Russell Lamberti, founder of investment advisory firm ETM Macro Advisors and part of a concerned group of economists, actuaries and data specialists operating under the PANDA (Pandemic ~ Data and Analytics) banner, is very skeptical about the effects of an extended lockdown and questions whether the decision was based on sound reasoning and proof. In this tell tale discussion with Alec Hogg, the co-author of When Money Destroys Nations, a book about Zimbabwe’s hyperinflation crisis, says the burden of proof to shut down life as we know it completely, weighs extremely high on government. – Vanessa Marks
Russell Lamberti joins us now. Russell thanks for coming onto the show this week. Last week we had a couple of your colleagues from PANDA who were giving us some really good insights into why they believe that the lockdown has been a disaster for South Africa and terribly exaggerated. Nick Hudson and Peter Castledon said that there was merit in the first three weeks to get the health care system ready. But the subsequent five weeks, your numbers at PANDA show, that perhaps this has not been that smart a view. I’m now reading what RW Johnson has been saying, this is an unmitigated disaster and it’s something that generations of South Africans are going to pay for. [Market analyst] David Shapiro, a participant on Biznews Rational Radio show] says we mustn’t argue with you because you are far too clever. So we are listening very carefully if you can unpack the way you see things and the way the economy is going to be impacted.
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I would probably take a slightly harder line than Nick and Peter. I’ve been skeptical of the lockdown pretty much from day one. You know I think that the burden of proof to shut down life as we know it, to shut down society and business congregating and everything that is social life, to bring a complete stop to that. I think the burden of proof should be extremely high. And what we got was a couple of dodgy models from epidemiologists. We got some fear in the media to say nothing about the actual severity of the virus which can be debated, certainly could have been debated back then, it’s getting more clarity now. But the burden of proof I think was very high. So I think from day one this unleashed what is has become a very big disaster.
Now, if it had been capped at three weeks and we’d gone straight from that into a full open economy again with the usual risk mitigation measures that we recognise we need, we probably could have just about come out of this okay and escape the worst of it. Three weeks is a little bit like a December holiday and you could almost have justified that sort of situation and perhaps we could have forgone a real December holiday at the end of this year to maybe make up for that or something to that effect. But once we started pushing beyond the three weeks, once we pushed it to five, once we started creating tremendous uncertainty around different levels, level 5, level 4, when is it going to be? Now we’ve pushed on to what I think will be about nine weeks of pretty hard lockdown.
This has opened up a real can of worms in terms of hunger, poverty and destroyed businesses. Many small businesses are closing and many of them won’t come back. I mean we could go on and on. What we’ve done in the Panda initiative really is just to take this intuition which is to say hang on a minute, if you close down life and if you close down the economy, this is not a situation of lives versus money or something trite like that. This is saying that how we live, this is how we sustain ourselves and if you start destroying the productive capacity of society, if you start destroying businesses, if you start creating mass unemployment, you’re going to get second, third, fourth round effects that you didn’t quite anticipate at the start. And one of those is a certain group of people in particular that are right on the edge of that margin between just about sustaining themselves and extreme poverty. It’s not just those people that we’re concerned about of course, but it’s that group that can really shift into that extremely vulnerable place where we know health outcomes are worse, mortality goes up and so we were taking that intuition and trying to put some numbers, what we are we losing versus what are we gaining on this lockdown. We really don’t think it’s even a close call, it’s manifestly so much worse to have done what we’ve done.
If you have a look at the history and I guess there always is a way of understanding today if we look back into the past. But at one point in time it did seem like for instance the UK was going to continue almost like the Swedish effect where they would tell their people to have social distancing but they wouldn’t lock down the economy. Then you got the report that came out from Imperial College which said left to its own devices, this virus will kill 550,000 people in Britain and 2 million – 2.2 million in the United States. And that seemed to shock everybody. I guess the question now is why was that data not better analysed because it looks that at worst the UK and the US will have one tenth of those mortality.
Yes and of course the counter argument to that is that the people who support the imperial approach would say that well we’re now living in the counterfactual to that original scenario and we can’t know what life would have been like if we hadn’t locked down. Thankfully therefore we have countries that have not locked down that give us a sense on how wrong the imperial model was. If you look at the imperial model estimations for Sweden for example, way above where Sweden’s actual infection and death outcomes have been. Sweden of course has not done nothing but it’s generally relied on its people to take the necessary precautions and that’s actually been my argument from day one is that in such a complex problem as this you need to diffuse and to decentralise risk management decisions.
You can’t expect one person to make a risk management call for 60 million people over 300 million people or a billion people. This is not our real world risk management works. Everyone faces a radically different set of tradeoffs in their life. Some people don’t need to work they can stay at home, some people have to work, some people are young and some people are old. Some people live far from towns or close to towns and this is a hugely complex issue and I think all things considered – there is no perfect government, there is no perfect country – but all things considered I think we’re going to see the Swedish approach resoundingly affirmed by the evidence. Not only are they experiencing a pandemic or an epidemic pretty much in line with their European peers but the early indications are that their economy is doing way better than everyone else’s. And that’s not withstanding the fact of course that being an open economy like Sweden you’re going to suffer the results of everyone else’s shut down. It’s going to hit your imports and export sector and it’s going to affect you. But even outside of that Sweden is performing considerably better on the economic front and that just stands to reason they haven’t shut everything down, they haven’t forced production to stop, they haven’t closed restaurants haven’t done all these things.
So yes, I think it was predicated on a model and you know this is the important line of inquiry. Why did we let a single model with pretty speculative inputs that were untested and unproven determine such big policy choices. I don’t have a great answer on that but somewhere along the line there’s a real efficiency in the democratic and in the sort of decision making process. Somewhere along the line, fear and excessive reliance on very speculative modelling, and the processes that should hold that decision in check – that should disallow such a big decision to go through without as very big burden of proof – that’s all just fallen apart. And that’s why we’ve seen that not only in South Africa but we’ve seen it in the UK, we’ve seen it in parts of America, we’ve seen it in most countries in the world. That’s a real unveiling of a deficiency in a lot of modern democracy. If there are themes emerging from this, things that we learn, one of them is that our political systems need some serious rethinking.
Well perhaps that’ll be one of the upsides out of this. But the question for you from our earlier conversation with Piet Viljoen is – and given that you straddle both worlds on the number side and the investment world – Piet says that now he would put the chances of South Africa going on a Venezuela/Zimbabwean route at about 20%, which is substantially higher than he was thinking pre-Covid. And of course, when one extrapolates that you have to consider whatever investments you’re making into JSE-listed companies even though some of them look terribly cheap at the moment. If that is a factor to really start worrying about, how are you reading that?
It’s a sobering comment from Piet who I know well and respect. I think that he himself wouldn’t say that 20% is a hard and fast probability. I think the fact that anyone could be plausibly talking about 5%, 10% or 20% or even 1% chance of us going down that particular pathway, I think speaks to how bad things have become in South Africa. Those sorts of trajectories, the Zimbabwe/Venezuela trajectory, is really the worst case. It’s basically as bad as it gets apart from outright war, outright civil war and ultimate destruction because when you get on those sorts of routes everything becomes dysfunctional, markets become conventionally un-investable really, property rights breakdown. You can’t really even be that secure in your share certificates that you might hold in that particular environment. All bets are off in that sort of world.
So, to get into the nitty gritty of that idea I guess the thing has always been to what degree is South Africa susceptible to outright political corruption that causes your central bank first and foremost to be plundered, that causes your central bank essentially to be fully captured for very nefarious and narrow political ends and of course that the result is that the money gets printed and the currency gets debased. In that scenario the rand obviously would come under more pressure than we’ve ever known, even worse than that in the early mid-80s and even the early 2000s. We would see our currency under huge threat, we would see a large immigration wave from the country. There’s already been a large immigration wave and that would continue. In that scenario there’s a few things to say, one is from a big asset allocation perspective is that you actually want to be getting out of bonds and cash.
So there are certain equities in that world that can protect your wealth. Companies that have offshore exposure really just become the only sort of game in town. So if you go back to the Zimbabwe days it was Old Mutual as a big dual-listed stock and a similar thing would start to happen in the SA context. You would get a huge crowding into rand hedge stocks and you would have to sort of play it in that way and obviously then you would have to just try and offshore your assets as best as you could as early as you could. You’d have to try and avoid capital controls because that would be the inevitable result. Now where are we on that timeline. You know the Reserve Bank remains a well-run institution. All things considered as far as central banks go, I was a once quite a big critic but I’m quite admiring of Lesetja Kganyago, most of his team, they’ve held the line they’ve been relatively firm.
The Ramaphosa administration along with Mr Mboweni and finance ministry broadly respect and get that the central bank shouldn’t be used as a political tool. I think that there’s a huge faction in the ANC that would love to use the central bank as a political tool and a money printing machine. And of course now that we’ve come into this corona crisis, I guess the window of what’s considered acceptable monetary policy has started to shift. We’re getting an acceptance that liquidity provision and money printing and QE, as much as the SARB tries to deny the word quantitative easing they are basically buying bonds from the banks ,they’re first and foremost re-liquefying the banking system, shoring up bank balance sheets with printed money.
It’s not in massive scale yet. So far it’s been kind of fairly measured but it’s beginning. And once that process starts with what we learned from the Fed and the Bank of England the European Central Bank and all these guys it’s very hard to reverse that process once it begins. And emerging markets don’t have a good track record of managing such a process well and markets punish emerging markets a lot more than they do developed markets when they misbehave at a sort of money printing level, so these are certainly risks.
Piet is right, that risk has certainly increased. I guess analytically we’ve just got to keep really beady eyes on what’s going at the central bank how the politics of South Africa’s central bank and monetary policy is evolving.
Russell thanks for joining us today we appreciate your inputs and lots of words of caution there and room for thinking more deeply about it.
