Bu ar

What I’m

telling clients

Brendan MacMillan,

CIO, QP Global Family

Offices in New York,

which manages family

offices and their wealth

We believe the market

hasn’t discounted the

full potential for an

event as significant

and symbolic as the

temporary closure

of the U.S. school

system, or at least their

statewide closures in

California or New York.

We don’t see a high

probability that the

effects of Covid-19 will

lead to a credit crisis

yet, but just in case

we get that wrong,

we will look to hedge

our equity positions

by shorting stuff like

HYG, the high-yield

bond exchange-traded

fund. �As told to

Joel Weber

4

○ When Covid-19strikes, the worstof the

damageisdonebythebody’sefforttofightoff

the disease. The immune system can overreact

in what doctors call a cytokine storm. Immune

cells attack not just the viral invader but healthy

tissue as well. Victims gasp for breath as their

lungs fill with fluid. The novel coronavirus,

which scientists have christened SARS-CoV-2,

tricks us into fighting it so hard that, in the most

extreme cases, we kill ourselves.

As with the body’s immune system, so with

the defenses of the global economy. There’s a vir-

tual cytokine storm going on: The all-out effort to

battle the disease is doing more harm to global

growth than the disease itself. Quarantines, travel

restrictions, business closings, and citizens’ vol-

untary self-protection measures have frozen busi-

ness while wreaking havoc on people’s routines.

This will be the business story of 2020: Can the

world modulate its immune response so as to fight

Covid-19 in a way that saves lives without damaging

everything else we care about? Or is this a lost year?

There’s reason to worry that simultaneously

defeating the virus and sustaining growth will be

hard, if not impossible. New cases in China have

declined sharply, which is wonderful news. But to

make that happen the country’s leaders imposed

one of the most extensive quarantines in his-

tory, corralling close to 60 million people inside

Hubei province, the epicenter of the outbreak.

Governments in surrounding provinces also took

steps to protect their populations, enacting travel

bans and forcing factories to shut down. The eco-

nomic toll has been high: Growth in the first quar-

ter will be just 1.2%, according to projections by

Bloomberg Economics—the slowest year-over-year

rate since China started keeping records.

Despite Beijing’s best efforts, there have been

large outbreaks of Covid-19 across China as well as

in South Korea, Iran, Italy, and elsewhere. And now

that authorities outside of Hubei have begun easing

restrictionstolimittheeconomicpain,there’sa

riskthatthenumberofnewcasesinthecountry

will begin to rise again as people go back to work-

ing, studying, and shopping. If the number of new

cases in China does keep falling, it will show that

an authoritarian state with a pliant population and

high-tech surveillance capabilities can rein in Covid-

19. But few—if any—other nations could employ
    China’s strategy with the same strictness.
    Forecasters have now turned their attention to
    the U.S., the only nation with a bigger economy than
    China’s. The question is the same: How much will
    Covid-19 take off U.S. growth—and how much of the
    harm will come from efforts to fight the disease vs.
    the disease itself? There were 1,107 reported cases
    and 36 deaths in the U.S. through 4 p.m. Eastern
    time on March 11, according to data collected by
    Bloomberg. That number is expected to leap.

● How vulnerable

is the U.S.?

Economists who were initially blasé about the

potential hit to the U.S. have become increasingly

concerned. Goldman Sachs Group Inc. revised its

U.S. outlook downward in late February to reflect

a drop in U.S. goods exports to China, fewer tour-

ist arrivals from China, and modest supply chain

disruptions for U.S. retailers. But that turned out to

be not pessimistic enough. “Over the last week the

situation has proven worse than we expected,” the

Goldman team wrote on March 1, citing increased

economic weakness in China and further spread

of the virus outside the country as key factors in

the decision to downgrade full-year 2020 growth

to 1.3%—a full percentage point below the previ-

ous forecast. A week later, Goldman lowered its

forecast once more, to 1.2%, despite the Federal

Reserve’s half-percent rate cut.

il h

he economy