Ebola and Markets

October 14, 2014

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Ebola containment measures such as screening at airports and quarantining close contacts of Ebola patients continue to roll out. Five major American airports, constituting 90 percent of the incoming foreign-sourced air traffic into the US, are now involved. More involvement is anticipated. The same will be true in most developed countries.

Airline passengers and staff face additional impediments in their travels. They will be less mobile, take more time and carry an additional cost. That is what happens when methods of screening or quarantine occur. The process not only disrupts the transit of people and goods, it also saddles both developing and mature economies with economic costs as they respond to a natural phenomenon.

With viruses, that response needs time. Governments need money to implement the barriers. They either have it in reserve or they borrow it. Any fiscal restraint is set aside if a virus threat is perceived to require spending.

We have seen initial estimates that the global Ebola response will reduce gross world product (global GDP) growth rates between 0.2 and 0.4 percent. In the directly affected countries, the drop in output will be much more and harsh. These types of numbers are guesstimates. As a practical matter, we do not yet know how much GDP growth rates will be diminished by Ebola response and quarantine. We do know that growth rates will be reduced.

Economic consequences also result when fear and concern change behavior. If consumers and businesses retrench by reducing flights on airplanes, changing vacation plans or altering business connections in a globally interdependent world, GDP growth rates will fall farther. We do not know how much, at what speed, or for how long.

We have references with events and circumstances surrounding Severe Acute Respiratory Syndrome (SARS) or Bird Flu (H5N1 and H1N1). What we do not know is whether the Ebola virus itself will mutate to become more readily transmissible.

Currently, Ebola is transmitted by contact with the blood or other body fluids of an infected person or by contact with contaminated surfaces. It has not mutated to become “sneeze transmissible,” a term coined by Jay Simkin of Stratecon. Screening for fever can identify the potentially infected and contagious, and the virus is believed to be containable with quarantine methods and barriers such as specialized protective clothing.

Viruses are constantly changing. The media energizes viewers to alter their behavior by showing death and pain as a result of viruses. We believe Ebola’s effects on the 2014-2015 economic and financial market landscape will include a slowing of growth, an additional layer of cost and other impediments that remain to be seen.

Ebola piles on the already growing list of geopolitical risks, stronger dollar adjustments and central bank policy changes. Most recently, we learned the specific revelation that ECB Emperor Draghi has no clothes. The eurozone has become a zero growth mess with zero interest rates and zero inflation. Is a Japan-like stretch of 0 and 0 and 0 over time now the eurozone’s destiny?

We are looking at panicky markets. Entry levels are starting to reveal themselves. We maintain a cash reserve but may be deploying it at any time.


The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is a commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at http://www.cumber.com/commentary_archive.aspx.

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