Infectious Pests

Although SARS does not appear to be as contagious as the 1918 Spanish flu, its mortality rate is higher. The current pandemic shows that in the future, new infectious diseases will increasingly be a global problem. Modern air transportation can spread a disease all over the world within a very brief period of time.

In other words, as was the case with food-borne epidemics, antibiotic-resistant bacteria, insect-borne diseases such as the West Nile virus and AIDS, an outbreak anywhere in the world is soon a threat everywhere.

As we experienced with the Hong Kong bird flu in 1997, when more than a million chickens were slaughtered, the dense mingling of humans, wild and domestic birds, and livestock – principally pigs – in southern China provides a natural breeding ground for genetically new pandemic flu strains that will continue to threaten Hong Kong, due to its proximity to China and its porous border, which around 400,000 people cross each day. (The number of people crossing the border has recently fallen by 50%.)

The current SARS outbreak is a devastating blow to the already fragile Hong Kong economy, as well as to other Asian economies where tourism makes up around 10% of GDP. In Hong Kong, retail sales have tumbled by 50%, and hotel occupancy rates are running at around 20%! Restaurants and bars are suffering, airlines are reducing the number of flights into and out of Hong Kong as well as around Asia, and a very large number of conferences and conventions in the region have been cancelled.

Plagues: The Effect on the Asian Economy

In fact, the SARS scare (whether justified or not) has affected the Asian economies to a far greater degree than the war on Iraq, which hardly affected the apolitical Asian populations. That infectious diseases can influence economics and geopolitics is hardly news, since there have been a number of instances in the past when plagues shaped the course of history.

I am not suggesting that the current SARS scare will have a long-lasting and major impact on the global economy, but if this highly infectious disease spreads unchecked, or if another even more virulent infection emerges sometime in the future (as is likely, according to some experts), then we should at least be aware of the risks involved.

But I should like to point out, in this respect, that in one of its very rare moments of intellectual glory, the Far Eastern Economic Review (owned by Dow Jones & Co.) published, in June 2001, an article by David Lague entitled “A Deadly Flu Ready to Strike”. The article made the point that there are three prerequisites for a real viral pandemic in humans: a population without enough exposure to develop immunity; sufficient virulence to lead to deadly disease; and the ability to jump easily from person to person.

Referring to the 1997 bird flu, Lague explained – quoting Graeme Laver, a retired professor of virology and a pioneer in establishing that influenza strains infecting humans originate in animals – that the bird virus only scored two out of three, since it did not spread from person to person. The decision to kill all the chickens in Hong Kong may have averted a “global tragedy”, because if the virus had “learned to transmit between people, it would have killed millions of people”. Well, now the SARS bug has learned how to spread among humans and, therefore, serious future pandemics should certainly not be ruled out. According to Graeme Laver, “this is a dress rehearsal for a real pandemic. If it was a lethal flu, there would probably be hundreds of thousands of people dead by now.”

Plagues: The Black Death

An infectious disease that did have a lasting impact on the global economy was the Pest (also called the Oriental Plague or Black Death) caused by the above-mentioned Pasteurella pestis. It was primarily a disease of rodents, and epidemics in human beings originated through contact with infected rodents, most commonly rats or their fleas. The disease in man had three clinical forms: bubonic, characterized by swelling of the lymph nodes; pneumonic, in which the lungs are extensively involved; and septicemic, in which the bloodstream is so strongly invaded by Pasteurella pestis that death ensues before the bubonic or pneumatic forms have had time to appear.

It appears that the plague had already made its appearance at the time of the Philistines in the 11th century BC. It reappeared in the sixth and seventh centuries AD in Europe and then, with great virulence, in the 14th century (as the Black Death). The 14th century version most likely originated in Mongolia and traveled with the overland caravan movement across Asia, reaching its peak under the Mongol empires founded by Genghis Khan (1162-1227). At the peak of its power, the Mongol empire extended across China and almost all of Russia, as well as Asia, Iran and Iraq. A vast communications network, with messengers capable of traveling 100 miles per day and slower caravans and armies moving across the enormous expanse of the empire, knitted the empire together. But along with this movement of people and horses, it is believed that burrowing rodents, which had become carriers of the Pasteurella pestis, reached parts of China and eventually Kaffa in the Crimea. (The Mongols probably brought back infected rodents from their invasion of Yunnan and Burma in the 13th century.)

The Black Death, after having decimated a large portion of the population of China (in 1331, an epidemic in Hopei is believed to have killed 90% of the population) and Turkistan, made its first serious appearance at the Genoese port city of Kaffa in 1346, when it was besieged by the army of the Mongol leader, Kipchak khan Janibeg. The plague wrought havoc among his troops and compelled his withdrawal, but not before he had catapulted plague- infected corpses into the city in order to infect the population. (This is the first use of “biological weapons” in the history of warfare, that I am aware of.)

From Kaffa, the plague spread rapidly to the Mediterranean port cities on Genoese ships and then inland to the north of Europe. It moved at high speed from city to city (Sicily suffered in 1347; North Africa, Corsica, Sardinia, Italy, Spain and France in 1348; Switzerland, France, and southern Germany in 1348; and England in 1349) and was halted neither by prayers, and all sorts of alchemy and physics, nor by the mass burning of Jews, who were popularly believed to have spread the plague by poisoning the wells. Contemporary archives and detailed research carried out about mortality rates in England suggest that Europe’s population declined by approximately 30% between 1346 and the end of the 14th century.

Moreover, by 1500, the population of the whole area including Europe and North Africa was still markedly lower than it had been just before the Black Death, more than 150 years earlier. It was only in 1550, more than 200 years after the outbreak of the pest at Kaffa, that Europe’s population again reached pre-plague figures.

Plagues: Population Drops

In China, it is estimated that the population declined from 123 million prior to the Mongol invasion in 1200, to only 63 million at the end of the 14th century following the final expulsion of the Mongols from China and the establishment of the Ming Dynasty in 1368. It should be noted that, in general, cities with a dense population suffered far more than the countryside and dry areas in Europe. In addition, following the outbreak of the plague in 1346, numerous recurrences took place in 1361-1363, 1369-1371, 1374-1375, 1390 and 1400, and then with less frequency after the 15th century. (Venetian statistics show that in 1575-1577 and 1630-1631, a third of the city’s population died of plague.)

The Great Plague of London occurred in 1665 and was followed by the Great Fire of 1666, which accelerated the replacement of thatch roofs by tiles, thus reducing the habitats of rats and fleas and therefore, also, the incidence of the plague epidemics. (The last great plague in the western Mediterranean occurred in Marseille in 1720- 1721.)

One can only imagine the economic impact of a 30-40% decline in Europe’s population between 1346 and the early part of the 15th century, and of an even greater fall in some of Europe’s thriving commercial centers. A declining population must have put severe pressure on property prices, and considerably reduced trade and commerce. Moreover, grain prices collapsed by close to 70% between the start of the 14th century and the end of the 16th century, as demand for food diminished.

However, there were also beneficiaries of the plague. Due to a contracting population, laborers were in short supply, which meant that real wages rose. Port cities introduced the quarantine regulations whereby ships arriving from any port suspected of plague had to anchor for 40 days in a secluded place and without physical communication with the land. This practice was a heavy burden for trade and was not particularly effective, as rats and fleas could usually still make their way to shore.

Plagues: Consumer Confidence

In addition, “consumer confidence” must have suffered a serious blow in times of plague outbreaks, which would have further reduced consumption, traveling, and visits to crowded places such as inns and fairs. It isn’t hard to imagine what would happen if in today’s economic environment, a “mildly” infectious disease were to reduce the population of a city, a region, or, given the intense connectivity between the various world economies, the entire world by, say, 5% – let alone 30-40%! And while I certainly would not wish this to happen to humanity, it would show just how ineffective is Greenspan’s and Bernanke’s economic “wisdom”, which seems to rest on the belief that all economic ills can be cured by monetary policy measures!

The history of infectious diseases is all very interesting to you I’m sure…but what does it have to do with whether the stock market will rise or fall next week, or over the next 12 months? I believe that investors who focus strictly on economic and financial statistics may not be sufficiently informed to make sound judgments about the course of stocks, bonds, real estate and commodities in the years to come.

I was recently in transit at Hong Kong’s airport and was shocked to find it like a ghost town. I am not exaggerating! There were hardly any passengers in this usually hyperactive and crowded place. And it is no wonder: as of the time of this writing, 164 flights per day have been cancelled. Cathay Pacific, the Hong Kong-based airline, is presently carrying just one-third the passenger numbers of a year ago. Many hotels and restaurants are, for all practical purposes, empty. Unless the SARS pandemic is eliminated immediately, more economic hardship is likely to follow. Under normal conditions, one might be tempted to buy tourism-related shares in Hong Kong and the rest of Asia, since they have been sold off following the SARS outbreak.

However, if SARS continues to spread and leads to further travel restrictions, then lower prices are only a matter of time. I might add that, in a bizarre twist of events, China – where SARS originated – has banned its citizens from traveling to Singapore, Malaysia, and Thailand in retaliation for these countries’ accusations that SARS started in China!

For destinations like Thailand, Singapore, and Hong Kong, where tourism and business travel account for a large proportion of their economies, the effects of SARS or any future infectious disease can be catastrophic and may have a long-lasting impact on the valuation of real and financial assets. This would particularly be true for Hong Kong, as its economy is gradually integrated into the southern China region, which is, and will remain for a long time, the epicenter of infectious diseases.


Marc Faber,
For The Daily Reckoning
April 29, 2003

P.S. While I am tempted to use the present weakness in Asian hotel and airline companies as a buying opportunity because of their very favorable growth potential in the long term, I am equally very concerned that, the Middle Eastern situation aside, we are dealing here with a very negative development for the overall valuation of equities.


The sun is shining. Azaleas are in bloom. Stocks are, finally, rising. What more could you ask for?

Will you forgive us, dear reader, if we worry about the dollar once more?

Not that we have anything new to say about it. But what we’ve been saying just seems so important we can’t help but say it again; it makes us feel clever.

Everything we buy…and every asset we own…nearly our entire lifetimes of schlepping and saving…rest on the value of the dollar. If it is worth a lot…we are worth a lot. But if it suddenly turns out to be worth less than we think – we could be ruined.

And yet, hardly anyone bothers to think about it…so confident are we of the ‘can do’ mechanics at the Fed. If there is a breakdown, in the dollar or the economy, we can count on them to get out the ratchet set and fix the problem.

The Fed has proven that it can be an “inflation fighter”, boasted Fed governor J. Alfred Broadus Jr. two weeks ago. Now, it needs to show the world that it can be a “deflation fighter” too.

But the Fed’s record as an “inflation fighter” is more deserving of a court martial than a medal. Since the Fed’s founding in 1913, inflation has gained so much ground against the defending Fed that a man who kept his money in gold rather than dollar bills would have nearly 20 times as much.

What’s more, a careful look would show that the Fed did not so much fight inflation as cause it.

Yet we come not to blame, but merely to worry. The current account deficit – the difference, roughly, between the money the nation takes in and the money it pays out – leaves a “financing gap” approaching 6.5% to 7% of GDP. The Federal deficit alone is projected to reach into the trillions in the years ahead. The trade deficit is already nearly $2 billion per day. This outflow of dollars has left nearly $8 trillion of dollar assets in foreigners’ hands.

“The more U.S. assets are held by foreigners,” writes Marc Faber, “the more the U.S. becomes vulnerable to the whims of foreign investors, and not just in terms of the value of dollars, but also in terms of all asset markets, since foreigners hold approximately 30% of U.S. Treasuries (excluding U.S. Treasuries held by the Fed)…13% of U.S. equities, and 23% of corporate bonds.”

Here at the Paris headquarters of the Daily Reckoning, we have long lived among foreigners and have gotten to know their ways. They are decent people, for the most part, but they are no fools. One day…we wish we could say which one…they will get tired of holding so many dollars. Then, all of a sudden, we Americans will be a lot poorer.

“I would be concerned as a foreigner about holding very significant financial assets in the U.S.,” Faber continues. “Given the dependence of the U.S. on foreign capital lows, the imposition of foreign exchange controls at some future date would seem to be, in my opinion, quite a probable event.”

Over to you, Eric…


Eric Fry in the capital of the foreign-held asset: New York City…

– A spectacular spring day arrived in Manhattan yesterday, and the trading posts on the New York Stock Exchange sprouted buy orders like peach blossoms. The Dow Jones Industrial Average climbed 165 points to 8,482, with all 30 components heading higher, and the Nasdaq added nearly 2% to 1,462. Does the recent advance on Wall Street herald the springtime of a new bull market?

– Almost anything is possible, of course – this year’s winter in Manhattan lasted about 15 months – but we suspect that today’s buyers of Dow 8,482 will fare little better than the buyers of Dow 10,060 one year ago.

– No matter how balmy the conditions on Wall Street may appear, we at the Daily Reckoning still consider it a bad idea to pay 30 times earnings for stocks in a slow-growing economy. However, it easy to see why the bulls are so excited: the war is finally over. We are referring, of course, to the war between Wall Street’s research department and the Securities and Exchange Commission (flanked by New York Attorney General Elliot Spitzer).

– In an “historic” agreement yesterday with the SEC, Merrill Lynch, Credit Suisse First Boston, Citigroup’s Salomon Smith Barney and seven other Wall Street firms agreed to pony up $1.4 billion in fines as recompense for issuing fraudulent research reports. The 10 firms neither admitted nor denied wrongdoing, but paid the $1.4 billion anyway. We would observe that innocent parties – much less 10 innocent parties with gaggles of lawyers on their payrolls – rarely agree to pay $1.4 billion in fines…But let’s not jump to any conclusions.

– “I am profoundly saddened – and angry – about the conduct that’s alleged in our complaints,” said SEC Chairman William Donaldson. “There is absolutely no place for it in our markets and it cannot be tolerated.”

– We too are saddened. But we are also amused…As King Solomon once observed, “There is nothing new under the sun.” And certainly, there is nothing new on Wall Street…the rules may change a bit from year to year, but the game never changes. Yesterday’s settlement merely signals a rule change, which means that Wall Street will need to devise creative new ways to fleece its clients…Don’t underestimate Wall Street’s ingenuity.

– In order to continue playing the game, Wall Street firms understand that they must offer up sacrificial lambs from time to time. Enter Internet analysts Henry Blodget and Jack Grubman. By epitomizing bubble-era excess, these two über-analysts were made-to-order sacrificial lambs. As such, they have also come to personify post-bubble recrimination. Their former employers tried to distance themselves from their celebrity analysts, at the same time that individual investors sought retribution.

– Yesterday, the SEC announced that the two former analysts have agreed to pay $19 million in penalties and have accepted a lifetime ban from the securities industry. (Do I hear $20-million book deal with movie rights?)

– Interestingly, Mary Meeker, the star analyst of Morgan Stanley, escaped any charges or penalties in Monday’s settlement. Who says chivalry is dead?

– So now the financial markets are safe once again for widows and orphans, right? Not so fast. Reported earnings might be more honest now, but they are honestly meager. What’s more, the “era of honesty” on Wall Street is unlikely to last long…The capital markets are a phoenix of duplicity.


Bill Bonner, back in Paris…

*** What’s this…another American complaining about the French? But this time it’s not foreign policy, but farm policy, that’s the source of the irritation. Ingrid Newkirk, president of a group of animal lovers, doesn’t like the way the French make foie gras, says today’s Le Figaro newspaper.

The geese and ducks probably don’t like it very much either; enormous amounts of food are stuffed down their throats, using a funnel in order to enlarge their livers. The ducks never complain, but Ms. Newkirk has a big beef with the practice and has decided to give her own liver to the French, after her death, of course, in a form of symbolic protest. She’s also bequeathing other parts of her body…such as her ears to the Canadians, “so they’ll finally be able to hear the cries of animals caught in traps in their country…”

“We don’t know what she’s doing with her brain,” concludes the Figaro report, “but to tell you the truth, if we had the choice, we’d prefer it to the liver…we’d like to see how it works.”

*** We read in the International Herald Tribune that Donald Rumsfeld, speaking to troops in Iraq, compared the taking of Baghdad to the liberation of Paris in WWII.

What must WWII vets think, we chuckle to ourselves? They died by the thousands, fighting a determined, well-armed, disciplined enemy in order to free a country from an invading army. Now, Rumsfeld, at the head of the world’s most puissant army, invades a wretched, third-world hell hole and imagines he is Patton.

The Daily Reckoning