By Nick Paumgarten. (April 13, 2020)
The investor who calls himself the Australian headed out for a walk on his farm in the Alps of New South Wales, three hundred miles south of Sydney. This was a morning in late March. He’d been holed up there for a month with his wife and three kids, plus two portable oxygen units and a store of hydroxychloroquine. “But my intention is not to get it,” he said, of covid-19. “I don’t plan to see anyone until October.” He was talking on a cell phone. You could hear the caw of crows in the background, and the luffing of the wind. “I only see four other people in the valley. If I need to kill them, I will.” One assumed, from the way he laughed, that this was a joke.
The Australian, who spoke on the condition that his name not be used, is a voluble redhead just shy of fifty. “Billions dude looks like me,” he wrote, in a WhatsApp message accompanied by a pair of photos. He did indeed resemble Damian Lewis, the actor who plays a hedge-fund magnate in the Showtime series “Billions.” “He stole my look.” Reared in Sydney, the Australian moved to New York in 1994, when he turned twenty-two, to trade commodities at Goldman Sachs. At JPMorgan, he and a couple of his countrymen—known as the Aussie mafia—earned the firm hundreds of millions in profits during the early months of the financial crisis, in 2008. In 2015, he moved to Singapore. Proximity to China, a bearish disposition, and an interest in the history of virulent diseases led him to pay special attention to the effects that recent outbreaks had had on financial markets. sars, H1N1, Ebola. Last October, he listened to an audiobook by the Hardcore History podcaster, Dan Carlin, called “The End Is Always Near.” “So I had pandemics and plagues in my head,” the Australian said. “In December, I started seeing the first articles about this wet-market thing going on in China, and then in early January there was a lot on Twitter about the shit in Wuhan.” He was in Switzerland on a ski holiday with his family, and he bought all the surgical masks and gloves he could find. On the flight back to Australia, he and his wife wore some, to the bewilderment of other passengers.The New Yorker’s coronavirus news coverage and analysis are free for all readers.
He quickly put some money to work. He bought a big stake in Alpha Pro Tech, one of the few North American manufacturers of N95 surgical masks, with the expectation that when the virus made it across the Pacific the company would get government contracts to produce more. The stock was trading at about three dollars and fifty cents a share, and so, for cents on the dollar, he bought options to purchase the shares at a future date for ten dollars: he was betting that it would go up much more than that. By the end of February, the stock was trading at twenty-five dollars a share. He shorted oil and, as a proxy for oil, the Canadian dollar. (That is, he bet against both.) Finally, he shorted U.S. equities.
“You don’t know anyone who has made as much money out of this as I have,” he said over the phone. No argument here. He wouldn’t specify an amount, but reckoned that he was up almost two thousand per cent on the year.
Emboldened by vindication, the Australian, walking through the countryside, laid out his prognosis for the United States and the world. America needed to “rip off the Band-Aid,” he said. The federal government should close the borders, shut off all international commerce, declare martial law, deploy the military to build field hospitals and isolation wards, and arrest or even fire on anyone who didn’t abide by a stay-in-place protocol. (“In 1918, in San Francisco, a cop shot someone in broad daylight for being outside without a face mask, and the cop was celebrated for it!”) Or perhaps the government should reward each citizen who strictly observed the quarantine with fifty thousand dollars. “The virus would burn out after four weeks,” he said. The U.S. had all the food and water and fuel it would need to survive months, if not years, of total isolation from the world. “If you don’t trade with China, they’re screwed,” he said. “You’d win this war. Let the rest of the world burn.” The problem, he said, was that, perhaps more now than ever, Americans lack what he called “social cohesion,” and thus the collective will, to commit to such a path. “Plus, you have guns. Lots of guns. And all the base materials for your drugs, like ninety-seven per cent, come from China.” He predicted that any less stringent measures—the slow removal of the Band-Aid that we are experiencing now—would result in social unrest bordering on civil war, and the decimation of our medical ranks. “So suddenly everyone who’s seen ‘House’ would be a doctor,” he said. Politically, the Australian considered himself well right of center, yet he thought it ridiculous that the United States doesn’t have nationalized health care. He predicted the cancellation of the Presidential election, or Donald Trump’s resignation, or the creation of an emergency leadership council, to which, throughout the conversation, he nominated Generals Mattis and Petraeus, Bill Gates, and Gary Cohn, for whom the Australian had worked at Goldman Sachs. “You could have either four weeks of pain and a future boom or years of this rolling bullshit and a depression. But people are just selfish. They’re not thinking. They’re morons.”
It was one such moron, an old friend of mine, who had introduced me to the Australian. They’d overlapped at Goldman Sachs. I’d been eavesdropping for a week on the friend’s WhatsApp conversation with dozens of his acquaintances and colleagues (he called them the Fokkers, for an acronym involving his name), all of them men, most of them expensively educated financial professionals, some of them very rich, a few with connections in high places. The general disposition of the participants, with exceptions, was the opposite of the Australian’s. Between memes, they expressed the belief, with a conviction that occasionally tipped into stridency or mockery, that the media, the modellers, and the markets were overreacting to the threat of the coronavirus—that it was little more than another flu, and that effectively shutting down the economy to prevent, or at least slow, the spread of the virus would turn out to be far more harmful, in the long run, than the virus itself. “The biggest own goal in memory,” one Fokker wrote.
“Suicide due to innumeracy,” another noted.
They constituted a sample of the-cure-is-worse-than-the-disease segment of the population, and, on the day of my conversation with the Australian, President Trump appeared to be steering hard their way. Defying the dire prognostications and pleadings of the medical establishment, Trump threw out there that businesses would soon reopen and that economic activity might kick in again by Easter. (Oh, well.) In the next few days, it was perhaps this prospect, as well as the unprecedentedly large two-trillion-dollar stimulus package passed in the Senate, that caused the stock market to rally, after one of the most precipitate collapses in its history. (As a general rule, despite the assertions of the financial media, it is difficult to say with any certainty which relevant facts or sentiments may make the market indices go up or down on any given day.) On March 26th, when the Labor Department reported that a record 3.3 million Americans had filed jobless claims the previous week—as if every man, woman, and child in Philadelphia and Phoenix suddenly joined the breadline—both the Dow Jones Industrial Average and the S. & P. 500 shot up more than six per cent. The crosswinds were fierce.
Meanwhile, New York’s health-care system was sinking into chaos, as covid-19 cases swamped hospitals. That day, there were more 911 calls than there had been on September 11, 2001. Some Fokkers, however, felt that it was important not to get swept up in apocalyptic tales or media reports, or to fall for the Chicken Littles. They mocked Jim Cramer, the host of the market program “Mad Money,” on CNBC, for predicting a great depression and wondering if anyone would ever board an airplane again. Anecdotes, hyperbole: the talking chuckleheads sowing and selling fear.
As in epidemiology, the basis of the financial markets, and of arguments about them, is numbers—data and their deployments. Reliable data about covid-19 have been scarce, mainly because, in the shameful absence of widespread testing, no one knows how many people have or have had the virus, which would determine the rate of infection and, most crucially, the fatality rate. The numerator (how many have died) is known, more or less, but it’s the denominator (how many have caught it) that has been the object of such speculation. If I had a roll of toilet paper for every finance guy’s analysis of the death rate I’ve been asked to read, I’d have toilet paper. Most of these calculations, it seems, are arguments for why the rate is likely to be much, much lower than the medical experts have concluded. The less lethal it is, the better the comparison to the flu, and therefore the easier it is to chide everyone for getting so worked up over it. As Lawrence White, a professor of economics at George Mason University, tweeted, “Almost everyone talking about the #coronavirus is displaying strong confirmation bias. Which only goes to prove what I’ve always said.”
Still, it’s hard for a coldhearted capitalist to know just how cold the heart must go. Public-health professionals make a cost-benefit calculation, too, with different weightings. What’s the trade-off? How many deaths are tolerable? Zero? Tens of thousands, as with the flu? Or whatever number it is that will keep us from slipping into a global depression? The public-health hazards of deepening unemployment and poverty—mental illness, suicide, addiction, malnutrition—are uncounted.
Financial people love to come at you with numbers, to cluck over the innumeracy of the populace and the press, to cite the tyranny of the anecdote and the superior risk-assessment calculus of the guy who has an understanding of stochastic volatility and some skin in the game—even when that skin is other people’s. But while risk and price are intertwined, value and values are something else entirely. It can be hard to find the right math for those.
In the months following the first tidings of covid-19 from China, Trump played down its potential impact—attempting to jawbone a virus, or at least the perception of it. But a virus, unlike a President, doesn’t care how it’s perceived. It gets penetration, whether you believe in it or not. By the time, later in March, that he acknowledged the scale of the pandemic (and sought to convince those who hadn’t been paying attention that he’d been paying attention all along, except to the extent that he’d been distracted), it had long been abundantly clear that he cared more about the economic damage—even if it was only in relation to his reëlection prospects, or to the fate of his hotel and golf-resort businesses—than about any particular threshold regarding loss of life or the greater good. Others, perhaps on his behalf, have tried to expand his position. For a few days, the message, reinforced by the likes of Glenn Beck (“I’d rather die than kill the country”) and Dan Patrick, the soon-to-be-seventy lieutenant governor of Texas (“If that’s the exchange, I’m all in”), was that we might have to sacrifice our elders for the sake of the economy. The politics of it were perverse. Many of the same people who had cited “death panels” in the fight against Obamacare were now essentially arguing the opposite. One man’s cost controls are another man’s eugenics.
For Trump, the economy is basically the stock market. He’s obsessed with it, much the way he fixates on television ratings. The stock market is, among other things, a great mood indicator. But it isn’t the economy—not even close. As we’re now discovering, to more horror than surprise, the cessation of commercial activity—travel, tourism, entertainment, restaurants, sports, construction, conferences, or really any transactions, in significant volume, be they in lawyering, accounting, book sales, or sparkplugs—means no revenue, no ability to make payroll or rent, mass layoffs, steep declines in both supply and demand, and reverberations, up and down the food chain, of defaults on debt. That’s the economy.
This brutal shock is attacking a body that was already vulnerable. In the event of a global depression, a postmortem might identify covid-19 as the cause of death, but, as with so many of the virus’s victims, the economy had a preëxisting condition—debt, instead of pulmonary disease. Corporate debt, high-yield debt, distressed debt, student debt, consumer debt, mortgage debt, sovereign debt. “It’s as if the virus is almost beside the point,” a trader I know told me. “This was all set up to happen.”
The trader was one of those guys who had been muttering about a financial collapse for a decade. The 2008 bailout, with the politically motivated and, at best, capricious sorting of winners and losers, rankled, as did the ongoing collusion among the big banks, the Federal Reserve, and politicians of both parties. He’d heard that the “smart money,” like the giant asset-management firms Blackstone and the Carlyle Group, was now telling companies to draw down their bank lines, and borrow as much as they could, in case the lenders went out of business or found ways to say no. Sure enough, by March’s end, corporations had reportedly tapped a record two hundred and eight billion dollars from their revolving-credit lines—a “revolver frenzy,” as the financial blog Zero Hedge put it, in publishing a list of the companies “that managed to get their money in time.” Corporate America had hit up the pawnshop, en masse. In a world where we talk, suddenly, of trillions, two hundred billion may not seem like a lot, but it is: in 2007, the subprime-mortgage lender Countrywide Financial, in drawing down “just” $11.5 billion, helped bring the system to its knees.
It is hard to navigate out of the debt trap. Creditors can forgive debtors, but that process, especially at this level, would be almost impossibly laborious and fraught. Meanwhile, defaults flood the market with collateral, be it buildings, stocks, or aircraft. The price of that collateral collapses—haircuts for baldheads—leading to more defaults. The market in distressed debt has already ballooned to about a trillion dollars.
As April arrived, businesses, large and small, decided not to pay rent, either because they didn’t have the cash on hand or because, with a recession looming, they wanted to preserve what cash they had. Furloughed or fired employees, meanwhile, faced similar decisions, as landlords sent threatening reminders. Would property owners, without their monthly nut, be able to finance their own debts? And what of the banks, with all the bad paper? In the last week of March, an additional 6.6 million Americans filed jobless claims, doubling the previous week’s record. In New York State, where nearly half a million new claims had been filed in two weeks, the unemployment-insurance trust began to teeter toward insolvency. Come summer, there would be no money left to pay unemployment benefits.
As the stock markets tanked, and the bond markets freaked out, the klaxons of doom broke the spell of what had been a kind of perpetually rattled complacency. For three years, Trump’s fits and provocations—and even his protectionist policies toward traditional trading partners—had failed to knock the markets off course for any prolonged stretch. The markets, the reasoning went, liked Trump—or at least his tide of deregulation, business-friendly tax policies, and the regimen (which, of course, predated his Presidency) of low interest rates and easy money.
On March 20th, Goldman Sachs spooked the world, by predicting a twenty-four-per-cent decline in G.D.P. in the second quarter, a falloff in activity that seemed at once both unthinkable and inevitable. Subsequent predictions grew even more dismal. The service sector—the economy’s real mainstay—would be hit the hardest, and the implications for people’s jobs, and their ability to pay for things, were dire. In an e-mail exchange among some of my old schoolmates—an orthopedic surgeon forced to all but shut down his practice because of the interruption of elective surgeries, a commercial-real-estate guy firing hundreds of employees—a futures trader wrote, “Sell everything that isn’t nailed down.” Earlier in the week, notes from a Goldman call, with talk of terrible numbers, had leaked out onto the Street. A couple of the Fokkers, on the basis of no evidence except decades of experience, suspected Goldman of sowing fear in order to profit. They certainly thought that was what Bill Ackman, the hedge-fund billionaire, had done: he went on CNBC and said, “Hell is coming.” He predicted that the nation would enter a depression if the White House didn’t take drastic measures. Hotel chains would go out of business; Hilton’s stock would go to zero. The Fokkers, watching from their home trading stations, mocked him:
“Now Ackman is in tears.”
“He sounds unhinged.”
“Irresponsible. . . . Wanker.”
“In an industry of cocks, he’s one of the great ones.”
Like the Australian, Ackman advocated a shutdown of the global economy. And, like the Australian, he had profited from his pessimism. A week after his appearance on CNBC, his firm, Pershing Square Capital Management, announced that it had netted $2.6 billion (on an investment of just twenty-seven million dollars) on bearish credit bets, which paid off if certain bundles of loans declined in value. This news enraged the Fokkers; they felt that he’d been scaring people, for money. (They were more comfortable with those who would reassure people, for money.) But, by then, Ackman told me, he’d plowed most of his proceeds back into the stock market. “Our hedge had already paid off prior to my going on CNBC,” he said.
Since last year, I’ve been receiving daily mass e-mails from a retired hedge-fund manager named Whitney Tilson. We’d met walking our dogs in the Park, back when talking to strangers was a thing. We chatted about mountain climbing and an attempt he’d made to become a contestant on “Survivor.” He added me to his list. Most of his e-mails recounted his exploits and his travels as an outdoor enthusiast—fitness advice and selfies of him climbing and hiking and skiing and running triathlons and doing Tough Mudders. Advertisements for his investment newsletter began sprouting up on some of my favorite Web sites.
Tilson is a close friend of Ackman’s, from their days as undergraduates at Harvard, in the late eighties, when they sold ads for the “Let’s Go” travel guides. On March 27th, Tilson declared in his newsletter that Ackman had “just made the greatest trade of all time.” He was a little envious. “Was it really so hard to see on February 19, only 37 days ago, when the S&P hit an all-time high and credit spreads were close to all-time lows, that the coronavirus might be a big problem?” he wondered.
Yet, on March 9th, when it was even less hard to see that the coronavirus might be a problem, the subject line of Tilson’s daily e-mail had read, “I think the current panic over the coronavirus is one of the most irrational things I’ve ever seen.” He wrote, “Many times throughout my career, when such irrationality has manifested itself in financial markets, leading to big sell-offs, I’ve taken advantage—and made tens of millions of dollars for my investors.” He noted that he was writing a book called “All I Want to Know Is Where I’m Going to Die: The Five Calamities That Can Destroy Your Life and How to Avoid Them.” A pandemic was not one of the five.
Tilson wrote that, except for the elderly with additional health problems, “I can find no evidence that the risk of serious illness or death from the coronavirus for the overwhelming majority of Americans is anything but infinitesimal—like one in million.” He went on, “Therefore, unless new, contradictory evidence emerges, I think that the vast majority of Americans can safely go about their lives as usual. That’s exactly what my family and I are doing. I took three flights last week to Tampa, Chicago, and Jackson, WY. Susan and Katharine flew to London last Thursday and returned yesterday evening. They reported that everything there was completely normal. (Gotta love the stoic Brits—keep calm and carry on!) Emily flew from Newark to join me in Jackson today. I rode a dozen times on a gondola today with strangers (as Emily and I will be doing every day this week).”
Putting aside the fact that luxury ski resorts in Europe and North America were already emerging as super-spreaders (“Après-ski is a virus spewer,” an Austrian epidemiologist said of Ischgl, formerly the Ibiza of the Alps and now its Wuhan), Tilson’s apparent disregard for the commonweal touched a nerve with his readers, who flooded him with angry replies. “I think you are totally wrong and causing harm,” Ackman told him. “This makes you look incredibly ignorant.” Like Mayor Bill de Blasio, who, slow on the draw, had urged New Yorkers to “go about your lives,” as the corona clouds massed, before grudgingly coming around, Tilson began to revise his opinions, as well as his tone. Soon he was volunteering to help build a field hospital in Central Park’s East Meadow, across the street from Mount Sinai Hospital and his apartment building. “I’m working so hard that I’ve lost five pounds (going from 169 to 163),” he wrote, on April 2nd, proving that innumeracy is contagious. “Can you believe we all used to pay for workout classes?”
The Fokkers found it hard to let go of the conviction that the crisis was overblown, and that the shutdown could do more harm than good. One of the more clamorous champions of this opinion went quiet for a while, as he battled the virus at home, in some terror over his mounting inability to breathe. Another had a cousin on a re-breather, a firefighter who’d worked the pile at Ground Zero. And yet within a week both of them were sharing a wish that there were a way to short the price of ventilators in June or September, in the belief that we wouldn’t need nearly as many as the governors of the most beleaguered states were claiming. Someone floated the idea of a job-losses-per-death calculation. Hope was expressed: in the levelling off of death rates in Italy; in the F.D.A.’s emergency approval of the experimental treatment of hydroxychloroquine; in the antibody tests coming out of the United Kingdom, which might determine who’d had the virus, and therefore who was immune and able to rejoin the workforce. Perhaps “the manufactured hysteria,” as one investor put it, was finally collapsing.
But no one doubted that, in economic terms, the situation was grave almost beyond imagining. A fund manager wrote, “Virus is like a huge sink hole in global economy. No one (not even anyone on this chat!) knows how big/deep it is. And every day world in lockdown it gets bigger and deeper. Policy makers also have no clue, but they have to do something, so they have started shoveling fiscal and monetary ‘dirt’ into hole. If hole bigger than dirt, we get deflation and you do the obvious. If dirt bigger than hole, you get . . . inflation. And if by complete dumb luck, dirt=hole, back to Goldilocks.” He reckoned “hole>dirt.”
Either way, it’s going to require a lot of fill. Whether you favor or abhor deficits, whether you’re a Keynesian, a Hayekian, or an advocate of Modern Monetary Theory, we have little choice at this point except to run up a huge deficit to fund rescue and stimulus on an unprecedented scale. This is the world we’ve made, or that our parents and grandparents have. There’s no real constituency now for austerity.
Another fund manager on the Fokker chain was modelling this behavior, on his own balance sheet. His advice: Borrow as much as you can. Mortgage everything. With interest rates at historic lows, you could accumulate cash and have money on hand to buy distressed assets on the cheap, whether they’re stocks, bonds, or real estate, and be well positioned to make money again when the world got back to work. This too shall pass, the old-timers said, as they always did. During the grimmer days of the 2008 financial crisis, most investors had hesitated as their more intrepid peers waded back in. They watched the hedge-fund manager David Tepper, who keeps a brass cast of a pair of testicles on his desk, make seven billion dollars by betting early on the recovery of the banks. No one wanted to miss it this time. At the end of March, there was a frenzy, in the debt markets, of “breathless buying,” as the trader put it. Optimism ran through them like a fever. Last week, the Dow and the S. & P. surged. “They have the playbook,” the hopeful ones said, of the central banks, which were rolling out every play they’d run in 2008.
I asked Mohamed El-Erian, the longtime co-chief investment officer at pimco, the world’s biggest bond fund (he now advises Allianz, pimco’s parent company), about the confidence of the Fokkers and the would-be Teppers. “It’s idiotic,” he said. “Well, I shouldn’t use that word. This notion of a V, of a quick bounce back to where we were before—people don’t understand the dynamics of paralysis.”
He said, “This is much bigger than 2008. 2008 was a massive heart attack that happened suddenly to the financial markets. You could identify the problem and apply emergency remedies and revive the patient quickly. This is not just a financial stop. This is infection all over the body, damage to virtually every limb and organ. The body was already so fragile. Those of us who have had the privilege of studying failed states have seen this before, but never in a big country like the United States, let alone a global economy.”
He went on, “In the financial crisis, we won the war but lost the peace.” Instead of investing in infrastructure, education, and job retraining, we emphasized, via a central-bank policy of quantitative easing (what some people call printing money), the value of risk assets, like stocks. “We collectively fell in love with finance,” he said. Apparently, we’re still in love.
Last Thursday, amid news that another 6.6 million Americans had lost their jobs, the Fed announced the infusion of an additional $2.3 trillion, including hundreds of billions to purchase corporate debt, ranging from investment-grade to junk: big dirt. Stocks surged anew. The Fed was propping up risk assets again, at a scale that dwarfed the interventions of 2008, and the bankers were back, hats in hand. They get paid like geniuses, and yet, every ten years, they need bailing out.
A popular meme dusted off in recent weeks is an illustration of a few dinosaurs looking up at an asteroid blazing toward Earth, with a T. rex saying, “Oh shit! The economy!!” Silly dinosaurs. It can certainly seem ghoulish to worry about capital when people are dying in droves, but this isn’t an extinction event. At a certain point, the pandemic will recede and leave behind a severe economic crisis, affecting everyone in ways and degrees that are impossible to predict. The financial markets are a bellwether, at least. Deflation or inflation? Rising rates? Negative rates? Three months? Six? Two years? Schools? Museums? Airplanes? Concerts? Nobody knows anything. The only thing we can say with certainty is that the pain will be unfairly distributed. People are betting on it.
