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The Zimbabwe Event

Summary:
Covid funeral in HarareOver the past two weeks, three senior Cabinet officials in Zimbabwe (including the Foreign Minister and the Infrastructure Minister) have died from Covid. Not gotten sick. Died. More broadly, reported Covid cases and deaths have exploded in this country of 15 million just in the month of January. The unreported numbers are certainly much higher, as about 90% of Zimbabwe’s population works outside of the formal economy, and the majority of Zimbabweans have little to no access to the healthcare facilities that report these official case and death numbers. through Jan. 21 (source: worldometers.info) through Jan. 21 (source: worldometers.info) The societal unraveling that is taking place in Zimbabwe – a desperately poor country where per capita GDP

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The Zimbabwe Event
Covid funeral in Harare

Over the past two weeks, three senior Cabinet officials in Zimbabwe (including the Foreign Minister and the Infrastructure Minister) have died from Covid. Not gotten sick. Died. More broadly, reported Covid cases and deaths have exploded in this country of 15 million just in the month of January. The unreported numbers are certainly much higher, as about 90% of Zimbabwe’s population works outside of the formal economy, and the majority of Zimbabweans have little to no access to the healthcare facilities that report these official case and death numbers.

The Zimbabwe Event
through Jan. 21 (source: worldometers.info)
The Zimbabwe Event
through Jan. 21 (source: worldometers.info)

The societal unraveling that is taking place in Zimbabwe – a desperately poor country where per capita GDP is less than $1,500 and declining – is staggering.

The Zimbabwe Event

This is the ‘Zimbabwe Event’, and I believe it has significant real-world and market-world consequences.

Like the ‘Ireland Event’ I’ve been writing about recently, what is happening in Zimbabwe (and every country in Southern Africa) is driven by a combination of relaxed social mitigation policies AND the introduction of a more infectious SARS-CoV-2 virus variant.

What is different is that Zimbabwe is a “weak state”, not a strong, stable state like Ireland.

What is different is that Zimbabwe is being hit by the South African-variant (501.V2), not the UK-variant virus (B117). 


The “Weak State” Difference

The stress of the Covid pandemic is enormous in ALL countries, and it is stress at EVERY stratum of society. The poor are dying. The middle class is dying and getting poorer. The elite are not dying quite as much, but they’re not getting richer and the difference in outcomes between some elites and other elites is enormous.

This broad societal stress results in popular discontent and elite conflict in every country on Earth.

Rich country or poor country, weak state or strong state, big nation or small nation … doesn’t matter. ALL nations are experiencing much higher levels of popular discontent and elite conflict today, which means that ALL governments are experiencing much higher pressure for regime change and leadership transitions.

In a strong state – meaning a nation that has the institutions, traditions, narrative legitimacy and state-supporting common knowledge to accommodate a peaceful leadership transition even under times of intense stress – you can survive a Covid Event without violent regime change.

In a weak state – meaning a nation that does NOT have the institutions, traditions, narrative legitimacy and state-supporting common knowledge to accommodate a peaceful leadership transition under times of intense stress – you cannot.

Weak states do not have an effective political steam valve for popular discontent and elite conflict, resulting in war and violent regime change when a Covid Event hits.

The United States is a strong state. It is, arguably, the strongest state in the world, with an institutional legitimacy and broad-based popular loyalty to those core institutions that has few peers. The United States has many political steam valves for the expression of popular discontent and elite conflict.

If the events of January 6th and the storming of the Capitol can happen in the United States, can you imagine what’s possible in Harare? In Tehran? In Moscow?

In a desperately poor country like Zimbabwe – and there are a lot of Zimbabwes in the world – the violence of popular discontent and elite conflict is obvious enough. When the core functions of a domestic government effectively collapse, civilian life in these circumstances quickly becomes, as Hobbes would say, nasty, brutish and short. The outcome of these circumstances is ALWAYS war. First a war of all against all, then a war of organized factions, then (often) a war of nations. Some of these wars in the Zimbabwes of the world will be entirely internal to existing borders. Some of these wars will cross those borders. Some of these wars will include major powers. 

I think 2021 will be a Year of Civil War in weak states that are desperately poor.

The market couldn’t care less about that, of course, whatever the human enormity of this violence might be.

But the dynamics I’m describing are not only true for an insanely poor weak state like Zimbabwe, but are also true for a relatively wealthy weak state like South Africa. Or Iran. Or Russia.

If you don’t see that the Navalny protests and the growing popular discontent with Putin and his billion dollar palace and all that is both made possible and accelerated by the enormous stress that Covid has placed on the Russian economy and public health … well, I think you’re missing the larger picture here. By the same token, I also think it’s clear that there is real and significant elite conflict behind the protests you see on TV, similarly stemming from that stress on the Russian economy. Clausewitz famously said that war is the continuation of politics by other means. In weak states, though, the reverse is also true: politics is the continuation of war by other means. Right now, Russia is a political war of all against all. Can Putin survive this political war? Sure. But if he does, it won’t be pretty. My bet is that he “retires for health reasons”.

I could absolutely see the same thing happening with Khamenei in Iran. Or MBS in Saudi Arabia.

I think 2021 will be a Year of Unexpected Regime Change in weak states that are relatively wealthy.

The market will care about this a great deal.


The S. African-Variant (501.V2) Difference

My notes about the Ireland Event focused on two questions:

1) how likely is a rolling series of B117-driven Ireland Events in the United States? (very, in my opinion)

2) where are we in the timeline for the first of these US-based Ireland Events? (2 to 3 weeks from today, in my opinion)

There was a third question embedded in all this, of course, which is what the market response might be to an Ireland Event here in the United States. Again imo, I don’t see this as a similar risk as last March. I really don’t see this as an epic major market smackdown, provided that the Fed and the White House say all the right things about unlimited liquidity support for S&P 500 companies … which they will. But I DO see this as a sharp punch in the nose to all of the dominant investment themes and narratives today: “dollar debasement”, “reflation”, “number go up” (Bitcoin), “commodity supercycle”, “cyclical recovery”, “earnings recovery”, “pent-up consumer spending”, etc. etc.

Is it just one good punch to all risk assets before we return to our regularly scheduled market entertainment of looking through previously unthinkable numbers of deaths and cases to some happy day of fully vaccinated business as usual?

Probably. But more and more I’m thinking it’s a very solid punch. More and more I’m thinking that this is a tradable punch. I say this for four reasons:

1) There is a sharp difference in general media coverage of the risk of viral variant spread versus financial media coverage of the risk of viral variant spread. 

While there’s an almost willful ignoring of the virus variants in major financial media, this is not the case with major non-financial media, where coverage of the news and risks of viral variant spread shows both “coherence” and “strength”, to use our narrative structure terms. Notably, however, even in non-financial media, the sentiment associated with articles about viral variant spread is oddly … positive. Like it’s really not a big deal and with Team Biden at the helm we got this covered! Yay, Team Biden! I think this is a classic example of narrative complacency, particularly in financial media, where all of the narrative risks right now are to the downside.

2) There are now four independent medical studies showing that the B117 variant is both more infectious AND more lethal than the baseline virus, versus zero medical studies showing only the same lethality (you can download a PDF copy of the most recent NERVTAG paper here). 

While the mathematical truth is that increased lethality is not nearly as “dangerous” from a public health perspective as increased infectiousness, from a popular perspective just the reverse is true. Stories of increased lethality carry a lot more narrative punch than stories of increased infectiousness. When there’s a confirmation of the lethality data (and I think it’s a when, not an if), that’s a hard hit to the “variants aren’t a big deal” narrative.

3) We now have multiple examples of a B117-driven Ireland Event, not just in Ireland and the UK, but also now in Portugal, Spain and Israel, and coming soon to the rest of continental Europe. 

The ‘Israel Event’ is particularly chastening, as the explosion in Covid cases occurred despite the most advanced vaccination program in the world, with close to 40% of the population vaccinated even as the Event occurred. As I wrote last week, one of the major consequences of a more infectious viral strain is that the percentage of the population that must be vaccinated before herd immunity brings down the R-number is significantly higher than with a less infectious viral strain, so that even 40% is only a modest help in limiting new infections. Also, and this is even more problematic news, Israel reports that a single dose of the vaccines that originally contemplated a two-dose regimen is notably less effective than was suggested in clinical trials. Whether this reduced efficacy for one dose of a two-dose vaccine is because of something particular to the B117 variant is unknown. Either way, that gets us to the last and more important point.

4) The potential for reduced vaccine efficacy is at the heart of why I think the 501.V2 variant is so important, both in real-world and in market-world. 

On Monday, we got the first hard evidence on vaccine efficacy versus 501.V2 (you can read the full Moderna press release here), largely duplicating the findings of South African studies earlier this month of antibody protection from prior baseline Covid infections. These are in vitro tests (lab tests) on the sera (blood) of vaccinated (Moderna analysis) or previously Covid-infected (S. African analysis) patients to measure how much “neutralizing” the antibodies in this vaccinated or previously Covid-infected sera gives you against the new virus variant. There will always be some degradation in neutralizing efficacy, but it’s a matter of degree as for whether you can keep going with the existing vaccine or whether you need a booster shot or whether you need to develop a new vaccine or what. The results from both studies, showing a “six-fold reduction in neutralizing titers” (vaccine protection) and an “eight-fold reduction in neutralizing titers” (prior Covid-infection protection) are on the okay side of “meh” but are still pretty “meh”. These are “yes, but” results.

YES, the current Moderna vaccine appears to be technically effective against 501.V2, meaning that it should provide a greater than 50% chance of protection against serious illness from contracting Covid. My interpretation of a “six-fold reduction in neutralizing titers” is that it’s roughly as effective as last year’s flu vaccine would be for this year’s flu (happy to be corrected on this by anyone who knows better). That’s not nothing! It’s a lot, in fact. BUT it’s a far cry from the efficacy we’ve seen in clinical trials against the non-variant virus, which is really outstanding.

In market-world, I think it is impossible to overstate the destabilizing impact of a Covid variant that is vaccine-resistant.

And to be clear, 501.V2 is probably not that variant. If it were, then I’d be worried about a lot more than just a transitory punch to the market’s nose. Also to be clear, I don’t think 501.V2 in the United States is even in the case, case, case phase of the nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! cycle of exponential virus spread. B117 is the immediate threat here, not 501.V2.

But what we DO have with 501.V2 is the start of a vaccine-resistant Covid variant narrative.

I hope that’s all it ever is … the start of a vaccine-resistance story that never develops into a vaccine-resistance reality! But for market-world, the mere existence of a narrative like this, even in an embryonic state, is enough to drive tradeable market events.

Put this together with recent developments with B117 … put the imminent impact of a US-based Ireland Event together with the long-term and geopolitical impact of Zimbabwe Events … and yeah, I think you’ve got a tradeable punch coming to markets.


About Ben Hunt
Ben Hunt
He is the chief investment strategist at Salient, a $14 billion asset manager based in Houston and San Francisco, and the author of Epsilon Theory, a newsletter and website that examines markets through the lenses of game theory and history. Over 100,000 professional investors and allocators read Epsilon Theory for its fresh perspective into market dynamics.

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