The Hammer and the Dance

By May 5, 2020News

Stock prices have moved in optimistic fashion of late, haven’t they. The MSCI World index peaked at 2,431 on 19 February before falling 34 percent to 1,602 on 23 March. A decline of 34 percent is big but it’s nothing like the 50 percent decline that came about during the 2007-08 Global Financial Crisis.

No matter, the MSCI World index now stands at 1,998 (04 May 2020), some 25 percent higher than the 23 March low. That fact alone is enough to make some investors nervous.

Scott Minerd, Chief Investment Officer at New York-based Guggenheim Investments, is convinced that stocks are ‘propped up by liquidity’. With the S&P 500 index up at 2,843 (04 May 2020) today, he is warning of a likely retreat to much lower levels. He is quoted by Bloomberg as saying, ‘it could be 1,500, 1,600, 1,200’.

Quite what ‘propped up by liquidity’ means, and why any of the numbers he picks might offer more realistic valuation levels is left out of the report. We do, though, get an insight into the reasons for his pessimism. He is said to be forecasting ‘rolling shutdowns for the next two years, preventing a full-scale return to work’.

As it happens, Scott Minerd and us would agree on quite a few things. COVID-19 isn’t going away any time soon and it seems quite reasonable to assume that it could have an impact on our societies for two years or more.

We’re going to see a great many lost lives and a great many lost livelihoods. And therein lies the puzzle that the stock markets are trying to unpick.

On one side of the equation are the number of COVID-19 deaths and injuries and on the other side are the deaths and injuries associated with sustained and/or rolling economic lockdowns. The damage wrought by COVID-19 is in sharp focus, but severe societal restrictions, and plummeting economic activity, are not without their consequence. The question is not one of ‘health versus wealth’, it is of health versus health.

The more we know about COVID-19, the more we increase our hospital capacity, the more we learn to contain the spread, the less damage it will do. At the same time, the longer the lockdowns persist, the more damage they will do. There is a trade-off here. In our judgment, severe restrictions on economic activity will not last for as long as two years, COVID-19 or no COVID-19.

Our understanding of the virus and the necessary policy response was helped along in leaps and bounds when we came across Tomas Pueyo’s articles published on That’s where we picked up ‘The Hammer and The Dance’ metaphor and from that moment, our research has been better focussed and we quickly developed a more useful framework for analysis.

Incidentally, be careful when you google ‘The Hammer and The Dance’. You’ll almost certainly hit upon the right article, but the temptation to click on an MC Hammer dance tutorial might manifest in a little lost time and an amazon order for a pair of ‘hammer pants’. Anyway…

We realise now that, prior to reading Tomas Pueyo’s musings, we had underestimated the immediate threat that COVID-19 posed. The reality was far worse than we imagined and doing nothing was not an option for policymakers. Given what we know, the lockdowns are a rational response.

The lockdown phase is represented by The Hammer. The Hammer is a drastic tool with two objectives:
1) buy time to increase capacity across the healthcare system; and
2) control the outbreak.

The outbreak is controlled when the spread rate is characterized by an ‘R0’ (‘R-nought’ or just R for short) of less than 1, meaning that, on average, those infected pass the infection on to less than one other person. We don’t know what the true R number is, or was, but in some parts of Europe it is estimated that it was as high as 3 or 4 in the early phase of the pandemic. This is why it accelerated through many countries in a matter of weeks.

In the last few days, at just over 3 weeks into the lockdown, Sir Patrick Vallance, the British Government’s Chief Scientific Officer, has speculated that R has now fallen to less than 1, perhaps to 0.6.

And so, it appears that The Hammer works. Though we don’t actually know if R would have come down all the same even with less stringent measures. Remember though, that The Hammer will not eliminate the threat from CoVID-19. The threat remains and there will still be daily incidents of new cases and, sadly, more deaths.

That is why The Dance is so important. And it is a dance that will go on long into the night, until a vaccine is found.

The main objective of The Dance is to maintain R at or below 1. With an effective testing regime, life can begin to look a little more ‘normal’. Still not actually normal, mind, but the more effective the testing regime, the better the contact tracing effort, the further into normality life can extend.

Social distancing in its milder form, including wearing masks, bans on large gatherings, travel restrictions, and ramped up hygiene will all still be necessary. But more businesses will be allowed to open.

Of course, there will be times when, and places where, R creeps above 1, necessitating a stricter policy response but those measures will be temporary and can be applied at a local, rather than national, level.

Just as there is evidence to support The Hammer phase as an effective policy tool. There is increasing evidence to support The Dance phase too. It is working in China, South Korea and Taiwan. In the next few weeks, before The Dance begins in the UK, we will have further evidence from Europe, particularly in Germany and some parts of Italy. We’ll also have further data from Sweden where The Hammer phase was, almost uniquely, skipped entirely.

Each day we learn something new about the virus, how to treat it and how to contain it.


To read the rest of our Portfolio Update Q2 2020, please click here.