Initially the severity and effect of the virus was unknown. The rapid China shutdown response made sense given the potential massive risk.
However, now a month into the pandemic, there is much more data about the virus available and the risks are better understood. The main finding is that the virus is dangerous only for the elderly, especially smokers.
In my opinion, the fatality rates quoted are still overestimated (possibly by an order of magnitude) because the numbers of fatalities and severe cases is known much better than total infections (if your infection is not severe, you would not go to hospital or be tested, whereas a death is hard to miss).
Like other viruses, this one will ultimately infect most of the world population. Going forward, it will then become another one of the many viruses in equilibrium with the human population.
Many of the people at risk will die. This is regrettable and sad but will not materially affect society.
One year later, people will have forgotten about SARS-CoV-2, as they forgot about SARS and Swine Flu.
The UK government has accepted that everyone will be infected and chosen a “herd immunity” strategy. The action for now is to attempt to reduce the infection rate (by self isolation) in order to smooth out the peak (unknown whether this is a futile attempt). Despite the mass criticism on Twitter, I think this is a good strategy.
In South Africa, it is still unknown how people infected with HIV/AIDS will be affected and this is certainly a risk.
This week the S&P 500 dropped to 26% down from its peak in February.
This indicates the more important effect of the virus. The virus will kill some people, but its second order effects on the economy will cause more damage. Whether the virus ends up being devastating or not, people are panicking, borders are being closed, areas are being locked down and people are being told to self-isolate. This will reduce demand in various sectors such as travel, events and retail businesses. Those businesses will have to cut costs, lay off employees and default on loans. This will reduce demand for their suppliers, and so on.
It’s unknown at this point how severe the economic impact will be. It will play out over the next several months. In the 2001 internet bubble and 2008 financial crisis, the bear market lasted years and it took months for governments to coordinate a response.
Why did other assets besides stocks also fall this week? Trading firms are leveraged. When stock prices fall, margin calls are triggered and they are forced to sell assets to cover them.
Bitcoin dropped 50% from its February peak. The sales were apparently driven by liquidations from leveraged derivative platforms like BitMex. The crypto markets are increasingly interconnected with the traditional financial markets which brings inherent correlation. One interesting phenomenon is that crypto markets trade 24/7, and in fact the stock market drop on Monday 9 March was foreshadowed by drops in crypto on Sunday 8 March.
Another interesting event this week was the MakerDAO liquidations. Aside from some technical issues, the system worked as intended and the DAI peg held despite the ETH price drops. It’s interesting to see the same leverage margin call effect from the financial markets playing out in crypto with full transparency.
I don’t know what next week will bring, but I’m pretty sure it’s going to be turbulent.