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Pandemic Paths

The way forward is measured by the degree to which we will listen to scientists and consideration for our neighbors. As mitigation measures are reduced in stages, weighing the effect will occur. Benign data would suggest relaxing further rules. Unfavorable data will result in a return to the previous step. In essence, we will live a social experiment in real-time with thousands of lives in the balance.

For the United States, the outcome will emanate from the battle between strident individualism and collective conscience that is unresolved over centuries. History suggests that in a time of turmoil, Americans answer the call for the greater good. We are individuals in peace and a triumphant team when tested. Since the fate of millions hangs in the balance, we hope that this time is not different. E Pluribus Unum.

Racing Down. As States begin to restart their economies, the question arises whether it is too early? One way to answer the question is with the reproduction rate (“RO” or “R-Naught”), which measures how fast the virus reproduces. While not explicitly a time measure, framing it as the rate at which the virus doubles simplifies the exposition. The current rate is about 1.22, which translates into an approximate doubling time of 50 days (exhibit 1). This rate will still deliver over 15,000 new cases a day. The size of this number implies 105 deaths per day and should give people pause in their eagerness to open up the economy. This outcome, however, is not the only measure.

Exhibit 1. United States COVID19 Reproduction Rate

Source: Capital Risk calculations. Reproduction rate is a 7-day moving average.

This reproduction rate was the result of unrivaled action by the government to slow the virus. Whole sections of the economy closed after enacting social distancing measures. Unparalleled unemployment is virulently spreading through the economy. In economic terms, the devastation is extraordinary in its scope. This outcome, however, is not a material measure.

The critical question policymakers must ask is, how much more can we reduce the reproduction rate? Short of a vaccine or a complete shuttering the economy, not much. This conclusion is essential to understand. Absent completely closing the economy through home quarantine, this level of reproduction is an exceptional outcome. Thus, we’ve achieved a level that is probably as good as it gets until a vaccine arrives.

The implication for mortality is not as reassuring. If the disease were to continue at the current rate, then estimated lives lost by the election would exceed 660,000 (exhibit 2). That number is higher than the total of both world wars for the US and is an unquestionably tragic outcome. Unfortunately, the result may be unavoidable absent the miracle arrival and production of a vaccine. This outcome is our base-case going forward as the current social distancing measures are maintained in some form.

Exhibit 2. United States COVID19 Lives Lost Forecast

Source: Capital Risk calculations. Virus reproduction rate from first week of May.

NOTE: This estimate is based on the current reproduction rate. It uses a standard Susceptible-Infected-Recovered (SIR) model for virus spread. As with all models, it is only as good as the underlying assumptions. The model used compares outcomes on a relative basis and is not an absolute forecast.

Past as prelude. The spread of