The V-shaped recovery in East Asia is sadly no template for the blundering West. The near euphoric rally on global equity markets is based on a fundamental fallacy.
Most of Europe and North America are not pursuing the policies that enabled China and the Pacific Rim – with big variations – to suppress COVID-19 and to stabilise their economies rapidly.
The OECD family has adopted the rhetoric of East Asian policy – “test/track/isolate” – but most countries in fact have hybrid containment regimes that fall far short. With a few exceptions they lack the surveillance and quarantine structures needed to carry out a clean exit. Dominic Cummings would not have been allowed to drive across China, Taiwan, or Korea to find a more congenial lockdown venue. He would have been stopped, arrested, and punished.
There is a common theme in the bullish reports crossing my desk from the big global investment funds. They all start from the premise that the rebound in Chinese economic growth will be replicated. This “one-and-done” hypothesis repeats the error made by these same funds in February before Wall Street crashed 35 per cent.
They were not listening to the warnings of global virologists. Financial funds were modelling COVID-19 as if it were like SARS. But it was nothing like SARS. We knew even then that it was as contagious as flu but ten times more deadly, and with no cross-immunity to check the spread.
The scientists are warning again. They fear that Europe and the US are dialling down containment measures before the tracking apparatus is fully in place and before the stock of infections has been cut to manageable levels.
A new paper by Imperial College, London, says the R rate is above 1 in 24 US states, including Texas, Florida, and Ohio. “Very few have conclusively controlled their epidemics,” it said. Most are opening up anyway.
Imperial said the percentage of the US population exposed to the virus as of May 17 was 4.1 per cent, and just 1 per cent in California. The best evidence in Britain is that exposure is not much above 15 per cent in London and 5 per cent in the rest of the country. We are not close to herd immunity. The case fatality rate is as awful as virologists first thought.
This creates a terrible dilemma for Western governments. My presumption is that once easing has begun, a second lockdown becomes unenforceable. Discipline is breaking down across Europe and America, Cummings or no Cummings.
Yet my other presumption is that leaders cannot let the virus run its course and hope a vaccine will come along. Donald Trump is angling to do exactly that and a great number of investors seem to be betting on it too.
Jeff Currie, Goldman Sachs’ oil guru, says his ultra-bullish call on commodities works whether the post-lockdown strategy succeeds or fails. His premise is that if the virus roars back, the political classes will go for growth the second time around.
You cannot count on liquidity alone to keep pumping up stock prices in the face of a massive economic shock, tumbling earnings, and a tide of bankruptcies.
I doubt that Western democracies would allow their governments to act with such ruthlessness, or that people would go about normal business in the midst of a Wave Two. My fear is that the next few months will be a messy series of false dawns, carving out a protracted Nike swoosh rather than the Chinese “V” assumed by equity markets.