Good Friday Morning! I usually write my missives to this list late Thursday night. Not today. My day job as a lawyer got abruptly canceled when it got announced we had “secondary contamination,” meaning it’s a “2-3 steps removed from Kevin Bacon” kind of situation. The entire office got closed the rest of the week for a “deep cleaning” “out of an abundance of caution.” Fun times.
I have a column coming out on the issue of testing. I keep beating this drum in columns, social media, and real life. We are not testing COVID-19 thoroughly enough. Here’s what you need to know on that front:
- The United States has had positive tests for COVID-19 on US soil going back to January, and no testing response from the FDA or CDC. Those agencies were blocking researchers from testing. An NYT report showed the CDC/FDA squandering two months of travel bans on China, and scrambling now. Read the entire piece.
- Our second problem is that even IF we get testing up to speed, we have to run those tests and get results. We are severely hampered by a lack of lab capacity on this front. The American Enterprise Institute put up a Twitter account where they track our testing capacity. As of Thursday afternoon, we could only test — nationwide — approximately 20.5k patients a day. We’re sending out millions of tests, and we have to increase our testing capacity.
- But that brings us to the third problem: U.S. coronavirus testing threatened by a shortage of critical lab materials. Even if we get the testing numbers up, and we get the number of patients we can test up, we’re still struggling to keep enough supplies in place to run labs on tests.
- Also, just for fun, China is threatening US drug and medical supplies, to prevent any retaliation against themselves. At the end of this entire fiasco — China is going to have to answer for its malfeasance.
Between China and our own bureaucratic red tape, the COVID-19 response so far has been paltry. Travel bans buy time; they aren’t solutions. We can’t fix a problem that we don’t know the scope of, and right now, we’re flying blind.
That’s on the healthcare front. In the newsletter, I’m going to touch on the economic front. Links to follow.
Where you can find me this week
Please subscribe, rate, and review my podcast on iTunes, Spotify, or Google Play — the reviews help listeners and readers like you find me in the algorithms. Make sure to sign up for the Conservative Institute’s daily newsletter.
Autopsy of an Impeachment: How and why the Democrats failed – The Dispatch
My debut piece for The Dispatch, the new news site of Steve Hayes and Jonah Goldberg. I attempt to strip down the entire impeachment and show what was genuinely animating the process, and not the daily news cycle. Hayes called it, a “comprehensive look … at how speed and partisanship doomed Democrats’ impeachment efforts.” And Goldberg said, “Save this for a long read.” They were both very complimentary, along with the entire Dispatch team. Give it a read and subscribe to their newsletters! I may or may not be framing those tweets.
This week on the show, host Daniel Vaughan about how the coronavirus (COVID-19) is impacting everything in the United States. He talks through the overall impacts on a pandemic level and also how the United States healthcare system would pay for a vaccine, pushing back against Bernie Sanders’s call for a vaccine to be free. Finally, he talks about how COVID-19 impacts the economy, the primary calendar, and campaigns.
A column about the tornado that went through Nashville, TN, and what it revealed about society.
Media hysteria is real — but so is the need to get ready and have a plan.
COVID-19 Ripple Effects
Let’s take a step back and think big picture. When you’re looking at the overall economy, there are two broad segments of it: supply and demand. In general, everything weaves in and out of the supply and demand, pushing and pulling those lines in different directions. Supply includes products sold by companies or services that companies deliver. Demand is the consumer side of the equation of the story — either customers buying products in the story or companies purchasing.
COVID-19, the coronavirus, Wuhan flu, or whatever you want to call it is unique in that it’s affecting both sides of the economy. On the one hand, we’ve dealt with extended supply issues out of China, with their factories getting shut down. That, in turn, affects US businesses who sell products or services based out of China, they have lower supply and run out of products to sell to consumers.
The demand side of the economy is hit in two ways by this phenomenon. First, if fewer products get sold, but demand hasn’t moved, then there’s less spending happening. Companies are losing out on potential sales. But, if suppliers and sellers aren’t making money, that can also mean they can’t pay employees, which means that there are fewer people spending money. COVID-19 is keeping people at home and canceling a lot of events too — which cuts down on people spending money on activities like NBA games and other things.
COVID-19 is affecting both sides of the economy, supply and demand, but cutting down both. When that happens, that means overall economic growth shrinks. And that’s what we’re facing right now: economic growth is going to grind to a halt this year, and the big question is, does it not only slow down — but shrink and lead to a recession?
That’s why there’s so much volatility in the markets this week — everyone is trying to figure out whether or not this market downturn is pointing to a recession. When a market hits a bear market, which is when it loses 20% or more of its value in decline, that typically signals a recession. 80% of the time markets enter a bear market; a recession is around the corner.
The corporate debt bubble
I’ve written several times that the virus could have ripple effects that would go across the entire economy if it hit a perfect storm. The conditions are ripe for that storm right now. The New York Times is even catching on now and had a story titled: “Coronavirus May Light Fuse on ‘Unexploded Bomb’ of Corporate Debt: A surge of risky borrowing by companies around the world leaves the global economy especially exposed to the potential costs of the outbreak.” Here’s what they say:
For years, wonks bearing spreadsheets have warned that corporations around the planet were developing a dangerous addiction to debt. Interest rates were so low that borrowing money was essentially free, enticing companies to avail themselves with abandon. Something bad was bound to happen eventually, leaving borrowers struggling to make their debt payments. Lenders would grow agitated, tightening credit for everyone. The world would confront a fresh crisis.
Something bad is now happening. As the coronavirus outbreak spreads, halting factories from China to Italy, sending stock markets plunging and prompting fears of a worldwide recession, historic levels of corporate debt threaten to intensify the economic damage. Companies facing grave debt burdens may be forced to cut costs, laying off workers and scrapping investments, as they seek to avoid default.
“We have been always saying that we are sitting on top of an unexploded bomb, but we don’t know what is going to trigger it,” said Emre Tiftik, director of Research for Global Policy Initiatives at the Institute of International Finance, a Washington-based financial industry trade group. “Can the coronavirus be a trigger? We don’t know. Maybe.”
By the end of 2019, total outstanding debt among corporations other than financial institutions had surged to a record $13.5 trillion worldwide, according to a recent report by Serdar Çelik and Mats Isaksson for the Organization for Economic Cooperation and Development, the Paris-based research institution. That number has swelled as many companies have sold riskier bonds to finance expansions.
The Federal Reserve has responded to the COVID-19 outbreak by loosening monetary reserves, again, dropping interest rates and flooding the markets with cheap money. But as the WSJ noted, this is only part of the problem. The Fed may be making it more affordable to pay off debt — but you still have to make payments:
After years of taking on ever-increasing amounts of debt, U.S. companies are by some measures more leveraged than at any point in history. With measures that governments around the world are taking to combat the virus, and individuals’ social distancing, the possibility of a sharp, prolonged drop in profits looms for many businesses. That makes it hard to pay the bills.
The Fed on Thursday reported that nonfinancial corporations owed $10.1 trillion in debt in the fourth quarter, up from $8.4 trillion three years earlier. That amounted 46.6% of gross domestic product, just a bit below the 46.9% reached in the third quarter and well above the peaks reached in either of the past two recessions.
WSJ does leave this caveat:
Over the past several years, many economists and policy makers have made the point that high corporate borrowing levels aren’t quite so alarming. Low rates have allowed companies to effectively refinance their debt, lowering interest costs as a result.
Furthermore, by issuing longer-term bonds, companies have lengthened the maturity of their debt so they don’t have to worry about sudden stops to the funding of their operations. It therefore seemed unlikely that corporate debt was about to ignite the next crisis.
But that didn’t mean that indebted companies could find themselves struggling to pay debt in a recession, exacerbating the downturn. The risk is that high levels of corporate debt represent a significant amount of dry tinder. The coronavirus just lit a match.
Worst-case scenario: it takes the full year to get past the COVID-19 scare, and businesses struggle to make a profit all year long. That leads to businesses going under due to debt, and the more that goes under, the worse off it is across the board.
Best-case scenario: this is a brief scare that only leads to 2-3 weeks of low economic productivity that we get back once everything is back to normal. Markets don’t know which scenario will play out, or if its something in the middle. And until we get that nailed down — and part of doing that is wide-spread testing that tells us how widespread this virus is — volatility in the markets will continue.
William Cohen wrote this in 2018 when we had another brief dip in the markets:
Debt is very unforgiving. And yet in the last decade the debt has piled up,especially at companies that bulked up through mergers and acquisitions. Campbell Soup borrowed more than $6 billion to buy Snyder’s-Lance, the potato chip and pretzel maker, and the company’s debt is now more than five times its cash flow. After Keurig Green Mountain and the Dr Pepper Snapple Group merged, the combined company’s debt reached $17 billion, nearly six times its cash flow. Bayer now has around $40 billion of net debt outstanding after its acquisition of Monsanto; CVS Health issued $40 billion of bonds to help pay for Aetna; and Sherwin-Williams sold $6 billion of debt when it bought Valspar. By one estimate, IBM will issue around $25 billion in new debt to complete its $34 billion acquisition of the software company Red Hat.
There’s a lot at risk here. If these BBB-rated companies get downgraded further into “junk” status — a distinct possibility if a slowing economy makes a dent in their profits or if their big acquisitions do not pay off — a vicious cycle is nearly inevitable. That means higher borrowing costs when it comes time to refinance or to obtain a new credit line and an increasing risk of default.
When bellwether companies such as G.E., AT&T and IBM get into financial difficulty, that’s bad news for the rest of us. When credit markets feel nervous about the biggest corporations, it’s a good bet that it will be harder for ordinary Americans to get or refinance a mortgage, or get a car loan or credit card. It is a scenario that became very familiar a decade ago; the sequel may be upon us soon.
Whether or not the sequel is upon us, we don’t know just yet. But there are areas in the economy, across the board, that would get hit particularly hard if this virus continues shrinking economic growth.
Links of the week
How to make your own home sanitizer – Popular Science
Tick-Tock – Ben Hunt
Coronavirus burial pits so vast they’re visible from space: Iranian authorities began digging a pair of trenches for victims just days after the government disclosed the initial outbreak. Together, their lengths are that of a football field. – Washington Post
Why the CDC botched its coronavirus testing: The first testing kits from the Centers for Disease Control had a simple fault, and red tape prevented other labs from creating their own. – Neel V. Patel, Technological Review
Media discover ‘Wuhan virus’ and ‘Chinese coronavirus’ are racist dog whistles just in time to attack Republicans – Becket Adams, Washington Examiner
Twitter Thread(s) of the week
Satire piece of the week
COLUMBUS, OH—In a campaign speech delivered via remote video feed, presidential candidate Joe Biden reassured everyone that the coronavirus outbreak “isn’t so bad” and that “the Black Plague” was much worse.
Many have expressed fears that Biden, who is too old to be called a boomer even, wouldn’t make it through this pandemic. And Biden put those fears to rest.
“Trust me — I’ve got firsthand experience with this — the Black Death was far worse,” Biden said. “We made it through that, and we’ll make it through the Coronavirus outbreak.”
Thanks for reading!