Friday, June 30, 2006

Lessons from the 1976 Non-pandemic

In 1976 a soldier at Fort Dix, N.J. died of what was diagnosed as a new and virulent strain of swine flu. This event led the CDC to recommend a $135 million campaign to immunize Americans. President Ford served as the poster child and got his shot on TV.

Almost forty million men, women, and children were immunized before public health athorities acknowledged that there was no pandemic. Very sadly, the swine flu vaccine caused at least 25 deaths. The vaccine was also linked to substantial increase in the incidence of Guillain-Barré syndrome, a serious (and otherwise rare) nerve disease.

The immunization campaign is widely regarded as one of the worse public health humiliations in US history, and its consequences can not be far from the mind of any public health official who now warns of the potential of a H5N1 pandemic.

Is it different this time?

Mark Twain once said, "History may not repeat itself, but it rhymes." There is something to be learned from the 1976 experience; somethings have already been learned. One lesson is that producers of vaccine have a dicy business. This is why the hundred-plus US flu vaccine producers in the US in 1976 have been driven down to just two --- an economic story that deserves its own page.

One of take-aways from the 1976 senario is simply a reminder that human beings are remarkably poor at dealing with uncertainty. As a species, we have been well served by assuming that "things happen for a reason," and evolution has left us without much natural talent for dealing with things that genuinely depend on chance.

Then and Now

Let's look at some of the changes that have taken place since 1976 to see how they might draw a distiction between pandemic predictions then and pandemic preditions now.
  • World-wide monitoring is vastly improved
  • Understanding of the mutation pathways of viruses is greatly extended
  • Information sharing between nations has improved; in particular, the mental models that now frame the pandemic risks are not primarily US models. They are genuinely international models
One can cerainly add to this list of factors; in fact, commentors are encouraged to do so! Even just these three might be enough to suggest that we are now much better prepared to make a reliable prediction. On the flipside, we are not more prepared to provide timely distribution of a vaccine, nor are we substantially more able to minimize the side effects of a vaccine.

Bottom Line?

The events of 1976 underscore the real consequences of reputaion risk, and public health officials every where are keenly aware of the risks of crying wolf. If the cry goes out now, we know that they know the risk that is being taken. To ignore the cry today would be to fail to learn what 1976 has to teach us.

Reference: Fluwiki has a useful page on the 1976 pandemic, including a insightful quote from one of my favorite public policy books, Neustadt and May, Thinking in Time: The Uses of History for Decision Makers (1988).

Thursday, June 29, 2006

Jimmy Rogers on the Pandemic Play

According to Bloomberg (June 29) Jim Rogers of Quantum Fund fame says that in case of a bird flu pandemic "Stocks will go down a lot but commodities will go down less. Commodities will be the first to go back up.''

Since he also says that oil can go to $35/barrel, this suggests a 50% decline in stocks, of which the travel stocks would be hit worse.

Rogers says he is long airlines and does not expect a pandemic. More precisely (and more staccatto), he says:"I don't expect bird flu, bird flu has been so hyped in the press.''

My take-aways from the Bloomberg piece:
  • We should keep in mind that the pandemic may never show.
  • If it shows and there is a quick 10% sell-off in stocks, don't feel like the market has "fully discounted" the pandemic. There is room for 40% more decline.
  • As I have commented elsewhere, at the beginning I expect to place fixed-income bets pegged to LT US Treasuries.
  • If Rogers is right, it will pay to keep an eye on commondities as a leading indicator of a recovery.
  • I am not sure that Rogers is right. Stocks can rally on the first rays of hope, but commodities probably need real demand to spark a rally.
  • Rogers did not speak specifically about the behavior of soft commondities. Presumably, the demand for chicken feed would lag for years.
Rogers appropriately pointed out that he is not a health expert, just a commodities expert.

"More than Half of U.S. Physicians Believe Bird Flu will Achieve Human Transmission within Four Years"

HDC Health has reported the results of a survey which they have advertised with a press release with the title used above. To be sure, this title is a little strange, since the WHO has acknowledged that there have already been instances of H2H transmission, but the actual survey question is more reasonable. Specifically they asked: "What do you think the likelihood is that Influenza A (H5N1)/avian influenza (bird flu) will gain the capacity to spread easily from person to person during the following time periods?" [24 months, 36 months, etc.]

Even the best surveys are difficult to interpret honestly, and it is close to impossible for a one-shot survey to have any genuine scientific value --- however interesting or important the questions might be. I hope that HDC continues with this survey over time. If repeated every six months (and if the sampling design is well done), this survey could teach some important lessons about the ways that the MD community forms a consensus about a public health issue.

Still, what we would like to know is the probability of a pandemic, and a survey such as this speaks to that problem only very indirectly, say as filtered through the famous "wisdom of crowds" effect. The best that we can expect from the HDC survey is just a reflection of

  • the fraction of MDs who have issue awareness of the pandemic possibility

  • and a measure of the extent to which the MD population puts its faith in the public health infrastructure.
Addendum: There is was also a February 2006 Harvard School of Public Health Survey : "While Concerned, Most Americans Do Not Expect Widespread Human Cases of Avian Flu in U.S. in the Next Year"

Wednesday, June 28, 2006

Trust for America's Health: Pandemic Flu and You

The Trust for America's Health has created what is now without a doubt the best general website for information about an H5N1 Pandemic. The site does a superb job with many tasks. It is the only site that provides a genuine media watch, complete with timelines and article counts.

Friday, June 23, 2006

Odds and Outs of a Bird Flu Pandemic

A little calibration --- and some Hold'em analogies --- may help to
illustrate your personal odds of dying in an 1918-level pandemic. To focus the discussion, let's take the US Government's scenario where there are two million pandemic deaths in the US. This is a horrifying number, but many people will find it less frightening once the two million is put in perspective.

First, two million is only about 2/3 of one percent of the population. Thus, if you are a random US resident, and if the government's worst case scenario unfolds, you have only about a probability p=0.0066 of dying in the pandemic. In the familiar terms of Hold'em poker, this is just a bit more than the probability of being dealt pocket Aces (1/221=0.00452) and a bit smaller than the probability of being dealt pocket Aces or Kings (2/221=0.00904).

Getting Additional Outs

Would you like to cut your own personal p down from p=0.0066 to say a fifth of that? That would make your personal p about 0.0013, or a bit more than a one-in-a-thousand shot. This seems to be a practical goal that is well worth the price of a little a planning.

The Non-controversial Basics

* First, everybody is better off if person-to-person contact is minimized.
* If you are quarantined then for heaven's sake, stay quarantined.

Schools should have a very low threshold for closing, and rational parents should have an even lower threshold for keeping their kids out of school. If you have toyed with the idea of home schooling, this is the time to get serious. Staying alive does depend on luck, but you tilt the odds in your favor by minimizing exposure ("social distancing") and by paying close attention to hygiene, especially washing your hands and disinfecting items that you bring into your house.

How about Masks?

The benefit of using a N95 mask is a little more speculative. In aggregate, they may not help much because very few people will take the trouble to train themselves to use the masks appropriately. The must be correctly fitted, and --- most important --- they must be removed in a way that avoids accidental post-use contamination.

Also, simple physics suggest that masks have a high hurdle to clear. A single virus and an N95 mask have about the same relationship as a golf ball and a tuna net. The single virus goes through easily. Where the masks help is in stopping those big wads of virus that have the analogous size of a softball --- or even a basketball. These wads can be stopped, and it is worthwhile to stop them.

There is even some empirical evidence that masks can help. In the SARS epidemic N95 masks made a useful difference. They reduced caregiver infection from 6% (per shift!) to 1% (per shift!). Here of course, the medical personnel were trained in the proper use of the masks.

Finally, there are two hidden benefits of the use of masks. First, the wearer will touch his face less often and thus cut down on one of the principal pathways of infection. Second, a mask wearer is likely to be accorded more than the usual "social distance," since --- at the beginning at least --- it is likely to be assumed that the wearer is ill.

Anti-Virals: The Major Source of Outs

The Roche anti-viral Tamiflu is now regarded as the best available tool for both the prevention of bird flu infection and the treatment of infected persons. When the history of the 21st Century flu pandemic is written, there will be many volumes that will treat the science, politics, and ethical storms that surround Tamiflu and other anti-virals. In subsequent posts I will explore several senarios of Tamiflu-economics.

Thursday, June 22, 2006

Personal Finance in an Influenza Pandemic

Everyone's first and most fervent wish is that they and their family survive. Only the survivors give a hoot about the economics. Still, all but an unlucky few will survive, and they will find a changed world.

Many small businesses that cannot sustain months of closure will go broke, but large businesses and institutions will not be too traumatically affected. Schools and universities will experience long closures, but eventually things will return to normal. The infrastructure elements (public utilities, highways, media) will be modestly degraded, but most will remain functional almost all of the time.

Hospitals are an exception. In the course of a 1918-level pandemic, hospitals without a well-designed pandemic plan will quickly become worse than useless. They will lose many employees, and they will lose a very great deal of money as resources are diverted from their normal activities. In the post-pandemic period there will be calls for government bail-outs, and some government assistance will eventually come through --- though predictably it will be too little and too late for many institutions.

The CBO estimates a worst-case hit to US GDP of 5%, which is just a little bit more than a typical recession. If this guess holds up, the large scale economic consequences of a pandemic are certainly not so terrible. Still, the CBO has been caught before walking around wearing rose-colored glasses. The World Bank statement on the economic impact of a pandemic does not pick a number.

Interest rates and inflation rates are almost certain to decline during the pandemic, though there will be some price gouging at the retail level. US Treasuries should do very well, but quality spreads are likely to widen and corporate bonds will do less well. Muni's are certainly a mixed bag, and some may submarine since cities will face many unplanned expenses and many already live close to the edge of solvency. On the equity side, my guess is that one can expect at least a 10% sell-off as soon as Wall Street tells itself "this is the real deal" --- an event that will probably lead the real deal by several months. My further guess is that the initial sell-off will be followed by a malaise that will take the market down another 15 to 25% before a bottom is reached. Thus, my worst case scenario is for about a 35% decline; so I am actually a bit more optimistic than some Wall Street analysts.

The CBO takes an optimistic view and says "It seems quite likely that the stock market would fall initially and then rebound later, as it did in Hong Kong during the SARS episode." Here it seems that CBO may not have taken fully into account the fortunate fact that SARS did not develop into a pandemic. I would also expect a full recovery, but not until the end of the pandemic is firmly part of the collective consciousness.

Even if death rates are comparable to those of 1918-1919, there is likely to be an almost full market recovery within two years of the initial sell-off. Curiously enough, the US market did not do badly in 1918; it went up 23% from August 1918 to August 1919. To be sure, there were confounding effects due to the end of WWI, and in 1918 there was nothing like the information flow that we have today.

The lesser pandemics of 1957 and 1968 failed to show any clear-cut market impact and the relevance of the SARS scare is ambiguous. Still, clumps of sell-side research that now circulate the planet convince me that the case has been made for a pretty big sell-off the minute that efficient H2H transmission is strongly suspected. Wall Street will probably ring its bell a day or two before WHO makes it official that we are at pandemic level four.

What Should You Do Economically --- While Staying Alive?

If you are a genuine long-term investor, it may be rational for you decide right now to do nothing. I am sure this will be the choice of many of my wisest friends. Under the CBO model, this would not be much different than staying full invested during a recession. Prediction of a pandemic does seem a little easier to me than prediction of a recession, but this may just be hubris.

Still, once a pandemic begins, it will unfold in a sequence of almost reasonably well-defined steps, so our investment task is reduced to guessing right about how the market will react to those steps. Personally, don't plan to spend too much time hunting for single issue home runs on either the long or the short side.

Nevertheless, the scenarios that I have suggested do make the case for acting early with a staged reduction of equity exposure. There is also a case for holding US Treasuries over corporate bonds, municipal bonds, or TIPS. Also, let's not forget that --- even more than a recession --- a pandemic is of finite duration. Once the market is off 15%-20% there is no reason not to start moving back to your previously preferred bond/equity mix.

Resources and References

World Bank Statement: Economic Impact of Avian Flu
Congressional Budget Office Report (May 22, 2006)
Congressional Budget Office Report (December 8, 2005)
"Bird Flu Fears Ripple through Market" Business Week (5/23/06)
Laurie Garrett at the Council on Foreign Relations
Nesbitt-Burns (Canadian Brokerage) Research Report
Becker-Posner Blog (Tsunami Related, but relevant)
142 Million Lives (CNN Report)

Sunday, June 18, 2006

An Agenda: Avian Influenza Economics

Essentially all public health officials agree that an avian flu pandemic is just over the horizon. Governments around the world are bracing for a very serious event, one on the order of the 1918 pandemic that killed at least 40 million and perhaps as many as 120 million people.

Such a pandemic would be the defining event for a generation, yet it would be strangely different from past defining events:
  • First, the stages of this pandemic --- unlike wars or other human disaster --- are reasonably amenable to being thought through well in advance of the events themselves.
  • Second, although there will be innumerable surprises, we know that the event will be of limited duration.
  • Third, with high probability (and with perhaps a few small exceptions), the permanent changes will be personal and local --- not geo-political.
The public health consensus is that we face a "when, not an if" situation, so we also face a strange kind of uncertainty --- one for which no one has much practice and one for which many people have little patience. We face a huge, uncontrolled, non-laboratory experiment for decision making. In aggregate, humanity is not likely to perform well in this experiment, either in its preparation or its eventual confrontation with the pandemic.

What you can expect to find here is a critical commentary on the events that lead us toward, through, and past the anticipated avian flu pandemic. The issues that you can expect to see discussed here include:
  • The economics and the ethics of antiviral (Tamiflu, Relenza) stockpiling by governments, NGOs, business enterprises, and individuals.
  • The responses of financial markets to the present pandemic threat --- including contrasts with past pandemics and pandemic threats (SARS).
  • The responses of pharmaceutical firms to the approaching pandemic, including changes in patent policy such as Roche's non-statement statement that "Tamiflu is not protected by patent in Indonesia."
This blog will also explore the responsible actions that can be taken by individuals and families to protect their physical as well as their financial health.