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Post-corona: a golden age of informed risk management?

Post-corona: a golden age of informed risk management?
9 April 2020

If there is one thing the coronavirus has taught us, it's that even for the lucky inhabitants of 21st century industrialised nations, life comes with unforeseen, existential risks.

We won't be able to ever prevent that from happening, nor will we suddenly develop a crystal ball for accurately predicting such calamities.

What we do have control over, however, are the following aspects:

  • Your risk management strategy, i.e., how to minimise the effect that unexpected significant events have on your life (financially and otherwise).
  • Your taking advantage of new investment opportunities, and working to find them in unexpected places and before others snap them out from under your face.
  • Your attitude towards dealing with crises of any kind on a personal level, and if you permit such instances to unduly influence your life.

As a consequence of all that we have experienced recently, I believe that a golden age of informed risk management is upon us.

With today's Weekly Dispatch, I'd like to help you develop a slightly different mindset for approaching the issue – primarily financially, but also going beyond that. We all want to manage financial risks, make use of investment opportunities, and enjoy our lives. During the post-corona era, the ways how to achieve and manage these goals are going to shift.

Knowing what I know about my readers from email contacts and personal meetings, I decided to steer this article in a slightly different direction than my usual writings. It is an article that covers many angles, parts of which were triggered by questions from readers.

If there is anything you particularly like or dislike about today's issue, do shoot me an email.

Keep an open mind about this crisis – because no one knows jack sh** so far

People who have been around long enough thought they had already seen two incredible Black Swan events: 9/11 and the 2008 Great Financial Crisis. Both felt terrible, unique, and like they couldn't possibly be topped by anything other than the biblical end of days or the zombie apocalypse.

We were just taught a lesson that it can always get worse, and just as unfortunate is the fact that we still barely understand what hit us.

It'd be easy to think that following the 24/7 onslaught of media reporting and expert opinions, we are already a lot wiser about recent events.

However, I don't think we've got much of a clue about the conclusions that will eventually be drawn from the coronavirus pandemic. Once you start looking into it, you realise that no one has sufficient data yet.

Right now, experts can't even decide whether the virus has already spread through large parts of the population (and simply stayed asymptomatic in most people), or if it has only reached a tiny part of the population yet and the real growth of the epidemic still lies ahead.

E.g.:

  • That same day, a Professor of Medical Statistics and Epidemiology at a university in Milan published a study that the real number could be 5m, 10m, or even 20m – based on the majority of infected people not showing any symptoms at all. Relative to any of these numbers, the number of victims so far would be statistically almost negligible, and the pandemic would appear in a new light.

Which one now?

Well, no one knows for sure.

Worst of all, certain viewpoints can't easily be discussed in a public setting (yet). The term "corona-denier" has entered the dictionary, and we all know what that means. Coronavirus has, of course, become a part of the Western world's raging culture war. Needless to say, that doesn't stop me from looking at it from all perspectives.

My number #1 conclusion from the past weeks is that as soon as you start to scratch the surface of the available and widely-used data, you realise that we know very little yet. Most of the available data is at the very least questionable, because it's incomplete, based on different formats, or from sources that don't deserve to be trusted. It might even turn out to be useless altogether. The jury is still out, but the current data throws up about as many questions as it seemingly answers.

For example:

  • The US Center for Disease Control (CDC) has been keeping weekly numbers of pneumonia deaths for many years. In recent weeks, these numbers have come in significantly lower than usual during this time of the year. How can that be? Was the coronavirus headcount inflated by counting people who died primarily from pneumonia but also carried the coronavirus? How should such multi-causal deaths be treated to make them accurately reflect the situation? Such nuance exists in all data sets, which is why data cannot always be taken at face value.
  • Why aren't the widely-circulated daily death statistics based on the so-called excess deaths? That's the count of victims who died solely or primarily from coronavirus, instead of counting anyone who carried the coronavirus but would have likely died from pre-existing conditions in the foreseeable future. Wouldn't excess deaths be one of the critical numbers for making existential decisions such as closing down entire economies? Where I did spot comparisons of death rates vs. excess death rates, these diverged by up to a factor of 20.
  • It has already become apparent that the quality of tests used differs from country to country, and at times even between individual states within a country. Some tests capture smaller concentrations of viruses in a body, others higher ones. What effects does all this have on the usefulness of the available data? Never mind questions of test availability across time and space, which further distorts data.

There are all sorts of interesting affiliated questions to which we haven't got sufficiently clear answers because the data isn't available yet.

Add to it all the special interest groups that pull the debate into one or the other direction.

E.g., how can it be that even in 2020, any Western media organisation at all takes numbers from China at face value and reports them as fact? After all, everyone knows that China is ruled by an authoritarian communist regime that has manipulated its numbers habitually for decades. The corporate media drive significant parts of the public narrative, and public narrative drives the actions of national leaders. What was the influence of the media on political decision-making, and how can its effects (positive and negative) be quantified? For that discussion to happen – and make no mistake about it, it WILL happen once the dust settles – we first need more data. The results of it could make much of what we have seen recently appear in a different light.

Of course, we all know why the lack of reliable data hasn't stopped recent far-reaching decisions. Demonstrating a certainty that does not yet exist can help promote the interests of those who disseminate it.

"USA's deaths surpass China's deaths" makes for a headline that sells newspapers, and it enables some to score political points.

"USA's speculative per-capita death rate compared to China's unknown numbers does not provide any useful conclusions" may be closer to the truth, but it won't sell another copy of The New York Times and it is harder to get across than to shout "Orange Man Bad".

None of this is new, and we will never live in a perfect world. There are, without a doubt, lots of well-meaning, hard-working people on the frontlines who need to make decisions based on the information available at the time, and taking into consideration factors such as funding limitations, public pressure, and maybe even an objective need to overreact in the face of unknown risks.

I even (almost) feel for employees of the ad-funded corporate media. Their jobs were at risk before the corona crisis, and the recent rapid fall in ad revenue will have them fear for their livelihoods like never before. You can empathise with their dreaming up the most outrageous of headlines because clickbait has become a vital part of their business model and that keeps their salaries flowing. We all want to live.

None of that changes, though, that it'll take a while before we can draw any useful conclusions about what has happened recently. Every scientist would normally agree that you wait until all the data is in before you can draw conclusions. If you aren't on the frontlines of emergency decision-making, there may be a period where you simply have to wait.

In the meantime, it's a good use of your time to make yourself more aware of risks in life and how to analyse, manage and even utilise them. Being knowledgeable and skilful in this particular area will become much more valuable in the world we are now entering. The distinct risk of potentially losing everything was something that pre-Second World War generations had always faced, and even considered a normal risk in life. We have had a lucky 75-year break from these cycles. The world may now return to normality, where every other generation runs a high risk of having to start all over again.

That's a risk you should become better at managing, and it can even be quite stimulating and entertaining. Use the current period to improve your skills for what may lay ahead of us.

To send you off to a good start, here are some of the more interesting lessons I've learned in recent weeks.

Putting the fun into risk management

Nassib Taleb had already done the world a huge favour when he published "The Black Swan – The Impact of the Highly Improbable [2]" in 2007. Has there ever been any other book that did more to bring the subject of risk management to the masses? Sales figures aren't known, but The Sunday Times ranked it as one of the 12 most important books since the end of the Second World War. Its sales must be in the double-digit millions by now – quite remarkable, given that it's a book about highly improbably risks!

The subject has been on the up for a while, but with limitations holding it back. E.g., the 2008 Great Financial Crisis led to more awareness of systemic risks in the financial system, but the fallout was limited to a smaller part of the world's population. The coronavirus and its manifold effects simply affect a much larger number of people. It's no coincidence – and quite telling – that 2020 will be remembered as the year millions went panic-shopping for toilet paper. That's when things got real.

What's more, the availability of information on the Internet has massively changed since the last major crisis.

We have only had iPhones since 2007, and social media as a global town square for debate was still in its infancy when the Great Financial Crisis hit.

Today, we are all connected to just about anyone else at any given time and can engage in any possible subject thanks to the resources available to us. Enter the coronavirus crisis, which suddenly made all of us aware of the many risks that we have to manage – up to and including having food at home, or keeping ourselves from dying. The day and age of the smartphone and social media are forever going to change our appreciation and management of the subject of risk because we now have more information available to ourselves and can swap notes with a few billion other people.

Just by following world developments over the past weeks and doing some selective reading on the back of it, I already feel like my appreciation of the subject and its various pitfalls have increased significantly.

E.g., I would not have previously known about "dread risks" (ie, the additional risks that you take on – often irrationally – just because you dread something). The most famous case in dread risk science are Londoners who took to their bicycles after the 7/7 bombings of the London Underground. All these inexperienced cyclists hitting the road led to hundreds (!) of additional injuries [3] and also deaths. Had they taken the London Underground instead, nothing would have happened to them. It has become a famous case where the cure was worse than the disease.

Whether the cure is worse than the disease is an important subject of debate right now, and it'll heavily influence the economy and stock market. There is already a raging debate whether the baby-boomer generation – the subset of people who are mostly in control of politics, key institutions and most household wealth, but are also the #1 risk group for dying from the coronavirus – is sacrificing the wider economic good to protect themselves from the risk of infection. If you speak to younger people, you'll find many who are taking a serious interest in these matters. With a few clicks, they can now find a study from London's Imperial College about the deaths caused by economic shocks. Based on their research, the Great Financial Crisis of 2008 is likely to have led to an additional 500,000 deaths worldwide [4]. The younger generation is the least likely to die from the coronavirus, but they are also the least financially stable. By preventing them from going about their work, their risk of dying as a result of the economic calamities caused by the shutdown is going up dramatically. We now have an active public debate about the economic shutdown's effects cascading into the financial, emotional and mental health of people everywhere. How do the lives of those who are dying from the coronavirus measure up against the (potentially millions) of deaths that may now be caused by the government-ordered greatest economic slowdown of the last 100 years? Do you base such a debate on the absolute number of "corona deaths", or do you base it on the "excess deaths" figure? It's a fascinating question, and many have grown rather interested in it recently. That's a complex, multi-faceted risk management debate thrown to the forefront of the public discussion. Who'd have expected that?

There is now also increasing – if not already widespread – awareness of the previously underestimated risk of placing too much emphasis on the input of experts. Pre-Internet, I wouldn't have known about the statements that Dr Anthony S. Fauci made during the 1980s Aids hysteria. I am old enough to remember how scientists, politicians and the corporate media scared the living daylights out of everyone. Aids was the coronavirus of the time. Who remembers the 1985 LIFE magazine cover: "HOW NO ONE IS SAFE FROM AIDS" (they did use capitals!). Back in the days, a young Dr Fauci warned of the dangers of French kissing between boys and girls: “Health officials have to presume that it is possible to transmit the virus by exchange of saliva in deep kissing. That presumption is made to be extra safe.” As the generation who grew up back then, I have vivid memories of reading about this and feeling shit-scared. Subsequently, transmission rates by kissing between heterosexuals turned out to be non-existent. It's just one example. By now, I can remember a long list of doom-and-gloom situations that experts have conjured up over the past decades, only for matters to develop quite differently. To stick to a more recent example, thanks to the Internet, I have also been able to look up the 2014 warning by the CDC of 1.4m deaths from Ebola [5]. The count came in at 11,323, as we can today check easily and for free from the comfort of our sofa. That's 99% less than predicted, or put another way, the experts were off by a factor of 1:100. Don't get me wrong, experts have valid viewpoints and need to be heard, and their airing of concerns could have contributed significantly to the low number of Ebola deaths. But they mustn't be treated as demi-gods or shielded from accountability, because that, in turn, increases risks for others (and not for them, given that they inhabit lifelong, unelected positions in irreformable bureaucracies).

Career politicians, unelected experts, and the corporate media used to be able to control the flow of information and the resulting narratives. Not anymore. They are now facing an increasingly informed and sceptical populace, thanks to the information that we all have available to us and which we can discuss amongst ourselves.

Combine that with the effects that decisions by our quasi-permanent ruling class have recently had on our finances.

The economy has been closed down to a significant extent, putting us well on the way to the worst economic slowdown since the Great Depression.

The stock market crashed faster and harder than ever.

The value of our money is now widely questioned, because of the many trillions of euros and dollars that were printed (or created digitally, to be precise) to push the financial and economic reality further out into the future.

These are new risks, and there are new ways for us to deal with them. Who doesn't believe that all of this will affect how much money we are likely to have in our future bank account? Taking a keen interest in what is going on around us and how significant policy decisions are made has never been more impactful in our lives.

Which brings us to the crux of the matter – how will it all affect your investments, both in terms of managing risks and maximising the opportunities?

The risk of your country's currency or banking system getting wiped out

The only certainty I see right now is that we will all be surprised by the twists and turns that public discourse and political decision-making will take over the coming years. By extension, we will all need to learn new skills to deal with an entirely new set of circumstances.

As an example, take central banking, our monetary system, and the value of the money in your bank account.

Personally, I've always found monetary theory boring and only mildly relevant for myself. There was a bit of inflation, which we all factored in as a rounding error in our personal finances. Central banks were distant organisations that did stuff barely anyone ever understood; at best, their actions were seen as making holidays in countries with other currencies a bit more or a bit less expensive, depending on the currency fluctuations at the time. Runaway inflation was something I last experienced during my childhood holidays in Yugoslavia in the early 1980s when a newspaper cost 20,000 dinar when we arrived and 100,000 dinar by the time we left. Monetary policy has not had any existential relevance to me in decades. In much of the Western world, it has been like that for a hundred years.

Even after the almighty 2008 crisis, only finance geeks questioned the work and role of central banks as well as the value of the banknotes in their pocket.

Fast forward to April 2020, and everyone I know is worried about the risks these institutions – and the political machinations behind them – pose to their financial health and our very economic existence.

If TRILLIONS of dollars and euros are created out of thin air overnight, what will the financial and political ramifications be? No one knows for sure, because it hasn't happened in the Western world since the 1920s. It doesn't take much, though, to figure out that new, substantial and unprecedented risks were created in the process.

Right now, only history buffs will know of the extraordinarily contentious US presidential election of 1896 and what it entailed for America's monetary system. It was THE election fought out over the monetary system and how it affected the broader economy as well as the lives of ordinary people. Millions of people – the entire population – talked about the monetary system and its effects.

What risk is there of upcoming elections featuring the future of our monetary system as a key political battleground? Imagine daily cover-page headlines about politicians arguing if our money is still safe. How could this affect your investments? What if a country like Russia took advantage of the situation by introducing a gold rouble and inviting worried savers from the world over to stash their money in Russian accounts? Putin could use Kaliningrad, the former German territory (Königsberg) and now Russian enclave, as a special banking zone that is segregated from the rest of Russia. (I just made that up, but feel like slipping Putin a note!)

The obvious next questions are:

  • Should we invest in gold, silver or bitcoin?
  • How safe is your home country for keeping money and securities in a bank? What are the alternatives (if any)?
  • Which currencies are going to appreciate as a result of all these developments, and which will be reduced to toilet paper? (Which may yet have its use!)
  • Will citizens of high-debt countries find themselves in a kind of perpetual debt servitude, not unlike that of medieval feudal slaves?

These are risks that have become very real for all of us

All of a sudden, there is an entirely new layer of risk to consider. Even worse, it could quickly become more serious yet again.

As a result of the recent fiscal “stimulus”, Italy’s debt-to-GDP ratio will jump by 33% to 167% of GDP. Portugal is going up to 146%, Greece is at 219% (red alert territory), Spain clocks 126%, and France follows at 123%. Every single one of these numbers is giving cause for serious concern. What if Western Europe has to go into on-and-off lockdowns and sustain a second wave? These are unprecedented developments.

It could have a severe influence on your financial health or even destroy your retirement plans. You might no longer be able to pay for life-saving healthcare at a later stage in your life, never mind have food on the table. Is old age in acute poverty still as unimaginable for Europeans and North Americans as it was until recently?

Could such prospects lead to a reorientation, away from the welfare state and back to the nuclear family – combined with a surge of conservatism in politics? On the back of that, could Eastern Europe become the new safe haven within Europe and see Western Europeans seek refuge for comfortable living or safely stashing away their money?

Which risks may be hiding out there, which we simply haven't picked up on yet? Should we all spend more time watching 4.5-year-old TED talks by Bill Gates [6]?

How do you manage these new risks?

Is there a way to benefit from them?

What risks (if any) are you exposing yourself to if you follow (or don't follow) the advice from politicians, their affiliated industries (NGOs, think tanks, international institutions like the UN or WHO), or the corporate media?

All of a sudden, everything we thought we knew and took for granted has been thrown into question. There are more risks than I can even count, and that doesn't even include the infamous unknown unknowns.

I can only speak for myself, but the new situation we are in has me terrified and excited in equal measures.

I am terrified of the thought of simply letting others decide what will happen to my finances and my life in general, and excited about what could be a period of extraordinary change, unlike anything we have seen since the end of the Second World War.

The only certainty I see right now is the need to educate myself about subjects that so far, I've cared relatively little about. How can I best manage these (and other) risks in the future? More knowledge will help me navigate some of them.

Although the good news is, there are already signs that plenty of new opportunities will stem from all this. For these, too, information and knowledge will go a long way.

There WILL be winners (and "corona unicorns")

The apparent winner from recent events will be parts of the tech sector, because of booming demand created by the Big Brother state. Yet more electronic monitoring of citizens will almost certainly be the inevitable result, whether you like it or not (and I don't).

Governments may decide to roll out free diagnostic smart devices. We might develop a new routine of global "roll calls" to establish where problems lie. Your smartphone might carry an app that some countries will require before you are allowed to enter.

We already see the initial steps of this. JP Morgan recently published a report about the coming "Internet of LIVING Things". Your body will be turned into an electronic device of sorts, thanks to your smartphone (or smartwatch) and its connection to the Internet. For parts of the tech industry, the coronavirus crisis could be what 9/11 was for manufacturers of airport security devices. The companies that are producing such devices and the software that operates them could be in for an unprecedented boom.

All data relating to pandemics (and other comparable subjects) are now more likely to be made available to the public so that everyone can help crowdsource solutions. The widespread availability of such data could lead to products and services that no one has ever thought of. Companies that process big data, like Alphabet (ISIN US02079K3059), will likely be at the forefront because they own the world's data like no other.

It won't be long before start-ups that up to now no one had ever heard of will become multi-billion companies. Which country will see the first "corona unicorn" emerge?

The pharmaceutical industry is worth another look, and for reasons that may well be quite different from what seems obvious. The business model of "Big Pharma" since the end of the Second World War was to invest billions into developing new chemical compounds. That model has been under increasing pressure for a variety of reasons, as can be seen from the laggard long-term performance of these stocks. Newly developed vaccinations, combined with national enforcement of vaccinations, could make billions for these companies. Is there a renaissance in the making for the shares of big pharma companies? Or are we currently seeing the death convulsions of an outdated industry? There is no certainty yet that the coronavirus crisis does not, in the end, turn out to have been an ill-guided hysteria. Could it all lead to an as-yet unimaginable backlash against anything that is deemed "establishment", and a growing interest in what is considered "alternative"? Both for healthcare and other walks of life.

For much of this, too, the jury still out.

But it's worth investigating.

There'll be countless new investment themes coming out of recent events, and you can combine them with your revised approach for financial and personal risk management.

You can expect a lot more from me about these questions over the coming months. Unlike ad-fuelled corporate media, I can share without restrictions what I am learning and which conclusions I am drawing.

Exciting times ahead – and plenty of new "learnings" (sorry, Brits!)

Risk management used to be a boring subject, and we've looked at it with way too many limitations because we all relied on relatively few resources.

The discussion of risk management – for investing, as well as other areas of life – will become much more intense, diverse and productive once we have dealt with the current coronavirus crisis. All its challenges and human misery aside, the crisis is also an incredible learning exercise.

Nothing beats learning on the back of a current, relevant subject. From the second half of April, much more (and more useful) data will become available about the coronavirus crisis. I am excited about the prospect what we will all learn from it and which direction the debate (and its conclusions) will eventually go. While the evidence is as inconclusive as it is, my (and your) time can be spent in a much better way than to be glued to the daily drama.

I, for once, am busy researching which challenges arise out of all this for investors, and which new opportunities we might be able to take advantage of. If you are up for learning new skills, you will be able to improve your financial and personal resilience, unlike any generation before you. I see it all as a precursor for the golden age of informed risk management. If you like, use my writing to help guide you along the way.

Watch this space – there is plenty more reporting coming your way!

Did you find this article useful and enjoyable? If you want to read my next articles right when they come out, please sign up to my email list [7].

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