Paul Singer: COVID-19 effects run deeper than most realize

The coronavirus pandemic has changed the world in just a few short months. Social distancing and other measures have ground the global economy to a halt, and it’s unclear how these measures can be ended without triggering a second wave.

Q1 2020 hedge fund letters, conferences and more

In his April letter to investors, which was reviewed by ValueWalk, Paul Singer of Elliott Management explained how the interconnectedness of the world has made things even more difficult now than they were during past pandemics. He also highlighted other potential disasters that could more problems now than they have in the past.

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Paul Singer: Consequences of COVID-19

Singer noted that the pandemic has brought “ongoing widespread misery and tragedy and imposed a heavy psychological toll on humanity.” He pointed out that many people around the globe are suddenly out of work without any financial support. Additionally, they’re experiencing or witnessing severe illness and death from the COVID-19.

Meanwhile, policymakers and governments must make decisions affecting their respective countries. He added that there are negative consequences for the markets, which have been made more complex due to the interconnectedness of the world.

He noted that debt has been rising, and there are “gigantic amounts of derivatives.” Further, the global transportation system, the internet, the electric grid and supply chains are all interconnected and complex. As COVID-19 takes its toll on humanity, the implications of the pandemic are not only of the first order but also “cascades of second-order, third-order and deeper effects.”

How complexity makes the pandemic’s effects worse

Singer explained that air transportation has gotten so advanced that most of the world’s population is able to travel. As a result, COVID-19 has been able to spread around the globe in hours rather than months, and it’s been outrunning efforts to contain it.

He also noted that the electric grid is much more complex than it used to be. This complexity has made it and society more vulnerable to events like electromagnetic pulses (EMPs). He called attention to an EMP episode called the Carrington Event, which was caused by a solar flare that disrupted the world’s electric grid.

At the time, the grid was very rudimentary, so it didn’t have a major effect on life. However, if the same event happened today, the effect “would be extremely painful.” He also noted that any interference with the internet would also have “unimaginably negative consequences.”

The world’s supply chain runs on “just-in-time inventory practices,” which work when everything is running perfectly. However, supply chains have broken down, and disruptions are “cascading around the world.” The lack of cushion and inventory is causing serious problems. Businesses and governments will think more about their supply chains when the pandemic is over.

Singer also pointed out that the developed world’s healthcare systems are now being taxed by the lack of extra capacity. Emergency preparations were deemed too expensive and unnecessary.

“The world has been lulled into complacency by extended periods of normal or close-to-normal functioning, notwithstanding that serious health emergencies have emerged regularly throughout history and have periodically exacted an enormous cost from society,” he wrote.

Much to learn about the coronavirus

Singer added that policy responses to COVID-19 to limit its spread and support the global economy have been “spotty, highly variant, largely panicked and only partially effective.” He noted that responses have been large, but it’s impossible to know yet whether they are big enough.

Singer noted that there is still much to learn about COVID-19, although it is clear that it spreads easily from person to person and that seniors and those with preexisting conditions are more at risk. He also said there is evidence that the virus may not thrive as much during the spring and summer.

However, until effective treatments are developed, hopefully in a few months, or a vaccine is available, probably in at least 18 months, the coronavirus will probably “go coursing around the world for at least a couple of seasonal cycles until the world’s population develops something like ‘herd immunity.’”

He noted that the Spanish flu killed about 50 million people around the globe, and it went through three cycles starting in the spring of 1918. He also said the data about the virus is politicized and that it’s difficult to separate the politics from the truth.

Varied effects of social distancing and other measures

Singer also said there is great disagreement about whether the economy should be shut down for months to reduce the death rate and keep the healthcare system from being overwhelmed. However, the drawback of this is that it delays the development of herd immunity. On the other hand, some believe there should just be modest precautions like encouraging social distancing to keep the economy functioning and allow herd immunity to develop faster.

The second option suggests there will be more deaths in the near term, possibly “at catastrophic levels.” However, it could mean it won’t take as long for the critical phases of the pandemic to come to an end. Until treatments and a vaccine are available, he expects the situation to be one of stopping and starting. Declining numbers will give people more hope, but then new waves will be started with partial re-openings of the economy until immunity is widespread.

He added that one of the big questions that can’t be answered yet is how the social-distancing policy and other measures will be unwound.

“Our guess is that restarting the global economy will be a patchwork of actions and edicts, occurring on timelines that elicit endless controversy by policymakers and by the judgment of employers and workers, based on the evolving situation on the ground in different locations.”

He expects supply chains to come back online more slowly than expected and in a changed form due to government policies around the globe.

“Our further guess is that the recovery (in the economy, not necessarily in financial markets) will not be steep and sharp, and may take many months or even years to get the wheels turning to a ‘new normal.’”

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