Making a Killing in the Stock Market During a Crisis

Perhaps I am naïve and too idealistic, but I find it repugnant that people take advantage of a crisis to make money in the stock market.  If you decide to sell stocks before the crisis hits when the prices are high and then purchase them again at lower prices once the full impact of the crisis has been felt, then you are basically stealing from other people.

Recent news reports have publicized multi-million-dollar sales of stock before the fall of the stock market by very wealthy senators and representatives.  After these sales generated public outrage, these so-called leaders denied any specific advanced knowledge and made the excuse that their financial advisors made these stock sales independently.

I find it reprehensible that leaders of our country would allow their financial advisors to pursue profit at a time when our financial system and economy are clearly at great risk.  This is a highly unethical decision.  Any profits made from these sales are not due to companies doing well or generating profits, they are simply the result of the COVID-19 crisis and the broken nature of our financial markets.  The money these people make is money that was lost by others who were not as keenly aware of the coming chaos.

I know that the stock market is as much a gambling casino as an investment vehicle.  In normal times I would begrudgingly give the devil his due and acknowledge that one person’s mistake is another’s good fortune in many transactions and that the market cannot be designed to prevent that type of zero-sum win/loss.

But in a time of world crisis, when people will be losing jobs and income on a massive scale, it is the very height of greed and callousness to knowingly and actively benefit from others’ financial misfortune.

Time To Open Up the Wallets America!

The first order of business for the world is to contain COVID-19 to the greatest extent possible.  The second is to find a vaccine or significant treatment regimen that will curtail or eliminate the threat. The world must be united in these quests.

In parallel, we must be energetic and radically generous in our efforts to support those whose livelihoods and lives have been dramatically damaged by this pandemic.  It will not be enough to provide unemployment pay and loans.  By the time this is over, there will be widespread poverty, hunger, despair and chaos.

There are vast resources of funds that could be used to keep people safe and secure during the pandemic and rebuild the economy once it has ended.  Let’s start with the wealthy and even the well-to-do.  It is time for all of us to extend our hands and open our pocketbooks. 

But there are many institutional pots of gold that could be re-directed to resuscitate a desperate world.  Public and private universities have absurdly large endowments that could be used to stimulate the economy and lessen the suffering.  Private universities have over $339B in endowment funds and public universities have over $153B.  I know these endowments augment the universities’ programs, but there is a new set of priorities in this world and having bigger and better athletic centers at universities is way down on the list.

There are legions of private foundations that also have rich endowments and use the income to support their programs.  There are untold billions of dollars in these foundations (just the top 40 listed in Wikipedia total more than $300B).  Now is the time for these foundations to dig deep into their funds to keep this world from disintegrating.

Make no mistake.  This pandemic will not be over in a few weeks and may not be over in 6 months.  I am sure we cannot yet comprehend the damage it will wreak.  Human beings are resilient creatures and we will survive and eventually prosper again.  But it will require some new thinking in terms of the way we share resources.  It is time to open the wallet.

Preppers and Saints in the Time of the Coronavirus

It is difficult to find words for the disgust I feel for the prepper mentality that has proliferated in the wake of the coronavirus pandemic.  People are hoarding vital supplies, stocking up on guns and preparing for the apocalypse.  The prepper world is flourishing.

Meanwhile, millions of medical professionals are risking their lives to help those who have contracted the disease.  Millions more are donating time and resources to help those whose businesses or livelihoods have been destroyed as a consequence of the pandemic.

In times of crisis there have always been saints and villains.  Humanity is a strange mix of selfless nobility and craven self-interest.  When put to the test, each human being must decide.  Will I be a person who tries to assist others by some means, who is willing to risk and potentially sacrifice resources or health for the general good?  Or will I seek to shield myself and my family and retreat from society, hoarding whatever supplies and resources I can get my hands on, regardless of the impact on others?

We are currently facing a unique challenge that crosses national borders, racial and ethnic lines and even economic class.  How we respond to this challenge will determine whether the human race can survive in the coming years of potential pandemics and climate catastrophe. 

The costs in terms of life and commerce will be staggering no matter how we respond. But if we are optimistic and work together in good faith, we will make it through this period with a heightened sense of our common humanity. We may even discover that our civilization becomes more united and empathetic, and that we can make further progress on other daunting problems such as war, genocide, refugees, immigration and climate change.

There are many saints among us who have chosen the high road.  In this time, it is the doctors, nurses and other health professionals who are most worthy of our gratitude and respect.  We also are grateful for the people who risk infection in their jobs of  keeping essential services and resources available But all of us can contribute in some way, whether it is donating generously to worthy organizations, keeping our social distance, or helping out neighbors in need.

The preppers and the hoarders are the vermin of society.  They have lost their humanity and they have somehow convinced themselves that a solitary, end-of-world existence is worth their stockpiling of resources and effort that could otherwise have been put to good use in our common need.  Shame on them!

The Nature and Dilemmas of Pandemics

The current coronavirus pandemic has re-emphasized the complex nature of health decisions.  Medical science informs our decisions, but the science is not exact, or at least our current capabilities to model and understand these phenomena are not at a level where we can be completely confident in our analysis.

Some people are outraged or indignant about the precautions currently being implemented.  Part of this is political in nature, as all things seem to be lately in our society.  But part of it is basic ignorance of how small uncertainties and differences can play a huge role in the progression of a pandemic.

Many argue that we should treat this like a flu epidemic, since flu epidemics spread rapidly and kill tens of thousands of people each year.  They don’t understand why we should view this disease any differently.

However, there are several factors that can play a dramatic role in a pandemic, and the coronavirus appears to be just different enough from the flu to make these factors very significant.

The first is the basic reproduction number - Rₒ, which is an estimate of how many people a contagious person will infect.  The flu typically has an Rₒ of between 1.1 and 1.6.  COVID-19 appears to have a much higher number, around 2.2.

This is a huge difference!  After 20 cycles of transmission the flu, with an Rₒ of 1.4, will infect about 136 people.  When a virus has an Rₒ of 2.2, twenty cycles will infect 137,000 people!!  

The second major factor is the mortality rate.  The flu generally has a mortality rate of 0.1%, meaning that 1 person in a thousand who get sick will die from the flu.  COVID-19 appears to have a much higher mortality rate, anywhere from 1-2.5%.  This means that 1 to 2.5 people out of a hundred will die.  This is a very big difference.

There are other important factors – the incubation time and how long the person is contagious are examples.  All of these factors are estimated from data collected.  We have years and years of data from the flu and understand the threat quite well.  The exact opposite is true of COVID-19.  We are learning in real-time and having to make decisions based on limited data.

Another key aspect of managing the pandemic is the ability of healthcare services to treat people with the disease.  Hospitals and healthcare providers are not prepared to respond to huge surges in sickness.  They make heroic efforts, but they simply do not have the beds, the equipment (respirators, etc.), the qualified people, or the quantity of drugs necessary to deal with massive increases in infected patients.

We have seen what the combination of high Rₒ, high mortality rate, and limits on healthcare facilities can do in Wuhan, Italy and Iran.  The mortality rate in these places rose well above the expected mortality rate because a triage situation occurred and many patients who could have been saved were abandoned because of the overwhelming number of desperately ill people. Those examples make it clear what can happen when little is done to defend against the spread of the disease. 

The tricky thing is that there are really no half measures that one can employ to control contagion.  The usual recommendations of washing hands and covering your mouth when you cough are simply not enough to limit the spread of something with such a large Rₒ.  And the risk of creating a situation like those mentioned above is too high.  The only real solution until all of the cases are known and tracked is isolation and social distancing.

The sad fact is that these extreme measures, though certainly justified and necessary, will necessarily cause widespread hardship.  A world recession of unknown depth and duration will certainly occur.  I hope that it will bring out the better angels in our human nature and teach us to care for one another and this fragile earth.  Perhaps it will be the wake up call we need?

Economic Effects of the Coronavirus Pandemic

With much of the world taking dramatic measures (lockdowns, travel restrictions, social distancing etc.) to prevent or temper spread of the virus, there is no doubt that the economic impact will be significant.  Obvious victims will be the travel industry (air travel, hotels, cruise lines, tourism businesses, etc.), restaurants, bars, sports events, gyms, entertainment venues – pretty much any activity where people gather.

Many businesses will ask or insist that their employees work remotely.  But most businesses do not have that flexibility.  It is difficult to do a construction job remotely, or landscape work.  Most blue collar or service jobs will either continue to be done as before with whatever risk that entails, or the work will be suspended with the consequent layoffs and loss of income.

Initially, the worst damage will occur in the businesses mentioned in the first paragraph.  If the restrictions stay in place long, this will cause many of these businesses to at least temporarily lay off personnel.  Additionally, there will be many small business owners whose businesses have had their revenue dramatically curtailed.  All of this will have a negative feedback effect of causing less spending in general.  Once consumption rates start to fall, all businesses will feel the effects, as consumer spending is what drives the economy. 

It is difficult to predict how far all of this will go.  It will depend primarily on the length of time that extreme measures are in place.  However, what is clear is that the first negative effects will not be felt uniformly across the populace.  Those who have guaranteed salaries, and especially those who can continue to work remotely, will essentially be untouched initially (other than having their stock portfolios temporarily reduced!).  But people who work an hourly job or whose small business depends on the normal circulation of people, will be hit hard.

It would be wise for congress to target any aid packages to the people who are hit early and hardest, and not to institute a general stimulus like a payroll tax.  Unemployment pay, sick leave and outright tax reductions to those who are either laid off or those whose businesses lose money should be the first priority. 

Bailing out industries like the airlines, cruise lines, and other major industries with political clout should be done very carefully as they are in a position to recover better and more quickly than individuals or small businesses.  They will pass their woes onto their employees through layoffs with little hesitation, and their losses will typically only temporarily inconvenience their shareholders and lower their stock price.

The fair way to manage this crisis would be for those of us who are not impacted financially to share our good fortune with those who suffer significant effects.  Ideally, this would happen through generous, non-governmental transfer, however, there is no good way to accomplish this and it is unlikely to happen.  The next best way would be for the government to institute a higher tax on high incomes for a short duration and find a way to identify those who have legitimate claims (perhaps by comparing taxable income year over year or employment status) and make the funds available to them.

The Way It Should Have Been

I have been involved in computer software since 1975, when I took my first programming course junior year at Stanford University.  I was intimately involved with developing applications using data communications and networking for most of my career.

For many of the early years, the best software developers were a very eccentric group that saw software as a kind of art form.  They reveled in their counter-culture reputation and many of them disdained commercial influences. 

This was particularly true of the early Linux and Internet pioneers.  They saw the Internet as a shared resource that should be developed for the benefit of humankind.  They did not see it as something that would generate vast fortunes or megacompanies.  Many were associated with universities or labs, which also operated in a more altruistic manner in those days, unlike the modern versions that are mired in commercial and start-up relationships and are completely focused on making money.

The concept of open source software became popular as a way for these kindred spirits to develop code and allow it to be used by others without commercial gain.  There was an understanding that commercial software development would be undertaken for specific business purposes, but the idea was that the primary building blocks and infrastructure of the Internet and its progeny would be public property and free to all.

All good things fall apart, as they say.  Two things conspired to derail this trend.  The first was the Revenge of the Nerds deification of the computer programmer.  Suddenly it was cool, and more importantly, profitable, to be an engineer or a coder.  This brought in all the wrong kind of people to the industry and corrupted many of the formerly altruistic participants.

The second was the emergence of the massive venture capital infrastructure.  The money available for start-ups and entrepreneurs grew exponentially and tempted every clever developer or idea with a fistful of cash and the promise of a pot of gold at the end of the rainbow.

The Internet was first viewed as the ideal of an open society – information access and personal connection for all.  Programmers were proud to contribute their work to build up this incredible human resource without compensation.  But sadly, as the Internet evolved, the openness, idealism and public-spiritedness of its origins faded.  There was big money to be made. 

Open source search engines that allowed one to find anything became private companies addicted to ad revenue.  Social media that celebrated the connected nature of human society became similarly addicted. Both used the data they collected to manipulate users.

Imagine there was no google or facebook.  If search engines and social media were basic infrastructural pieces of a public service like highways and water supply, then we would not be facing the same level of privacy concerns and manipulation that threaten us today.  Imagine there was no Amazon, that all retailers would be equally accessible.  We would not have the increasing danger of an all-controlling single distributor of goods.

Both google and facebook make all their money from advertising.  This revenue has basically been robbed from traditional advertising channels such as printed media and television.  The Faustian bargain we have made with these megacompanies brings us many clever apps and gimmicks, but it also sells our souls, or more specifically, our data, in exchange for these tools. 

There is a balance to be struck between the free market and the best interests of a society.  Unfortunately, the debacle of revolutionary communism created a counter wave of uncritical idolization of capitalism that has created many modern monsters.

It is true that centralized planning and control can be horribly inefficient and paralyzing.  But allowing human society to develop without any plan or control also has its ills, as we are certainly experiencing today.

It is axiomatic in capitalism to assume that innovation will not occur without the incentive of profit and the freedom of an unplanned market.  But that is simply not true.  Innovation is a basic human trait.  The joy of creating something new is not dependent on money or even fame, though those rewards are certainly tempting.  The act of creation is reward enough for the best minds.

The early pioneers of the Internet, as well as a whole generation of engineers working on the US space program innovated joyfully with very little monetary motive.  It may be that innovation would not occur quite as rapidly under more planned circumstances, but perhaps that would actually be a benefit.  Rapid change often has disquieting side effects.

Adam Smith argued that all of society benefits from people pursuing their self-interest.  We have spent the last two hundred years equating that self-interest with wealth and power.  If we recognize that our self-interest can also be the joy of innovation and the feeling of contributing to a better world, then we might find a better path in this troubling time.