Investment Office Logo

COVID-19: The Power of NIMBY

Whatever the Western world’s reaction may be, ‘NIMBY’ discrimination might be changing sides. Will the Chinese now scrutinize and fear the rest of the world?
Didier Darcet
Gavekal Intelligence Software, The Quant Corner, March 2020

Last week, the COVID-19 epidemic turned into a financial pandemic. The MSCI World equity market suffered its third worst loss ever in a week, right behind the 1987 and 2008 crashes. However, the number of new infections in the world had turned out to be some 40% fewer than during the previous week.

So, why did the market crash?

The Chinese coronavirus epidemic had already been developing for two months. It was fading nicely and in line with the statistical analysis that we published on the 10th—despite widespread skepticism concerning China’s coping abilities and willingness to report accurate contamination numbers. Skepticism about the spread of the virus simply proved to be unfounded.

However, global equity markets started collapsing between the 21st of February and the 24th, and since then the fall has only accelerated. Weekends are always dangerous periods for stressed markets. Two days without the ability to protect oneself: It’s more than enough time to think and worry.

Panic arose from the epidemic spreading outside of China, as evidenced by limited but increasing numbers of cases reported in South Korea, Italy and, to a lesser extent, the USA. South Korea has modern infrastructures, a world-class healthcare system, and a revenue per capita listed higher than Spain’s or Italy’s. There is little concern that the country can address the issue the way China did, if not better.

Italy and the USA are another story and were the likely trigger of the global markets’ collapse. The two countries belong to the peer group of Western developed economies. The financial pandemic revealed their internal fragility, which has been mounting for decades. Sure, any Western society can cope with health risks, but the gut reaction is unavoidable: ‘Not In My Backyard’. NIMBY!


Risk vs. Catastrophic Risk

There is a fundamental difference between risk and catastrophic risk.

Risk is opportunity. It’s the main driver of wealth in any stable ecosystem, simply because an ecosystem arbitrates risk-adjusted returns. Investors know the rule quite well: equities return more than bonds, and bonds more than bills. Some risktakers will do well, others will go bankrupt but, on average, risk is remunerated via a ‘risk premium’.

A psychological factor, however, weighs in at an individual level. An ‘average’ is not incarnated; it’s statistical, i.e. never guaranteed for the decision maker: “Even though I know the rule, am I ready to risk bankruptcy, or simply a discomfort, for a potentially better outcome?”

A society or a civilization can study risk and manage it in an intelligent way. However, if it turns its back entirely on risk, it will inevitably soft-land and vanish.

A catastrophic risk is of a different nature. It endangers the stability of the ecosystem itself. No one will be better off if it materializes, until the system finds a new equilibrium, a long way down the road.

Since our first publication on the coronavirus, one month ago, we have been tracking and analyzing the ‘catastrophic risk’. Where do we stand?

Read the full report