A Second Wave of Coronavirus? (w/ Raoul Pal & Giovanni Pozzi)
RAOUL PAL: One of the other things I'm interested in is China had its shutdown, which Italy is going through now. So, then they start bringing production back to life and a bit of consumption. Look, nobody trusts each other, the social distancing. There's a lot of scarring that comes out of something that's so fast. But the issue now is China's trading partners are all about to go through the same. There's a rolling shutdown. So, let's say Italy now has taken the more extreme measures, and within-- call it 60 days-- the rate of growth has now fallen significantly, like Korea, and they've got it under control. But at that stage, Spain or the UK or the US is going through peak. My issue is, does this drag on a lot longer just because of how this is spreading and how slow people are reacting? And does that create more problems than the initial shutdown? GIOVANNI POZZI: Well, it certainly will. It's a global system, interconnected, and we can't really split it in parts. It's not that China is all good and safe now, and Italy will be good and safe in 38 days. And then after 10 days, the UK. Of course, it's all very fluid on the positive and negative side. I would take it from another angle. So, if I look at the economy and the markets in general now, what would I want to know of the future to understand where they are headed? I would want to know how and when and where the second wave of infection develops. Because the first one, we've understood it. So, science and statistics seem to agree that the base case is that this pandemic, at some point over the years, will infect 50% of the population, maybe. People say between 30% and 70% with a slowly decreasing— RAOUL PAL: Which we need, because we need to herd immunity. People need to get infected, but slowly. GIOVANNI POZZI: Correct. Exactly. So, decreasing severity and decreasing stress on the health system, of course. So, if this is the case, it probably means that, as you said, let's say 60 days from now, most of the developed world sees a flattening curve in new cases, in deaths, and decreasing. And let's say the problem is solved, or uncertainty is gone. In this scenario, the Olympic games in Tokyo are happily held, which I strongly hope is not being superficial. That's August, that's not April. And then next winter in the Northern Hemisphere, we get back to the second wave. By then, maybe some vaccine is available. We don't know that yet. We know it takes long, but we'll see. So, that's the base case. In that base case, in my opinion, it would be hard to see a V-shaped the recovery, as they say, both in economy and in markets, because some impact on both the consumer confidence and investor confidence will remain. So, in a way, whichever the bottom level the markets and the risky assets will have reached by then, we'll have time to put money to work. And as well, we'll have time to get back to normal life. This will be different between the various areas. You have the old continent, Europe, behaving one way, and then probably you have China that was already running ahead as a herd of buffalo before, and they will continue to do so. And it has the domestic consumption power to have a V recovery. By the way, it wouldn't be a V, because the markets there didn't come off that much. So, it's clearly a different story. Now, this is the base The other two scenarios are worst and best. Worst scenario-- which I think not enough people are talking about, or maybe it's better that not enough people talk about it-- is that the second wave of infection comes long before, like now in China. That would be a killer. That would have everybody throw in the towel. It will kill the investor and consumer confidence, and we would really be left with no marginal buyer in the markets. RAOUL PAL: And that was similar to the Spanish flu, because it actually came back in July and August in France and a few other countries earlier than anybody would imagine. And that was the damaging one because everyone had stopped social distancing, everyone had relaxed. And then before you know it, it really takes off again. So, it's a hugely dangerous outcome, that one. GIOVANNI POZZI: Exactly. Of course, we strongly hope that times are different from the times of the Spanish flu-- and they are-- and that this doesn't happen. But let's keep this in a corner of our mind. And if we are investors in the markets, let's be ready to act if we want to reduce risk in case it happens, as we did, or we should have done, depending, when there was the first outburst of the first wave. Then luckily there is also a third scenario, which is the best case, justified by the temperature. So, there was a study, and there's a great map from, I believe, the University of Maryland, although I'm not entirely sure, that shows that all the regions affected strongly from Japan, Korea, Hubei, Iran, Italy, up to California are in the same yellow zone, which means they share the same ratio between temperature and humidity. So, it looks like it makes sense to think that the virus can die when it's warm. There is also a possibility, however small, that the virus dies forever in the summer-- in the northern hemisphere summer. So, let's try to keep always a positive note on the table, and we also have this scenario. RAOUL PAL: Yeah. And I think the key here is we will not know until later in the summer. So, we may get to the point of pausing as the curves all start to slow down. And I think we need to go through the panic in the US and probably in the UK first, that France and Germany and everybody is going through almost today. And then we'll see the curves flatten out. And then we have to wait, and we won't know. GIOVANNI POZZI: Yeah. Which is one of the reasons why I don't expect such a sharp V recovery as in other cases. I'm not negative. I'm a buyer on dips, in general. I think the underlying bull trend for the economy in general is still there. The reasons why it could extend some more time are still there, as well as the problems that were hidden behind that are still there. But that doesn't mean that it accelerates immediately. And one of the reasons is what you and I just said-- it will take some time for all of us to feel so safe and so strong from every perspective, including that of investing money in risky assets.