The language commonly used to describe speculative manias is borrowed from epidemiology. A new technology sparks a “contagion”, investors are “infected” with greed and speculative “fever” breaks out. Today, the world is faced with another epidemic. Our response to the coronavirus pandemic resembles the inverse of a speculative mania, with fear replacing greed, and errors of pessimism potentially replacing those of optimism.
In his new book, The Rules of Contagion, Adam Kurcharski observes that bubbles and diseases have similar growth phases. Both see periods of exponential growth. Eventually the spread peaks, the bubble bursts and the number of infections falls sharply. A typical outbreak chart resembles an inverted “V”; bubbles follow a similar trajectory. Financial bubbles and epidemics are both prone to cross national borders. Bubbles are a form of social contagion. When markets are soaring, “fear of missing out” rules. Investors lose the capacity to make reasoned judgments. Herd behaviour and groupthink prevail. Bullish narratives proliferate.
The coronavirus panic has a familiar ring. Friends and contacts have taken to forwarding articles by an alarmist Covid-19 commentator (not a professional epidemiologist) who claims that his article is the only thing you’ll ever need to read and will save lives. It’s impossible to say whether this advice is sound or not. But it certainly feels like the pandemic mirror image to the Wall Street pied pipers who loudly played their tunes during the internet bubble.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Trust the experts, we are told: follow the data and science. If only it were that simple. During the internet and real-estate bubbles, financial experts were wrong. A top hedge-fund manager once complained to me that “every bubble has an academic shill”. Epidemiology, like finance, is as much an art as science. A colleague and I once gathered data on every bubble we could find. Each one turned out to be different. Epidemiologists face the same problem – as they like to joke, “if you’ve seen one pandemic, you’ve seen… one pandemic”.
Both investors and epidemiologists face chronic uncertainty. During an epidemic, the data is always changing. Differences in climate and social behaviour affect the spread of disease across geographies. This poses huge challenges when trying to model a pandemic. Epidemiologists, like investment strategists, are prone to egregious forecasting errors. In September 2014, the Centers for Disease Control and Prevention forecast 1.4 million cases of Ebola in West Africa by the following January. In the end, this epidemic produced fewer than 30,000 reported cases.
The true infection rate of Covid-19 is unknown, as outside of South Korea testing has been inadequate and no antibody test is yet available. China can’t be trusted to provide accurate data. As for the fatality rate, Italians are recording deaths due to Covid-19 when other conditions may be prevalent. Last week Imperial College predicted more than two million would die in the US and half a million in the UK if Covid-19 was not suppressed. These forecasts persuaded the US and UK governments to take drastic action.
Yet the assumptions in Imperial’s model – the reproduction rate, fatality rate, etc. – are at best educated guesses. Even Imperial admits what it calls “conservative” assumptions are pessimistic. Such pessimism, or call it excessive caution, appears to be the institutional bias of epidemiologists, just as finance types are prone to hyper-optimism.
A few dissenting voices can be heard. Stanford University epidemiologist John Ioannidis claims that analysis of the outbreak on the Diamond Princess cruise ship suggests the virus is much less of a danger to life than commonly assumed. Also drawing on the cruise experience, Michael Levitt, the Stanford biophysicist and Nobel laureate, makes a similar point. “What we need to control is the panic...,” Levitt told the Los Angeles Times, “we’re going to be fine.”
This calls to mind Franklin D. Roosevelt’s words to the American people in his address at the depth of the Great Depression in 1933: “the only thing we have to fear is… fear itself – nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance”. When the history of this pandemic is written, it may become a postscript to the ever-expanding volume, Extraordinary Popular Delusions and the Madness of Crowds first published in 1841.
-
Is a mortgage in retirement always a bad idea?A mystery shopper exercise shows high street lenders are “shunning” retirees looking to take out a mortgage. Are they right to do so?
-
Three funds to consider as UK small caps trade at 30% discountUK small caps have been unloved for some time, but a shifting economic environment could give them a boost
-
Investors are still in denial about inflation and interest ratesNews There are worrying signs that inflation is becoming embedded in the economy, but many investors are struggling to adjust to the new reality.
-
One year later: how is Afghanistan faring under Taliban rule?Briefings It’s been a year since the Taliban took back control in the country following the withdrawal of US troops. The outlook remains grim. Simon Wilson reports
-
How millennial entrepreneurs are ruining the work ethicAnalysis Millennial entrepreneurs flush with cash are undermining the work ethic. That is a dangerous trend, says Matthew Lynn.
-
Neom megacity: Saudi Arabia’s vision of the futureBriefings The kingdom is building a futuristic city in the desert, a key component of its plan to wean the economy off oil and woo tourists and global businesses. Could it work?
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
A turning point in economic history as globalisation comes to an endNews Nancy Pelosi’s visit to Taiwan could mark a turning point as Western firms swap low costs for resilience, moving away from China to more “friendly” countries.
-
Semiconductor shortage: industry heads for “supersize bust”News The semiconductor shortage could soon become a semiconductor glut as demand for electronic gadgets falls while state subsidies could mean a surplus of supply.
-
Why China will remain an economic powerhouseAnalysis Some analysts think China is on a path to economic disaster. They are kidding themselves, says Matthew Lynn. He explains why China is not in any type of serious economic trouble.
