The COVID-19 financial crisis

This article was written based on a request from UQBS marketing by the An excerpt was subsequently published in the Courier Mail on February 2020 magazine release. Below is the full copy of the article.

The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger--but recognize the opportunity.

               - John F. Kennedy, President of USA 1961-1963

As of the time of writing, the COVID-19 has infected a shocking 1.3M cases globally and claimed 67K deaths. The US and the several European countries have a total of 760k cases which is slightly more than half the total number of cases globally. There are beacons of hope that countries that have been exposed to the virus at very early stages have been able to minimize the rate of infections such as Taiwan, Singapore, and Japan.

Upon receiving information that a highly infectious virus was spreading in China, the governments of these countries swiftly informed their population of the dangers and recommended social behaviours and enacted policies to minimize the spread of the contagion. It should be noted that these countries have experienced the SARS outbreak of 2003 and genuinely respect the dangers of a highly infectious disease. Of all these countries, Taiwan which had one of the earliest COVID infections in the region has less than 400 total COVID cases. Thus, from an epidemiology perspective, we do have evidence that the spread of the COVID virus can be managed and mitigated.

Financial markets have vacillated between moments of abject fear and panic versus hope and calm in response to promises of government aid and central bank intervention. They say every financial crisis is different. So what’s different about the COVID-19 2020? What are the dangers and where are the opportunities?

What’s different?

Arguably, the most important global financial crises in modern history are the 1930s Great Depression, 1987’s Black Monday, 2000’s Dotcom Boom, and the 2007-2009 Great Recession. Noone foresaw that these financial crises would occur before they did and much detective work was performed by regulatory agencies, financial experts and the academic community to peel back the obfuscation and complexity that often surrounds the world of high finance. Furthermore, for these financial crises their actual definitive causes continue to be subject to academic and professional debate.

With the current COVID financial crisis, we do know that it is happening because of the virus. We know that populations are fearful, and because it spreads so quickly, all we can do is minimize “population funnels” where people congregate due to work or living practices (e.g., airports, schools, offices, public transport). We know that the businesses that depend on these population funnels will be impacted drastically, and that both their business models and the social behaviour within these population funnels will have to change. Although there will be a short-term cash crunch, as businesses pause to contain the COVID-19 virus, businesses will recover. All banks need to do is provide adequate lines of credit to these businesses when they need it.

During most financial crises, banks are usually the problem and problems in the economic stresses often lead to insolvency especially when banks attempt to collect upon debts owing to them. However, there is a reasonable expectation that this cash crunch caused by the COVID is temporary. When business activity resumes, payments will start flowing once again. Furthermore, the banks are now well-capitalized compared to the 2007-2009 crisis and therefore can be depended upon to offer forbearance to corporates and mortgage holders. Central banks are working in unison to ensure that retail banks have sufficient liquidity.

Differently from previous crises, there is no individual, company, industry, or country that is responsible for causing this crisis. We know that no specific tribe is to blame; but that all tribes must work together to resolve it. Thus, different from previous crises, the general populace will be more accepting of the necessary fiscal actions that the governments take to safeguard our physical, emotional, and financial welfare.

Landlords will be asked for rent reductions or reprives by their tenants. Creditors will be asked to defer the payment scheme of their debtors. Banks will be asked for laxity on repayment of home mortgages. Reserve banks will be asked to support the economy by quantitative easing, lowering interest rates, and buying government and corporate bonds. Governments will be asked to help the unemployed and elderly who are most at risk from the COVID pandemic. Governments will be expected to provide the leadership and fund infrastructure projects to mitigate the impact of the next global pandemic.

And in no other financial crisis in history have we seen governments across the globe unanimously promising multibillion or even trillion dollar stimulus packages to kickstart the economy as a response to COVID-19 pandemic.

Known knowns, known unknowns, and unknown unknowns

‘...there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know...’

    - Donald Rumsfield, US Secretary of Defense 2001-2006

If there’s one thing that I’ve learnt while working on Wall St, is the importance of scenario projection for risk management. First, we need a careful analysis of our understanding of the situation. Once we have a careful understanding of the known knowns, and the known unknowns we can begin scenario projections and planning accordingly.

Known knowns

COVID mitigation strategies. We know that COVID can be contained. We have seen at least 5 countries in Asia that have worked incredibly hard and made difficult decisions to impose strict measures to safeguard the health of their populations and limit the spread of the pandemic, namely China, Korea, Japan, Taiwan, and Singapore. We also know that these countries have experienced SARS and whose governments and populations are well aware of the social and economic costs of a pandemic.

Movement restrictions. Governments have imposed a series of border controls that range from stopping air travel between countries, movement between states within a country, towards public and private transport between suburbs. To effectively enforce such rules, governments have ranged from performing a public address to inform the citizens, towards engaging the police and even the military to perform mobile patrols and roadblocks. Minimizing human funnels by shutting down bus stations, train stations, airports, office work, construction sites schools and universities. Only allowing essential services (e.g., telecommunications, electricity, gas, water, banking, medical services, grocery supplies, waste disposal) to continue operations whilst providing the appropriate PPE for all required personnel.

Civic consciousness. The population can exhibit appropriate behaviours such as wearing masks, social distancing, self-quarantine and self-isolation and other health and safety guidelines recommended by the government’s health authorities. Anti-social behaviours such as panic buying and vilifying segments of the population such as illegal migrant workers should be minimized. All members of the population should feel comfortable enough to contact the relevant health authorities to be checked for the virus and obtain appropriate treatment. This is the most important aspect for mitigating the spread of the virus is to ensure that all members of the population “respect” the severity of the pandemic and act accordingly.

Contact tracing and surveillance using mobile technology. It is necessary to detect the pandemic clusters and although it may be difficult for most infected patients to remember their movements for the last 14 days, the answer lies in the palm of our hand, the mobile phone. Although it is possible to request location information using mobile networks accessing our SIMcard information, many mobile phone users have Google Maps with the “Your Timeline” functionality. Using the “Your Timeline” functionality presents all the time and places that the mobile phone user has been too, thus providing useful surveillance and cluster information for governments and health care providers.

Known unknowns

How long will it take for governments to act decisively? How long will it take for the general populace to acknowledge the pandemic, accept their roles and actions to minimize the spread of the virus, and effectively practice social distancing and civic consciousness?

Governance challenges facing western democracies. Although some criticism has been directed at the governments of western democracies for dithering over a response to the COVID pandemic, western democracies are loathe to impose state-managed lockdowns and to impinge on personal freedoms as they are reminiscent of fascist, authoritarian, ultranationalistic regimes that existed during 1920s-1940s. Likewise, the citizens of these countries, being used to their liberal freedoms baulk at the idea of being forced into a mandatory lockdown and neither have they directly experienced previous epidemics such as SARS.

Scenario Projection

We understand that the known known is that the countries will be able to contain the COVID pandemic as we have seen countries execute strategies to effectively slow its spread. The known unknown is how long it will take for containment to occur as this is largely dependent on the willingness of a government to enforce a state-managed lockdown and the willingness of the population to abide by necessary albeit draconian measures.

Prompt recovery. A united and coordinated front by governments across multiple continents to manage the pandemic. US, Europe, Asia and Oceania enact strict movement controls within their borders and enforce strict international border controls by mid-April. Epidemic peaks in May. By June, public sentiment becomes more optimistic as the number of cases is substantially reduced and more cases begin to recover. Summer season sets in and the virus infection rate is found to be somewhat seasonal thus reducing infections in the northern hemisphere. The southern hemisphere experiences a slight increase in infections, but the strategy of population movement controls by governments and the increase in civic consciousness by the populace minimizes the impact of a second surge of infections. Global recovery begins by Q4 2020 and governments and businesses begin to spend in preparation for 2021.

Delayed recovery. Fractured and uncoordinated response by governments across multiple countries continents. Different countries enact movement and border controls of varying degrees of severity in April and May. An unbalanced recovery occurs across different countries, where some are still coping with the initial wave of infections, and others are trying to suppress the second wave of infections from international travellers and asymptomatic COVID carriers. A co-ordinated global response to COVID is internationally recognized where an agreed set of strict movement and border controls occurs in Q3 2020. These controls extend until Q4 2020. Global populations begin to be demoralized and pessimistic, thus reducing spending and leading to an increase in layoffs and bankruptcies. A deep recession occurs in Q1 2020 and governments and central banks begin to work in unison to resolve the global recession. Recovery begins in Q2/Q3 2021.

If governments globally choose to act in a unified manner, we have seen that the strict measures taken by China have led to a reduction in infectious cases over a period of 2-3 months. The measures taken by China might be hard to swallow for those individuals used to their liberal freedoms in a western democracy, but they may be necessary to quell the spread.

Now that we know that the main known unknown is how governments will act together to contain the virus, let’s focus on what will happen after the COVID pandemic is contained.

Opportunity: The last global pandemic? Or the first?

It is unlikely that the COVID-19 panic is the last pandemic. Governments, corporations and individuals will have to plan for the likelihood that a pandemic is likely to occur every decade or so. As such, the opportunities lie in the industries that are required to prepare us for future pandemics.

Construction. One of the key issues arising from the COVID pandemic in healthcare facilities are the lack of isolation rooms and wards in existing hospital healthcare facilities. It is likely that governments will commission the construction of a dedicated isolation healthcare facility for pandemics about 60 minutes away from major city centres. The centre will serve to house and ward infectious patients and separate them from other vulnerable patients. Short-term living facilities also need to be provided for the healthcare workforce that will be supporting these patients on their road to recovery. Such a construction project will be a boon to a recovering economy. Engineering, construction firms and medical equipment manufacturers are likely to benefit. (e.g., Boral, Honeywell, GE, Siemens, Resmed).

Medical and pharmaceutical products. Manufacturers of disinfectant products, alcohol wipes, disposable gloves, masks, or any Protective Personal Equipment that is helpful for minimizing contact with viral or bacterial infections will benefit from a post COVID world. Areas that are population funnels (i.e., schools, public transport, stadiums, offices) will have to be disinfected regularly even in non-pandemic periods, and must be prepared to step-up disinfection procedures during a pandemic period.

Education. Courses specializing in pandemic prevention, or training workers with specialty skills in disinfection activity will be introduced. New medical specialties or training for the allied healthcare workforce for dealing with pandemic situations will be popular. Corporations will have training courses for pandemic management for employees similar to fire drills or active shooter training in the US.

Automobiles. As public transportation hubs are population funnels, it is likely that more people will have a small car to ensure that they can get to the grocery store, pharmacy or hospital in a manner that minimizes the risk of infection to others. Car manufacturers may focus on small vehicles that are only for two passengers to be used in these situations and car sharing companies may gain more popularity.

Commercial Technology. More companies will need to plan for employees to be productive when working from home. As such, the expertise of consulting firms will be required to help companies transition from having physical to digital storage of information on cloud drives. Access to this information in a secure and accessible manner by employees will require VPN services and issuance of laptops. Being able to hold meetings via video conferencing will be vital. (CISCO, Dell, Accenture, Zoom, Google, Microsoft). More investments will be made in virtual reality and telemedicine.

Retail Electronics. Individuals will invest in an appropriate home office set-up with monitors, printers, desks, keyboards, laptops and an appropriately fast broadband connection to ensure work productivity is maintained. Investment in 5G networks and national broadband fibre networks are more important than ever to ensure that Australia’s economy still hums along despite everyone staying at home. (Huawei, Ericsson, Nokia). Electronic bidets similar to those used in Japan will be installed in more household washrooms.

Entertainment. Broadcasting services will need to prepare for the delivery of movies and shows straight to mobiles or computers rather than depending on the cinema box office. More companies will depend on delivering entertainment straight to your home rather than requiring consumers to go to the shops to make a purchase. (Netflix, Disney+, Amazon Prime, NVIDIA, Google Stadia).

Finance. As more individuals become more wary of minimizing physical contact and the fact that viruses can live on the surface of products for several days, a natural transition towards a cashless society that uses eWallets is imminent. All payments can be made using cell phones using NFC technology or barcode scanning. As more transactions for goods and services becomes cashless, transacting in cryptocurrency or digital assets will start to be heavily adopted amongst the younger and tech-savvy segments of the population. Moreover, with DeFI (i.e., decentralized finance) on the Ethereum network becoming more user-friendly and efficient to perform retail banking activities such generate interest via safety deposits or obtaining personal loans, the traditional financial system will be challenged.

Industries negatively impacted. Businesses that require large numbers of people to congregate (i.e. organized religion, conferences, concerts, theme-parks, casinos and mass travel such as cruise lines and airplanes) will need to adapt to the “new normal”. I certainly do not believe that pandemics serve as the death knell for these businesses; however, I do believe that their costs will increase as they purchase insurance policies or enact policies that will allow them to better cater for their customers in the event of another global pandemic.

What’s next?

I am optimistic that we can pull together through this COVID pandemic and realize that we are all one, and the same. The vitriol & divisiveness is the true plague of global politics today. There is nothing that homo sapiens can overcome as long as we look after each other and realize that we are all in it together.


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