Thursday, March 28, 2024

FROM THE RIDGE: Death could be a devastating experience

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Last week the World Health Organisation officially announced coronavirus is a worldwide pandemic. Through good management and luck New Zealand has just five cases at the time of writing, all back at home, and no deaths yet.
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Last week the World Health Organisation officially announced coronavirus is a worldwide pandemic.

Through good management and luck New Zealand has just five cases at the time of writing, all back at home, and no deaths yet.

Compared to Italy with 13,000 cases and more than 850 deaths already it’s easy to see what can go wrong very quickly.

Worst case scenario here with a 50% infection rate is that 2.5 million Kiwis will catch it and at a 2% death rate some 50,000 people could die.

Eight and a half thousand New Zealanders died in the Spanish flu epidemic in 1918 from a population of just over a million, so a comparable death rate.

It would be a devastating experience but let’s hope the respite we have now gives us time to learn from elsewhere what to do and what not to do.

Trump’s surprising announcement of a ban on flights from Europe for 30 days was pure politics and an unhelpful and likely damaging economic and social response. 

Only two days earlier he was saying it would soon go away and much of the commentary was fake news contradicting health experts.

It would be surprising given the economic impacts we are already seeing all around us that the economy doesn’t have a couple of quarters in a row of negative economic growth and slip into the definition of a recession.

But of most interest will be how long a slowdown will last. The pundits are predicting a short, sharp shock as the virus runs its course.

However, moves like Trump’s or other unexpected reactions could force a depression or maybe another global financial crisis if the banks aren’t in as good shape as they should be after the experience of 2008.

Let’s consider the share market’s recent reaction to the growing crisis and take a look back into history for reassurance.

The Dow Jones industrial average has dropped 20% from its all-time high over the last few weeks. It shed 5% purely on the announcement by the WHO that it is now a pandemic.

This sounds a lot and it is. I’m no expert on the share market and don’t have many shares but, like most of us, I’m in Kiwisaver along with all the family and everyone else I know and I suppose that’s dropped something like 20% but I haven’t bothered to check it out.

I sent the 100-year-old graph of the Dow Jones index to my three sons and reminded them their Kiwisaver schemes are there for the long term. Keep calm and carry on.

If our grandparents had tucked a little share portfolio away for us in 1932 after the plunges of the Wall Street crash of the late 1920s, that fund would now be 25,000 times bigger. Sadly, none of mine did.

I see the years from 1966 to 1982 weren’t great times to be an investor in the share market though those farming during that period had a great time even though the last few of those years were propped up by Muldoon’s subsidies.

I began farming in 1983 and watched those more established jump into the share market and things like Lloyds of London but we were in survival mode, not investing, so I didn’t share the pain in 1987 when it all came crashing down. It was an enormous deal at the time but when you look at the long-term graph it was just a correction from a bull run but took four years to get back to where it had been.

I see the share market has increased tenfold since 1982 until now and muse that if I’d put my borrowed money into the share market instead of a small farm we would be in the same financial position as we find ourselves now. But I wouldn’t have worked decent toil or had the satisfaction of a farming career so no regrets there.

The graph does show that the GFC of 2008 was a serious setback to the share market and, as we know, a close-run thing to a total collapse of the financial situation prevented only by governments bailing out banks all over the place.

That time it took six years to get back to the previous peak and, as we know, continued as an 11-year bull run until the last few weeks.

If coronavirus hadn’t come along there would have been an inevitable correction from some other drama.

How big this correction is and what sort of economic outcome results remains to be seen.

As the old Chinese curse says, “May you live in interesting times”.

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