Gareth Vaughan on more globalisation as a solution for globalisation, why the pandemic isn't a black swan event, too many alpha men, China swoops into a vacuum & a pawpaw tests positive for Covid-19

This COVID-19 Top 5 Alert Level 3 special comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

Now that we're well into Alert Level 3, I'm wistfully thinking of Level 2, hoping we'll be there soon and it'll mean my kids can go back to school and I can get a haircut...

1) Michael Parker, Part 2 - the solution to globalisation is more globalisation

Last week I looked at a report from Michael Parker, the ex-pat Kiwi who is managing director, strategist, and director of research at Bernstein in Hong Kong. With the Covid-19 pandemic and burgeoning economic downturn sweeping the globe, many people are viewing the virus as a hit to globalisation, a reversal of globalisation or even globalisation's death knell.

In contrast Parker argues globalisation will resolve the crisis. He notes that a pathogen in Hubei that hospitalised 42 people by January 2, shut down a region of 50 million people by January 23rd, and subsequently crippled a global population of seven billion by late April.

The integration of the global economy is now so extreme and the interconnection so complete that there is no friction that prevents an app, an idea or a virus from moving seamlessly through networks we created – in part - to lessen our exposure to nature's cruel indifference.

The perfect efficiency of the delivery mechanism is both an indictment of our economic system and the attribute that ensures the system's survival. The notion of reversing the globalization project of the last 70 years – no matter how appealing it may seem to parts of every electorate – is simply not possible. There may be a world with appetite for a $5,000 price tag for a MacBook as the reasonable cost to insulate Europe and the U.S. from Asia. Similarly, there may even be a world where France, Spain and Australia can consider finding an alternative to tourism as their largest economic contributor. That world, however, is not the world in which we live.

Parker argues that at some point over the next year we will have a solution to COVID-19 in the form of an injection that offers protection against the virus, and that China will have a key role to play.

The problem will invert instantaneously. The challenge facing the global pharmaceutical industry will go from diagnostic and curative to logistic. The largest producer of vaccines in the world today – Serum Institute of India ("SII") – is ramping up to produce 400 million doses (of something) next year, or less than 10% of the amount we will require. We need seven billion doses to be safe… and four billion if we accept global herd immunity of 50-60%. How do you produce four or seven billion of anything in 2020 in a fast, efficient and cheap manner with a minimal failure rate? There is surely only one answer: China.

Parker goes on to say Bernstein's European Specialty Pharma Biotech analyst Wimal Kapadia told him it's not necessarily the case that China will produce all or even most of the vaccine doses. Manufacturing will be heavily dependent on the successful vaccine approach.

But, Parker says, vaccine production and an international immunization drive will take place against the backdrop of a global economy gripped by massive quantitative easing measures. This means "serious-sounding people will be teeth-gnashing about inflationary risks."

An important tool to prevent price inflation – and to keep consumers (and voters) happy – will be new, shiny TVs and phones at ever-lower prices. For that, there truly is only one answer: China.

Whether the vaccine is ultimately developed by a not-for-profit or a publicly traded pharmaceutical company and regardless of whether the vaccine comes from the U.S., Europe or China, and even if there are multiple vaccines developed at roughly the same time from a combination of the above sources, the solution in terms of immunization and economic recovery will unambiguously be global and integrated. Your enemy's enemy… and all that.

Covid-19 infections and fatalities are lower in Asia than in the U.S. and Europe. Re-opening of Asian economies is happening faster than in the U.S. and Europe. Yet the U.S. [equities markets] has rallied more than Asia since late March. In short, the U.S. is pricing in a v-shaped recovery. Asia is having a v-shaped recovery. Plus, China is on the brink of demonstrating itself to be the indispensable nation or (if you're feeling a little less hyperbolic) global integration is on the brink of demonstrating itself indispensable. Isn't this how the pendulum swings back to Asian equities? . Every ten to fifteen years, the equity market discovers a new dynamic – commodity inflation, technology, financial globalization, technology again, pandemics – which it is not capable of correctly pricing. A financial crisis or significant drawdown ensues. These are the only periods where Asia outperform the U.S. It's tempting to suggest now such a period.

He acknowledges, however, that's something of a crude simplification.

Emerging from Covid-19, the project of globalization will be closer to completion because of necessity, rather than any intellectual victory. Economic rents will accrue to companies with access to global markets and high barriers to entry derived through intellectual property. In that environment, which region is going to outperform? The answer most years will continue to be: the region with the smartest scientists.

In the 21st century, trade wars are to geopolitics and economics as professional wrestling is to boxing. So, as we all look forward to a post-Covid world, perhaps the final word on reversing the globalization project is best left to another heavyweight champ, Mike Tyson: everyone has a plan… until they get hit in the face.  

(Globe & money image: Shutterstock).

2) Covid-19's not a Black Swan. Instead it's a portent of a more fragile global system.

The New Yorker has an interesting story featuring Nassim Nicholas Taleb, who coined the term “black swan” for an unpredictable, rare, catastrophic event, in his 2007 book The Black Swan. He's annoyed when the Covid-19 pandemic is described as a black swan. His book, Taleb says, endeavours to explain why we need to change business practices and social norms, not provide “a cliché for any bad thing that surprises us.”

In 1983 Taleb became an options trader.

Over the next twelve years, he conducted two hundred thousand trades, and examined seventy thousand risk-management reports. Along the way, he developed an investment strategy that entailed exposure to regular, small losses, while positioning him to benefit from irregular, massive gains—something like a venture capitalist. He explored, especially, scenarios for derivatives: asset bundles where fat tails—price volatilities, say—can either enrich or impoverish traders, and do so exponentially when they increase the scale of the movement.

These were the years, moreover, when, following Japan, large U.S. manufacturing companies were converting to “just-in-time” production, which involved integrating and synchronizing supply-chains, and forgoing stockpiles of necessary components in favor of acquiring them on an as-needed basis, often relying on single, authorized suppliers. The idea was that lowering inventory would reduce costs. But Taleb, extrapolating from trading risks, believed that “managing without buffers was irresponsible,” because “fat-tail events” can never be completely avoided. As the Harvard Business Review reported this month, Chinese suppliers shut down by the pandemic have stymied the production capabilities of a majority of the companies that depend on them.

The coming of global information networks deepened Taleb’s concern. He reserved a special impatience for economists who saw these networks as stabilizing—who thought that the average thought or action, derived from an ever-widening group, would produce an increasingly tolerable standard—and who believed that crowds had wisdom, and bigger crowds more wisdom. Thus networked, institutional buyers and sellers were supposed to produce more rational markets, a supposition that seemed to justify the deregulation of derivatives, in 2000, which helped accelerate the crash of 2008.

As Taleb told me, “The great danger has always been too much connectivity.” Proliferating global networks, both physical and virtual, inevitably incorporate more fat-tail risks into a more interdependent and “fragile” system: not only risks such as pathogens but also computer viruses, or the hacking of information networks, or reckless budgetary management by financial institutions or state governments, or spectacular acts of terror. Any negative event along these lines can create a rolling, widening collapse—a true black swan—in the same way that the failure of a single transformer can collapse an electricity grid.

3) Too many alpha men in the room.

Here, Der Spiegel, talks to economists, diplomats and pollsters about their prognoses for the post-coronavirus future. Those spoken to include former Indian diplomat Shivshankar Menon, who now teaches at Ashoka University.

The pandemic could have served as a beneficial shock, by bringing the world closer together. Instead, COVID-19 will further deepen the fault lines that have been emerging since the financial crisis. We will see an increase in protectionism, the polarization of society and a further shift to the right. What little was left of multilateralism has failed. We are experiencing the return of power politics.

The problem is that there are too many alpha men in the room. Authoritarian rulers, whether in Japan, China, the United States or India, base their legitimacy on ultra-nationalism. The give and take of diplomacy proves much harder for them as they fear that compromises would make them appear weak.

It will become much tougher for India to achieve her goals in this new world. We want to transform India into a country where every Indian can achieve his or her potential. India’s success in doing so depends on an open world -- and on peace. Both could be in short supply in the future.

4) China swoops into a vacuum left by the US of A as the rest of the world laughs at the US president.

Writing for The Atlantic, Anne Applebaum suggests the Covid-19 crisis is probably the straw that breaks the camel's back in terms of US global leadership. She looks at how China has mocked the US through the short “Once Upon a Virus” video (see below), and how the rest of the world has laughed at Donald "Disinfectant" Trump.

Others are drawing even more radical conclusions, and with remarkable speed. The “disinfectant” comments—and the laughter that followed—mark not so much a turning point as an acceleration point, the moment when a transformation that began much earlier suddenly started to seem unstoppable. Although we are still only weeks into this pandemic, although the true scale of the health crisis and the economic catastrophe is still unknown, the outline of a very different, post-American, post-coronavirus world is already taking shape. It’s a world in which American opinions will count less, while the opinions of America’s rivals will count more. And that will change political dynamics in ways that Americans haven’t yet understood.

Look beyond the Lego video at China’s more serious public-relations campaign: the stunts at airports around the world, from Pakistan to Italy to Israel, designed to mark the arrival of Chinese aid—masks, surgical gowns, diagnostic tests, and sometimes doctors. These events all have a similar script: The plane lands; the receiving nation’s dignitaries go out to meet it; the Chinese experts emerge, looking competent in their hazmat gear; and everyone utters words of gratitude and relief. Of course some of this, too, is propaganda.

And:

 To be absolutely crystal clear: I am not praising China’s efforts. I am simply calling attention to the fact that, in a world where people laugh at the American president, they might succeed. Inside the bubble of officials who surround Pompeo, it may well seem very brave and cutting-edge to use the expression “Wuhan virus” or to call for bigger and bolder rhetorical attacks on China. But out there in the real world—out there in the world where Pompeo’s boss is perceived as a sinister clown, and Pompeo himself as just the sinister clown’s lackey—not very many people are listening. Once again: A vacuum has opened up, and the Chinese regime is leading the race to fill it.

5) A pawpaw tests positive for Covid-19.

Tanzania's President John Magufuli is grumpy about imported coronavirus testing kits, Al Jazeera reports, after samples taken from a goat and a pawpaw tested positive.

The president, whose government has already drawn criticism for being secretive about the coronavirus outbreak and has previously asked Tanzanians to pray the coronavirus away, said he had instructed Tanzanian security forces to check the quality of the kits.

They had randomly obtained several non-human samples, including from a pawpaw, a goat and a sheep, but had assigned them human names and ages.

These samples were then submitted to Tanzania's laboratory to test for the coronavirus, with the lab technicians left deliberately unaware of their origins.

Samples from the pawpaw and the goat tested positive for COVID-19, the president said, adding this meant it was likely that some people were being tested positive when, in fact, they were not infected by the coronavirus.

Magufuli is now turning his attention to a herbal treatment.

The herbal remedy, called "Covid Organics" and prepared by the Malagasy Institute for Applied Research, is made out of Artemisia, a plant cultivated on the Indian Ocean island of Madagascar.

Despite a lack of scientific evidence, President Andry Rajoelina of Madagascar claimed that the remedy has already cured some Madagascans of COVID-19. Children returning to school have been required to take it.