Now vs. 1918: Looking beyond the obvious - Ripples

In two recent posts (Part 1 and Part 2), I talked about ways in which the modern world differs from the world of 1918 (the time of the severe pandemic known as the "Spanish Flu"). While many people think we're better positioned to face a pandemic, I'm not sure they're correct.

For one thing, we lack enough "surge capacity" to respond to a pandemic-driven surge in the need for health care. (Hospital administrators are frank about it; their facilities would be overwhelmed.)

Secondly, in a pandemic, sickness is just part of the problem. Being sick or caring for the sick is the pandemic's direct impact. But any time that many people are that sick, there can be less apparent - but very important - indirect impacts, also. These are the domino effects, the ripples, the hiccups in the system, the "gotchas." To see them, you have to look farther outward or farther downstream. You have to Think It Through.

Stated differently, if you pull enough people out of their normal roles in daily life, it can have major consequences.

In the second part of this discussion, I talked about how modern supply chains could be vulnerable during a pandemic (due to a shortage of workers) and how that could disrupt the availability of materials, goods-in-process, and finished goods. Supply chains today are long and fine-tuned, depending on a just-in-time flow of materials. And they are often global.

Of particular note is the possible shortage of medicines and medical supplies - not just pandemic-related supplies, but all kinds of medicines and medical goods.

But the impacts could stretch even further. Read on.

Ripples: An economist's view

People who have convinced themselves we can't have a severe pandemic never think about "What if we did have a severe pandemic?" Unfortunately, their erroneous conclusion (in my opinion) makes them more vulnerable. These people never begin to consider the ramifications should a major pandemic actually occur.

Other people, however, do think about these ramifications.

One is Dr. Sherry Cooper, an economist who is an executive officer at BMO Financial Group and Global Economic Strategist for BMO subsidiary Harris Bank. In an October 2005 update [890 kb .pdf] to her firm's August 2005 report, "An Investor's Guide to Avian Flu," Dr. Cooper suggested some of the potential economic and financial ripples from a flu pandemic:

Tourism and hospitality industries would suffer an enormous blow - the same for airlines and most other transportation sectors. This means reduced demand for oil and gasoline. Large gatherings of people - including concerts, plays, movies, conferences and sporting events - would be cancelled. And the retail sector would be hit as most discretionary spending and trips to shopping centres would be dramatically curtailed. Other front-line casualties would include the leisure sector, gaming, racetracks and theme parks like Disney's. Life insurers and re-insurers could throw their actuarial tables out the window.

To the extent that a disproportionate share of 20-to-40 year olds would die, housing markets would weaken in response to excess supply, and all related building, real estate, decorating, and furnishing companies would suffer. Property values would fall, and some would be had later at bargain-basement prices.

Banks and other lenders would see a marked decline in mortgage and consumer lending. Commercial and corporate lending activity would likely slow at first as well. Loan losses could well increase sharply as households lose income earners and businesses in many sectors are hit badly. ... Investment banks, financial planners, mutual fund companies and other institutional, corporate or private-client money managers would be under enormous pressure to minimize risk and wait out the pandemic as best as possible.

Not all of the economic possibilities are bad. Dr. Cooper notes that the ripple effects might benefit some businesses:

Some sectors could benefit from a pandemic in terms of revenue growth and profitability, as well as changing patterns of consumer and business behaviour. Telecommunications and tech businesses that cater to telecommuting could see enhanced demand for their products and services. Large and small businesses would likely boost their virtual private networks (VPNs) and increase use of videoconferencing to conduct business. ... Cable-TV companies offering home connections via broadband could also benefit as service providers. Equipment suppliers ... may gain additional revenue from increased networking...

Ripples: Retailing & Restaurants

As Dr. Cooper noted, retailers whose products involve discretionary spending would be vulnerable during a pandemic. For instance, how many people will be wanting to buy non-basic clothing, shoes, jewelry, furniture, home decor, or books? Or cars and trucks? How many will want to eat at restaurants?

There are two reasons why such spending might decline. First, to avoid catching the flu, people might reduce the frequency and duration of their public outings. Second, household income may be suffering because (a) income-earners are sick, caring for sick family members, or tending to children who are home because schools and daycare programs are closed and (b) employers may be closed, reducing operations, or reducing staffing due to the pandemic's impact on their volume of business.

There's no way to know how large these shifts in consumption would be or what impact they would have. It would depend upon (a) the severity of the pandemic, (b) how businesses and consumers react to the pandemic conditions, and (c) how well the businesses have prepared for a pandemic.

On the positive side, we would have the advantage of living in the age of online e-commerce. Many purchases, including purchases of basic goods, could shift online. People could order through Internet sites and avoid in-store visits. Some grocers and other local businesses are making contingency plans about how to offer home delivery. (Might delivery companies see a surge in business? Absolutely. Another ripple. Will they have enough healthy staff and vehicles for the surge? I hope so. Another ripple.)

Also, at least in some product categories, there may be a surge in pent-up demand after the pandemic as people make deferred purchases. While this may offset some or all of the earlier lost business, there's a question of how well retailers will do in the interim, given possibly reduced cash flows.

Ripples: Avoiding the travel crowds

As I wrote in detail recently and as Dr. Cooper stated, the Travel and Tourism industry would be vulnerable because it involves crowds of people. Crowded travel hubs ... crowded carriers ... crowded lodging ... crowded destinations. Crowds might be a key factor in the spread of a transmissible infectious disease, of course.

Today, more of us travel. Compared to 25, 50, or 75 years ago, we travel more frequently, farther, and faster.

To illustrate, in 2005 U.S. airlines carried 745 million passengers on 11.0 million flights. That's more than two million passenger boardings on 30,000 flights PER DAY. Just in the United States.

Not only does travel involve crowds, it involves being away from home. People may very much not want to leave their home cities. Why? First, they want to be readily available to help should a family member become sick. Second, if they get sick themselves, they don't want to be halfway across the country away from home. Such psychological and emotional factors need to be included in pandemic planning scenarios.

Another possible constraint on travel: Some businesses may prefer that employees remain available at their local offices or plants to sustain core operations instead of being on the road.

I imagine that the more transmissible and/or virulent the pandemic, the more people would reduce their travel. Don't you agree?

Ripples: Globalized business

Consider these common characteristics of business today compared to 25, 50, or 75 years ago:

• Greater specialization
• More complex products
• Distributed labor
• Distributed sourcing of parts
• Foreign suppliers
• Foreign customers
• Just-in-time delivery and inventory control

These modern business practices help companies save money and/or be more competitive. In normal times, these practices may be very beneficial. In a pandemic, they may be an Achilles heel.

One special note: Many healthcare providers have adopted these same business models, for the same cost-saving reasons. With it, they get the same vulnerabilities.

For more details on the supply chain vulnerability, see my last post.

Ripples: Financial markets

Dr. Cooper mentioned that money managers would be under pressure to minimize risk during a pandemic. Having worked as a stockbroker for a major investment firm years ago, I've wondered how a pandemic would impact investments and financial markets.

Consider some of the differences in the markets today versus past decades. For example:

• Much higher percentage of individual investors in equities - via mutual funds, IRA accounts, 401(k) accounts, etc. In 1952, 6.5 million individuals in the United States - one for every 16 adults - owned common stock. In 2005, it was 91 million individuals or one for every 2.5 adults.
• Much greater trading volume. In the last half-century, trading volume has risen about 1,450-fold. At the end of 1953, the New York Stock Exchange daily volume was exceeding one million shares. For 2004, NYSE average daily volume was 1.46 billion shares.
• Derivative financial products have resulted in more complex investment positions and more speculation. To cite some examples, the Chicago Board of Trade (CBOT) began trading its first non-grain product, a futures contract for silver, in 1969. In 1973, the Chicago Board Options Exchange (CBOE) opened as the world's first stock options exchange. In 1979, the New York Stock Exchange (NYSE) expanded into futures trading by forming the New York Futures Exchange. From the 1970s to 1990s, these markets introduced contracts for interest rate futures, U.S. Treasury Bond futures, and Fed Fund futures, as well as equity options and options on broad-based stock indexes. (Those are just some examples and just from U.S. markets.)

How might investor psychology change? Would there be a "flight to safety" with institutional and individual investors moving out of more vulnerable or volatile stocks into blue chip stocks ... or even selling equities (stocks, stock mutual funds) in favor of U.S. Treasury bills & notes, cash, and hard assets (e.g., gold)?

How the markets react is more than just a question of how poultry- or healthcare-related stocks will fare. A flu pandemic won't just threaten the stocks of poultry producers such as Pilgrim's Pride, Tyson Foods, Gold Kist, and Sanderson Farms and poultry restaurants such as Yum! Brands' KFC restaurants. Any publicly traded company could be at risk of lower revenues and/or higher expenses if it experiences significant employee absenteeism, supply chain disruptions, or reduced customer demand because of the pandemic's effects. The effects might be worsened if the companies have not planned and prepared well for the pandemic. Furthermore, there might be the potential for uninsured losses and lawsuits of various sorts.

Also, some categories of business may suffer more than others. Travel & Tourism and Retailing, mentioned above, are examples of industries which may be particularly vulnerable. Publicly traded companies in these industries may suffer, accordingly.

When the dominoes start falling

When a new human-to-human strain of influenza emerges, within a few months (or weeks) there will be more dominoes falling worldwide than we can imagine. There may be many far-reaching secondary and tertiary impacts at both the personal and business levels. As part of our planning, we need to Think It Through and make preparations that will buffer us from adverse impacts as much as possible. That will help us and it will better enable us to help others.

This post is part of a series:

• You're right, it's not 1918. Is that good or bad?
• Now vs. 1918: Looking beyond the obvious
• Now vs. 1918: Looking beyond the obvious - Ripples
• Now vs. 1918: Looking beyond the obvious - Demographics

FOOTNOTE: Please note that I am not providing financial or investment advice. These are simply thoughts about possible impacts of a flu pandemic. In making financial decisions, you should rely on those expert sources and advisers you normally use - not on me.