10-4: How to Reopen the Economy by Exploiting the Coronavirus’s Weak Spot

People can work in two-week cycles, on the job for four days then, by the time they might become infectious, 10 days at home in lockdown.

If we cannot resume economic activity without causing a resurgence of Covid-19 infections, we face a grim, unpredictable future of opening and closing schools and businesses.

We can find a way out of this dilemma by exploiting a key property of the virus: its latent period — the three-day delay on average between the time a person is infected and the time he or she can infect others.

People can work in two-week cycles, on the job for four days then, by the time they might become infectious, 10 days at home in lockdown. The strategy works even better when the population is split into two groups of households working alternating weeks.

Austrian school officials will adopt a simple version — with two groups of students attending school for five days every two weeks — starting May 18.

Models we created at the Weizmann Institute in Israel predict that this two-week cycle can reduce the virus’s reproduction number — the average number of people infected by each infected person — below one. So a 10-4 cycle could suppress the epidemic while allowing sustainable economic activity.

Even if someone is infected, and without symptoms, he or she would be in contact with people outside their household for only four days every two weeks, not 10 days, as with a normal schedule. This strategy packs another punch: It reduces the density of people at work and school, thus curtailing the transmission of the virus.

Schools could have students attend for four consecutive days every two weeks, in two alternating groups, and use distance-learning methods on the other school days. Children would go to school on the same days as their parents go to work.

Businesses would work almost continuously, alternating between two groups of workers, for regular and predictable production. This would increase consumer confidence, shoring up supply and demand simultaneously.

During lockdown days, this approach requires adherence only to the level of distancing already being demonstrated in European countries and New York City. It prevents the economic and psychological costs of opening the economy and then having to reinstate complete lockdown when cases inevitably resurge. Giving hope and then taking it away can cause despair and resistance.

A 10-4 routine provides at least part-time employment for millions who have been fired or sent on leave without pay. These jobs prevent the devastating, and often long-lasting, mental and physical impacts of unemployment. For those living on cash, there would be four days to make a living, reducing the economic necessity to disregard lockdown altogether. Business bankruptcies would also be reduced, speeding up eventual economic recovery.

The cyclic strategy is easy to explain and to enforce. It is equitable in terms of who gets to go back to work. It applies at any scale: a school, a firm, a town, a state. A region that uses the cyclic strategy is protected: Infections coming from the outside cannot spread widely if the reproduction number is less than one. It is also compatible with all other countermeasures being developed.

Workers can, and should still, use masks and distancing while at work. This proposal is not predicated, however, on large-scale testing, which is not yet available everywhere in the United States and may never be available in large parts of the world. It can be started as soon as a steady decline of cases indicates that lockdown has been effective.

The cyclic strategy should be part of a comprehensive exit strategy, including self-quarantine by those with symptoms, contact tracing and isolation, and protection of risk groups. The cyclic strategy can be tested in limited regions for specific trial periods, even a month. If infections rates grow, it can be adjusted to fewer work days. Conversely, if things are going well, additional work days can be added. In certain scenarios, only four or five lockdown days in each two-week cycle could still prevent resurgence.

The coronavirus epidemic is a formidable foe, but it is not unbeatable. By scheduling our activities intelligently, in a way that accounts for the virus’s intrinsic dynamics, we can defeat it more rapidly, and accelerate a full return to work, school and other activities.

Recognizing the Scapegoating Dynamic: Coronavirus Scapegoating

Why the bulls are wrong

Equity markets have bounced well over 20% since the lows just over a month ago, so technically we are already back in a new bull market. With peak new cases now behind us in Australia, business is agitating to reopen and governments are starting to ease restrictions. With the biggest fiscal programs since WW2 and huge monetary stimulus in the pipes, are the bulls about to be proven spectacularly right? No. Not even close, according to Jerome Lander who manages the Lucerne Alternative Investments Fund.

In this 25-minute outdoor video interview, Jerome first set the stage by giving three reasons the bulls are wrong before then saying the bottom for the market could be more than 40% below where it is now:

“… it’s very easy to come up with figures around, 1600 or 1800 on the S&P 500. Obviously we’re up at 2800 on the S&P at the moment”.
Citing the risks of ongoing virus infestations, credit defaults, geopolitical risks, poor consumption and investment spending going forward, he paints a picture of a future that is vastly different from the past.

In this new paradigm, he argues, investors face the very real prospect of long-term asset price deflation as fundamentals reassert themselves, and that in this environment investors will require a completely different approach to the one that has worked for the last 40 years.

Discussion points through the interview

– Three reasons the bulls are wrong
– What could drive the bear market and how low it could go
– What the most imminent risks are, including conflict
– What ‘the new normal’ might look like
– The biggest mistakes most investors are making
– The lens investors should now view the market through
– Investment styles that reduce market risk
– A message for all anxious investors out there

You can access the full transcript here: https://www.livewiremarkets.com/wires/why-the-bulls-are-wrong

I think firstly the Bulls are pretending
this virus itself the problems gone away
and the problem hasn’t been solved so
although we’ve reached a peak in daily
new cases we we still haven’t got an
effective treatment or an effective
vaccine for the virus firstly secondly
we have valuations at all-time record
for earnings levels not with saying the
economic settings we have had we have
and thirdly I think the Bulls really
ignore the overall picture which is that
we have unsustainable and unsustainable
amounts of debt driving our economic
growth for many years now and that we
may well be becoming to the end of a
long term debt cycle which makes it
really very difficult to be optimistic
about the returns that you’re going to
get from traditional asset classes
there’s a lot of people out there who
just seem overly optimistic to me given
the the the settings we have at the
moment for investment markets so we
think about where we’re at we have
economies which are really operating
unsustainably still we keep on putting
on more and more debt we have
unsustainable situation whereby we we
keep trying to pretend that we can just
layer and layer upon layer of extra
extra debt and create some sort of
nominal growth the low amount of growth
given the amount of debt we’re putting
on and that somehow we’re going to we’re
going to be able to continue doing that
forever and I think the balls really
ignore those things so the Bulls often
focus on very short term short term sort
of settings and they’re overly
optimistic by Nature
I suspect so I think when you’re
investing it’s ideal to be flexible so
you want to be bullish sometimes very
sometimes neutral at other times and be
able to adjust yourself to the settings
and the opportunities that you have if
you think about where we’re at now we’re
in a position where valuations are
expensive you know we actually when you
price what markets are going to deliver
just normally based on historical
context given how they’re being priced
you come up with very low returns from
traditional asset markets
if you then layer on top of that you
know we’re at economically we’re really
we really look to be coming towards the
end of the long term debt cycle whereby
it’s becoming increasingly obvious and
increasingly challenging to actually
keep economic growth going given the
type of economic settings we have we
have a very imbalanced economy so we
have a lot of wealth in the hands of
relatively few parties and we have a lot
of people living unsustainably on the
basis of the fact they can keep on
borrowing money to to buy what they need
and that doesn’t really create a
virtuous circle in the long run or a
situation which can really resolve
itself favorably I think sure so if you
look at a traditional bear market you
know it sort of takes place over many
months so you don’t suddenly you don’t
see the bear market over in a one-month
period of time so if we are in a bear
market there would be strong reason to
suspect that it will take many months
for it to play out we might for example
see a significant default cycle over
time we might see further waves of virus
infestations should we not be in a
fortunate position to come across you
know better treatments or were
unfortunate with mutations or whatever
we might see all sorts of ramifications
further shocks to the system from
geopolitical risks there’s lots of X
factors that can still occur to mean
that shocks the system that mean that
people really re reassess whether their
prices they’re paying at the moment in
this rally actually are supported by the
fundamentals at the moment the the rally
the bear market rally you know is
supported by by the fact that that we
have got you know daily new cases piki
have piqued by optimism around that but
mainly really by massive central bank
liquidity and that central bank
liquidity there is a fight between bulls
based which the bull case is really
based upon central bank liquidity and
bears based on fundamentals and the
strong possibility of a high default
cycle and poor consumption and poor
investment spending etc going forward
and so you know that’s gonna be the
tussle back and forth now this this bear
market doesn’t have to be like any other
bear market we’ve seen before it can
definitely be different so I think while
history can inform
what we might expect going forward it
could equally be very very different the
thing that’s of concern to me I guess is
that many investors are assuming that
we’re going to go back to normal or that
although the asset prices are justified
and I think that I think that they’re
not there’s been lots of work done on
this to say well what is this support
what is a supported evaluation for these
markets and if we think about what what
earnings are doing this year and where
bear markets historically sort of get to
you know historically we’ve seen
valuations you know bottom at much lower
multiples and what we see now we’ve
obviously got earnings coming off a long
way this year so it’s very easy to come
up with figures around you know 1600 or
1800 on the SP obviously we’re up at you
know 2800 on the SP at the moment so
that would be a fall around circa 50%
plus to get to what you might argue is a
fair valuation level for the market now
clearly we’re not in a situation where
central banks have any interest or
wanting to allow valuations to fall to a
normal valuation level or experience
that sort of situation so they’re
fighting very hard to keep the bubbles
alive and they’re providing massive
amounts of liquidity and stimulus to to
to keep that secured basic prices afloat
now at the end of the day will that be
successful we don’t know you know how
long will they be able to do that for we
don’t know but there’s clearly a lot of
risk to the downside should for any
reason central bank’s not be successful
at continuing to stimulate stimulate
asset prices and support our set prices
one of the things I raised concerns
about was the valuations of commercial
property unlisted property and and where
that would go to going forward so you
think about the situation now with
everybody having you know a lot of
people being at home working from home
and a lot of people actually saying we
can actually work at home effectively
and employers saying well actually we
can have our employees and working from
home and they’re more productive you
simply aren’t going to have the same
sort of demand or need for office space
coming out of this coming out of this
crisis they needed before not to mention
the fact that you know unemployment
levels will be higher probably a
substantially higher so the demand for
property won’t be what it was and that
means that a lot of those you know those
evaluations probably are not sustainable
and you’re likely to see a lot of
pressures on on property property
evaluations moving forward also with
respect to you know residential property
we have to ask ourselves you know
depending upon what the unemployment
picture does and and how ugly this gets
are those valuations justified you know
can we can we really support valuations
purely on the basis of cheap money or do
we have to have people in employment
with good employment prospects being
able to grow their incomes over time and
people with the confidence to be able to
take out big loans banks with the
willingness to lend people in those
situations lots of money so they can
continue to pay the the high prices that
we have on on property more generally I
think one other issues I raised was the
valuations that are that you know that
are being used of unlisted assets within
super funds and so forth and there’s now
been more published on that whereby
people have raised the fact that you
know that valuations arguably weren’t
being priced fairly such that if you
think take the bottom of the market the
the short-term bottom in the market back
in March and the recovery since that
time a lot of super funds haven’t
actually recovered with the markets over
that period of time so if you had
actually invested at that time thinking
you were getting the bottom one of the
markets all had a been fortuitous enough
just to just to be in that situation and
you had of invested in one of these
super funds you were actually buying
into unlisted property prices unlisted
infrastructure price unlisted private
equity prices at at prices which were
inflated which didn’t really reflect
reality your fair valuation and those
valuations will need to now gradually
come back to what they really worth and
and that means is that there’s an
inequity in the way those those
investors are actually being treated
there is actually a much higher risk of
conflict post post two pandemic
interestingly enough and certainly when
you start doing funny things with your
money then also there’s a high risk of
conflict when you look at political
cycles and you think about people trying
to retain power there’s also an
incentive incentive there for them to
you know try and remove trying to move
the the attention of the populace onto
some external focus because they know
that if you’re at war with someone
you’re much more likely to vote in ink
to be conservative in that regard so you
can certainly come up with situations
whereby the likelihood of conflict you
know you can certainly assess the like
little conflict as being higher now than
what we’ve seen before
now of course we
already have a lot of conflict in the
world we have we have we have trade war
you know that’s been going on for some
time between China and us you know fight
for supremacy there we have cyber war
going on this is not something that
people necessarily focus on I talk about
but we have lots of that going on at the
moment already so the war doesn’t have
to necessarily be in the in terms of
physical confrontation we have economic
war going on at the moment and and that
can certainly be you know exaggerated
there’s a lot of focus in the media
recently on you know what was the real
cause of this forest did China you know
did China handle this appropriately when
they did certain things and certainly
you can point to those things very
easily and and be quite upset about the
fact that that maybe this problem should
have been contained a lot of earlier
than it was and it shouldn’t have been
the problem shouldn’t become the problem
that it did if certain state actors had
it behaved very differently than what
they had ever had that then they’d have
done so you know there might be a focus
of attention turned towards that and and
that might create you know D
globalization terms of people looking to
there’s a need that in fact for people’s
supply chains become much more resilient
out of this to move to move certain
industries which are strategic and
necessary or at least diversify them but
move some of them back to to kind of
more familiar territory and more home
territory in order to ensure they have
supplies of essential goods and services
for their economy so there’s a lot of
things that can happen out of this and
there is certainly a much higher risk of
conflict and I think he’s being
appreciated it’s one of those X factors
that’s out there in terms it’s not just
China there’s obviously the possibility
of conflict in the Middle East again all
prices have dropped very significantly
that’s going to be putting a lot of
pressure on those budgets and a lot of
those a lot of those those those
countries there’s obviously the the
tensions with Iran
there’s tensions with Venezuela there’s
lots of Powder Keg some places around
the world where
this can go wrong I think it’s some
things are definitely going to change as
a result of of this shock to the system
I think certainly we’re not going to go
back in a hurry to the levels of
unemployment that we had previous to
this shock very easily so we now have in
the US unemployment fast approaching
about 20% of the population and although
we may on the other side of this once we
do and if we do get to a solution to the
coronavirus have a rapid sort of
comeback in unemployment
it won’t quickly come back at all to
where it was before so we’re going to
come out of this with a lot more
unemployment and certainly a much more
challenged consumer than what we had
before and that will mean that will come
back with a lot of people much more
hesitant in the way they go about their
daily business and the way they choose
to interact with the world is it safe to
go and do the things you did before do I
you are you are you willing to sort of
travel overseas and go to exotic places
like you were before are you in a
situation financially where you can even
afford to do that will you be confident
in your ability to take on long term
debt and your ability to pay pay off
that debt given the fragility that
you’ve just learned with respect to your
employment prospects there’s a lot of
there’s a lot of reason to think things
will some things will change permanently
as a result of this crisis one of the
concerns I have is that when you look at
the big picture we have an economy
that’s operating it
you know that’s this size say you know
we’ve got an economy sort of this size
and we have asset prices which are this
size so there’s a massive misalignment
between the size of our asset prices and
the size of our markets and the size of
our real economy and furthermore we’re
not really growing this real economy you
know we don’t have and and this crisis
is really going to accentuate that even
further we’ve got a kind of low
productivity economy we haven’t actually
got the right settings to grow the
economy strongly and it’s laden with
debt you know basically and with the
debts been used to boost asset prices to
these levels and that’s just not a
sustainable picture long-term so
investors really should be conscious of
that in the back of their heads they
should be thinking and
really safe if I just go and buy you
know a broad basket of equities so I
just invest in a traditional way
am I really safer I’m really taking the
risk that one day this big these asset
prices that are all the way out here
this massive on the back of this massive
financialization and massive easy money
on that central banks have provided gets
collapse towards the size of the real
economy alternately do I really believe
with the way we’re operating the
economies today are we going to grow
those economies rapidly so they ask they
grow you know they grow the asset
they’re going to be asset prices so to
speak I think if you look at either
those situations there’s strong reason
to think that there’s going to be at
some stage you know you know there’s a
there’s a gravity that’s pulling asset
prices down there’s a force there that
asset prices actually naturally want to
collapse and the settings were right now
we have massive deflationary forces
operating on our set prices they want to
collapse the only thing that’s keeping
them up is really central bank easy
money and and that’s that’s becoming
harder and harder to do the real
question mark out of this is whether we
gonna get one more bubble you know
whether they manage to float those I set
prices higher again into one more even
bigger bubble how long will that last if
they manage to do that or whether this
is it this is the end of the long term
debt cycle and we have to change the way
we everything will change basically all
the things will change to mean that you
know the the returns you get from being
invested in a traditional way
long equities long property all along
all these long debt basically lot read
through an assets gets collapsed down
and so you know for me I can’t go to I
can’t I can’t sleep at night if I was
operating under that paradigm with that
with what I know now I wouldn’t I
couldn’t sit there and look at that
setting and say I should put all my
investors into that sort of risk in a
very concentrated fashion and just hope
it’s all okay because I think there’s no
reason when you look at it I think that
it will be okay in the long run so you
have to operate on the assumption that
that can collapse and therefore you have
to do things very differently from the
way most people are actually doing it
most investors are really operating
under a traditional or historic paradigm
so they’re really they’re really you
know they’ve got their equity dominant
portfolios and they really operate under
the assumption that this is a strategic
asset allocation type framework which is
based on historical returns and they’re
basically assuming that
the portfolio’s ahead for the last 40
years are the right portfolios are run
with going forward now I don’t believe
that is the case I think they’re quite
clearly we can mount a very very strong
case for why real returns will be very
low from here looking forward on the
basis of valuations or pond on the basis
of the unsustainable economic settings
we have and on the basis of all the
risks that are out there that were that
the world’s facing that investors are
facing that just aren’t being priced
into markets and and on the basis of
that I think you really need to you know
if you’re really assessing the world or
thinking about how risk it really is and
also thinking about what investors
really want for their money
you know this is don’t want a roller
coaster ride they don’t want to go up
and down like a yo-yo and end up going
nowhere at the end of that they want to
actually have absolute returns with low
risk of large you know substantial
losses and have their money protected
and genuinely diversified and if you’re
just running a portfolio which depends
purely upon you know interest rates
moving from very high to very low and
upon debt levels continuing to expand at
extraordinary and unsustainable rates
you’re not really running running a
portfolio that’s suited for what we’re
facing the next five or ten years I
think one of the things investors often
underappreciated as well is that you
know it’s geometric returns that matter
to most investors over time it’s not
arithmetic ones so if you return ten
percent this year ten percent next year
and ten percent the year after that but
then you do you do minus 30% you know
you’ve actually you’ve actually lost
investors a lot of money overall and
achieve nothing so the whole the whole
name of the game investing for the long
term is to make sure you avoid large
losses because if you have if you
experience large losses and you exposing
vistas to large losses and you’re not
you’re not giving them what they need or
want and you’re not really doing a good
job for them and I think our industry
really at the moment under the
traditional paradigm it’s it’s operating
under is really giving investors that
experience and it’s it’s really
necessary for a lot of people to sit
back and think you know given what given
what you know from operate from first
principles is this the way it would
design a portfolio for today or is this
the way the portfolio has been designed
a long time ago on a very with very very
different investment settings you’ve got
to assume that that asset prices are
going to be very low in the long run
you’ve got to assume that you know
crises are a normal part of the way
you know you manage money you have to be
your portfolio has to be resilient to
crises basically because this isn’t
gonna be the last crisis we face we
can’t just sit here and say this is a
one in a hundred year event and it’s
gonna go away even if we do somehow
manage to go over the coronavirus very
soon which as we’ve talked about there’s
no strong reason to think that will be
the case but let’s let’s say that we do
they’ll still be further crisis because
of the way we’ve set everything out and
because of the risks that there are in
the real world so we have to build a
portfolio that’s resilient to Christ as
it can still make us money and still
meet the objectives that we have now to
do that unfortunately we can’t all do
we can all do that by just investing in
a traditional way so we can’t say let’s
go and invest in a risky way let’s go
and chase equity risk and property risk
it inflated valuations and which is what
by the way think just about the entire
industry does so what I’m saying is that
the way the entire industry operates is
is flawed that’s what I’m basically
saying and in terms of what the
individual investor actually needs it’s
based on historical paradigm that
probably isn’t going to work very well
so we have to think how do we get away
from those risks you know if the stove’s
gonna be really hot and really dangerous
to touch how do i how do i trying to
avoid touch that i have to think very
differently you have to do something
very differently to what to what they’re
doing have to expose myself I have to
minimize that risk basically so you need
to have a lot less risk exposed to the
traditional long-only type of investing
and you have to move much more into a
more conservative more active more more
sort of long-short way of looking at the
so more skill-based
strategies basically so a lot of so a
lot of what I focus on is you know
finding skilled strategies that I can
use combined combined in a portfolio to
mean that I can get a return which is
along with what investors actually won
which isn’t as dependent upon
traditional asset process and
traditional asset Marcus remaining
inflated because that’s a very binary
risk so if you really want to build a
diversified or balanced portfolio you
need to think about how do i how do I
minimize the exposure to interest rate
risk you know how do I minimize the
exposure this asset price inflation risk
how do I make sure the portfolio can
survive the cry
SIB again face going forward so with
life basically what we do is we look at
we look for skills underlying
investments managers and strategies that
really bring something different to the
portfolio there’s not heavily dependent
upon you know markets so you want to
find sources of return that don’t depend
upon the markets basically going up to
achieve a good result for investors and
that’s why we’ve had such resilient
returns assess resilient results put
part whose have managed to find those
returns and we’ve managed to combine
them in a way such that we manage a lot
of the risks that are that are out there
and ensure that you know investors have
a have a have a true to label type
experience now investors in life you
know are basically looking for absolute
returns we have low risk of large
capital losses I mean one of the things
are published on as an example of
something we have used in the portfolio
which is a more traditional sort of type
of exposure in a sense but which you
know even other investors could could be
using a lot more of is precious metals
precious metals have been in a bull
market for some time now there’s still
strong reason to expect that bull market
might continue it’s amazing when you
look at you know your every Superfund or
average large institutional investor out
there how little if anything for having
precious metals it’s incredible giving
the settings we actually have at the
moment and it’s just an example of what
I was talking about before that most
investors really aren’t thinking outside
the square and aren’t really trying to
adjust their portfolios from a
historical paradigm to one which is
better suited to the sort of situation
we face today if you actually looked
under the hood of the way a lot of these
these investors operate you would
realize that bringing in an idea that’s
kind of considered you know
non-consensus is getting it into the
portfolio is actually quite difficult so
there might be in individual investors
within large institutions who actually
believe and who are themselves investing
in gold but they won’t be able to get it
in past Syria their investment
communities or their investment boards
and get it into the portfolio in any
meaningful degree I mean I saw a study
recently suggesting that even though
historically institutions had a couple
of percent of their portfolio in gold
more recently was only half a percent
which is incredible in this massive bull
market that were actually been on for
some time now
it’s amazing so some of the long short
exposures we have for example there’s
that one of the strategies that’s that’s
worked for a long period of time is in a
long short land it’s basically being
long you know higher quality companies
and low you know lower quality companies
there’s a generic sort of buckets so we
think about that there are a lot of
companies on the stock exchange which
really aren’t good companies you know
you shouldn’t be investing in them so
when you buy an index fund you’ve got an
exposure automatically to all these
crappy companies you’ve got exposure to
you know actually differentiating
between the good companies and the bad
companies people are actually adding
economic value of creating value over
time and people who aren’t so the
benefit of being long short is that you
can you can you can actually say look
these are these are good companies these
are actually adding you know creating
value for their shareholders over time
and on the other hand here we have a
whole bunch of let’s call them bad
companies in and sometimes these bad
companies are really are really bad
companies they’re fraudulent for example
there’s a lot of frauds fraudulent
companies that are on stock exchanges
around the world and in the long run
they’re going to burn their investors so
if you’re able to create a basket of of
shorts to sort of fraudulent companies
or mismanage companies or highly
indebted companies at a time when the
economy’s turning south all sorts of
different strategies you can use as a
longshore manager to to have that bucket
of low quality companies and over time
the strong reason to expect you get a
you get a relative return out of that
that the good companies will actually
outperform the poor quality companies
and you’ll be able to extract a return
that’s not depend upon whether the
markets go up or down but it’s dependent
upon whether those good companies
outperform those bad companies over time
and and that sort of strategy is one of
the strategies we use if you think about
traditional asset assets if you like the
original asset classes are things like
you know equities bonds cash property
you know these are all considered sort
of traditional asset classes the ones
that make people feel most comfortable
most familiar with the ones that are
most mainstream and most you know used
in a traditional sort of paradigm you
think about alternate eternities they’re
really everything else so alternatives
can can be alternative asset classes so
things like precious metals often
considered alternatives some people even
think about
unlisted versions of of listed asset
classes as being alternative I don’t
really see them as alternatives I see
them as unlisted
unlisted versions of the listed version
but they still expose the underlying
similar economic risks for me but when I
think about alternatives I’m thinking
more about liquid alternatives so ways
of taking traditional asset classes but
operating with them very differently so
for example you know market neutral so
your long one company your short another
company against it you’re taking out the
market that you you you you taking it
down to another level and saying you
know within that within that asset class
what is there that I want to own what is
there that I don’t want to own what can
i what is going to outperform something
else so you totally getting a different
return stream out of it and that’s
that’s an alternative strategy in my
book it’s understandable that investors
are confused because lots of things are
changing and it’s important that your
investment approach also changes will be
my message
if investment markets if you don’t
believe investment markets are going to
offer strong returns going forward if
you don’t believe like I do that
economies are well set up to encourage
high productivity growth that the
valuations are attractive that settings
are sustainable that we don’t have a
debt bubble that’s a big problem in this
sort of thing like if you if you believe
everything is okay and you can continue
to invest in a traditional way and have
your portfolio or your your wealth and
your future dependent upon that but if
you think things that you know if you
think things aren’t like that and think
the world’s different place from that
now I think you really need to think
have I got the right investment approach
at all haven’t got the right investment
partners do I need to do something very
differently than what the industry at
large offers me and I think you do I
think people absolutely need to think
differently about how they manage money
and what’s a line with what they’re you
know not knowing that the way the world
is but what they are trying to achieve
for their portfolios the truth is most
of us don’t want a rollercoaster ride we
don’t want to be on this you know seesaw
and end up going nowhere we want to
actually have you know steady more
reliable more skill-based returns for
investment managers that aren’t depend
upon everything being okay and I don’t
expose us to so much crisis risks that’s
out there so my message to investors
will be just that you know really think
about whether you’ve got the right
alignment for what you’re trying to
achieve and is there a better way is
there a different way and do I need to
do I need to make sure I’ve got the
right investment partners for that

What are the ingredients which Suggest a Financial Crisis?

@RaoulGMI identified the following factors contributing to a crisis, before Coronavirus:

  1. Stocks: Largest Equity Bubble of All Time: (Pension Crisis & Buyback Bubble)
  2. Demographics:
    • Largest Retiree Wave, all wanting to sell stocks and bonds at the same time
    • Millennials are too poor and indebted (make 20% less than parents)
  3. Corporate Credit: Largest Credit Bubble of All Time
    • ($10 Trillion + Off balance Sheet = 75% of GDP)
  4. Student Loan Bubble:
    • $1.6 Trillion
  5. Auto Loan Bubble
    • ($1.2 Trillion)
  6. Indexation Bubble
  7. ETF/Market Structure Bubble
  8. Foreign Borrowings (Dollar Standard Bubble)
  9. Monetary Policy Bubble (The Central Bank Bubble)
  10. EU Banking Crisis
  11. A Trade War:
    • The Trade Wars “shattered” supply chains
  12. Coronavirus
    • Largest Supply & Demand Shocks of all Time


Big Picture:

Central Banks have been fighting for the last 20 years:

  • Full Scale Debt Deflation and a Solvency Crisis

Turns into:

  • A loss of confidence in the Dollar Standard and the Entire Financial Architecture

(page 29-30)

“Down The Rabbit Hole” – The Eurodollar Market Is The Matrix Behind It All

Submitted by Michael Every of Rabobank


  • The Eurodollar system is a critical but often misunderstood driver of global financial markets: its importance cannot be understated.
  • Its origins are shrouded in mystery and intrigue; its operations are invisible to most; and yet it controls us in many ways. We will attempt to enlighten readers on what it is and what it means.
  • However, it is also a system under huge structural pressures – and as such we may be about to experience a profound paradigm shift with key implications for markets, economies, and geopolitics.
  • Recent Fed actions on swap lines and repo facilities only underline this fact rather than reducing its likelihood

What is The Matrix?

A new world-class golf course in an Asian country financed with a USD bank loan. A Mexican property developer buying a hotel in USD. A European pension company wanting to hold USD assets and swapping borrowed EUR to do so. An African retailer importing Chinese-made toys for sale, paying its invoice in USD.

All of these are small examples of the multi-faceted global Eurodollar market. Like The Matrix, it is all around us, and connects us. Also just like The Matrix, most are unaware of its existence even as it defines the parameters we operate within. As we shall explore in this special report, it is additionally a Matrix that encompasses an implicit power struggle that only those who grasp its true nature are cognizant of.

Moreover, at present this Matrix and its Architect face a huge, perhaps existential, challenge.

Yes, it has overcome similar crises before…but it might be that the Novel (or should we say ‘Neo’?) Coronavirus is The One.

So, here is the key question to start with: What is the Eurodollar system?

For Neo-phytes

The Eurodollar system is a critical but often misunderstood driver of global financial markets: its importance cannot be understated. While most market participants are aware of its presence to some degree, not many grasp the extent to which it impacts on markets, economies,…and geopolitics – indeed, the latter is particularly underestimated.

Yet before we go down that particular rabbit hole, let’s start with the basics. In its simplest form, a Eurodollar is an unsecured USD deposit held outside of the US. They are not under the US’ legal jurisdiction, nor are they subject to US rules and regulations.

To avoid any potential confusion, the term Eurodollar came into being long before the Euro currency, and the “euro” has nothing to do with Europe. In this context it is used in the same vein as Eurobonds, which are also not EUR denominated bonds, but rather debt issued in a different currency to the company of that issuing. For example, a Samurai bond–that is to say a bond issued in JPY by a nonJapanese issuer–is also a type of Eurobond.

As with Eurobonds, eurocurrencies can reflect many different underlying real currencies. In fact, one could talk about a Euroyen, for JPY, or even a Euroeuro, for EUR. Yet the Eurodollar dwarfs them: we shall show the scale shortly.

More(pheous) background

So how did the Eurodollar system come to be, and how has it grown into the behemoth it is today? Like all global systems, there are many conspiracy theories and fantastical claims that surround the birth of the Eurodollar market. While some of these stories may have a grain of truth, we will try and stick to the known facts.

A number of parallel events occurred in the late 1950s that led to the Eurodollar’s creation – and the likely suspects sound like the cast of a spy novel. The Eurodollar market began to emerge after WW2, when US Dollars held outside of the US began to increase as the US consumed more and more goods from overseas. Some also cite the role of the Marshall Plan, where the US transferred over USD12bn (USD132bn equivalent now) to Western Europe to help them rebuild and fight the appeal of Soviet communism.

Of course, these were just USD outside of the US and not Eurodollars. Where the plot thickens is that, increasingly, the foreign recipients of USD became concerned that the US might use its own currency as a power play. As the Cold War bit, Communist countries became particularly concerned about the safety of their USD held with US banks. After all, the US had used its financial power for geopolitical gains when in 1956, in response to the British invading Egypt during the Suez Crisis, it had threatened to intensify the pressure on GBP’s peg to USD under Bretton Woods: this had forced the British into a humiliating withdrawal and an acceptance that their status of Great Power was not compatible with their reduced economic and financial circumstances.

With rising fears that the US might freeze the Soviet Union’s USD holdings, action was taken: in 1957, the USSR moved their USD holdings to a bank in London, creating the first Eurodollar deposit and seeding our current UScentric global financial system – by a country opposed to the US in particular and capitalism in general.

There are also alternative origin stories. Some claim the first Eurodollar deposit was made during the Korean War with China moving USD to a Parisian bank.

Meanwhile, the Eurodollar market spawned a widely-known financial instrument, the London Inter Bank Offer Rate, or LIBOR. Indeed, LIBOR is an offshore USD interest rate which emerged in the 1960s as those that borrowed Eurodollars needed a reference rate for larger loans that might need to be syndicated. Unlike today, however, LIBOR was an average of offered lending rates, hence the name, and was not based on actual transactions as the first tier of the LIBOR submission waterfall is today.

Dozer and Tank

So how large is the Eurodollar market today? Like the Matrix – vast. As with the origins of the Eurodollar system, itself nothing is transparent. However, we have tried to estimate an indicative total using Bank for International Settlements (BIS) data for:

  • On-balance sheet USD liabilities held by non-US banks;
  • USD Credit commitments, guarantees extended, and derivatives contracts of non-US banks (C, G, D);
  • USD debt liabilities of non-US non-financial corporations;
  • Over-the-Counter (OTC) USD derivative claims of non-US non-financial corporations; and
  • Global goods imports in USD excluding those of the US and intra-Eurozone trade.

The results are as shown below as of end-2018: USD57 trillion, nearly three times the size of the US economy before it was hit by the COVID-19 virus. Even if this measure is not complete, it underlines the scale of the market.

It also shows its vast power in that this is an equally large structural global demand for USD.  Every import, bond, loan, credit guarantee, or derivate needs to be settled in USD.

Indeed, fractional reserve banking means that an initial Eurodollar can be multiplied up (e.g., Eurodollar 100m can be used as the base for a larger Eurodollar loan, and leverage increased further). Yet non-US entities are NOT able to conjure up USD on demand when needed because they don’t have a central bank behind them which can produce USD by fiat, which only the Federal Reserve can.

This power to create the USD that everyone else transacts and trades in is an essential point to grasp on the Eurodollar – which is ironically also why it was created in the first place!


Given the colourful history, ubiquitous nature, and critical importance of the Eurodollar market, a second question then arises: Why don’t people know about The Matrix?

The answer is easy: because once one is aware of it, one immediately wishes to have taken the Blue Pill instead.

Consider what the logic of the Eurodollar system implies. Global financial markets and the global economy rely on the common standard of the USD for pricing, accounting, trading, and deal making. Imagine a world with a hundred different currencies – or even a dozen: it would be hugely problematic to manage, and would not allow anywhere near the level of integration we currently enjoy.

However, at root the Eurodollar system is based on using the national currency of just one country, the US, as the global reserve currency. This means the world is beholden to a currency that it cannot create as needed.

When a crisis hits, as at present, everyone in the Eurodollar system suddenly realizes they have no ability to create fiat USD and must rely on national USD FX reserves and/or Fed swap lines that allow them to swap local currency for USD for a period. This obviously grants the US enormous power and privilege.

The world is also beholden to US monetary policy cycles rather than local ones: higher US rates and/or a stronger USD are ruinous for countries that have few direct economic or financial links with the US. Yet the US Federal Reserve generally shows very little interest in global economic conditions – though that is starting to change, as we will show shortly.

A second problem is that the flow of USD from the US to the rest of the world needs to be sufficient to meet the inbuilt demand for trade and other transactions. Yet the US is a relatively smaller slice of the global economy with each passing year. Even so, it must keep USD flowing out or else a global Eurodollar liquidity crisis will inevitably occur.

That means that either the US must run large capital account deficits, lending to the rest of the world; or large current account deficits, spending instead.

Obviously, the US has been running the latter for many decades, and in many ways benefits from it. It pays for goods and services from the rest of the world in USD debt that it can just create. As such it can also run huge publicor private-sector deficits – arguably even with the multitrillion USD fiscal deficits we are about to see.

However, there is a cost involved for the US. Running a persistent current-account deficit implies a net outflow of industry, manufacturing and related jobs. The US has obviously experienced this for a generation, and it has led to both structural inequality and, more recently, a backlash of political populism wanting to Make America Great Again.

Indeed, if one understands the structure of the Eurodollar system one can see that it faces the Triffin Paradox. This was an argument first made by Robert Triffin in 1959 when he correctly predicted that any country forced to adopt the role of global reserve currency would also be forced to run ever-larger currency outflows to fuel foreign appetite – eventually leading to the breakdown of the system as the cost became too much to bear.

Moreover, there is another systemic weakness at play: realpolitik. Atrophying of industry undermines the supply chains needed for the defence sector, with critical national security implications. The US is already close to losing the ability to manufacture the wide range of products its powerful armed forces require on scale and at speed: yet without military supremacy the US cannot long maintain its multi-dimensional global power, which also stands behind the USD and the Eurodollar system.

This implies the US needs to adopt (military-) industrial policy and a more protectionist stance to maintain its physical power – but that could limit the flow of USD into the global economy via trade. Again, the Eurodollar system, like the early utopian version of the Matrix, seems to contain the seeds of its own destruction.

Indeed, look at the Eurodollar logically over the long term and there are only three ways such a system can ultimately resolve itself:

  1. The US walks away from the USD reserve currency burden, as Triffin said, or others lose faith in it to stand behind the deficits it needs to run to keep USD flowing appropriately;
  2. The US Federal Reserve takes over the global financial system little by little and/or in bursts; or
  3. The global financial system fragments as the US asserts primacy over parts of it, leaving the rest to make their own arrangements.

See the Eurodollar system like this, and it was always when and not if a systemic crisis occurs – which is why people prefer not focus on it all even when it matters so much. Yet arguably this underlying geopolitical dynamic is playing out during our present virus-prompted global financial instability.

Down the rabbit hole

But back to the rabbit hole that is our present situation. While the Eurodollar market is enormous one also needs to look at how many USD are circulating around the world outside the US that can service it if needed. In this regard we will look specifically at global USD FX reserves.

It’s true we could also include US cash holdings in the offshore private sector. Given that US banknotes cannot be tracked no firm data are available, but estimates range from 40% – 72% of total USD cash actually circulates outside the country. This potentially totals hundreds of billions of USD that de facto operate as Eurodollars. However, given it is an unknown total, and also largely sequestered in questionable cash-based activities, and hence are hopefully outside the banking system, we prefer to stick with centralbank FX reserves.

Looking at the ratio of Eurodollar liabilities to global USD FX reserve assets, the picture today is actually healthier than it was a few years ago.

Indeed, while the Eurodollar market size has remained relatively constant in recent years, largely as banks have been slow to expand their balance sheets, the level of global USD FX reserves has risen from USD1.9 trillion to over USD6.5 trillion. As such, the ratio of structural global USD demand to that of USD supply has actually declined from near 22 during the global financial crisis to around 9.

Yet the current market is clearly seeing major Eurodollar stresses – verging on panic.

Fundamentally, the Eurodollar system is always short USD, and any loss of confidence sees everyone scramble to access them at once – in effect causing an invisible international bank run. Indeed, the Eurodollar market only works when it is a constant case of “You-Roll-Over Dollar”.

Unfortunately, COVID-19 and its huge economic damage and uncertainty mean that global confidence has been smashed, and our Eurodollar Matrix risks buckling as a result.

The wild gyrations recently experienced in even major global FX crosses speak to that point, to say nothing of the swings seen in more volatile currencies such as AUD, and in EM bellwethers such as MXN and ZAR. FX basis swaps and LIBOR vs. Fed Funds (so offshore vs. onshore USD borrowing rates) say the same thing. Unsurprisingly, the IMF are seeing a wide range of countries turning to them for emergency USD loans.

The Fed has, of course, stepped up. It has reduced the cost of accessing existing USD swap lines–where USD are exchanged for other currencies for a period of time–for the Bank of Canada, Bank of England, European Central Bank, and Swiss National Bank; and another nine countries were given access to Fed swap lines with Australia, Brazil, South Korea, Mexico, Singapore, and Sweden all able to tap up to USD60bn, and USD30bn available to Denmark, Norway, and New Zealand. This alleviates some pressure for some markets – but is a drop in the ocean compared to the level of Eurodollar liabilities.

The Fed has also introduced a new FIMA repo facility. Essentially this allows any central bank, including emerging markets, to swap their US Treasury holdings for USD, which can then be made available to local financial institutions. To put it bluntly, this repo facility is like a swap line but with a country whose currency you don’t trust.

Allowing a country to swap its Treasuries for USD can alleviate some of the immediate stress on Eurodollars, but when the swap needs to be reversed the drain on reserves will still be there. Moreover, Eurodollar market participants will now not be able to see if FX reserves are declining in a potential crisis country. Ironically, that is likely to see less, not more, willingness to extend Eurodollar credit as a result.

You have two choices, Neo

Yet despite all the Fed’s actions so far, USD keeps going up vs. EM FX. Again, this is as clear an example as one could ask for of structural underlying Eurodollar demand.

Indeed, we arguably need to see even more steps taken by the Fed – and soon. To underline the scale of the crisis we currently face in the Eurodollar system, the BIS concluded at the end of a recent publication on the matter:

“…today’s crisis differs from the 2008 GFC, and requires policies that reach beyond the banking sector to final users. These businesses, particularly those enmeshed in global supply chains, are in constant need of working capital, much of it in dollars. Preserving the flow of payments along these chains is essential if we are to avoid further economic meltdown.

Channeling dollars to non-banks is not straightforward. Allowing non-banks to transact with the central bank is one option, but there are attendant difficulties, both in principle and in practice. Other options include policies that encourage banks to fill the void left by market based finance, for example funding for lending schemes that extend dollars to non-banks indirectly via banks.”

In other words, the BIS is making clear that somebody (i.e., the Fed) must ensure that Eurodollars are made available on massive scale, not just to foreign central banks, but right down global USD supply chains. As they note, there are many practical issues associated with doing that – and huge downsides if we do not do so. Yet they overlook that there are huge geopolitical problems linked to this step too.

Notably, if the Fed does so then we move rapidly towards logical end-game #2 of the three possible Eurodollar outcomes we have listed previously, where the Fed de facto takes over the global financial system. Yet if the Fed does not do so then we move towards end-game #3, a partial Eurodollar collapse.

Of course, the easy thing to assume is that the Fed will step up as it has always shown a belated willingness before, and a more proactive stance of late. Indeed, as the BIS shows in other research, the Fed stepped up not just during the Global Financial Crisis, but all the way back to the Eurodollar market of the 1960s, where swap lines were readily made available on large scale in order to try to reduce periodic volatility.

However, the scale of what we are talking about here is an entirely new dimension: potentially tens of trillions of USD, and not just to other central banks, or to banks, but to a panoply of real economy firms all around the Eurodollar universe.

As importantly, this assumes that the Fed, which is based in the US, wants to save all these foreign firms. Yet does the Fed want to help Chinese firms, for example? It may traditionally be focused narrowly on smoothly-functioning financial markets, but is that true of a White House that openly sees China as a “strategic rival”, which wishes to onshore industry from it, and which has more interest in having a politically-compliant, not independent Fed? Please think back to the origins of Eurodollars – or look at how the US squeezed its WW2 ally UK during the 1956 Suez Crisis, or how it is using the USD financial system vs. Iran today.

Equally, this assumes that all foreign governments and central banks will want to see the US and USD/Eurodollar cement their global financial primacy further. Yes, Fed support will help alleviate this current economic and brewing financial crisis – but the shift of real power afterwards would be a Rubicon that we have crossed.

Specifically, would China really be happy to see its hopes of CNY gaining a larger global role washed away in a flood of fresh, addictive Eurodollar liquidity, meaning that it is more deeply beholden to the US central bank? Again, please think back to the origins of Eurodollars, to Suez, and to how Iran is being treated – because Beijing will. China would be fully aware that a Fed bailout could easily come with political strings attached, if not immediately and directly, then eventually and indirectly. But they would be there all the same.

One cannot ignore or underplay this power struggle that lies within the heart of the Eurodollar Matrix.

I know you’re out there

So, considering those systemic pressures, let’s look at where Eurodollar pressures are building most now. We will use World Bank projections for short-term USD financing plus concomitant USD current-account deficit requirements vs. specifically USD FX reserves, not general FX reserves accounted in USD, as calculated by looking at national USD reserves and adjusting for the USD’s share of the total global FX reserves basket (57% in 2018, for example). In some cases this will bias national results up or down, but these are in any case only indicative.

How to read these data about where the Eurodollar stresses lie in Table 1? Firstly, in terms of scale, Eurodollar problems lie with China, the UK, Japan, Hong Kong, the Cayman Islands, Singapore, Canada, and South Korea, Germany and France. Total short-term USD demand in the economies listed is USD28 trillion – around 130% of USD GDP. The size of liabilities the Fed would potentially have to cover in China is enormous at over USD3.4 trillion – should that prove politically acceptable to either side.

Outside of China, and most so in the Cayman Islands and the UK, Eurodollar claims are largely in the financial sector and fall on banks and shadow banks such as insurance companies and pension funds. This is obviously a clearer line of attack/defence for the Fed. Yet it still makes these economies vulnerable to swings in Eurodollar confidence – and reliant on the Fed.

Second, most developed countries apart from Switzerland have opted to hold almost no USD reserves at all. Their approach is that they are also reserve currencies, long-standing US allies, and so assume the Fed will always be willing to treat them as such with swap lines when needed. That assumption may be correct – but it comes with a geopolitical power-hierarchy price tag. (Think yet again of how Eurodollars started and the 1956 Suez Crisis ended.)

Third, most developing countries still do not hold enough USD for periods of Eurodollar liquidity stress, despite the painful lessons learned in 1997-98 and 2008-09. The only exception is Saudi Arabia, whose currency is pegged to the USD, although Taiwan, and Russia hold USD close to what would be required in an emergency. Despite years of FX reserve accumulation, at the cost of domestic consumption and a huge US trade deficit, Indonesia, Mexico, Malaysia, and Turkey are all still vulnerable to Eurodollar funding pressures. In short, there is an argument to save yet more USD – which will increase Eurodollar demand further.

We all become Agent Smith?

In short, the extent of demand for USD outside of the US is clear – and so far the Fed is responding. It has continued to expand its balance sheet to provide liquidity to the markets, and it has never done so at this pace before (Figure 5). In fact, in just a month the Fed has expanded its balance sheet by nearly 50% of the previous expansion observed during all three rounds of QE implemented after the Global Financial Crisis. Essentially we have seen nearly five years of QE1-3 in five weeks! And yet it isn’t enough.

Moreover, things are getting worse, not better. The global economic impact of COVID-19 is only beginning but one thing is abundantly clear – global trade in goods and services is going to be hit very, very hard, and that US imports are going to tumble. This threatens one of the main USD liquidity channels into the Eurodollar system.

Table 2 above also underlines looming EM Eurodollar stress-points in terms of import cover, which will fall sharply as USD earnings collapse, and external debt service. The further to the left we see the latest point for import cover, and the further to the right we see it for external debt, the greater the potential problems ahead.

As such, the Fed is likely to find it needs to cover trillions more in Eurodollar liabilities (of what underlying quality?) coming due in the real global, not financial economy – which is exactly what the BIS are warning about. Yes, we are seeing such radical steps being taken by central banks in some Western countries, including in the US – but internationally too? Are we all to become ‘Agent Smith’?

If the Fed is to step up to this challenge and expand its balance sheet even further/faster, then the US economy will massively expand its external deficit to mirror it.

That is already happening. What was a USD1 trillion fiscal deficit before COVID-19, to the dismay of some, has expanded to USD3.2 trillion via a virus-fighting package: and when tax revenues collapse, it will be far larger. Add a further USD600bn phase three stimulus, and talk of a USD2 trillion phase four infrastructure program to try to jumpstart growth rather than just fight virus fires, and potentially we are talking about a fiscal deficit in the range of 20-25% of GDP. As we argued recently, that is a peak-WW2 level as this is also a world war of sorts.

On one hand, the Eurodollar market will happily snap up those trillions US Treasuries/USD – at least those they can access, because the Fed will be buying them too via QE. Indeed, for now bond yields are not rising and USD still is.

However, such fiscal action will prompt questions on how much the USD can be ‘debased’ before, like Agent Smith, it over-reaches and then implodes or explodes – the first of the logical endpoints for the Eurodollar system, if you recall. (Of course, other currencies are doing it too.)

Is Neo The One?

In conclusion, the origins of the Eurodollar Matrix are shrouded in mystery and intrigue – and yet are worth knowing. Its operations are invisible to most but control us in many ways – so are worth understanding. Moreover, it is a system under huge structural pressure – which we must now recognise.

It’s easy to ignore all these issues and just hope the Eurodollar Matrix remains the “You-Roll-Dollar” market – but can that be true indefinitely based just on one’s belief?

Is the Neo Coronavirus ‘The One’ that breaks it?


ORACLE: “Well now, ain’t this a surprise?”

ARCHITECT: “You’ve played a very dangerous game.”

ORACLE: “Change always is.”

ARCHITECT: “And how long do you think this peace is going to last?”

ORACLE: “As long as it can….What about the others?”

ARCHITECT: “What others?”

ORACLE: “The ones that want out.”

ARCHITECT: “Obviously they will be freed.”

What Everyone’s Getting Wrong About the Toilet Paper Shortage

It isn’t really about hoarding. And there isn’t an easy fix.

Around the world, in countries afflicted with the coronavirus, stores are sold out of toilet paper. There have been shortages in Hong Kong, Australia, the United Kingdom, and the United States. And we all know who to blame: hoarders and panic-buyers.

Well, not so fast.

Story after story explains the toilet paper outages as a sort of fluke of consumer irrationality. Unlike hand sanitizer, N95 masks, or hospital ventilators, they note, toilet paper serves no special function in a pandemic. Toilet paper manufacturers are cranking out the same supply as always. And it’s not like people are using the bathroom more often, right?

U.S. Health Secretary Alex Azar summed up the paradox in a March 13 New York Times story: “Toilet paper is not an effective way to prevent getting the coronavirus, but they’re selling out.” The president of a paper manufacturer offered the consensus explanation: “You are not using more of it. You are just filling up your closet with it.”

Faced with this mystifying phenomenon, media outlets have turned to psychologists to explain why people are cramming their shelves with a household good that has nothing to do with the pandemic. Read the coverage and you’ll encounter all sorts of fascinating concepts, from “zero risk bias” to “anticipatory anxiety.” It’s “driven by fear” and a “herd mentality,” the BBC scolded. The libertarian Mises Institute took the opportunity to blame anti-gouging laws. The Atlantic published a short documentary harking back to the great toilet paper scare of 1973, which was driven by misinformation.

Most outlets agreed that the spike in demand would be short-lived, subsiding as soon as the hoarders were satiated.

No doubt there’s been some panic-buying, particularly once photos of empty store shelves began circulating on social media. There have also been a handful of documented cases of true hoarding. But you don’t need to assume that most consumers are greedy or irrational to understand how coronavirus would spur a surge in demand. And you can stop wondering where in the world people are storing all that Quilted Northern.

There’s another, entirely logical explanation for why stores have run out of toilet paper — one that has gone oddly overlooked in the vast majority of media coverage. It has nothing to do with psychology and everything to do with supply chains. It helps to explain why stores are still having trouble keeping it in stock, weeks after they started limiting how many a customer could purchase.

In short, the toilet paper industry is split into two, largely separate markets: commercial and consumer. The pandemic has shifted the lion’s share of demand to the latter. People actually do need to buy significantly more toilet paper during the pandemic — not because they’re making more trips to the bathroom, but because they’re making more of them at home. With some 75% of the U.S. population under stay-at-home orders, Americans are no longer using the restrooms at their workplace, in schools, at restaurants, at hotels, or in airports.

Georgia-Pacific, a leading toilet paper manufacturer based in Atlanta, estimates that the average household will use 40% more toilet paper than usual if all of its members are staying home around the clock. That’s a huge leap in demand for a product whose supply chain is predicated on the assumption that demand is essentially constant. It’s one that won’t fully subside even when people stop hoarding or panic-buying.

If you’re looking for where all the toilet paper went, forget about people’s attics or hall closets. Think instead of all the toilet paper that normally goes to the commercial market — those office buildings, college campuses, Starbucks, and airports that are now either mostly empty or closed. That’s the toilet paper that’s suddenly going unused.

So why can’t we just send that toilet paper to Safeway or CVS? That’s where supply chains and distribution channels come in.

Not only is it not the same product, but it often doesn’t come from the same mills.

Talk to anyone in the industry, and they’ll tell you the toilet paper made for the commercial market is a fundamentally different product from the toilet paper you buy in the store. It comes in huge rolls, too big to fit on most home dispensers. The paper itself is thinner and more utilitarian. It comes individually wrapped and is shipped on huge pallets, rather than in brightly branded packs of six or 12.

“Not only is it not the same product, but it often doesn’t come from the same mills,” added Jim Luke, a professor of economics at Lansing Community College, who once worked as head of planning for a wholesale paper distributor. “So for instance, Procter & Gamble [which owns Charmin] is huge in the retail consumer market. But it doesn’t play in the institutional market at all.”

Georgia-Pacific, which sells to both markets, told me its commercial products also use more recycled fiber, while the retail sheets for its consumer brands Angel Soft and Quilted Northern are typically 100% virgin fiber. Eric Abercrombie, a spokesman for the company, said it has seen demand rise on the retail side, while it expects a decline in the “away-from-home activity” that drives its business-to-business sales.

In theory, some of the mills that make commercial toilet paper could try to redirect some of that supply to the consumer market. People desperate for toilet paper probably wouldn’t turn up their noses at it. But the industry can’t just flip a switch. Shifting to retail channels would require new relationships and contracts between suppliers, distributors, and stores; different formats for packaging and shipping; new trucking routes — all for a bulky product with lean profit margins.

Because toilet paper is high volume but low value, the industry runs on extreme efficiency, with mills built to work at full capacity around the clock even in normal times. That works only because demand is typically so steady. If toilet paper manufacturers spend a bunch of money now to refocus on the retail channel, they’ll face the same problem in reverse once people head back to work again.

“The normal distribution system is like a well-orchestrated ballet,” said Willy Shih, a professor at Harvard Business School. “If you make a delivery to a Walmart distribution center, they give you a half-hour window, and your truck has to show up then.” The changes wrought by the coronavirus, he said, “have thrown the whole thing out of balance, and everything has to readjust.”

While toilet paper is an extreme case, similar dynamics are likely to temporarily disrupt supplies of other goods, too — even if no one’s hoarding or panic-buying. The CEO of a fruit and vegetable supplier told NPR’s Weekend Edition that schools and restaurants are canceling their banana orders, while grocery stores are selling out and want more. The problem is that the bananas he sells to schools and restaurants are “petite” and sold loose in boxes of 150, whereas grocery store bananas are larger and sold in bunches. Beer companies face a similar challenge converting commercial keg sales to retail cans and bottles.

I’m absolutely convinced that very little was triggered by hoarding.

It’s all happening, of course, against the backdrop of a pandemic that makes it hard enough for these producers to keep up business as usual, let alone remold their operations to keep up with radical shifts in demand.

If there’s any good news, it’s that we can stop blaming these shortages on the alleged idiocy of our fellow consumers. “I’m absolutely convinced that very little was triggered by hoarding,” Luke said. Even a modest, reasonable amount of stocking up by millions of people in preparation for stay-at-home orders would have been enough to deplete many store shelves. From there, the ripple effects of availability concerns, coupled with a genuine increase in demand due to people staying in, are sufficient to explain the ongoing supply problems.

In the long run, the industry is still optimistic that it can adapt. “We’ve got fiber supply, we’ve got trees,” said Georgia-Pacific’s Abercrombie. “It’s just a matter of making the product and getting it out.”

In the meantime, some enterprising restaurateurs have begun selling their excess supplies of toilet paper, alcohol, and other basics. Last week I picked up takeout at a local restaurant with a side of toilet paper and bananas. The toilet paper was thin and individually wrapped. The bananas were puny. They’ll do just fine.

Testing Is Our Way Out

Returning to normal is too dangerous. Lockdowns are unsustainable. Let’s save lives without a depression.

For now, social distancing is the best America can do to contain the Covid-19 pandemic. But if the U.S. truly mobilizes, it can soon deploy better weapons—advanced tests—that will allow the country to shift gradually to a protocol less disruptive and more effective than a lockdown.

Instead of ricocheting between an unsustainable shutdown and a dangerous, uncertain return to normalcy, the U.S. could mount a sustainable strategy with better tests and maintain a stable course for as long as it takes to develop a vaccine or cure. The country will once more be able to plan for the future, get back to work safely and avoid an economic depression. This will require massive investment to ramp up production and coordinate the construction of test centers. But the alternatives are even more costly.

Two types of testing will be essential. The first test, which relies on a technology known as the polymerase chain reaction, or PCR, can detect the virus even before a person has symptoms. It is the best way to identify who is infected. The second test looks not for the virus but for the antibodies that the immune system produces to fight it. This test isn’t so effective during the early stages of an infection, but since antibodies remain even after the virus is gone, it reveals who has been infected in the past.

Together, these two tests will give policy makers the data to make smarter decisions about who needs to be isolated and where resources need to be deployed. Instead of firing blindly, this data will let the country target its efforts.

Here’s a simple illustration of how test data can save lives. Every day millions of health-care professionals go to work without knowing whether they are infectious and might spread the virus to their colleagues. We both have close relatives on the front lines. As soon as one of them developed a cough, she pulled herself out of service. But at that point she may have been infectious for several critical days. If she and her colleagues had all been tested every day, her infection would have been caught earlier and she would have isolated herself sooner.

To be used as a screening mechanism at the beginning of a shift, the test would need to be able to give a result within minutes. Developers are making progress on speeding up these PCR tests—so much so that the aforementioned physician received the results from her second test, conducted five days after the first, before those from the first test. Abbott and Roche, two pharmaceutical companies, are moving forward with tests that can decrease reporting times from days or hours to minutes. Now that the doctor has recovered, an antibody test could help determine when she can return to the frontlines of patient care.

As testing capacity expands, the same tests could be offered to all essential workers, such as police officers and emergency technicians, and then to other overlooked but critical workers—pharmacists, grocery clerks, sanitation staff. The next step would be to test people throughout the country at random to get up-to-date information about who is infected now and who has ever been infected.

For those who are currently infected, governments can provide immediate assistance to make sure they don’t infect anyone else, especially family members. Those infected before who now have antibodies may be less susceptible to reinfection. If that is proved in the weeks to come, they could also return to work.

Putting this system in place will take resources, creativity and hard work. Test developers will have to increase the production rate of kits by an order of magnitude. In his work fighting Ebola in West Africa, Dr. Shah saw how a virus can cause a 30% reduction in economic output. Mr. Romer’s back-of-the-envelope calculation is that the recession caused by the coronavirus pandemic has already caused a 20% reduction in U.S. output, which means the country is losing about $350 billion in production each month. If a $100 billion investment in a crash program to make antibody and PCR tests ubiquitous brought a recovery one month sooner, it would more than pay for itself.

Building this testing system would be complicated and require the best of American science, business and philanthropy working together. But it is the type of challenge that the U.S. has overcome before. It isn’t viable to wait a year or two for a vaccine before getting people back to work safely. To save lives and prevent a depression, testing on a massive scale is essential.

America’s Make-or-Break Week

The bills are now coming due for big companies and millions of laid-off workers. Decisions made in the next few days will shape how coronavirus impacts the economy

Congress has passed a $2 trillion rescue plan but before those funds start to flow, American companies from the owner of a single liquor store in Boston to corporate giants like Macy’s Inc., must decide what to do about April’s bills: Which obligations do they pay and which can they put off? How many employees can they afford to keep on the payroll? Can they get a break on rent?

The decisions they make this week could shape how deeply the economy is damaged by the coronavirus pandemic.

“Rent is due. Utilities are due. Credit card bills are due April 1,” said Hadley Douglas, who has laid off two workers from her liquor business, The Urban Grape. “The deadline is looming large and it is petrifying.” She said her landlord turned down a request to temporarily pay half the rent but said to keep in touch as it was focusing first on smaller, harder hit businesses.

Millions of Americans are suddenly out of work and many businesses have already closed under orders from state and local governments to close to prevent the spread of the virus. A record 3.28 million Americans filed for unemployment benefits in the week ended March 21.

The U.S. restaurant industry has lost $25 billion in sales since March 1, according to a survey of 5,000 owners by the National Restaurant Association. Nearly 50,000 stores of major U.S. retail chains have closed, according to the companies.

An estimated $20 billion in monthly retail real estate loans are due as early as this week, according to Marcus & Millichap, a commercial real-estate services and consulting firm. Many retailers and restaurants have said they are not going to pay their April rents, which in turn poses a threat to the $3 trillion commercial mortgage market.

Economic activity in the U.S. and other developed countries could be lowered by a quarter, the Organization for Economic Cooperation and Development said Friday.

Companies of all sizes are feeling the squeeze, especially retailers and restaurants that have closed their doors during the outbreak. Nike Inc. is asking to pay half its rents. TJ Maxx is delaying payments to its suppliers. Victoria’s Secret and Men’s Wearhouse have furloughed thousands of workers. Cheesecake Factory Inc. closed 27 of the company’s locations and furloughed 41,000 hourly workers, nearly 90% of its total staff.

Tyson Evans, a 23-year-old line cook for Cheesecake Factory in Indianapolis, Indiana, said he and fellow workers were stunned to learn about the furloughs. He said they believed the company would continue to employ them despite a drop in business. He is now filing for unemployment.

“We keep this company going,” said Mr. Evans, who is currently living with his parents and worried about paying bills including his phone, grocery and prescriptions. He has started an online petition to urge the chain to keep paying furloughed workers.

Denise Burger, a 64-year-old Cheesecake Factory server in Escondido, Calif., said she was counting on the 36 hours of work the company had scheduled for her before the furloughs came down. Ms. Burger said she’s been contacting her mortgage and credit card companies to try and postpone payments.

“This pandemic has put much stress and strain on me,” said Ms. Burger, who is single and has worked for the company for six years in a job she loved.

California-based Cheesecake Factory said it would continue to provide health insurance for employees until June 1, and provide them a daily meal from their restaurants that remain open for take-out orders.

Cheesecake Factory has notified landlords that it won’t pay April rent. “Due to these extraordinary events, I am asking for your patience and, frankly, your help,” wrote Chief Executive David Overton.

Owners of independent and small restaurant chains have also asked their landlords for rent relief, with mixed responses. Some say landlords are offering them deferments of several months, whereas others haven’t gotten much help yet.

“Landlords, if they are overly greedy, they could be losing us,” said Andy Howard, chief executive of Huey Magoo’s Restaurants, who is pleading for a break on rents for his Orlando, Fla., chicken tenders chain.

Residential and commercial landlords say they have been flooded with requests from individuals and businesses saying they will struggle to pay their rent for April and beyond.

“I feel like I’m running triage in a retail hospital out of my apartment,” said Ami Ziff, director of national retail for Time Equities Inc., which owns 122 retail centers, including shopping centers, malls and street-front retail locations in 25 states.

Mortgage firms are bracing for a wave of missed payments starting April 1 as borrowers lose their jobs. Fannie Mae and Freddie Mac say they will offer deferrals on home mortgages and postpone foreclosures. Auto dealers say consumers are calling to put off their April lease or loan payments.

Guy Hillel, 47 years old, got laid off from his job as a food and beverage manager at a Times Square hotel earlier this month after the property closed due to the outbreak. He is eligible for $504 a week in unemployment benefits, a fraction of what he was earning.

Mr. Hillel, who has a wife and two children, says it isn’t enough to cover the family’s expenses. He has called credit-card companies to negotiate payment extensions, and tried unsuccessfully to delay his monthly car loan for his family’s Volkswagen Tiguan sport-utility vehicle.

“It’s extremely stressful,” Mr. Hillel said. “It’s crazy: I’m more exhausted now than I was before when I had a job.”

Mr. Hillel estimates his family will receive some stimulus money, but not the full amount awarded to couples.

The federal economic stimulus program passed last week will provide direct payments to Americans as well as loans to large and small companies. The bill includes $350 billion to help small businesses keep people on their payrolls.

For employees, it increases current unemployment benefits by $600 a week for four months. It also provides one-time checks of $1,200 to Americans with adjusted gross income up to $75,000 for individuals and $150,000 for married couples; individuals and couples are eligible for an additional $500 per child.

Treasury Secretary Steven Mnuchin said the Trump administration aims to send out direct payments to individuals in three weeks and that banks should be able to originate same-day loans for small businesses in as little as a week.

Many business owners and individuals said they have little in the way of cash reserves or savings for bills that come due in the next few days. Some wonder whether the aid will be enough.

The Small Business Administration said the stimulus bill provides “small businesses with the resources they need to get them through this unprecedented time.”

America’s large, marquee retailers are also struggling.

Macy’s Chief Executive Jeff Gennette told suppliers last week that while he had hoped to reopen stores by April 1, that was highly unlikely. “While our digital business and call centers remain open, we have lost the majority of our sales,” Mr. Gennette wrote in a letter reviewed by The Wall Street Journal.

Macy’s has suspended its dividend and drawn down its credit line to bolster its cash. It has reduced pay for executives. It’s also canceling some orders and has doubled the amount of time it gives itself to pay suppliers, to 120 days. Nevertheless, Mr. Gennette wrote in the letter, the retailer may need to begin furloughing some of its 130,000 employees.

Nike has offered to pay 50% rent on its 384 closed U.S. stores, landlords say, and when the stores reopen, a percentage of sales in lieu of any rent for 12 months. Nike executives said they will continue to pay workers while the stores are shut.

“We are currently honoring all existing contracts with our landlords. In collaboration with our real estate partners, we provided a proposal looking at near and long term approaches that we believe will help ensure both parties remain viable business partners through this unprecedented time,” a Nike spokeswoman said.

Tapestry Inc., the parent of Coach and Kate Spade, extended U.S. and European store closures through April 10, but is continuing to pay store workers. “What will be important as we come out the other end is to have a committed team of people,” said Chief Executive Jide Zeitlin.

Mr. Zeitlin said the company is in negotiations with landlords about rent forgiveness and is looking at other expenses to cut aside from labor.

T.J. Maxx and Ross Stores Inc. have canceled orders through mid-June and are delaying payments to suppliers, according to people familiar with the situation. A T.J. Maxx spokeswoman declined to comment. A spokeswoman for Ross Stores didn’t respond to a request for comment.

Financial pressures are particularly intense for small business owners; In a typical community, about half of small businesses had less than two weeks of cash liquidity, according to a 2019 report by the JPMorgan Chase Institute.

Pennsylvania deemed auto repair an essential business, which allowed Tom Bemiller, the chief executive of The Aureus Group, to keep open his three repair shops in the Philadelphia area. Revenue is down 35% this month, he said.

“Customer after customer is telling us I am not going to get my car fixed until this blows over,” said Mr. Bemiller.

Mr. Bemiller said his priority is to pay his 25 employees and his suppliers. His bank is working to determine whether it can retool the terms of his company’s $450,000 loan to allow for interest-only payments and has increased its credit line by $50,000, enough to cover two weeks of payroll. Pennsylvania is letting him delay certain sales tax payments; American Express Co. has agreed to waive fees and interest if he delays his $270,000 corporate credit card bill for one month.

“Right now everything is on the table because we are in survival mode,” Mr. Bemiller said. “We are reaching out to all vendors and creditors and asking for help and trying to delay payments as much as possible.”

Mr. Bemiller has reduced his own salary. He hopes to defer payments on his mortgage, student loans, credit card bills and other expenses, but hasn’t had time to work on that yet because he’s been singularly focused on the business, which provides all of his family’s income.

At Envision Travel Holdings Inc., a travel agency with 11 offices, revenue has fallen by two-thirds in the past month and is expected to drop to near zero in the next month or so. The Las Vegas company, which normally has 40 employees and 25 independent contractors, has laid off four workers and cut hours by 20%.

All but one of Envision’s landlords has agreed to reduce rents, cutting payments to about $15,000 from $38,000, with missed payments tacked on to the end of the lease. The travel company put a hold on its 401(k) retirement savings plan and, for now, dropped its 50% contribution to the employee dental plan. “We are analyzing every expense, line by line,” owner Thomas Carlsen said.

The universal advice we are giving tenants is don’t pay your rent and see what happens,” said Derek Wolman, partner at law firm Davidoff Hutcher & Citron LLP, which often represents bars, restaurants and hotels in lease negotiations. He said this is especially true in New York state, where there is pending legislation that would give 90 days of rent forgiveness to residential and commercial tenants who suffered financially as a result of Covid-19.

In Detroit, Bedrock, a developer and property owner created by billionaire Dan Gilbert, is offering free rent to more than 100 small businesses and restaurants from April to June. “Hopefully, they sense we’re in it to help them,” said Matt Cullen, chief executive of Bedrock. On Monday, Michigan ordered all non-essential businesses to close.

Smaller landlords who don’t have enough reserves to tide them through a prolonged pause in rent collection say they are in a precarious state.

Why is the landlord the first line in bailing them out?,” said Corey Bialow, a small property owner. He owns a stake in 12 properties in different states including New Jersey and Massachusetts. He said he will be on the hook for additional costs beyond mortgages such as real estate taxes, maintenance and insurance and will have to dip into his savings to pay for these. “I’m personally on the hook.”

Coyote Hole Ciderworks, a three-year-old cider producer in Lake Anna, Va., saw an 80% drop in revenue after it was forced to shutter most of its operations.

Coyote typically employs seven workers most of the year and fifteen or more in the summer. Now, just co-owner Laura Denkers and one employee remain on the payroll; Her husband, Chris, has stopped taking a salary so the company can continue paying health insurance premiums. The Denkers’ 10-year-old twin sons have cystic fibrosis, which makes keeping health coverage crucial.

The couple began applying for a $60,000 disaster loan from the SBA on March 20. They said all the information they put into the system was lost when the SBA revamped the disaster loan application process because of technical difficulties.

The small company has secured a 90-day reprieve on mortgage payments from its bank; Mr. Denkers plans to pay the minimum allowed on his corporate credit card and is trying to defer payments on equipment loans and other bills. “The next three weeks is the real crunch time when we need an influx of money,” he said.

Jodi Rodriguez, until recently director of retail and sales for Ovenly, a New York City-based wholesale and retail bakery that laid off all of its 72 employees, filed for unemployment March 18.

She wrote a letter to the landlord of the building she’s lived in for eleven years, asking for a temporary discount on the rent on her New York apartment. Ms. Rodriguez owns a rental property in Florida, but the tenant is a make-up artist who isn’t currently working. “I’m unsure whether she is going to pay or not,” Ms. Rodriquez.

“The hardest part right now is health insurance,” said Ms. Rodriguez, noting that coverage through Ovenly ends March 31.

Even businesses that have had gains are facing uncertainty. Ms. Douglas, the Boston liquor store owner, said in-store sales are up 130% over what she had budgeted, more than offsetting the collapse of her catering and event business. She’s keeping a close eye on cash flow and expenses, worried that she, her husband or one of their employees might get sick, that worker illnesses could disrupt her supply chain or that the state could order liquor stores to close.

Ms. Douglas is a member of a local business group in Boston’s South End neighborhood that recently surveyed more than 100 small firms. Most of the owners reported revenue is down by 90% or more in March, with monthly losses totaling about $8.5 million for the 72 businesses that provided specific figures.

“Every order we put in is nerve-wracking because we are so worried about getting stuck with product we can’t sell,” she added. “We are open today but that doesn’t mean we will be open next week.”