In 1349, when Black Death was ravaging Europe, many of the day’s best and brightest banded together in pursuit of a common cure. They had little choice. Black Death was rapidly spreading across the continent. Nothing could stop it.
Boils were lanced with precision. Blood was let with vigor. But there was no escape from the plague’s instant death. It was efficient. It was relentless. People would go to bed at night perfectly healthy; by morning, they’d wake up perfectly dead.
Then, at the exact moment of maximum death and despair, flagellants came to the rescue. Processions marched to and fro, seeking relief through forcefully whipping themselves in public displays of self-mutilation. According to the History Channel:
“Some upper-class men joined processions of flagellants that traveled from town to town and engaged in public displays of penance and punishment: They would beat themselves and one another with heavy leather straps studded with sharp pieces of metal while the townspeople looked on.
“For 33 1/2 days, the flagellants repeated this ritual three times a day. Then they would move on to the next town and begin the process over again.”
This may seem strange, weird, and, quite frankly, a bit nuts. But something miraculous happened. The Black Death epidemic soon exhausted itself. The flagellants saved Europe from the mid-14th century onslaught of Black Death.
Or did they?
To be clear, flagellants had no influence on the eventual relenting of Black Death. Remember, correlation does not imply causation. Post hoc ergo propter hoc – “after this, therefore because of this” – or simply the post hoc fallacy, recognizes that just because one event happened to follow another, doesn’t mean the initial event caused the later event to occur.
The example of flagellants stopping the plague is absurd. Still, we present it to underscore several points:
(1) Humans are often irrational, especially during times of crisis, and
(2) Mis-assigning causation is a common appeal to ignorance, especially when it comes to modern day economics analysis.
One popular tactic of central planners, for example, is to point to an economic statistic – like low unemployment – and self-adulate for maneuvering it down. Does pumping fake money into credit markets somehow create jobs? Does pumping fake money into credit markets somehow create wealth and prosperity?
Similarly, when the yield curve inverts and the economy stalls, central planners always scratch for a convenient culprit. Last fall, when the economy slipped, the trade war with China was to blame. Now it’s the Chinese coronavirus. Jeffrey P. Snider, at Alhambra Investments, offers the following insight:
“The mainstream needs to blame something and given how convenient the timing between ‘protectionism’ and the ‘unexpected’ appearance of this globally synchronized downturn should the latter flame back up again, having never really been extinguished, China easily provides the next scapegoat (wouldn’t it be ironic if the virus was found to have jumped from goats to humans?)”
At this point, it’s still too early to tell. China’s coronavirus, like past outbreaks of the bird flu or SARS, is probably nothing. But it’s possibly everything.
You see, every bubble eventually finds its pin. Perhaps coronavirus is the pin that the twin stock and bond market bubbles have elegantly eluded over the last decade. If not, it should be.
By this, coronavirus would not be the cause of a bear market and economic recession. It would merely mark a coincidental turning point. One that could have been marked by a whole host of potential triggers over the course of many years.
The experience of the last decade, however, is that the coronavirus is probably nothing. Certainly, if central banks are being called on to save us from melting glaciers, a determined central bank can paper over coronavirus, right?
Indeed, complacency still reigns. The question, at the moment, is not whether the stock market bubble is bursting. But, rather, should you buy the dip?
The repeat lessons of the past decade are that you should definitely buy the dip. The yield curve may be inverting for the first time since October. But if this is a signal the Fed will be pumping more fake money, maybe, once again, it’s bullish for the S&P 500.
In the meantime, one thing is crystal clear. China’s lunar new year holiday has been ruined. And Xi Jinping, China’s paramount leader, is mad. He also recently distilled the coronavirus challenge down to a bite sized nugget:
“The epidemic is a devil. We cannot let the devil hide.”
Should this escalate to full pandemic, Mr. Xi will be compelled to join a procession of flagellants in Beijing; he’ll flog himself silly to rid the world of the coronavirus.
This has worked before. It’ll work again.