Generational Dynamics World View

[John J. Xenakis]

*** 17-Mar-20 World View -- Stock market plunges 13% on Monday, as investors begin to accept reality

This morning's key headlines from GenerationalDynamics.com

• Stock market plunges 13% on Monday, as investors begin to accept reality
  
• Price/Earnings ratios - Trailing and Forward earnings
  
• Why experts care calling for 'Flattening the Curve'
  
• The 'Herd Immunity' strategy
  
• Can you be reinfected with Wuhan Coronavirus?
  
• Containment and mitigation strategies
  
• The China enigma
  
• Some possible good news: The Real Economy
  

****
**** Stock market plunges 13% on Monday, as investors begin to accept reality
****


DJIA falls 2997 points on Monday

The Dow Jones Industrial Average (DJIA) fell 12.9% or 2,997 points,
which was one of the sharpest declines in history.

The index had already fallen around 2000 when president Donald Trump
gave his coronavirus press conference on Monday afternoon. As usual,
he was trying to be realistic while, at the same time, being as
optimistic as possible, when he made a remark that he expected the
coronavirus crisis to "wash out" in July or August. He added that "it
could be August, could be July, could be longer than that."

The background is that earlier in the day, I was watching one analyst
after another on tv talk about the virus crisis ending in April or
May, after which there would be a "V-shaped recovery." As I watched
these so-called "experts," I could get over the feeling that I was
watching a Donald Duck cartoon show, with each "expert" quacking the
same nonsense.

So when Trump made his remark, investors began to freak out because
their April-May assumption was apparently wrong, and a July-August
assumption meant that their V-shaped hopes were dashed. By the way,
as I've said several times in the past, I don't expect the crisis to
be over until a vaccine can be deployed, sometime in 2021. I'll
discuss this more below.

As long-time Generational Dynamics readers are very well aware, the
stock market is in a huge bubble that will have to implode at some
point, and that could occur at any time.

The Federal Reserve made several major moves to pour money liquidity
into banks on Sunday and Monday. Many commentators are complaining
that it didn't help the stock market, but that wasn't the intention
anyway. The problem being addressed was a "broken" bond market, with
a "credit crunch" similar to the one in 2007-08. The Federal Reserve
move helped the bond market, but not the stock market.

There's a conflict between governmental economic policy versus
coronavirus policy. Economic policy -- monetary and fiscal -- has the
goal of putting money in people's pockets so that they'll spend it and
the economy will grow. But coronavirus policy is that people
shouldn't be out shopping or attending events or traveling, but should
be staying quietly at home to limit spreading of Covid-19. This is a
conflict that shows how complicated the situation is.

The most pessimistic of the predictions that I've been posting since
the beginning of February, in articles and in daily reports on the
Generational Dynamics forum, are continuing to occur. We're still
waiting for an event that hasn't occurred yet but must occur, as
predicted by Generational Dynamics: A full-scale generational panic
leading to a global financial crisis. It might occur soon, or it
might not occur for weeks or months. But it will occur. ( "2-Mar-20 World View -- Coronavirus updates -- infections spread across the world"
)

****
**** Price/Earnings ratios - Trailing and Forward earnings
****

This is truly a remarkable time. I heard an analyst complain that
stock prices have become "completely untethered" from earnings,
because the only thing affecting stock prices now is the latest news
headline.

In fact, stock prices have been "untethered" from earnings for a long
time. As readers know, I focus on price/earnings ratio, to keep
things simple. Prior to the 1990s, the core value of a stock was
considered to be "tethered" to the P/E ratio, what today we would call
P/E based on "trailing earnings." This means that the "earnings" are
actual reported earnings for the previous year, also called "one year
trailing earnings."

Starting with the 1990s tech bubble, that P/E ratio was producing
results that stock salesmen disliked, so they started using "forward
earnings" or "operating earnings." But unlike trailing earnings,
which are solid values backed up by audited financial statements,
forward and operating earnings are fantasy earnings, not backed by
financial statements, but backed by wishful thinking from public
relations departments.

An example of the fantasy is something that I hear frequently.
Someone will say that stock X has a P/E ratio of 80, and stock Y has a
P/E ratio of 40, and therefore stock Y is better. This is total
nonsense, since both the 40 and 80 numbers are totally meaningless.

This has given rise to complete doublespeak. Analysts will talk about
a historic average P/E ratio of 14, and say that if a stock's P/E
ratio is less than 20, then it's close to the historic average.
Actually, 14 is the historic average P/E ratio with trailing earnings.
I've estimated that the historic average P/E ratio with forward
earnings is around 8. So a stock with a P/E ratio of 20 is
astronomically overpriced.

So stock prices have been untethered to trailing earnings since the
1990s, since analysts never talked about anything but their fantasy
forward earnings, and ignored trailing earnings. Under the forward
earning doublespeak, the stock market bubble has been growing to a
huge size.

So the analyst complaint that stock prices have become "completely
untethered" from earnings is particularly ironic, since they've been
untethered from trailing earnings for years. What's ironic is that,
in the last few months, stock prices have even become untethered to
fantasy forward earnings. We might also say that they've become
untethered to sanity.

****
**** Why experts care calling for 'Flattening the Curve'
****

Almost every news report these days contains the phrase "Flattening
the curve." This refers to postponing Covid-19 infections for as long
as possible, using such techniques as closing schools and stores,
locking down cities and making everyone stay at home.

The idea is that if everyone gets sick at once, then hospitals will be
overwhelmed. But if the infection rate can be slowed down, then
hospitals will be able to keep up.

Here's a graph that illustrates the concept:


The first curve shows what happens if everyone gets sick at once. The flattened curve shows how infections can be spread out over time (medium.com)

The above graph illustrates the concept. If everyone gets sick at
once, then the "Healthcare system capacity" will be exceeded, and
hospitals will be overwhelmed. But if the same number of cases is
spread over time, and the curve is flattened, then according to this
graph, the healthcare system will be able to handle them.

It's worth mentioning that the entire concept is fantasy. There's no
way to flatten the curve except through unacceptable draconian
measures (as in China), and even then, the flattened curve will have
to be years long.

****
**** The 'Herd Immunity' strategy
****

The two different curves in the chart above actually represent two
different strategies that a government might use to deal with the
Covid-19 crisis.

The first curve is associated with a strategy known as "Herd
Immunity."

This strategy is being proposed by some officials in the UK: Let the
entire population of a town become infected, and then the town is
immune.

This strategy would seem to have a great deal of appeal, especially to
young people who typically do not become seriously sick. Once you're
over it, you can stop worrying about touching your face and washing
your hands, and just get on with life. Even for old people like
myself, it's tempting to get it over with one way or the other.

According to psychologist Dr David Halpern, this herd immunity
strategy may become necessary, as more and more people become
infected:

<QUOTE>"There’s going to be a point, assuming the epidemic
flows and grows, as we think it probably will do, where you’ll
want to cocoon, you’ll want to protect those at-risk groups so
that they basically don’t catch the disease and by the time they
come out of their cocooning, herd immunity’s been achieved in the
rest of the population."<END QUOTE>

So according to Halpern, the Herd Immunity strategy works as follows:
Isolate the old people somewhere, let all the young people get
infected, and after they recover, let all the old people out.

****
**** Can you be reinfected with Wuhan Coronavirus?
****

The herd immunity strategy is based on one huge assumption: If you get
sick from coronavirus and recover, then you'll be immune from
reinfection.

This assumption has not been proven, and it's being debated. It seems
likely that a patient is immune from reinfection immediately after
recovery. But how long does that immunity last? It might be years,
but it might be only months or weeks or just days. Also, even if you
remain immune, then there might be new strains to which you aren't
immune. According to Anthony Costello, a pediatrician and former
World Health Organization director:

<QUOTE>Does coronavirus cause strong herd immunity or is it
like [ordinary seasonal] flu where new strains emerge each year
needing repeat vaccines? We have much to learn about Co-V immune
response."<END QUOTE>

So the "herd immunity" debate is interesting and ongoing, and as
Covid-19 continues to spread exponentially, a lot of places will have
to use the herd immunity strategy whether they want to or not.

****
**** Containment and mitigation strategies
****

Referring to the graph above, the "politically correct" strategy is
represented by the second curve, the flattened curve. The curve is
flattened by means of containment and mitigation strategies, as I've
described in a previous article. In the containment strategy, the
country tracks and tests people and uses contact tracing, to identify
infected people, and isolate them. When that fails, the mitigation
strategy is used, where schools and stores are closed, and large
gatherings are illegal, in order to reduce the number of infections.
( "2-Mar-20 World View -- Coronavirus updates -- infections spread across the world"
)

Both of those strategies should be quite familiar to almost everyone
at this time. They're being implemented throughout Europe and the
United States, as well as in many other countries. Cities, towns and
provinces are being locked down, stores and schools are being closed,
and borders are being closed.

Just to take one of many possible examples, France on Monday made it
against the law for many people to leave their homes. In Africa, 20
countries now have coronavirus infections, but most people are too
poor to be able to stop working and self-isolate, so mitigation will
fail and the virus will continue to spread exponentially.

Here's the problem with the containment and mitigation strategies:
They require stores and schools to be closed, and people to be
isolated, for many months until the crisis ends. As long as people
believe that the crisis will end in April or May, the restrictions may
be tolerable. But when it becomes clear that the crisis will continue
for many more months, then people will no longer tolerate the
restrictions.

That's why, in my opinion, until a vaccine is deployed some time in
2021, the virus is going to continue to spread, until everyone is
exposed to it sooner or later.

****
**** The China enigma
****

To my knowledge, there's only one country where the leaders claim that
the mitigation strategy has been successful: China.

China is claiming that they've conquered the Wuhan coronavirus by
means of extremely severe harsh mandatory mitigation measures. (They
also claim that Wuhan coronavirus was a bioweapon installed in Wuhan
by the US Army under the noses of the incompetent Chinese army, which
is typical of the crap that comes from the CCP.)

Since the Chinese Communist Party (CCP) lies about everything,
including enslaving Muslim Uighurs and annexing the South China Sea,
there is no reason to believe any of their claims. Furthermore, the
CCP is harshly censoring media, and punishing anyone who dares to
describe what's actually going on. So if an outbreak of caronavirus
breaks out in a rural area, a regional manager who reported the
outbreak to Beijing could be harshly punished, so has no motivation to
report it. So it seems quite likely that infections and outbreaks are
being hidden, or reported as other kinds of illnesses.

Here's one analysis from Thailand:

<QUOTE>"Doctors in provinces like Helionjang, Xinjiang, Henan
and Shanxi are telling a different story. According to a
stringer,there is an ever increasing amount of patients coming in
with respiratory symptoms but doctors have been given guidelines
as to what medications to prescribe and to admit them if serious
but not to conduct any diagnostic tests directly involved with
Covid-19! A check with hospitals in 4 provinces also showed that
Covid-19 test kits are not available in any of these hospitals.

Health authorities and medical entities have been given strict
warnings not to talk to the media and foreign entities while local
media have been prohibited from reporting on any local health
issues except official releases sent out to them." (Thailand
Medical News)<END QUOTE>

So this means that the mitigation strategy isn't working in China
either, and that many outbreaks are being covered up. Any one of
these outbreaks could explode at any time.

****
**** Some possible good news: The Real Economy
****

There might be some good news. In analyzing how the crisis will
unfold in the next few months, there are three related issues that
everyone is conflating, but which are really quite separate:

• The spread of the virus
  
• The stock market
  
• The real economy

Let's focus on the real economy. These are ordinary businesses, often
private businesses completely unaffected by the stock market, that are
scrambling to do everything possible to stay in business.

To show what I mean, here's what happened between 1929-33:

• the stock market fell 90%
  
• but the GNP (gross national product) fell only 35%.

The GNP represents what I'm calling the "real economy." Owners of the
businesses in the real economy take whatever steps are necessary to
stay in business, irrespective of virus or stock market disasters.

If a restaurant or bar wants to stay open, then the owner will
separate the tables and place screens between them to create
compartments, and then sanitize each compartment after the people
leave.

If a factory wants to stay open, and it depends on supply chains
originating from one country whose factories can't supply them, then
the owner will look for new suppliers in other countries.

Here are some examples of businesses that are likely to do well in the
next few months:

• Suppliers of bathroom and medical supplies.
  
• Beds, furniture, and various "self-isolation" products
  
• Online education services
  
• Telemedicine / telehealth services
  
• Online entertainment and gaming
  
• Electric scooter rentals (so you won't have to take the bus)
  
• Adaptive clothing of all kinds (protection from virus)
  
• Air filtration systems (for boats and planes)
  

Even in the worst case scenario, we can imagine a world that's as busy
and bustling as it was until recently, but now people are protected by
special clothing or compartmentalization or special safe modes of
transportation. These are all technically within reach -- and in fact
are really quite simple to implement -- but they just haven't been
necessary until now.

I believe that the real economy is going to do a lot better than most
people think, and possibly a lot better than the stock market, as it
did during the Great Depression. In fact, there may actually be a
"V-shaped recovery" in the real economy long before there's a recovery
in the stock market.

Sources:

• Dow Jones Dives 3,000 Points To New Session Lows As Coronavirus Crash Continues (InvestorsBusDaily, 16-Mar-2020)
  
• Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program (CNBC, 15-Mar-2020)
  
• Graphics: Flattening the curve (Medium, 16-Mar-2020)
  
• Herd immunity: will the UK's coronavirus strategy work? (Guardian, London, 13-Mar-2020)
  
• Can you get coronavirus twice? (The Hill, 13-Mar-2020)
  
• Coronavirus symptoms: Can you get coronavirus twice? (Daily Express, London, 14-Mar-2020)
  
• China Continues To Lie? China Says No New Coronavirus Cases Nationwide Outside Of Hubei! ::xwla-03/1 (ThailandMedicalNews, 10-Mar-2020)
  
• Chinese official Zhao Lijian echoes conspiracy theory that US is to blame for coronavirus outbreak (AFP, 13-Mar-2020)

Related Articles:

• Iran's army to monitor entire population for Wuhan Coronavirus (14-Mar-2020)
  
  
• Coronavirus updates -- infections spread across the world (02-Mar-2020)
  
  
• Planning for Wuhan Coronavirus (Covid-19) (21-Feb-2020)
  
  
• Wuhan coronavirus hits China's economy hard, threatens world economy (02-Feb-2020)
  
  
• China's coronavirus threatens Xi Jinping's Mandate from Heaven (25-Jan-2020)
  

KEYS: Generational Dynamics, China, Wuhan Coronavirus, Covid-19,
Herd Immunity, Flattening the Curve,
trailing earnings, forward earnings

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John J. Xenakis
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