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A Viral Lesson from History March, 2020

In a time of a medical and financial crisis, it's good to read up on history.  During periods of fear, some people predict, often persuasively, that the sky will fall.  Uncertainty rises very high.  The uncertainty about the future amplifies our immediate fears of catching the illness, or losing income over it, and some of us succumb to these fears   We make disastrous, life-changing mistakes in our investment portfolios.  


Reading history provides an antidote.  Stock market history is full of panics and crashes, but only a few cause lasting damage, and they all dissolve into recovery.  In the Great Crash of 1929, stocks lost almost 90% of their value over three years.  That was a whopper.  But numerous other crashes became statistical blips which today we can barely spot on a stock chart.  I think that the Corona virus panic will go down in history as one of those.


For my reading, I chose the period which accompanied the Spanish flu epidemic of 1918.  The Spanish flu was actually the H1N1 virus, which today we call Swine flu.  It had nothing to do with Spain. The first thing to note about this epidemic is that it lasted 3 years.  Between January 1918 and December, 1920, 500 million people, roughly 27% of the global population, caught the bug, thought to have originated in Kansas.  The death toll is unknown, but is estimated between 17 million and 50 million, with a few estimates as high as 100 million people.  This was a real illness - more serious than our current one.  Halfway through the epidemic, the virus mutated and became deadlier.  Mortality in young adults, who normally have stronger resistance than their elders, shot up, and the bug spread as efficiently in summer as in winter.  Cases declined and then disappeared abruptly at the end of 1920.


As today, hospitals and health care providers of the time were overwhelmed.  Hospitals established make-shift wards and did their best, but millions died without receiving medical treatment.  Sometimes, the treatments were worse than the illness.  Some number of victims died of aspirin poisoning, after taking 8 to 31 grams per day, as recommended at the time by the US Army Surgeon General and the Journal of the American Medical Association.


Stock market analysts of today haven't drawn many comparisons between the Spanish flu and our current virus.  I've read almost nothing of it online, and for one big reason.  During the Spanish flu epidemic, the stock market went up.  Before the virus broke out, the stock market had declined 39% due to the onset of World War I.  It was cheap already.  The market climbed steadily back during the years of the contagion, which coincided with victory for allied forces in Europe, the signing of the Treaty of Versailles, and the reestablishment of peacetime economies in Europe and North America.  Global economies then took off into the Roaring Twenties, which generated a 3.5-fold return from stocks, and culminated in the Great Crash of 1929.


The current epidemic is less scary than the Spanish flu.  Our mortality rate is lower.  And our infection rate is much lower.  500 million people caught the Spanish flu.  It's still early, but as of this writing, with 370,000 cases in a global population of 7.8 billion, we have an infection rate of 0.005%.  I will be surprised if infections pass, say, 25 million.  In the age before the internet and telecommuting, social distancing was less practical.  This time, it will work.  I know I sound a bit panglossian, but I think that we have this epidemic under control.


I personally see a scary epidemic coming at the end of eleven years of uninterrupted stock market advances.  That's the real story, and why I think that the market has crashed so severely.  It was simply very high.  How better to pop the mood of optimism and sow confusion than to have a surprise pandemic - a purple swan, as my friend Kevin Widrow has called it.


How the market recovers depends less on medical treatments than upon our economic policy response.  In 1929, disastrous policy responses unnecessarily turned a stock market crash into a Great Depression.  We must urgently avoid making similar mistakes.


Our steps towards social distancing - the closure of schools and restaurants and shopping malls, the complete cessation of travel - have economic consequences.  I'm not sure that higher education will ever be the same.  I understand social distancing and why we do it  It's a good idea.  But I think that policy makers should balance their desire to control the virus against economic consequences  . The Federal Reserve has lowered interest rates to zero, but that won't help if no one may leave their homes.


Those of us who see policy-making as a balancing act should inform our leaders that they shouldn't overdo it. I have confidence that Americans, who conveniently have an election coming up, will do so when they vote.


On the bright side, the economy will adapt.  University staff have been placed on leave, but Amazon has announced an intention to hire 100,000 new workers.  The beauty of our system lies in its enormous flexibility and capacity to adapt to new situations.  We need policies which encourage such flexibility and restore the freedoms of an open economy as soon as is practical.  Then, we may all get on with work, and enjoy the growth of our investment portfolios, and the prospect of a secure retirement.


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