Nearly seven centuries ago in the mid-1300s, the first major outbreak of the Bubonic Plague forced Europeans into some of the harshest social distancing measures in history.
As Boccacio wrote in The Decameron in 1353, the hysteria was so extreme that “brother abandoned brother. . . fathers and mothers refused to see and tend their children, as if they had not been theirs.”
When people sensed the worst was over, they slowly came out of their homes.
There was no grand re-opening of the economy like some department store suddenly under new management. People remained highly mistrustful of one another, continuing to avoid even the most basic interactions with friends, family, and professional colleagues.
Commerce was slow and the economy remained depressed for years.
And just when it seemed that the situation was finally starting to improve, the plague struck again in 1360. And again in 1374.
Medieval Europeans quickly realized that if there was just a single rat left on the planet carrying the disease, then another wave of the pandemic could begin anew.
And that made it next to impossible for anything to return to normal.
Only a handful of industries flourished after the plague. People still needed to eat, so agriculture did well.
And as more people remained in relative isolation, science began to advance at a pace never seen in western Europe.
But most industries suffered immeasurably.
Commercial trade dwindled. Italy’s woolen textile industry practically ceased to exist. Many prominent banks in Europe collapsed. And there were even government debt defaults.
Today our circumstances are obviously different. The world has some of its brightest minds working to eradicate this pandemic, and they have a pretty great track record.
And while there are certainly a lot of challenges to deal with, we’re still able to produce certain goods and services, ship them across the globe, and order online for home delivery.
But there are some similarities that are difficult to ignore.
Right now most people are barricaded in their homes while policymakers wait for this virus to die off.
But that’s not how biology works.
Just like in the 1300s, if there’s even a single carrier of the coronavirus remaining, then the whole thing starts over.
That person transmits the virus to 2-3 people, those people transmit the virus to 2-3 other people, and the exponential growth curve begins again.
Lockdowns don’t kill off the virus. They just reset the clock.
I’ve been writing about this for a while: what happens if there’s a second wave of outbreaks? Do we all go on lockdown for another two months and send the economy into another tailspin?
Even when they do lift the lockdowns, countless industries will be hideously disfigured; do we really expect crowded bars, airplanes, sports stadiums, and shopping malls to return to normal?
Even something as basic as office space could take an enormous hit.
I wrote last week that big businesses could be downsizing– permanently reducing their work forces and cutting back on office space. Even Disney acknowledged that they will reduce office space.
It’s hard to imagine that trend won’t have a major impact on the entire commercial real estate industry, from agents to construction companies to property owners, to the banks who own the mortgages.
Retail stores have been totally vanquished, and the bankruptcies are piling up; this could impact millions of workers in the retail sector and trigger a wave of defaults against the banks who loaned money to retail giants.
And you probably saw yesterday that the price of WTI crude oil crashed BELOW $0.
We’ll talk about that more in another letter… but it’s fair to say that low oil prices will force a lot of oil companies out of business.
And that will impact workers in the sector who stand to become unemployed… and, yes, the banks who loaned money to oil companies.
[According to a recent report from investment firm KBW, some banks, like Oklahoma-based BOK Financial, have more than 100% of bank equity tied up in loans to oil companies!]
I’ve been writing about this theme since the pandemic started: there will be some banks that don’t make it. They simply won’t be able to withstand the loan losses.
And it’s not just the energy sector.
Banks with loans to retail companies could take a hit. Bank with commercial real estate loans could take a hit.
And banks’ consumer loan portfolios will undoubtedly take a hit as millions of newly unemployed people stop paying their bills.
There will likely even be sovereign debt defaults, and banks will take a huge hit from those.
There’s more than $250 TRILLION worth of debt worldwide, much of it owned by banks. If even 1% of that debt goes to zero, a number of banks won’t survive.
And if you think that bank failures aren’t possible, please remember that oil prices hit MINUS $40 yesterday. Nobody thought that was possible. And yet it happened.
EVERY scenario is possible.
And this leads me to a very central idea:
I don’t know if the stock market is going to rise or fall. I don’t know what’s going to happen to oil prices.
But I have a strong suspicion that the government and central bank are going to keep working together, printing incomprehensible sums of money to bail everyone out– especially banks.
This ‘whatever it takes’ monetary policy could come at an extremely steep price.
The last thing politicians care about right now is the value of the currency. And history tells us that inflation is almost always the preferred tool of a government in crisis.
If they have to conjure $10 trillion out of thin air to bail out the economy, they’ll do it… even if it wrecks the currency.
This is an enormous implication worth preparing for today.