Five themes for investors to consider when assessing the impact of Covid-19 on the world

The historian and Lakestar advisor Niall Ferguson is unusually interested in the present and the future as well as the past. In a recent keynote to Lakestar investors, he shared insights on how lessons from history can help us to look at the macroeconomic context of Covid and how it can boost the next wave of innovation.
Niall Ferguson Covid19

Note: This keynote was originally held in late October 2020

This year has been exciting for me because it’s not often that an event of the magnitude of the Covid-19 pandemic comes along and gives historians a chance to put their knowledge to use. Most people have no experience of a pandemic of this scale so we’ve been working with Lakestar in a very creative way to think about how the world has changed.

Larry Summers, the former president of Harvard, recently published a paper co-authored with David Cutler about the economic shock that the world has experienced. Their findings are striking – they estimate the impact of Covid-19 is going to cost the US $16 trillion – that’s 90% of US GDP and twice the cost of all the wars the US has fought since 2001. If we scale that across the rest of the world we can understand the size of shock we are experiencing.

And this pandemic is not over yet. Even if an effective vaccine is produced, it’s going to take a while to be distributed and accepted by the population. Cutler and Summers estimate that the total death toll in the US could reach 625,000, roughly three times the total so far. So it’s reasonable to assume that we’re going to be living with this virus well through next year and beyond. In fact, the first history book on the pandemic – Apollo’s Arrow by Nicholas Christakis – was published before the pandemic itself is even over.

I have identified five themes arising from the pandemic that we should consider if we want to understand the likely impact on the economy, technology and politics and relate it to the kind of work that Lakestar does.

1 ⏤ There’s a danger that we exaggerate the impact of the virus.

Events that kill a lot of people, such as war, are important, not just because of the body count but also because of their long-term impacts on human activity. If you compare the deaths in the Covid-19 pandemic with previous pandemics – for example the 1918/19 influenza or the 1957/58 influenza – the current one is not even in the top 20. In those influenza pandemics the second waves were as big as or larger than the first wave, whereas what we see now across the world is, so far, closer to a second ripple. So far. The probability of a big second or third wave cannot be ruled out. 

The earlier influenza pandemics had high infection mortality rates and they killed the very young as well as the very old. For example, in the 1918/19 influenza pandemic many people in the prime of life died, whereas Covid-19 is mostly killing those over the age of retirement, people who have left the workforce. That’s a big difference in terms of the lost quality-adjusted life years and is the reason why I believe the Covid-19 pandemic is not going to be as costly as earlier ones. There’s a danger that if we don’t take account of the ageist character of the virus we exaggerate its impact.

2 ⏤ The magnitude of the economic shock is out of proportion to the magnitude of the pandemic.

Covid-19 probably ranks about 25th in terms of its impact on the global population. It’s even smaller than the 1957/58 pandemic (which nobody remembers).

So why is the economic impact so great? The answer is clear – governments that misunderstood the situation in the early months of this year resorted to the very blunt instrument of lockdown to try to contain the spread. Lockdowns are an indiscriminate form of house arrest for much of the population, circumscribing their working lives as well as their social lives. There’s no precedent for lockdowns: no government used them in 1957/58 and schools weren’t even closed in the US, despite the virus spreading among teenagers and killing a significant number of them.

Lockdowns explain a lot about the scale of the shock – governments used them as a last resort after bungling their previous strategy. We know what the appropriate strategy was because Taiwan adopted it, as did South Korea – testing and contact tracing followed by isolation for the infected.

Future historians will have to figure out why western countries were unable to do that in a competent way. In particular, the US was, on paper, pretty well prepared for a pandemic but it blew testing and has failed to get contact tracing right.

Research by the Blavatnik School of Government in Oxford on the effect of government stringency names Taiwan as best in class, being the least stringent but most successful at managing Covid. Argentina had the highest government stringency with a lockdown that lasted for months. That has been a complete failure because Argentina is having to ease the economic lock-down just as the disease is beginning to spread throughout the country.

European countries are in the middle of the stringency range. Within Europe, Sweden was the least stringent while the UK was quite near the top, but Sweden’s performance in terms of managing the pandemic has been better than the UK’s. Both at the time they were done, and also in hindsight, lockdowns look like a major policy failure or an expression of failure – they were a last resort.

3 ⏤ It’s highly likely that the dollar will weaken.

The third theme of the pandemic is the way governments have sought to offset the economic costs of lockdown with massive fiscal and monetary expansion. This has varied enormously from country to country but none can match the fiscal expansion seen in the US where it amounted to around $3.4 trillion, or 16% of GDP. In comparison, Germany’s fiscal expansion was around $90 billion, or 7.5% of GDP. 

Because the US has done so much in fiscal terms, it’s likely that over the next year or so the dollar will weaken. There has been an enormous expansion of monetary aggregates and the dollar supply has exploded, far more than it did after the global financial crisis. While that might make sense in the short run and explains why the US economy is recovering rather better than Europe’s economies, there must be some consequences, particularly if Joe Biden wins the upcoming presidential election. I would expect to see the dollar weaken considerably relative to other currencies.

4 ⏤ We see a dramatic deterioration of the attitude of the rest of the world towards China.

My fourth point is relevant for everyone interested in technology. Cold War II – by which I mean the cold war between the US and China – began before Covid-19 and it is not over. In fact, the pandemic intensified Cold War II and it will be very difficult for a Biden administration to change direction on a range of issues, particularly with respect to technology. They are not just going to call off the Trump administration’s campaign, for example, to limit Huawei’s dominance of 5G networks.

One of the most striking features of 2020 is the dramatic deterioration of the attitude of the rest of the world towards China. It’s not just in the US that anti-Chinese sentiment has soared in the last 18 months: a recent Pew poll revealed that Swedish sentiment is less favourable to China overall than American sentiment.

A big challenge for anybody navigating technology investment is to understand the implications of Cold War II and how the digital Iron Curtain is going to become harder to get through. It also creates a puzzle because a lot of western money is pouring into China right now – especially into tech stocks – and people are salivating at the prospect of the Ant Group IPO. This will look like a big mistake if Cold War II becomes the dominant geopolitical feature of the coming years and escalates, which I suspect it will over the issue of Taiwan.

5 ⏤ The future has been brought forward by 10 years in only 10 months.

I would like to make one final point on the pandemic’s social and cultural impact. I don’t think any of us fully understands how much the world has been changed by Covid-19. The world we have lost will be very hard to recapture. We will not be able to be as gregarious as we were and we will be working from home and relying more on internet-based technology for both work and leisure.

That’s the cloud’s silver lining for Lakestar. It feels that the future has been brought forward by 10 years in the space of as many months and that companies that were positioned for a more virtual world are going to be the principal beneficiaries of this great crisis.

All historical shocks have consequences that are not entirely adverse. The world after the First World War was dramatically changed. For those in the European elite it seemed like a worse world, but for many in the rest of the population it was a better world. For them, the world that they had lost by 1920 was one that was worth losing.

We may look back – admittedly not for many years – and say that this great shock brought much greater benefits than we anticipated.

This article is part of the 'Lakestar Briefing', a periodical publication about Lakestar's portfolio companies and our network of inspiring minds we like to work with. 

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About The Author
Niall Ferguson, MA, D.Phil., is the Milbank Family Senior Fellow at the Hoover Institution, Stanford University, and a senior faculty fellow of the Belfer Center for Science and International Affairs at Harvard. He is also a visiting professor at Tsinghua University, Beijing. 

He is the author of fifteen books, including The Pity of War, The House of Rothschild, Empire, Civilization and Kissinger, 1923-1968: The Idealist, which won the Council on Foreign Relations Arthur Ross Prize. He is an award-making filmmaker, too, having won an international Emmy for his PBS series The Ascent of Money. 

He is the founder and managing director of Greenmantle LLC, an advisory firm. His most recent book, The Square and the Tower: Networks and Power from the Freemasons to Facebook, was published in the U.S. in 2018, and was a New York Times bestseller. A three-part television adaptation, Niall Ferguson’s Networld, aired on PBS in March 2020.