John Mauldin writes an economic/investment newsletter that is read by millions of people. I’m one of them. This past week he produced such a stunning analogy of where we all are in the battle to get to a new normal that I feel compelled to share it with you, with all due credit to him.
He cites the 1974 sci-fi novel The Mote in God’s Eye, which features an alien species with three arms—two “normal” hands and a stronger, but less dexterous one called the “gripping hand.” Whereas we humans talk about “one the one hand, but on the other hand” when we’re pondering alternatives, this alien species has a third, most powerful alternative.
So here’s Mauldin’s alternative scenarios for 2021. One the one hand, there’s plenty of good news:
• There are vaccines against COVID-19. Not just the two already approved but several others that are still in the review phase.
• Most governments are propping up the economy – we’re in a recession, but without the fiscal and monetary stimulus, it would be deeper or worse. (Canada lost 63,000 jobs in December.)
• The virus forced the world into an “adapt or die” mode – the pace of innovation has never been faster – not just finding the vaccines, but the speed with which businesses are adapting their processes, productivity, supply chains, brand positioning is taking place years before it would have without the virus. Societies will reap the benefits in the years to come.
• Mauldin’s 4th good news point is a more nuanced and focused approach for US trade policy under the new American administration. Certainly, Canada will benefit along with the rest of the world if tariffs stop being used as a cudgel to hit countries and industries indiscriminately.
On the other hand, the bad news is that:
• The pandemic has permanently changed certain parts of the economy. Take business travel as an example. Not only is it down, but businesspeople have learned how to do business with a lot less of it. Will conventions come back? Fewer and smaller is bad news for that industry and entire cities, like Montreal, Vancouver, Toronto and Sherbrooke.
• The post-pandemic economy will need fewer shopping malls, retail strip centers, hotels, and office buildings. This will get sorted out, but it will take time and it’s very disruptive.
• The actions of governments pushing money into the economy and pushing interest rates to their lowest levels ever, although it has been necessary, is making the wealth-and-income-disparity divide much worse. Living on a fixed income that comes from interest is disastrous when interest rates are 1 or 2%.
• A lot of the money that has been pushed into the economy has found its way into the stock market, driving share prices far above any remotely fair valuation. Nothing goes up forever. Who knows what will trigger a sell-off or when, but a sell-off is guaranteed. (Another financial guru, David Rosenberg, has just told his readers to have 25% of their assets in cash in order to be able to buy at the bottom.)
That alien species with the third limb doesn’t have three equivalent hands. One of them is far stronger than the others. They call it the gripping hand.
In 2021, the gripping hand is the virus. The virus doesn’t care about our good or bad news. It will just spread until something stops it. The global economy will recover in direct proportion to our success in inoculating people against it.
This is where the news is problematic. Bluntly, delivery of the vaccines approved so far is not enough to cover the most vulnerable in North America and Europe by mid-year, let alone emerging markets. Millions of doses have been ordered but not yet delivered. The World Bank’s annual forecast was very plain about this. (https://www.worldbank.org/en/publication/global-economic-prospects)
They have four scenarios in which global growth ranges from 5% this year on the upside, to an unspecified below-zero number in their “severe downside” scenario. The primary difference between these scenarios is vaccine progress. If it goes well we could bounce back quickly and strongly. If not, we will stay in recession. That’s the gripping hand and it really isn’t complicated.
Look to your own situation and prepare accordingly.
Dian Cohen is an economist and a founding organizer of the Massawippi Valley Health Centre Cohendian560@gmail.com