About The Coronavirus Epidemic

The S&P 500 is down almost 14% from February 19 to February 27. Because of, if you believe the news, the Coronavirus and its effect on the world’s supply chain. Yield on 10-year treasuries is down to 1.27% in anticipation of a cut in the Fed’s published interest rate. Presumably from the same cause.

It takes decades even centuries to build an economy. It seems unlikely its intrinsic value changes 14% based on news of a virus. There have been other viruses and few remember them. People and markets are amazingly resilient. Just not in time units of hours or even days. But, that’s the news cycle and that’s what we notice.

Always keep in mind the news services have a business plan and it is dominated by getting attention. That drives eyeballs on the screen and clicks, and those drive advertising revenue. Fear and uncertainty are very powerful sales agents. The media knows that and uses it for their purposes.

The media does not always tell you what to think, but by using one story to dominate the news, they tell you what to think about. Given the cognitive error “Availability bias” they need do no more to make their business plan work.

The key to the availability bias is that something we see more often tends to seem more true. Further we expand our belief in its likelihood as we hear more about it.

Is Corona virus really a problem?

Most certainly yes, but not for everyone everywhere.

  1. It has a long incubation period which is not good as it allows an afflicted person to infect others before frank symptoms appear.
  2. It does not affect all afflicted people the same way. For young people with a healthy immune system it presents sysmptoms but not problem ones. For senior citizens and the immune compromised it can be, emphasis can be, deadly.
  3. It is easy enough to spread. Microscopic droplets in air up to about 6 feet or by skin to skin contact.
  4. Prevention is also easy enough. Wash your hands thoroughly and often.
  5. Is the death rate high? It is a little early to tell for sure, but it seems to be around 1%. That could change depending on the availability and quality of local health care.
  6. Is there a vaccine? No, but there likely will be one in a year or two.

The economic effects

The economic effects are more difficult to assess, because some of the effects are driven by emotion rather than underlying problems in the economy. Emotion is short term and random.

We can expect the supply chain to be adversely affected at least for a while.. The world supply chain has come to be like monoculture in agriculture. If you have only one variety, (supply source), and something harms it, you are out of luck. Notice how in the past bananas have been affected by monoculture problems. Examine Durch Elm disease and its effects. In 1842 Longfellow wrote “The Village Blacksmith”, a poem that includes the image “under the spreading chestnut tree.” A disease wiped out between 3 and 4 billion trees in the first half of the 20th century.

Diversity of supply sources is a benefit even if it costs a little more. Just like agriculture or a portfolio

What to do?

There is no answer to that because the dynamics of the problem are still foggy. Ultimately it depends on when you need your money. We will eventually see that the virus lead to a fluctuation caused by fear among people who buy and sell securities. Market prices change nearly at random because people are unpredictable especially when faced with fearsome topics. You get the same effect when greed is present.

So, your choice is to participate or not. Maybe participate later when the fog lifts a little. Try to keep a longer perspective. Try to find objective meaning.

Every crisis has an opportunity.

Further reading

Image from South China Morning Post Magazine 27 February 2020

For a deep look at the beginning, you might find this cover story from the South China Morning Post Magazine useful. How Disease X, The Epidemic-in-Waiting, Emerged in China. For those of you who wonder how I came to be reading a Hong Kong based magazine, the long article editor for SCMP magazine is my nephew – Dave Besseling. Good one Dave.

I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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