Via Scotiabank's Guy Haselmann,
Ebola Must Be Contained Now
President Obama and western governments are beginning to appreciate the scale of the Ebola crisis. Unfortunately, the highly deadly virus remains rampant in western Africa and is spreading there at an alarmingly exponential rate. Playing defense by trying to defend our borders will be insufficient since infected travels will not be identified give the long incubation period. However, health officials are doing an admirable and prudent job immediately quarantining all victims and tracing all of their contacts.
Yet, the West must play offensive and snuff the virus out at its source. Stopping Ebola in western Africa is the only way that the virus will be beaten. At the moment, entire societies are tragically being ravaged. These countries need desperate help, because, unlike in the West, they have poorly-equipped health care systems. Spending more today will save much more money later. The world is too interconnected to allow the virus to move from remote areas to large urban areas.
Nigeria did a masterful job preventing an outbreak when an infected person arrived in Lagos, a city of 11 million people. However, not all large metropolitan areas are equipped to do so well. There are 850 urban areas in the world with populations of 500,000 or more. There are 26 cities that qualify as a ‘megacity’ or a city whose population is greater than 10 million people or more. To put it in perspective, New York City is ranked 7th in population with 20 million people, but surprisingly it has the lowest population density of any ‘megacity’.
Other megacities: Tokyo 37M, Jakarta 26M, Seoul 22M, Delhi 22M, Manila 22M, Shanghai 20M, Sao Paulo 20M, Mexico City 19M, Cairo 17M, Beijing 17M, Osaka area 17M, Mumbai 17M, Guangzhou area 16M, Dhaka 15M, L.A. 15M, Kolkota 15M, Karachi 14M, Buenos Aires 13m, Istanbul 13M, Rio de Janeiro, 12M, Lagos 11M.
Clearly, many of these countries do not have adequate public health facilities to deal with Ebola.
(For sake of argument, ‘Urban area’ is defined as a continuous urban development within a metropolitan area whose physical form constitutes the essence of a city.)
There are two less obvious or less discussed economic reasons why the Obama administration may be urgently focusing more on the Ebola crises. Flu season is about to start and the symptoms of Ebola resemble those of the Flu. Some people with flu symptoms are likely to irrationally panic. There are likely to become numerous and frequent headlines about people being tested for Ebola-like symptoms and they might begin to impact financial markets. Hospitals could be overwhelmed particularly due to the vast requirements in terms of the facilities and personnel necessary in order to treat such a patient.
According to the US Census Bureau, there are over 40 million Americans who do not have health insurance. These people are more likely to not seek medical attention at all, thus significantly increasing the risk that the virus will be spread. The West needs to do ‘whatever it takes’ to stop Ebola immediately before one traveler brings it to a large city and we are looking at 1918 comparisons. Moreover, the desperate people in Western Africa deserve and require a global response. For markets, the outcome is binary.
Counter-Productive Micromanagement
The Fed’s message is too complex with too many contingencies and churned with too many mixed signals. Bullard’s comments yesterday are a case in point. One moment he says he has become ‘uncomfortable’ with official rates at zero (as have others); the next minute he says the FOMC needs to consider continuing QE3 or discussing QE4. Enough. Markets understand that the Fed is looking at everything and will act accordingly. (Note: I outlined the reasons in my note on Wednesday why continued or more QE is highly unlikely.)
The Fed must know that there is likely to be a strong negative market reaction during the Fed’s pivot toward normalizing policy. The recent (hollow) hints recently of more QE have foolishly juiced equity markets just as they were beginning the prudent process of preparing for a less accommodative Fed. I say “foolishly’, because those comments will increase market volatility as the market will ultimately have to do the recalibration trade all over again. (My note on Wednesday addressed the reasons why I believe the chances of QE4 are practically zero.)
The level of micro-management by the Fed appears to have reached a new shockingly high plateau. It was already surprising that markets were being told that policy tweaks would be impacted by ‘data dependency’. Can a $17 trillion complex global economy really be tweaked? What ever happened to the Fed rhetoric that whatever is done now only funnels into the broader economy 18 months from now?
- As far as data is concerned, Unemployment Claims reached a 14 year low, which was also the lowest level as a percentage of the workforce in history
- Once upon a time, the Fed said they were going to hike when the Unemployment Rate hit 6.5%. Today, the rate is 5.9% and the Fed is not even finished with QE.
Bullard also cited concern about the fall in the 5-year/5-year expected inflation rate. Since Fed policies and regulations have monumentally distorted the price of financial securities, how can the FOMC gain any useful information from any market valuations? Recently prices have been driven more by liquidity, fear, greed, and Fed policy, than by valuation. It is time that the Fed stops being a source of interference and confusion.
I expect long end Treasury rates to continue to maintain a strong bid at least for the remainder of 2014. Elevated volatility, credit widening and general risk-off themes will resume again next week. I expect the 30-year Treasury to march toward lower yields, eventually taking out the lows of the year within the next few weeks.
“Take him by the hand / Make him understand / The world on you depends” – The Doors
