The coronavirus is spreading from America’s biggest cities to its suburbs, and has begun encroaching on the nation’s rural regions. The virus is believed to have infected millions of citizens and has killed more than 34,000.
Yet President Trump this week proposed guidelines for reopening the economy and suggested that a swath of the United States would soon resume something resembling normalcy. For weeks now, the administration’s view of the crisis and our future has been rosier than that of its own medical advisers, and of scientists generally.
In truth, it is not clear to anyone where this crisis is leading us. More than 20 experts in public health, medicine, epidemiology and history shared their thoughts on the future during in-depth interviews. When can we emerge from our homes? How long, realistically, before we have a treatment or vaccine? How will we keep the virus at bay?
Some felt that American ingenuity, once fully engaged, might well produce advances to ease the burdens. The path forward depends on factors that are certainly difficult but doable, they said: a carefully staggered approach to reopening, widespread testing and surveillance, a treatment that works, adequate resources for health care providers — and eventually an effective vaccine.
Still, it was impossible to avoid gloomy forecasts for the next year. The scenario that Mr. Trump has been unrolling at his daily press briefings — that the lockdowns will end soon, that a protective pill is almost at hand, that football stadiums and restaurants will soon be full — is a fantasy, most experts said.
“We face a doleful future,” said Dr. Harvey V. Fineberg, a former president of the National Academy of Medicine.
He and others foresaw an unhappy population trapped indoors for months, with the most vulnerable possibly quarantined for far longer. They worried that a vaccine would initially elude scientists, that weary citizens would abandon restrictions despite the risks, that the virus would be with us from now on.
“My optimistic side says the virus will ease off in the summer and a vaccine will arrive like the cavalry,” said Dr. William Schaffner, a preventive medicine specialist at Vanderbilt University medical school. “But I’m learning to guard against my essentially optimistic nature.”
Most experts believed that once the crisis was over, the nation and its economy would revive quickly. But there would be no escaping a period of intense pain.
Exactly how the pandemic will end depends in part on medical advances still to come. It will also depend on how individual Americans behave in the interim. If we scrupulously protect ourselves and our loved ones, more of us will live. If we underestimate the virus, it will find us.
More Americans may die than the White House admits.
By comparison, heart disease typically kills 1,774 Americans a day, and cancer kills 1,641.
Yes, the coronavirus curves are plateauing. There are fewer hospital admissions in New York, the center of the epidemic, and fewer Covid-19 patients in I.C.U.s. The daily death toll is still grim, but no longer rising.
The epidemiological model often cited by the White House, which was produced by the University of Washington’s Institute for Health Metrics and Evaluation, originally predicted 100,000 to 240,000 deaths by midsummer. Now that figure is 60,000.
While this is encouraging news, it masks some significant concerns. The institute’s projection runs through Aug. 4, describing only the first wave of this epidemic. Without a vaccine, the virus is expected to circulate for years, and the death tally will rise over time.
The gains to date were achieved only by shutting down the country, a situation that cannot continue indefinitely. The White House’s “phased” plan for reopening will surely raise the death toll no matter how carefully it is executed. The best hope is that fatalities can be held to a minimum.
Reputable longer-term projections for how many Americans will die vary, but they are all grim. Various experts consulted by the Centers for Disease Control and Prevention in March predicted that the virus eventually could reach 48 percent to 65 percent of all Americans, with a fatality rate just under 1 percent, and would kill up to 1.7 million of them if nothing were done to stop the spread.
By comparison, about 420,000 Americans died in World War II.
The limited data from China are even more discouraging. Its epidemic has been halted — for the moment — and virtually everyone infected in its first wave has died or recovered.
In this country, hospitals in several cities, including New York, came to the brink of chaos. Officials in both Wuhan and New York had to revise their death counts upward this week when they realized that many people had died at home of Covid-19, strokes, heart attacks or other causes, or because ambulances never came for them.
In fast-moving epidemics, far more victims pour into hospitals or die at home than doctors can test; at the same time, the mildly ill or asymptomatic never get tested. Those two factors distort the true fatality rate in opposite ways. If you don’t know how many people are infected, you don’t know how deadly a virus is.
Only when tens of thousands of antibody tests are done will we know how many silent carriers there may be in the United States. The C.D.C. has suggested it might be 25 percent of those who test positive. Researchers in Iceland said it might be double that.
China is also revising its own estimates. In February, a major studyconcluded that only 1 percent of cases in Wuhan were asymptomatic. New research says perhaps 60 percent were. Our knowledge gaps are still wide enough to make epidemiologists weep.
“All models are just models,” Dr. Anthony S. Fauci, science adviser to the White House coronavirus task force, has said. “When you get new data, you change them.”
There may be good news buried in this inconsistency: The virus may also be mutating to cause fewer symptoms. In the movies, viruses become more deadly. In reality, they usually become less so, because asymptomatic strains reach more hosts. Even the 1918 Spanish flu virus eventually faded into the seasonal H1N1 flu.
At the moment, however, we do not know exactly how transmissibleor lethal the virus is. But refrigerated trucks parked outside hospitals tell us all we need to know: It is far worse than a bad flu season.
The lockdowns will end, but haltingly.
Until a vaccine or another protective measure emerges, there is no scenario, epidemiologists agreed, in which it is safe for that many people to suddenly come out of hiding. If Americans pour back out in force, all will appear quiet for perhaps three weeks.
Then the emergency rooms will get busy again.
“There’s this magical thinking saying, ‘We’re all going to hunker down for a while and then the vaccine we need will be available,’” said Dr. Peter J. Hotez, dean of the National School of Tropical Medicine at Baylor College of Medicine.
In his wildly popular March 19 article in Medium, “Coronavirus: The Hammer and the Dance,” Tomas Pueyo correctly predicted the national lockdown, which he called the hammer, and said it would lead to a new phase, which he called the dance, in which essential parts of the economy could reopen, including some schools and some factories with skeleton crews.
Every epidemiological model envisions something like the dance. Each assumes the virus will blossom every time too many hosts emerge and force another lockdown. Then the cycle repeats. On the models, the curves of rising and falling deaths resemble a row of shark teeth.
Surges are inevitable, the models predict, even when stadiums, churches, theaters, bars and restaurants remain closed, all travelers from abroad are quarantined for 14 days, and domestic travel is tightly restricted to prevent high-intensity areas from reinfecting low-intensity ones.
The tighter the restrictions, experts say, the fewer the deaths and the longer the periods between lockdowns. Most models assume states will eventually do widespread temperature checks, rapid testing and contact tracing, as is routine in Asia.
Even the “Opening Up America Again” guidelinesMr. Trump issued on Thursday have three levels of social distancing, and recommend that vulnerable Americans stay hidden. The plan endorses testing, isolation and contact tracing — but does not specify how these measures will be paid for, or how long it will take to put them in place.
On Friday, none of that stopped the president from contradicting his own message by sending out tweets encouraging protesters in Michigan, Minnesota and Virginia to fight their states’ shutdowns.
China did not allow Wuhan, Nanjing or other cities to reopen until intensive surveillance found zero new cases for 14 straight days, the virus’s incubation period. Compared with China or Italy, the United States is still a playground.
Americans can take domestic flights, drive where they want, and roam streets and parks. Despite restrictions, everyone seems to know someone discreetly arranging play dates for children, holding backyard barbecues or meeting people on dating apps.
Reopening requires declining cases for 14 days, the tracing of 90 percent of contacts, an end to health care worker infections, recuperation places for mild cases and many other hard-to-reach goals.
“We need to reopen the faucet gradually, not allow the floodgates to reopen,” Dr. Frieden said. “This is a time to work to make that day come sooner.”
“It will be a frightening schism,” Dr. David Nabarro, a World Health Organization special envoy on Covid-19, predicted. “Those with antibodies will be able to travel and work, and the rest will be discriminated against.”
Soon the government will have to invent a way to certify who is truly immune. A test for IgG antibodies, which are produced once immunity is established, would make sense, said Dr. Daniel R. Lucey, an expert on pandemics at Georgetown Law School. Many companies are working on them.
The California adult-film industry pioneered a similar idea a decade ago. Actors use a cellphone app to prove they have tested H.I.V. negative in the last 14 days, and producers can verify the information on a password-protected website.
As Americans stuck in lockdown see their immune neighbors resuming their lives and perhaps even taking the jobs they lost, it is not hard to imagine the enormous temptation to join them through self-infection, experts predicted. Younger citizens in particular will calculate that risking a serious illness may still be better than impoverishment and isolation.
“My daughter, who is a Harvard economist, keeps telling me her age group needs to have Covid-19 parties to develop immunity and keep the economy going,” said Dr. Michele Barry, who directs the Center for Innovation in Global Health at Stanford University.
Dozens of Cuba’s homeless youths infected themselves through sex or blood injections to get in, said Dr. Jorge Pérez Ávila, an AIDS specialist who is Cuba’s version of Dr. Fauci. Many died before antiretroviral therapy was introduced.
It would be a gamble for American youth, too. The obese and immunocompromised are clearly at risk, but even slim, healthy young Americans have died of Covid-19.
The virus can be kept in check, but only with expanded resources.
The next two years will proceed in fits and starts, experts said. As more immune people get back to work, more of the economy will recover.
But if too many people get infected at once, new lockdowns will become inevitable. To avoid that, widespread testing will be imperative.
Dr. Fauci has said “the virus will tell us” when it’s safe. He means that once a national baseline of hundreds of thousands of daily tests is established across the nation, any viral spread can be spotted when the percentage of positive results rises.
To keep the virus in check, several experts insisted, the country also must start isolating all the ill — including mild cases.
In this country, patients who test positive are asked to stay in their homes but keep away from their families.
Television news has been filled with recuperating personalities like CNN’s Chris Cuomo, sweating alone in his basement while his wife left food atop the stairs, his children waved and the dogs hung back.
But even Mr. Cuomo ended up illustrating why the W.H.O. strongly opposes home isolation. On Wednesday, he revealed that his wife had the virus.
“If I was forced to select only one intervention, it would be the rapid isolation of all cases,” said Dr. Bruce Aylward, who led the W.H.O. observer team to China.
In China, anyone testing positive, no matter how mild their symptoms, was required to immediately enter an infirmary-style hospital — often set up in a gymnasium or community center outfitted with oxygen tanks and CT scanners.
There, they recuperated under the eyes of nurses. That reduced the risk to families, and being with other victims relieved some patients’ fears. Nurses even led dance and exercise classes to raise spirits, and help victims clear their lungs and keep their muscle tone.
Still, experts were divided on the idea of such wards. Dr. Fineberg co-wrote a New York Times Op-Ed article calling for mandatory but “humane quarantine processes.”
By contrast, Marc Lipsitch, an epidemiologist at the Harvard T.H. Chan School of Public Health, opposed the idea, saying: “I don’t trust our government to remove people from their families by force.”
Ultimately, suppressing a virus requires testing all the contacts of every known case. But the United States is far short of that goal.
Someone working in a restaurant or factory may have dozens or even hundreds of contacts. In China’s Sichuan Province, for example, each known case had an average of 45 contacts.
All the experts familiar with vaccine production agreed that even that timeline was optimistic. Dr. Paul Offit, a vaccinologist at the Children’s Hospital of Philadelphia, noted that the record is four years, for the mumps vaccine.
Researchers differed sharply over what should be done to speed the process. Modern biotechnology techniques using RNA or DNA platforms make it possible to develop candidate vaccines faster than ever before.
But clinical trials take time, in part because there is no way to rush the production of antibodies in the human body.
Also, for unclear reasons, some previous vaccine candidates against coronaviruses like SARS have triggered “antibody-dependent enhancement,” which makes recipients more susceptible to infection, rather than less. In the past, vaccines against H.I.V. and dengue have unexpectedly done the same.
A new vaccine is usually first tested in fewer than 100 young, healthy volunteers. If it appears safe and produces antibodies, thousands more volunteers — in this case, probably front-line workers at the highest risk — will get either it or a placebo in what is called a Phase 3 trial.
It is possible to speed up that process with “challenge trials.” Scientists vaccinate small numbers of volunteers, wait until they develop antibodies, and then “challenge” them with a deliberate infection to see if the vaccine protects them.
Challenge trials are used only when a disease is completely curable, such as malaria or typhoid fever. Normally, it is ethically unthinkable to challenge subjects with a disease with no cure, such as Covid-19.
But in these abnormal times, several experts argued that putting a few Americans at high risk for fast results could be more ethical than leaving millions at risk for years.
“Fewer get harmed if you do a challenge trial in a few people than if you do a Phase 3 trial in thousands,” said Dr. Lipsitch, who recently published a paper advocating challenge trials in the Journal of Infectious Diseases. Almost immediately, he said, he heard from volunteers.
Others were deeply uncomfortable with that idea. “I think it’s very unethical — but I can see how we might do it,” said Dr. Lucey.
The hidden danger of challenge trials, vaccinologists explained, is that they recruit too few volunteers to show whether a vaccine creates enhancement, since it may be a rare but dangerous problem.
“Challenge trials won’t give you an answer on safety,” said Michael T. Osterholm, director of the University of Minnesota’s Center for Infectious Disease Research and Policy. “It may be a big problem.”
Dr. W. Ian Lipkin, a virologist at Columbia University’s Mailman School of Public Health, suggested an alternative strategy. Pick at least two vaccine candidates, briefly test them in humans and do challenge trials in monkeys. Start making the winner immediately, even while widening the human testing to look for hidden problems.
As arduous as testing a vaccine is, producing hundreds of millions of doses is even tougher, experts said.
Most American vaccine plants produce only about 5 million to 10 million doses a year, needed largely by the 4 million babies born and 4 million people who reach age 65 annually, said Dr. R. Gordon Douglas Jr., a former president of Merck’s vaccine division.
But if a vaccine is invented, the United States could need 300 million doses — or 600 million if two shots are required. And just as many syringes.
“People have to start thinking big,” Dr. Douglas said. “With that volume, you’ve got to start cranking it out pretty soon.”
Flu vaccine plants are large, but those that grow the vaccines in chicken eggs are not suitable for modern vaccines, which grow in cell broths, he said.
European countries have plants but will need them for their own citizens. China has a large vaccine industry, and may be able to expand it over the coming months. It might be able to make vaccines for the United States, experts said. But captive customers must pay whatever price the seller asks, and the safety and efficacy standards of some Chinese companies are imperfect.
India and Brazil also have large vaccine industries. If the virus moves rapidly through their crowded populations, they may lose millions of citizens but achieve widespread herd immunity well before the United States does. In that case, they might have spare vaccine plant capacity.
Alternatively, suggested Arthur M. Silverstein, a retired medical historian at the Johns Hopkins School of Medicine, the government might take over and sterilize existing liquor or beer plants, which have large fermentation vats.
“Any distillery could be converted,” he said.
Treatments are likely to arrive first.
In the short term, experts were more optimistic about treatments than vaccines. Several felt that so-called convalescent serum could work.
The basic technique has been used for over a century: Blood is drawn from people who have recovered from a disease, then filtered to remove everything but the antibodies. The antibody-rich immunoglobulin is injected into patients.
The obstacle is that there are now relatively few survivors to harvest blood from.
In the pre-vaccine era, antibodies were “farmed” in horses and sheep. But that process was hard to keep sterile, and animal proteins sometimes triggered allergic reactions.
The modern alternative is monoclonal antibodies. These treatment regimens, which recently came very close to conquering the Ebola epidemic in eastern Congo, are the most likely short-term game changer, experts said.
The most effective antibodies are chosen, and the genes that produce them are spliced into a benign virus that will grow in a cellular broth.
But, as with vaccines, growing and purifying monoclonal antibodies takes time. In theory, with enough production, they could be used not just to save lives but to protect front-line workers.
Antibodies can last for weeks before breaking down — how long depends on many factors, Dr. Silverstein noted — and they cannot kill virus that is already hidden inside cells.
Having a daily preventive pill would be an even better solution, because pills can be synthesized in factories far faster than vaccines or antibodies can be grown and purified.
But even if one were invented, production would have to ramp up until it was as ubiquitous as aspirin, so 300 million Americans could take it daily.
Some recalled that in the 1950s inadequate testing of thalidomide caused thousands of children to be born with malformed limbs. More than one hydroxychloroquine study has been halted after patients who got high doses developed abnormal heart rhythms.
“I doubt anyone will tolerate high doses, and there are vision issues if it accumulates,” Dr. Barry said. “But it would be interesting to see if it could work as a PrEP-like drug,” she added, referring to pills used to prevent H.I.V.
Others were harsher, especially about Mr. Trump’s idea of combining a chloroquine with azithromycin.
“It’s total nonsense,” said Dr. Luciana Borio, a former director of medical and biodefense preparedness at the National Security Council. “I told my family, if I get Covid, do not give me this combo.”
Chloroquine might protect patients hospitalized with pneumonia against lethal cytokine storms because it damps down immune reactions, several doctors said.
That does not, however, make it useful for preventing infections, as Mr. Trump has implied it would be, because it has no known antiviral properties.
Several antivirals, including remdesivir, favipiravir and baloxavir, are being tested again the coronavirus; the latter two are flu drugs.
Trials of various combinations in China are set to issue results by next month, but they will be small and possibly inconclusive because doctors there ran out of patients to test. End dates for most trials in the United States are not yet set.
Goodbye, ‘America First.’
Stimulus checks, intended to offset the crisis, began landing in checking accounts this week, making much of America, temporarily, a welfare state. Food banks are opening across the country, and huge lines have formed.
A public health crisis of this magnitude requires international cooperation on a scale not seen in decades. Yet Mr. Trump is moving to defund the W.H.O., the only organization capable of coordinating such a response.
And he spent most of this year antagonizing China, which now has the world’s most powerful functioning economy and may become the dominant supplier of drugs and vaccines. China has used the pandemic to extend its global influence, and says it has sent medical gear and equipment to nearly 120 countries.
A major recipient is the United States, through Project Airbridge, an air-cargo operation overseen by Mr. Trump’s son-in-law, Jared Kushner.
This is not a world in which “America First” is a viable strategy, several experts noted.
“If President Trump cares about stepping up the public health efforts here, he should look for avenues to collaborate with China and stop the insults,” said Nicholas Mulder, an economic historian at Cornell University. He has called Mr. Kushner’s project “Lend-Lease in reverse,” a reference to American military aid to other countries during World War II.
Dr. Osterholm was even blunter. “If we alienate the Chinese with our rhetoric, I think it will come back to bite us,” he said.
“What if they come up with the first vaccine? They have a choice about who they sell it to. Are we top of the list? Why would we be?”
Once the pandemic has passed, the national recovery may be swift. The economy rebounded after both world wars, Dr. Mulder noted.
The psychological fallout will be harder to gauge. The isolation and poverty caused by a long shutdown may drive up rates of domestic abuse, depression and suicide.
Even political perspectives may shift. Initially, the virus heavily hit Democratic cities like Seattle, New York and Detroit. But as it spreads through the country, it will spare no one.
He calculated that those voters could be 30 percent more likely to die of the virus.
In the periods after both wars, Dr. Mulder noted, society and incomes became more equal. Funds created for veterans’ and widows’ pensions led to social safety nets, measures like the G.I. Bill and V.A. home loans were adopted, unions grew stronger, and tax benefits for the wealthy withered.
If a vaccine saves lives, many Americans may become less suspicious of conventional medicine and more accepting of science in general — including climate change, experts said.
Summary of the article: Strong coronavirus measures today should only last a few weeks, there shouldn’t be a big peak of infections afterwards, and it can all be done for a reasonable cost to society, saving millions of lives along the way. If we don’t take these measures, tens of millions will be infected, many will die, along with anybody else that requires intensive care, because the healthcare system will have collapsed.
Within a week, countries around the world have gone from: “This coronavirus thing is not a big deal” to declaring the state of emergency. Yet many countries are still not doing much. Why?
Every country is asking the same question: How should we respond? The answer is not obvious to them.
Some countries, like France, Spain or Philippines, have since ordered heavy lockdowns. Others, like the US, UK, or Switzerland, have dragged their feet, hesitantly venturing into social distancing measures.
Here’s what we’re going to cover today, again with lots of charts, data and models with plenty of sources:
What’s the current situation?
What options do we have?
What’s the one thing that matters now: Time
What does a good coronavirus strategy look like?
How should we think about the economic and social impacts?
When you’re done reading the article, this is what you’ll take away:
Our healthcare system is already collapsing.
Countries have two options: either they fight it hard now, or they will suffer a massive epidemic.
If they choose the epidemic, hundreds of thousands will die. In some countries, millions.
And that might not even eliminate further waves of infections.
If we fight hard now, we will curb the deaths.
We will relieve our healthcare system.
We will prepare better.
We will learn.
The world has never learned as fast about anything, ever.
And we need it, because we know so little about this virus.
All of this will achieve something critical: Buy Us Time.
If we choose to fight hard, the fight will be sudden, then gradual.
We will be locked in for weeks, not months.
Then, we will get more and more freedoms back.
It might not be back to normal immediately.
But it will be close, and eventually back to normal.
And we can do all that while considering the rest of the economy too.
Ok, let’s do this.
1. What’s the situation?
Last week, I showed this curve:
It showed coronavirus cases across the world outside of China. We could only discern Italy, Iran and South Korea. So I had to zoom in on the bottom right corner to see the emerging countries. My entire point is that they would soon be joining these 3 cases.
Let’s see what has happened since.
As predicted, the number of cases has exploded in dozens of countries. Here, I was forced to show only countries with over 1,000 cases. A few things to note:
Spain, Germany, France and the US all have more cases than Italy when it ordered the lockdown
An additional 16 countries have more cases today than Hubei when it went under lockdown: Japan, Malaysia, Canada, Portugal, Australia, Czechia, Brazil and Qatar have more than Hubei but below 1,000 cases. Switzerland, Sweden, Norway, Austria, Belgium, Netherlands and Denmark all have above 1,000 cases.
Do you notice something weird about this list of countries? Outside of China and Iran, which have suffered massive, undeniable outbreaks, and Brazil and Malaysia, every single country in this list is among the wealthiest in the world.
Do you think this virus targets rich countries? Or is it more likely that rich countries are better able to identify the virus?
It’s unlikely that poorer countries aren’t touched. Warm and humid weather probablyhelps, but doesn’t prevent an outbreak by itself — otherwise Singapore, Malaysia or Brazil wouldn’t be suffering outbreaks.
The most likely interpretations are that the coronavirus either took longer to reach these countries because they’re less connected, or it’s already there but these countries haven’t been able to invest enough on testing to know.
Either way, if this is true, it means that most countries won’t escape the coronavirus. It’s a matter of time before they see outbreaks and need to take measures.
What measures can different countries take?
2. What Are Our Options?
Since the article last week, the conversation has changed and many countries have taken measures. Here are some of the most illustrative examples:
Measures in Spain and France
In one extreme, we have Spain and France. This is the timeline of measures for Spain:
On Thursday, 3/12, the President dismissed suggestions that the Spanish authorities had been underestimating the health threat.
On Friday, they declared the State of Emergency.
On Saturday, measures were taken:
People can’t leave home except for key reasons: groceries, work, pharmacy, hospital, bank or insurance company (extreme justification)
Specific ban on taking kids out for a walk or seeing friends or family (except to take care of people who need help, but with hygiene and physical distance measures)
All bars and restaurants closed. Only take-home acceptable.
All entertainment closed: sports, movies, museums, municipal celebrations…
Weddings can’t have guests. Funerals can’t have more than a handful of people.
Mass transit remains open
On Monday, land borders were shut.
Some people see this as a great list of measures. Others put their hands up in the air and cry of despair. This difference is what this article will try to reconcile.
France’s timeline of measures is similar, except they took more time to apply them, and they are more aggressive now. For example, rent, taxes and utilities are suspended for small businesses.
Measures in the US and UK
The US and UK, like countries such as Switzerland, have dragged their feet in implementing measures. Here’s the timeline for the US:
Wednesday 3/11: travel ban.
Friday: National Emergency declared. No social distancing measures
Monday: the government urges the public to avoid restaurants or bars and attend events with more than 10 people. No social distancing measure is actually enforceable. It’s just a suggestion.
Lots of states and cities are taking the initiative and mandating much stricter measures.
The UK has seen a similar set of measures: lots of recommendations, but very few mandates.
These two groups of countries illustrate the two extreme approaches to fight the coronavirus: mitigation and suppression. Let’s understand what they mean.
Option 1: Do Nothing
Before we do that, let’s see what doing nothing would entail for a country like the US:
This fantastic epidemic calculator can help you understand what will happen under different scenarios. I’ve pasted below the graph the key factors that determine the behavior of the virus. Note that infected, in pink, peak in the tens of millions at a certain date. Most variables have been kept from the default. The only material changes are R from 2.2 to 2.4 (corresponds better to currently available information. See at the bottom of the epidemic calculator), fatality rate (4% due to healthcare system collapse. See details below or in the previous article), length of hospital stay (down from 20 to 10 days) and hospitalization rate (down from 20% to 14% based on severe and critical cases. Note the WHO calls out a 20% rate) based on our most recently available gathering of research. Note that these numbers don’t change results much. The only change that matters is the fatality rate.
If we do nothing: Everybody gets infected, the healthcare system gets overwhelmed, the mortality explodes, and ~10 million people die (blue bars). For the back-of-the-envelope numbers: if ~75% of Americans get infected and 4% die, that’s 10 million deaths, or around 25 times the number of US deaths in World War II.
You might wonder: “That sounds like a lot. I’ve heard much less than that!”
So what’s the catch? With all these numbers, it’s easy to get confused. But there’s only two numbers that matter: What share of people will catch the virus and fall sick, and what share of them will die. If only 25% are sick (because the others have the virus but don’t have symptoms so aren’t counted as cases), and the fatality rate is 0.6% instead of 4%, you end up with 500k deaths in the US.
If we don’t do anything, the number of deaths from the coronavirus will probably land between these two numbers. The chasm between these extremes is mostly driven by the fatality rate, so understanding it better is crucial. What really causes the coronavirus deaths?
How Should We Think about the Fatality Rate?
This is the same graph as before, but now looking at hospitalized people instead of infected and dead:
The light blue area is the number of people who would need to go to the hospital, and the darker blue represents those who need to go to the intensive care unit (ICU). You can see that number would peak at above 3 million.
Now compare that to the number of ICU beds we have in the US (50k today, we could double that repurposing other space). That’s the red dotted line.
No, that’s not an error.
That red dotted line is the capacity we have of ICU beds. Everyone above that line would be in critical condition but wouldn’t be able to access the care they need, and would likely die.
This is why people died in droves in Hubei and are now dying in droves in Italy and Iran. The Hubei fatality rate ended up better than it could have been because they built 2 hospitals nearly overnight. Italy and Iran can’t do the same; few, if any, other countries can. We’ll see what ends up happening there.
So why is the fatality rate close to 4%?
If 5% of your cases require intensive care and you can’t provide it, most of those people die. As simple as that.
These numbers only show people dying from coronavirus. But what happens if all your healthcare system is collapsed by coronavirus patients? Others also die from other ailments.
What happens if you have a heart attack but the ambulance takes 50 minutes to come instead of 8 (too many coronavirus cases) and once you arrive, there’s no ICU and no doctor available? You die.
There are 4 million admissions to the ICU in the US every year, and 500k (~13%) of them die. Without ICU beds, that share would likely go much closer to 80%. Even if only 50% died, in a year-long epidemic you go from 500k deaths a year to 2M, so you’re adding 1.5M deaths, just with collateral damage.
If the coronavirus is left to spread, the US healthcare system will collapse, and the deaths will be in the millions, maybe more than 10 million.
The same thinking is true for most countries. The number of ICU beds and ventilators and healthcare workers are usually similar to the US or lower in most countries. Unbridled coronavirus means healthcare system collapse, and that means mass death.
Unbridled coronavirus means healthcare systems collapse, and that means mass death.
By now, I hope it’s pretty clear we should act. The two options that we have are mitigation and suppression. Both of them propose to “flatten the curve”, but they go about it very differently.
Option 2: Mitigation Strategy
Mitigation goes like this: “It’s impossible to prevent the coronavirus now, so let’s just have it run its course, while trying to reduce the peak of infections. Let’s just flatten the curve a little bit to make it more manageable for the healthcare system.”
This chart appears in a very important paper published over the weekend from the Imperial College London. Apparently, it pushed the UK and US governments to change course.
It’s a very similar graph as the previous one. Not the same, but conceptually equivalent. Here, the “Do Nothing” situation is the black curve. Each one of the other curves are what would happen if we implemented tougher and tougher social distancing measures. The blue one shows the toughest social distancing measures: isolating infected people, quarantining people who might be infected, and secluding old people. This blue line is broadly the current UK coronavirus strategy, although for now they’re just suggesting it, not mandating it.
Here, again, the red line is the capacity for ICUs, this time in the UK. Again, that line is very close to the bottom. All that area of the curve on top of that red line represents coronavirus patients who would mostly die because of the lack of ICU resources.
Not only that, but by flattening the curve, the ICUs will collapse for months, increasing collateral damage.
You should be shocked. When you hear: “We’re going to do some mitigation” what they’re really saying is: “We will knowingly overwhelm the healthcare system, driving the fatality rate up by a factor of 10x at least.”
You would imagine this is bad enough. But we’re not done yet. Because one of the key assumptions of this strategy is what’s called “Herd Immunity”.
Herd Immunity and Virus Mutation
The idea is that all the people who are infected and then recover are now immune to the virus. This is at the core of this strategy: “Look, I know it’s going to be hard for some time, but once we’re done and a few million people die, the rest of us will be immune to it, so this virus will stop spreading and we’ll say goodbye to the coronavirus. Better do it at once and be done with it, because our alternative is to do social distancing for up to a year and risk having this peak happen later anyways.”
Except this assumes one thing: the virus doesn’t change too much. If it doesn’t change much, then lots of people do get immunity, and at some point the epidemic dies down
How likely is this virus to mutate? It seems it already has.
This graph represents the different mutations of the virus. You can see that the initial strains started in purple in China and then spread. Each time you see a branching on the left graph, that is a mutation leading to a slightly different variant of the virus.
This should not be surprising: RNA-based viruses like the coronavirus or the flu tend to mutate around 100 times faster than DNA-based ones—although the coronavirus mutates more slowly than influenza viruses.
Not only that, but the best way for this virus to mutate is to have millions of opportunities to do so, which is exactly what a mitigation strategy would provide: hundreds of millions of people infected.
That’s why you have to get a flu shot every year. Because there are so many flu strains, with new ones always evolving, the flu shot can never protect against all strains.
Put in another way: the mitigation strategy not only assumes millions of deaths for a country like the US or the UK. It also gambles on the fact that the virus won’t mutate too much — which we know it does. And it will give it the opportunity to mutate. So once we’re done with a few million deaths, we could be ready for a few million more — every year. This corona virus could become a recurring fact of life, like the flu, but many times deadlier.
The best way for this virus to mutate is to have millions of opportunities to do so, which is exactly what a mitigation strategy would provide.
So if neither doing nothing and mitigation will work, what’s the alternative? It’s called suppression.
Option 3: Suppression Strategy
The Mitigation Strategy doesn’t try to contain the epidemic, just flatten the curve a bit. Meanwhile, the Suppression Strategy tries to apply heavy measures to quickly get the epidemic under control. Specifically:
Go hard right now. Order heavy social distancing. Get this thing under control.
Then, release the measures, so that people can gradually get back their freedoms and something approaching normal social and economic life can resume.
What does that look like?
All the model parameters are the same, except that there is an intervention around now to reduce the transmission rate to R=0.62, and because the healthcare system isn’t collapsed, the fatality rate goes down to 0.6%. I defined “around now” as having ~32,000 cases when implementing the measures (3x the official number as of today, 3/19). Note that this is not too sensitive to the R chosen. An R of 0.98 for example shows 15,000 deaths. Five times more than with an R of 0.62, but still tens of thousands of deaths and not millions. It’s also not too sensitive to the fatality rate: if it’s 0.7% instead of 0.6%, the death toll goes from 15,000 to 17,000. It’s the combination of a higher R, a higher fatality rate, and a delay in taking measures that explodes the number of fatalities. That’s why we need to take measures to reduce R today. For clarification, the famous R0 is R at the beginning (R at time 0). It’s the transmission rate when nobody is immune yet and there are no measures against it taken. R is the overall transmission rate.
Under a suppression strategy, after the first wave is done, the death toll is in the thousands, and not in the millions.
Why? Because not only do we cut the exponential growth of cases. We also cut the fatality rate since the healthcare system is not completely overwhelmed. Here, I used a fatality rate of 0.9%, around what we’re seeing in South Korea today, which has been most effective at following Suppression Strategy.
Said like this, it sounds like a no-brainer. Everybody should follow the Suppression Strategy.
So why do some governments hesitate?
They fear three things:
This first lockdown will last for months, which seems unacceptable for many people.
A months-long lockdown would destroy the economy.
It wouldn’t even solve the problem, because we would be just postponing the epidemic: later on, once we release the social distancing measures, people will still get infected in the millions and die.
Here is how the Imperial College team modeled suppressions. The green and yellow lines are different scenarios of Suppression. You can see that doesn’t look good: We still get huge peaks, so why bother?
We’ll get to these questions in a moment, but there’s something more important before.
This is completely missing the point.
Presented like these, the two options of Mitigation and Suppression, side by side, don’t look very appealing. Either a lot of people die soon and we don’t hurt the economy today, or we hurt the economy today, just to postpone the deaths.
This ignores the value of time.
3. The Value of Time
In our previous post, we explained the value of time in saving lives. Every day, every hour we waited to take measures, this exponential threat continued spreading. We saw how a single day could reduce the total cases by 40% and the death toll by even more.
But time is even more valuable than that.
We’re about to face the biggest wave of pressure on the healthcare system ever seen in history. We are completely unprepared, facing an enemy we don’t know. That is not a good position for war.
What if you were about to face your worst enemy, of which you knew very little, and you had two options: Either you run towards it, or you escape to buy yourself a bit of time to prepare. Which one would you choose?
This is what we need to do today. The world has awakened. Every single day we delay the coronavirus, we can get better prepared. The next sections detail what that time would buy us:
Lower the Number of Cases
With effective suppression, the number of true cases would plummet overnight, as we saw in Hubei last week.
As of today, there are 0 daily new cases of coronavirus in the entire 60 million-big region of Hubei.
The diagnostics would keep going up for a couple of weeks, but then they would start going down. With fewer cases, the fatality rate starts dropping too. And the collateral damage is also reduced: fewer people would die from non-coronavirus-related causes because the healthcare system is simply overwhelmed.
Suppression would get us:
Fewer total cases of Coronavirus
Immediate relief for the healthcare system and the humans who run it
Reduction in fatality rate
Reduction in collateral damage
Ability for infected, isolated and quarantined healthcare workers to get better and back to work. In Italy, healthcare workers represent 8% of all contagions.
Understand the True Problem: Testing and Tracing
Right now, the UK and the US have no idea about their true cases. We don’t know how many there are. We just know the official number is not right, and the true one is in the tens of thousands of cases. This has happened because we’re not testing, and we’re not tracing.
With a few more weeks, we could get our testing situation in order, and start testing everybody. With that information, we would finally know the true extent of the problem, where we need to be more aggressive, and what communities are safe to be released from a lockdown.
We could also set up a tracing operation like the ones they have in China or other East Asia countries, where they can identify all the people that every sick person met, and can put them in quarantine. This would give us a ton of intelligence to release later on our social distancing measures: if we know where the virus is, we can target these places only. This is not rocket science: it’s the basics of how East Asia Countries have been able to control this outbreak without the kind of draconian social distancing that is increasingly essential in other countries.
The measures from this section (testing and tracing) single-handedly curbed the growth of the coronavirus in South Korea and got the epidemic under control, without a strong imposition of social distancing measures.
Build Up Capacity
The US (and presumably the UK) are about to go to war without armor.
We have masks for just two weeks, few personal protective equipments (“PPE”), not enough ventilators, not enough ICU beds, not enough ECMOs (blood oxygenation machines)… This is why the fatality rate would be so high in a mitigation strategy.
But if we buy ourselves some time, we can turn this around:
We have more time to buy equipment we will need for a future wave
We can quickly build up our production of masks, PPEs, ventilators, ECMOs, and any other critical device to reduce fatality rate.
Put in another way: we don’t need years to get our armor, we need weeks. Let’s do everything we can to get our production humming now. Countries are mobilized. People are being inventive, such as using 3D printing for ventilator parts. We can do it. We just need more time. Would you wait a few weeks to get yourself some armor before facing a mortal enemy?
This is not the only capacity we need. We will need health workers as soon as possible. Where will we get them? We need to train people to assist nurses, and we need to get medical workers out of retirement. Many countries have already started, but this takes time. We can do this in a few weeks, but not if everything collapses.
Lower Public Contagiousness
The public is scared. The coronavirus is new. There’s so much we don’t know how to do yet! People haven’t learned to stop hand-shaking. They still hug. They don’t open doors with their elbow. They don’t wash their hands after touching a door knob. They don’t disinfect tables before sitting.
Once we have enough masks, we can use them outside of the healthcare system too. Right now, it’s better to keep them for healthcare workers. But if they weren’t scarce, people should wear them in their daily lives, making it less likely that they infect other people when sick, and with proper training also reducing the likelihood that the wearers get infected. (In the meantime, wearing something is better than nothing.)
All of these are pretty cheap ways to reduce the transmission rate. The less this virus propagates, the fewer measures we’ll need in the future to contain it. But we need time to educate people on all these measures and equip them.
Understand the Virus
We know very very little about the virus. But every week, hundreds of new papers are coming.
The world is finally united against a common enemy. Researchers around the globe are mobilizing to understand this virus better.
How does the virus spread?
How can contagion be slowed down?
What is the share of asymptomatic carriers?
Are they contagious? How much?
What are good treatments?
How long does it survive?
On what surfaces?
How do different social distancing measures impact the transmission rate?
What’s their cost?
What are tracing best practices?
How reliable are our tests?
Clear answers to these questions will help make our response as targeted as possible while minimizing collateral economic and social damage. And they will come in weeks, not years.
Find Treatments
Not only that, but what if we found a treatment in the next few weeks? Any day we buy gets us closer to that. Right now, there are already several candidates, such as Favipiravir, Chloroquine, or Chloroquine combined with Azithromycin. What if it turned out that in two months we discovered a treatment for the coronavirus? How stupid would we look if we already had millions of deaths following a mitigation strategy?
Understand the Cost-Benefits
All of the factors above can help us save millions of lives. That should be enough. Unfortunately, politicians can’t only think about the lives of the infected. They must think about all the population, and heavy social distancing measures have an impact on others.
Right now we have no idea how different social distancing measures reduce transmission. We also have no clue what their economic and social costs are.
Isn’t it a bit difficult to decide what measures we need for the long term if we don’t know their cost or benefit?
A few weeks would give us enough time to start studying them, understand them, prioritize them, and decide which ones to follow.
Fewer cases, more understanding of the problem, building up assets, understanding the virus, understanding the cost-benefit of different measures, educating the public… These are some core tools to fight the virus, and we just need a few weeks to develop many of them. Wouldn’t it be dumb to commit to a strategy that throws us instead, unprepared, into the jaws of our enemy?
4. The Hammer and the Dance
Now we know that the Mitigation Strategy is probably a terrible choice, and that the Suppression Strategy has a massive short-term advantage.
But people have rightful concerns about this strategy:
How long will it actually last?
How expensive will it be?
Will there be a second peak as big as if we didn’t do anything?
Here, we’re going to look at what a true Suppression Strategy would look like. We can call it the Hammer and the Dance.
The Hammer
First, you act quickly and aggressively. For all the reasons we mentioned above, given the value of time, we want to quench this thing as soon as possible.
One of the most important questions is: How long will this last?
The fear that everybody has is that we will be locked inside our homes for months at a time, with the ensuing economic disaster and mental breakdowns. This idea was unfortunately entertained in the famous Imperial College paper:
Do you remember this chart? The light blue area that goes from end of March to end of August is the period that the paper recommends as the Hammer, the initial suppression that includes heavy social distancing.
If you’re a politician and you see that one option is to let hundreds of thousands or millions of people die with a mitigation strategy and the other is to stop the economy for five months before going through the same peak of cases and deaths, these don’t sound like compelling options.
But this doesn’t need to be so. This paper, driving policy today, has been brutally criticized for core flaws: They ignore contact tracing (at the core of policies in South Korea, China or Singapore among others) or travel restrictions (critical in China), ignore the impact of big crowds…
The time needed for the Hammer is weeks, not months.
This graph shows the new cases in the entire Hubei region (60 million people) every day since 1/23. Within 2 weeks, the country was starting to get back to work. Within ~5 weeks it was completely under control. And within 7 weeks the new diagnostics was just a trickle. Let’s remember this was the worst region in China.
Remember again that these are the orange bars. The grey bars, the true cases, had plummeted much earlier (see Chart 9).
The measures they took were pretty similar to the ones taken in Italy, Spain or France: isolations, quarantines, people had to stay at home unless there was an emergency or had to buy food, contact tracing, testing, more hospital beds, travel bans…
Details matter, however.
China’s measures were stronger. For example, people were limited to one person per household allowed to leave home every three days to buy food. Also, their enforcement was severe. It is likely that this severity stopped the epidemic faster.
In Italy, France and Spain, measures were not as drastic, and their implementation is not as tough. People still walk on the streets, many without masks. This is likely to result in a slower Hammer: more time to fully control the epidemic.
Some people interpret this as “Democracies will never be able to replicate this reduction in cases”. That’s wrong.
For several weeks, South Korea had the worst epidemic outside of China. Now, it’s largely under control. And they did it without asking people to stay home. They achieved it mostly with very aggressive testing,contact tracing, and enforced quarantines and isolations.
The following table gives a good sense of what measures different countries have followed, and how that has impacted them (this is a work-in-progress. Feedback welcome.)
This shows how countries who were prepared, with stronger epidemiological authority, education on hygiene and social distancing, and early detection and isolation, didn’t have to pay with heavier measures afterwards.
Conversely, countries like Italy, Spain or France weren’t doing these well, and had to then apply the Hammer with the hard measures at the bottom to catch up.
The lack of measures in the US and UK is in stark contrast, especially in the US. These countries are still not doing what allowed Singapore, South Korea or Taiwan to control the virus, despite their outbreaks growing exponentially. But it’s a matter of time. Either they have a massive epidemic, or they realize late their mistake, and have to overcompensate with a heavier Hammer. There is no escape from this.
But it’s doable. If an outbreak like South Korea’s can be controlled in weeks and without mandated social distancing, Western countries, which are already applying a heavy Hammer with strict social distancing measures, can definitely control the outbreak within weeks. It’s a matter of discipline, execution, and how much the population abides by the rules.
Once the Hammer is in place and the outbreak is controlled, the second phase begins: the Dance.
The Dance
If you hammer the coronavirus, within a few weeks you’ve controlled it and you’re in much better shape to address it. Now comes the longer-term effort to keep this virus contained until there’s a vaccine.
This is probably the single biggest, most important mistake people make when thinking about this stage: they think it will keep them home for months. This is not the case at all. In fact, it is likely that our lives will go back to close to normal.
The Dance in Successful Countries
How come South Korea, Singapore, Taiwan and Japan have had cases for a long time, in the case of South Korea thousands of them, and yet they’re not locked down home?
Coronavirus: South Korea seeing a ‘stabilising trend’
South Korea’s Foreign Minister, Kang Kyung-wha, says she thinks early testing has been the key to South Korea’s low…
In this video, the South Korea Foreign Minister explains how her country did it. It was pretty simple: efficient testing, efficient tracing, travel bans, efficient isolating and efficient quarantining.
This paper explains Singapore’s approach:
Interrupting transmission of COVID-19: lessons from containment efforts in Singapore
Highlight. Despite multiple importations resulting in local chains of transmission, Singapore has been able to control…
Want to guess their measures? The same ones as in South Korea. In their case, they complemented with economic help to those in quarantine and travel bans and delays.
Is it too late for these countries and others? No. By applying the Hammer, they’re getting a new chance, a new shot at doing this right.The more they wait, the heavier and longer the hammer, but it can control the epidemics.
But what if all these measures aren’t enough?
The Dance of R
I call the months-long period between the Hammer and a vaccine or effective treatment the Dance because it won’t be a period during which measures are always the same harsh ones. Some regions will see outbreaks again, others won’t for long periods of time. Depending on how cases evolve, we will need to tighten up social distancing measures or we will be able to release them. That is the dance of R: a dance of measures between getting our lives back on track and spreading the disease, one of economy vs. healthcare.
How does this dance work?
It all turns around the R. If you remember, it’s the transmission rate. Early on in a standard, unprepared country, it’s somewhere between 2 and 3: During the few weeks that somebody is infected, they infect between 2 and 3 other people on average.
If R is above 1, infections grow exponentially into an epidemic. If it’s below 1, they die down.
During the Hammer, the goal is to get R as close to zero, as fast as possible, to quench the epidemic. In Wuhan, it is calculated that R was initially 3.9, and after the lockdown and centralized quarantine, it went down to 0.32.
But once you move into the Dance, you don’t need to do that anymore. You just need your R to stay below 1: a lot of the social distancing measures have true, hard costs on people. They might lose their job, their business, their healthy habits…
You can remain below R=1 with a few simple measures.
This is an approximation of how different types of patients respond to the virus, as well as their contagiousness. Nobody knows the true shape of this curve, but we’ve gathered data from different papers to approximate how it looks like.
Every day after they contract the virus, people have some contagion potential. Together, all these days of contagion add up to 2.5 contagions on average.
It is believed that there are some contagions already happening during the “no symptoms” phase. After that, as symptoms grow, usually people go to the doctor, get diagnosed, and their contagiousness diminishes.
For example, early on you have the virus but no symptoms, so you behave as normal. When you speak with people, you spread the virus. When you touch your nose and then open door knob, the next people to open the door and touch their nose get infected.
The more the virus is growing inside you, the more infectious you are. Then, once you start having symptoms, you might slowly stop going to work, stay in bed, wear a mask, or start going to the doctor. The bigger the symptoms, the more you distance yourself socially, reducing the spread of the virus.
Once you’re hospitalized, even if you are very contagious you don’t tend to spread the virus as much since you’re isolated.
This is where you can see the massive impact of policies like those of Singapore or South Korea:
If people are massively tested, they can be identified even before they have symptoms. Quarantined, they can’t spread anything.
If people are trained to identify their symptoms earlier, they reduce the number of days in blue, and hence their overall contagiousness
If people are isolated as soon as they have symptoms, the contagions from the orange phase disappear.
If people are educated about personal distance, mask-wearing, washing hands or disinfecting spaces, they spread less virus throughout the entire period.
Only when all these fail do we need heavier social distancing measures.
The ROI of Social Distancing
If with all these measures we’re still way above R=1, we need to reduce the average number of people that each person meets.
There are some very cheap ways to do that, like banning events with more than a certain number of people (eg, 50, 500), or asking people to work from home when they can.
Other are much, much more expensive economically, socially and ethically, such as closing schools and universities, asking everybody to stay home, or closing businesses.
This chart is made up because it doesn’t exist today. Nobody has done enough research about this or put together all these measures in a way that can compare them.
It’s unfortunate, because it’s the single most important chart that politicians would need to make decisions. It illustrates what is really going through their minds.
During the Hammer period, politicians want to lower R as much as possible, through measures that remain tolerable for the population. In Hubei, they went all the way to 0.32. We might not need that: maybe just to 0.5 or 0.6.
But during the Dance of the R period, they want to hover as close to 1 as possible, while staying below it over the long term term. That prevents a new outbreak, while eliminating the most drastic measures.
What this means is that, whether leaders realize it or not, what they’re doing is:
List all the measures they can take to reduce R
Get a sense of the benefit of applying them: the reduction in R
Get a sense of their cost: the economic, social, and ethical cost.
Stack-rank the initiatives based on their cost-benefit
Pick the ones that give the biggest R reduction up till 1, for the lowest cost.
This is for illustrative purposes only. All data is made up. However, as far as we were able to tell, this data doesn’t exist today. It needs to. For example, the list from the CDC is a great start, but it misses things like education measures, triggers, quantifications of costs and benefits, measure details, economic / social countermeasures…
Initially, their confidence on these numbers will be low. But that‘s still how they are thinking—and should be thinking about it.
What they need to do is formalize the process: Understand that this is a numbers game in which we need to learn as fast as possible where we are on R, the impact of every measure on reducing R, and their social and economic costs.
Only then will they be able to make a rational decision on what measures they should take.
Conclusion: Buy Us Time
The coronavirus is still spreading nearly everywhere. 152 countries have cases. We are against the clock. But we don’t need to be: there’s a clear way we can be thinking about this.
Some countries, especially those that haven’t been hit heavily yet by the coronavirus, might be wondering: Is this going to happen to me? The answer is: It probably already has. You just haven’t noticed. When it really hits, your healthcare system will be in even worse shape than in wealthy countries where the healthcare systems are strong. Better safe than sorry, you should consider taking action now.
For the countries where the coronavirus is already here, the options are clear.
On one side, countries can go the mitigation route: create a massive epidemic, overwhelm the healthcare system, drive the death of millions of people, and release new mutations of this virus in the wild.
On the other, countries can fight. They can lock down for a few weeks to buy us time, create an educated action plan, and control this virus until we have a vaccine.
Governments around the world today, including some such as the US, the UK or Switzerland have so far chosen the mitigation path.
That means they’re giving up without a fight. They see other countries having successfully fought this, but they say: “We can’t do that!”
What if Churchill had said the same thing? “Nazis are already everywhere in Europe. We can’t fight them. Let’s just give up.” This is what many governments around the world are doing today. They’re not giving you a chance to fight this. You have to demand it.
Share the Word
Unfortunately, millions of lives are still at stake. Share this article—or any similar one—if you think it can change people’s opinion. Leaders need to understand this to avert a catastrophe. The moment to act is now.
The risks of the banking industry and how it is likely to perform in this environment are discussed.
The hardest-hit loan type will be different this time.
Over 95% of publicly traded banks are Community or Regional banks. These differ significantly from the larger money center banks.
The banking industry is in a stronger position than it was going into the last recession, but still quite vulnerable if the Covid-19 virus pandemic lasts past the summer.
Recent History
It has been Goldilocks times for banks in the last two years. Profits have been strong, loans have grown, interest margins have been solid, and problem loans have been low.
Two items of note have occurred in the past two years. The biggest item was the tax rate cut effective January 1, 2018 reducing the federal income tax rate from 35% to 21%. This had a major impact on the earnings of banks. Since then, earnings for most community banks have increased by 20-50%.
The second item is interest rates. There are two rates that matter most to banks: the daily rate and the 5-year treasury. The daily rate is used for many commercial loans and most commercial and consumer lines of credit. It has been based on the prime rate or LIBOR indexes, both of which are based on the Fed Funds rate. Recently, it was announced that LIBOR would be phased out and the Secured Overnight Financing Rate (SOFR) would be substituted. SOFR is a more market-based rate than LIBOR, which means it is less controlled by the banks. The 5-year treasury is the most common fixed rate used for commercial real estate loans and many commercial term loans. It also has some relevance to the fixed-rate residential mortgage rates and vehicle loans. The 5-year treasury was at historic lows in 2016, dipping below 1%. It then rose in 2017 and 2018, getting just over 3%. This benefitted most banks. In the last month, it plunged to 0.66% as of today. The Fed Funds rate acted similar to the longer-term fixed rates. It rose from 0-0.25% in 2016 to 2.25-2.50% in December 2018. In the month, it has been slashed all the way back to 0-0.25%.
On a longer-term view, the number of U.S. banks have been cut by 46% since 2000. There were 4,561 banks in the U.S. as of September 30, 2019, down from 8,458 on March 31, 2000. Almost no new banks have been granted charters since the last recession, until just the past year or so. However, the industry has gotten more competitive due to expansion of the remaining banks and competition from non-banks. Despite all the mergers, there are still too many banks. Most larger and even mid-sized markets have at least a dozen commercial lenders and often hundreds of residential lenders.
Community Banks Compared to Larger Banks
There are three classifications of banks in this country based on size and geography. Community banks are those with under $10 billion in assets. The next size up is Regional banks. They are over $10 billion in assets but operate regionally. The largest size is Money Center banks, which tend to be even larger and operate nationally and, often, internationally. There are only a handful of Money Center banks. Over 95% of publicly traded banks are Community or Regional, with most of those being Community banks.
Community banks differ from large banks in that they mostly stick to a local geography that they know well. They are almost never involved in the riskier activities used by big banks, such as credit cards, derivatives, foreign loans and services, asset trading, and investment products like managing mutual funds, private equity, and hedge funds. They also have virtually no exposure to the industries currently being most impacted by the Covid-19 pandemic. These industries include airlines, aerospace, oil & gas, mortgage REITs, and retail chains. The Regional banks are mostly like the Community banks, but often are involved in some of the Money Center bank activities.
Because community banks have less risky activities, they generally a higher P/E ratio than large banks. Part of this is also due to industry consolidation. The Community banks are more likely to be acquired than the larger banks, giving them a buyout premium. There has been significant consolidation in recent years and few new banks added. Most bank acquisitions are done with stock, because using cash depletes all important capital. Many smaller banks (under $1.5 billion) are having difficulty competing with the heavy regulatory burden and increasing IT costs. Their numbers are rapidly decreasing, as they have been selling out.
The Covid-19 Situation
The Covid-19 virus has spread rapidly in almost all areas where a lockdown has not been employed. Efforts to battle the virus only got serious in the past week. Most events and meetings of over 100 people have been cancelled. People are just starting to change their lifestyle. Test kits are only now becoming available. The point here is, because of the 1-2 week latency of the virus, it will take another week or two to see if current efforts will slow the spread of the virus. Meanwhile, it is doubling in the U.S. and many other areas about every two days. We know only one thing that has worked – that is a lockdown. The growth of the virus has almost completely stopped in China, the most impacted nation, due to lockdowns. It has slowed significantly in South Korea, the other nation that started lockdowns more than a week ago. We cannot afford to wait to see if our current efforts will work, since it is spreading too fast and the current level of prevention has not worked elsewhere yet. For purposes of this article, I am assuming a full or major lockdown in the U.S. within two weeks. I do not see another course of action until a proven vaccine in sufficient quantity is available. That is my base case. If we continue with the partial lockdown and many business closures, the pandemic will likely last longer with probable worse economic consequences.
Impact of a Lockdown Scenario
Based on what China has done, and the time the virus is in human bodies, a 30-45 day lockdown will probably be needed. The alternative is partial lockdowns and many business closures over a longer period. The following is a list what that will mean for banks.
1. Much less new lending – Lending is the lifeblood of banks. If more loans are paid off than made, loan balances decline. Loan balances will decline due to much less demand and banks’ own tighter lending standards. That leads to less interest income. For most banks, interest income is their largest source of revenues. The good news is many loans are for 5 years or longer, so they pay off relatively slowly.
2. Credit lines will be drawn out– A lockdown means most businesses doors will be closed or limited for 30-45 days. But they have expenses that don’t go away, like wages, rent, insurance, commitments and the like. The average small business does not keep that much cash around. That is also true to a slightly lesser degree for larger businesses. Most profitable businesses have a line of credit for daily operations and other temporary financing. A large number will be living off that line until business starts back up.
3. Lower interest rates – Rates have been slashed. All loan interest rates based on the prime rate, or LIBOR, will immediately drop 1.50% lower. That’s the bad news. The good news is deposit rates are also dropping, though more slowly. They also have less they can drop than 1.50%. The other good news is all those 5-year fixed-rate term loans stay where they are. The net effect should be a moderate to high compression of banks interest margin (interest income less interest cost). The amount will change from bank to bank. Those with more fixed-rate loans will fare better.
4. More bad loans – There are numerous businesses that cannot handle a 30-45 shutdown. Some may never reopen. The amount of uncollectible loans will increase significantly. How much again depends on how aggressive or conservative each bank’s lending standards are. There are crosswinds here. One major trend in commercial lending is a significant reduction in loan covenants banks use to protect themselves. This means they often have to wait until the borrower defaults before they can take action. That is offset somewhat by the fact that the banks around today all survived the last recession, which took out those that had poor lending practices. Bad loans are very expensive. They reduce interest income as payments stop. They increase legal fees and management costs.
5. More Real estate Owned – Loans that get foreclosed on result in the bank taking title to real estate. Not only does that real estate not pay interest, but the bank has to now pay real estate taxes, insurance, maintenance, management and repairs.
6. Wealth Management – The majority of banks over $1 billion in assets have a wealth management division that helps clients with their investment portfolios. The pricing is usually a percentage of the client’s portfolio. A big drop in stock prices results in a similar percentage drop in wealth management revenues.
Large Banks’ Additional Problems
In addition to the problems above, larger banks, especially Money Center banks, have other big risks.
As noted above, they lend to industries such as airlines, aerospace, oil & gas, mortgage REITs, and leveraged hedge funds, which the smaller banks usually don’t touch.
They have many derivatives on their books used to help customers hedge interest rates, currencies, and commodities. If hedged properly, that is usually not a problem. The risk now is counter-party risk. What if the company they are hedging with goes under?
Some larger banks have overseas exposure where economies may be even weaker.
Most credit cards in the U.S. are issued by the largest banks. Scale is imperative in this business. A large increase in unemployment will lead to many more charge-offs.
Large banks have less residential loans as a percentage of assets than smaller banks. Residential loans tend to be safer. People tend to stop paying other loans before defaulting on their residential loans. The last recession was an exception, but only because residential lending standards got way too loose. That is not the case this time.
Stock Prices
Below is a table showing the stock price movement of a sample of banks. They are the first 20 Community banks, 8 Regional banks and 5 Money Center banks listed alphabetically in Value Line. The S&P 500 peaked on February 19th. Current prices (as of March 18th) are compared to that date.
(1) Performance in the last recession rated from 1 (worst) to 5 (best).
(Source: Value Line, FDIC, Yahoo Finance and SEC)
As shown above, all bank stocks have dropped considerably, about 40% on average. Money Center and Regional Banks have dropped slightly more if you exclude the Bank of Hawaii outlier. Bank stocks are now mostly trading below book value. This means the stock market expects large losses, as they usually trade above book value. In the next section, I will go over the factors that cause some to trade weaker than others. But looking above, you can see that banks that performed poorly in the last recession are on average down more with a lower price-to-book than the others.
How Banks Will Fare in This Environment
The first question is how long the Covid-19 crisis will last. The first fallback is that viruses usually go away come April. That is still possible, but the recent spread in warmer weather areas makes that questionable. The second fallback is the current partial lockdowns and business closures. We won’t know how effective they are for another week or so. They will likely slow things but not stop it. The third fallback is a full or major nationwide lockdown for 30-45 days. That is my base case. The Chinese showed that does work, though it is painful. But a short, sharp pain is much less damaging economically than a less intense but drawn-out one.
Let’s start by drawing one major conclusion: we are in a recession. It’s just a matter of how fast we recover. Using the base case, here is what can be expected.
First of all, banks have an advantage over most businesses in this environment, as they don’t have to be open for most of their revenues to keep coming. Interest keeps getting accrued until the borrower demonstrates it can no longer pay.
The type of loans that will suffer most will be different this time. Usually, the hardest hit in a recession are non-owner occupied commercial real estate loans, especially land, development and construction loans. Those loans were the primary reason we lost thousands of banks in the 1980-1982 and 2007-2009 recessions. In 2007-2009, residential mortgages were also hard hit, primarily subprime loans. However, only the Money Center banks had a lot of subprime mortgages. The loan type at most risk this time is commercial loans, including owner-occupied real estate loans. Those are followed by consumer loans for credit cards and vehicles, and then the usual suspect, non-owner occupied commercial real estate.
Regarding commercial loans, as I mentioned earlier, many, if not most, businesses will be either closed or at much reduced revenues for the next 1-3 months at a minimum. They will have to rely on their balance sheet and lines of credit. There are several things businesses can do in the short term. After cash runs out, they can stretch their payables. They can draw on their lines. They can stop all new purchases of things like inventory and fixed assets. They can lay off employees to save on labor expense. They can stop drawing an owner’s salary. They can temporarily stop paying rent and taxes. They can sell or borrow against fixed assets. However, eventually, many will run out of ways to conserve cash and will stop paying on their loans. The Federal government and some more local governments will likely help some. There is already talk of loans or other aid to essential industries, such as airlines, aerospace and hotels.
Regarding consumer loans, many individuals who have lost their jobs have little in savings. They will continue to pay on their residential mortgages as long as they can, and will stop paying credit card and vehicle loans first. The unemployment rate will be totally dependent on how long businesses stay shut or reduced. I have seen estimates as high as 20% if this drags out.
Another item of concern to some is bank liquidity. Let me emphasize this: bank liquidity is not a problem. Banks these days have overwhelming sources of places they can go to for liquidity. The biggest sources are borrowing against their loans and investment securities with reverse repurchase agreements and Federal Home Loan Bank Advances. Another source is the Fed. The Fed has already opened up its lending window wide open to banks.
In the last recession, the Federal government invested directly into banks in what was heavily derided as a bailout. Several hundred billion dollars were directly infused into the healthier banks as preferred stock. This program was, in my opinion, the most successful government program in the last two decades. It stabilized the banking system, it was not dilutive, and it actually made money for the government. This is a definite possibility to repeat if necessary.
Another issue is the interest rate yield curve. The bigger the curve (long-term rates higher than short-term), the better. The yield curve has widened significantly in recent days, as shown below.
So, it will come down to two things. One, how long the virus lasts. Two, how risky each individual bank is. Let’s look at the latter next.
What to Look for in Individual Banks
While Community and Regional Banks share many of the same characteristics, there are many differences which will dictate how they trade in a recessionary environment. These are summarized below.
1. Level of risky assets – How much of their portfolio is commercial, owner-occupied commercial real estate and consumer? Commercial non-owner real estate becomes more of an issue the longer the virus drags on.
2. Track record – The stocks of banks in the list above, such as Citigroup (C), Atlantic Capital Bancshares (ACBI) and Ally Financial (ALLY) are getting hit harder, in large part due to their weak performance in the last recession.
3. Concentrations – Banks that have a large amount of loans to a riskier industry such as oil and gas, restaurants and hotels should have more bad loans.
4. Current level of delinquencies – We have had a strong economic expansion for years, and most banks have few bad loans. Those that have a higher-than-average level indicate they are likely to be harder hit due to looser underwriting standards.
5. Geography – Banks in places like Texas, Oklahoma, Louisiana and the Dakotas will suffer if oil and gas prices stay down a while, even if they have no direct loans to companies in that industry. The local economies will suffer more than other places. In the list above, Business First (BFST) of Louisiana and BancFirst (BANF) of Oklahoma are two of the stocks down most. Also, if we have lockdowns in only certain areas, those areas will likely have more bad loans.
6. Capital level – Most banks have a significantly higher level of capital to assets than they did going into the last recession. This gives them a bigger cushion to absorb losses. An average level for Community and Regional banks is around 10% capital to assets. Be careful with those significantly below that, though there are relatively few.
Loan Quality
The following two charts show what the market thinks about current credit quality. They show the yield investors want for junk and investment grade bonds. Banks loans are mixed through both categories.
Takeaway
I expect most banks to suffer, but to perform better in this recession than the last one for the following reasons, assuming the recession is relatively short-lived.
1. They have significantly more capital.
2. Many of the looser lenders were weeded out by last recession
3. There are no major bubbles to pop like the dot.com in 2000 and subprime mortgage in 2007.
If the virus pushes us into a longer recession, I still think they perform better, as long as businesses reopen and the recession after the virus is gone isn’t too sharp.
Community and Regional banks have less risks than the largest banks, but also tend to have looser underwriting or many higher-risk small businesses that have less liquidity. I recommend avoiding the largest banks for now.
As always, some banks will perform poorly due to loose underwriting. If you see a bank’s problem loans balloon rapidly in excess of peers, look to sell.
I currently have no position in any bank stocks. However, I feel it is likely that the 40% average drop in bank stocks is excessive. That view will change if the pandemic stays longer or results in a major recession after its gone. I would consider buying a few bank stocks or an ETF or basket of banks once we get a better picture on the containment of the Covid-19 virus.
