revolution on our hands.
      Later in the year when this farce is forgotten it will be the Alien thing again or Australia day, or transgenders mutating after Corona Virus and setting up a new break away AFL league.


  10. Preetty sloppy analysis.

    You need to learn to distinguish between an exponential curve (which this isn’t) and the early stage of an S curve (which outside China cases is) – they do look similar but they are NOT the same. The early stage doubling rate is a furphy.

    As to “We know the disease is incredibly virulent – the Diamond Princess showed that.”-no – what the Diamond Princess shows is that you confine a group of people in close quarters with shared air conditioning etc then you are creating a breeding ground for any and all infections.

    You are guilty (as are so many) of the availability heuristic fallacy and base rate neglect. Google how many cases of the normal flu there were in Italy just a month ago – Then compare that to the paltry number of CV cases in Italy (or even globally) – the answer should sober any alarmism.

    • Ummm, no.

      Flu statistics are difficult to compare across different eras. But reasonable estimates would be as follows
      The mortality from seasonal flu in western countries is perhaps 0.01% (0.009% in Italy this winter in the article you linked to)
      The mortality from the 1957 and 1964 pandemics was perhaps 0.1%
      The mortality from 1818 Spanish flu was about 2.5%

      We don’t really know the mortality of this. Best estimates are around 1%, with an error factor of 4 either way (i.e. most likely between 0.25% and 4%). So perhaps 100x higher than the usual seasonal flu most of us think of.
      It is exponential at this point.
      Doubling every 7 days
      Or 10% growth per day

      At some point, it will stop being exponential. R will fall as it runs into more previously infected people, and this will disrupt spread. But right now, it is expanding quickly.

      This is almost certainly going to be something far worse than anything we have previously seen.

      • Maybe you should have a look at recovery statistics – they are also growing exponentially (whereas deaths are growing linearly).

        My point about the flu (which you have completely missed) is that it is far more widespread an prevalent and kills far more annually than have even caught CV – we are being scared due to the novelty. Yes CV has a higher death rate, Hubei is a disaster and yes precautions are necessary – but context free alarmism ignoring the base rate of similar infection is not just stupid – its sloppy epidemiology and is producing woeful policy decisions that will be more harm than the virus itself

    This suggests things are pretty bad in Wuhan.

    Two very good posts you all need to read if you have not already done so. They have some practical advice, and are much better than anything on MSM.

    Hard to know how this will compare to 1918
    Much more mobile population = faster spread
    Much older population
    Much more diabetes and obesity …..
    MUCH less resilient psychologically
    Australia much less self-sufficient

    We didn’t have anything to treat ‘flu in 1918.
    We don’t have anything to treat COVID-19 100 years later.

    There could be a demand for 650,000 ICU admissions in the most severe scenario.
    With SARS, some patients needed many weeks in ICU.
    But lets say average 7 days = 4,500,000 ICU bed days.

    Sure we won’t need them all the same time – that is the point of trying to slow this down and get a broader but falter peak (although we won’t be able to totally smooth the demand curve).

    There are about 2,000 ICU beds in public and private hospitals combined (I expect the government would take control of the private hospital facilities)
    = 730,000 bed days pa

    So there will need to be some rationing – I suspect age-based.

    There is limited scope to increase ICU resources – industry has “just in time”, health has “just enough” – these are very expensive resources, and no one wants to pay for more than necessary.

    This assumes
    1. No other patients going to ICU – no bypass surgery, no neurosurgery, no trauma…
    2. No shortage of consumables
    3. No staff sickness, absenteeism and al beds able to be utilises
    4. None of those casually employed health staff decide “Hey, I’m casual”

    So worst case is very very bad – much worse than 1918.

  12. One of the scariest things about this has been the way governments have responded.
    The Chinese response was extraordinary (not seen for 500 years) in January. At the time, that was highly disconcerting to many of us.

    Western governments (esp 5 Eyes) have been very coordinated in their response to this
    1. Coordinated in quarantining China and ceasing scheduled flights
    2. Coordinated in evacuating their citizens from Wuhan
    3. Coordinated in evacuating their citizens from the Diamond Princess
    4. Coordinated in the official announcements and release of plans all round the world the last 24 hours

    You may suspect that such coordination reflects a significant event.