States of shock: Assessing the depths of our new tech recession

When we wake up from this long pause, a lot of what we see will no longer be what we know. Many of us will have lost someone we know; too many someones we love. We may never fully calculate whether what we saved, in terms of economies and political structures, was worth what was sacrificed. Perhaps we should not try.

At some point, it will be time for us to find our way again. Our sense of priority will have been altered. Information technology, with all its platforms and infrastructure, staging and deployment, development and methodology, will not seem important or, to those whom the global pandemic event will have hurt, even relevant. But it is, to some measure, the bootstrap with which we must pick ourselves up.

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Disequilibrium

The leaders of the world’s nations each had the terrible choice of whether to prioritize the health and safety of their peoples over the continued growth of their economies. (The integrity of their personal stock portfolios, in a perfect world, would be a far lesser priority.) Some made the decision early, and as a result, both saved lives and minimized their recessions. Others deferred.

“The siren call has gone out, and a number of strategies are being pursued to ramp up [producing] all kinds of things we need to deal with the current caseload,” stated ZDNet contributor Ross Rubin, principal analyst with Reticle Research. “Floating hospitals being dispatched to cities; automotive factories being converted to produce ventilators; numerous companies working on new testing methodologies and vaccine tests.

“At some point, given the steps that have been taken to curtail the spread, you’re going to reach equilibrium,” Rubin continued, referencing a term also commonly used in economics. “Once you reach that, unless you do nothing and the virus population continues to spread exponentially, at some point, you should see a curtailing of new cases.”

Whatever technology economy emerges from the recovery, whenever that will be, will be the direct and undeniable result of these choices.

The first, critical link in most of the world’s technology supply chains is rooted somewhere in Asia. Today, more often, it’s China. When the COVID-19 disease first became an epidemic in China, its immediate effect on the economy was a supply shock – an inability to produce goods in accordance with demand. Historically, supply shock events have been catalysts for recession.

China, South Korea, and Taiwan may all emerge from this supply shock event soon, ready to ramp up production once again for a world of consumers eager for mobile devices and digital experiences. But those consumers won’t be there. North America, Europe, much of South America, and Australia will all likely be frozen in time, their economies still in stasis. Asia will find itself in the midst of a demand shock event — an economic storm matched only in scale by the pandemic.

“This coronavirus has now added enormous extra strain to this [economic] system,” remarked Dr. Sherman Robinson, senior fellow with the Peterson Institute for International Economics. “It is really a supply shock, and it’s big enough to have macro repercussions. We’re seeing it.”

Certainly no one alive comprehends the principle of supply shock more deeply than Dr. Robinson. Since the 1980s, he and his colleagues have mastered the use of computational general equilibrium (CGE) — a means of computationally simulating the effects of supply and demand shifts on markets and economies, to determine the optimum levels needed to sustain health and growth. In a way, CGE is a predecessor to neural networking, applying and adjusting weights until a mathematical model is sufficiently trained. It’s the basic math behind machine learning, just without the neurological allegory.

The typical global recession, Robinson explained, begins in asset markets — stocks, real estate, precious metals, money markets. A major financial event, such as the 2008 sub-prime mortgage lending debacle, triggers a crisis of confidence in a country’s leadership. Immediately, foreign investors withdraw funds from investments in that country. This withdrawal triggers a foreign exchange crisis, which soon spills over into domestic securities investment, forcing both a stock market crash and consumption levels to collapse.

“This time around,” said Robinson, “we have an administration that’s been delighted to have trade wars.”

In 2017, just days after the current US administration took office, it launched a trade war with China, along with trade skirmishes in the EU, the UK, Canada, Japan, and South Korea. Citing Asian nations’ ability to pay workers lower wages, the US pulled out of the Trans-Pacific Partnership. Later, 5G Wireless became another battleground, with the US leveraging evidence that China was wedging open back doors for its own surveillance, in Huawei routers and other network equipment, to frame China as the free world’s post-Soviet adversary.

With the US administration lashing out at nearly every country with which trade agreements are critical to American business, foreign investment in American growth projects — such as the manufacturing of factories, production facilities, and data centers — essentially stopped. For its part, China stepped up enforcement of regulations regarding what it calls “value-added telecom permits,” which forbid the licensing of data center projects there to any company with a majority foreign owner. As a result, none of the major US-based cloud service providers actually manage their own services for China.

The message the US sent the rest of the world was that it is no longer a dependable trading partner.

“Okay. Could you actually have a recession that starts in commodity markets, through trade wars?” posed Robinson rhetorically, referring to trading in raw goods such as farm products and fuel. His macro-economist friends answered him, not really.

The normal global recession doesn’t get triggered by a trade war. Trade only accounts for about 15% to 20% of countries’ economies, and thus tends not to generate what Robinson calls “a repercussion at the aggregate level.” There are two exceptions: when investors become spooked by a growing chorus of negative expectations, and when consumers’ expectations of continued growth are reduced. These are commodities-oriented events that, when compounded, spill over into asset markets where recessions are typically triggered.

When both exceptions take place simultaneously, conditions became ripe for a global economic brush fire.

“And that’s what we’re seeing,” said Robinson.

Choke points

“When they manufacture at scale,” remarked Kevin Anderson, a senior semiconductor analyst with Omdia (formerly known as IHS), “manufacturers have very tight and close relationships with their suppliers. So if there are shortages, teams spring into action to attempt to mitigate the problem. This happens quite frequently. Procurement teams work with supplier teams to make sure they have just enough product, so they can keep running.”

This is the case, of course, when manufacturers are actually running on-schedule. When it first appears to procurement teams that the components they need to assemble a product may be in tight supply soon, they plan ahead by double-booking. When stockpiles rise, that sends a signal to the rest of the world.

“If suppliers are having trouble making enough for everybody,” Anderson continued, “then they’re going to want to make sure that they understand the true demand — not the demand they’re seeing from the order flow, but, ‘What do you need to build tomorrow?’ ‘What do you need to build next week?’ ‘Next month?’ ‘We’ll ship you what you need, not what you’re asking for.'”

You could call this a “Bailey Bros. Building Loan” version of demand mitigation, and Anderson said it’s built into the system. The collaboration between suppliers and component builders, already takes place. And supply shock events of some limited magnitude, he told us, happen astonishingly frequently — too frequently to bother mentioning in the business press.

If an epidemic were to pick a convenient time to become a pandemic, from the perspective of tech manufacturing, Omdia’s Anderson believes, February was a pretty good choice. Manufacturers in China would have already built ahead, as a matter of normal principle, in advance of the Lunar New Year’s holiday on February 12, when the country celebrates a week-long holiday. What’s more, Asian countries were the first to order their citizens to shelter-in-place. As one might expect, that triggered a demand shock event, where demand plummets to near-zero. But for countries such as China itself and South Korea, which implemented containment measures earlier than the rest of the world, the demand waves that follow such shocks could be more easily addressed with stockpiled inventory.

Had the spread of the novel coronavirus been contained to these Asian countries, plus perhaps Japan and parts of Southeast Asia, it’s conceivable that deaths could have been minimized and most global disruptions overcome. We could have been talking now about the tech economy’s resumption of equilibrium, that factor Dr. Robinson is the world expert at identifying. . . assuming such a story about normal factors leading to normal outcomes would even have been assigned.

That’s not what happened. A series of inattentions to the clear and arguably loud signals emerging from Asia led to the virus hopping over into unprotected territories. In a few days’ time (if we’re being honest, in a handful of hours), the US’ official attitude toward the novel coronavirus shifted from framing it as a trade war conspiracy, to a stealth siege from an unidentified power.

The fact that this shift was so sudden — that point “A” on the chart of rationality was so far from point “B,” though the transition was made with the flip of a switch — triggered crises of confidence throughout world economies. In many places, the results were demand shocks in anticipation of supply shocks that may or may not have actually happened.

“That’s one of the issues coming up with climate change: We’re observing more extreme events,” noted Dr. Robinson, “and therefore more danger of choke points getting damaged.”

Choke points, in Dr. Robinson’s lexicon, are the most vulnerable parts of any supply chain. One example he cites is China’s virtual monopoly over the mining and refinement of certain rare earth metals critical to the electronics industry, such as cesium. According to the US Geological Survey [PDF], China produces no less than 95 percent of the world’s supply of cesium. “One earthquake and all of a sudden,” he remarked, “you close down a whole industry.”

Governments worldwide have been aware of bottlenecks such as this. Private enterprises, on the other hand, either feigned ignorance or actually were ignorant. “They were buying these supplies from all over,” Robinson told us, “but they weren’t aware that it was all coming from one place in the end.”

In a normal epidemic disruption, a country’s supply chains become susceptible to unanticipated influences, such as panic-induced demand shocks. The epicenters of those demand shocks can be Dr. Robinson’s choke points: necessary commodities that are critical to production, that are only sourced from one location.

It’s a perfect setup. One could not have constructed a hand grenade or a land mine with any greater deliberacy.

The other climate change

Still, a little warning would have helped. You’ve probably heard that complaint in recent days. Had anyone thought to have shown a bright spotlight on what would be required from a national, or perhaps even a global, response to the coronavirus outbreak, our systems of health and well-being would have been capable of reacting sooner.

Except such warnings did exist. Well, it still would have been nice had those warnings come from experts or people with plenty of experience, who had already earned the public’s trust.

Except they did.

“Of all the issues before us, pandemic and epidemic is the issue with the highest ratio of global seriousness to policy attention,” declared former US Treasury Secretary Lawrence H. Summers, during a speech to the Rockefeller Foundation in 2016. He spoke slowly and emphatically, as though his words could be chiseled in stone in real-time.

“Relative to its significance in/for humanity, there is no issue that gets less attention,” the Secretary continued. “To put the comparison in a direct way, I believe. . . that if you calculate the expected cost to humanity over the next century from epidemics and pandemics on our current global path, it is in the same broad range — within a factor of 2 or 3 — as the expected cost from global climate change.”

Sec. Summers referred to both priority and cost. His comments accompanied the publication by the US National Academy of Science of a kind of global warning. Entitled The Neglected Dimension of Global Security: A Framework to Counter Infectious Disease Cases, the report included a suggestion by two students of Harvard University’s PhD. program in health policy, that countries ran the collective risk of losing between $60 billion and $120 billion per year, in expenditures necessary to fight the growing threats from global pandemics, the frequency of which was estimated unlikely to eclipse 8 events per century.

The pandemic stimulus relief package just passed by Congress has a projected value of over $2 trillion.

We are well past the time to be debating the preventative measures that could have been. The opportunity was there, four years ago, for not just our governments but our private institutions and commercial enterprises to prioritize pandemic response on at least the same low-heat back-burner as global warming. At this point, while many of us are sheltering in place, and too many are praying for the health and safety of those we love, the job ahead of us is to determine how to make an economy — any economy — viable and workable in the world into which we have all entered.

That will be the subject of Part 2 of this report. Until then, hold strong.

The strength of an economy, or any segment of it, is secondary to your health and well-being, and the health of those close to you. Information about countries’ and governments’ response to coronavirus is available from the World Health Organization. Information about personal safety measures is also available from WHO, as well as from the American Red Cross. Further information about the spread of the novel coronavirus in the US is available from the Centers for Disease Control. Individuals who believe they may be exhibiting symptoms of the virus are advised first to seek safety and isolation, and then to make contact by phone with emergency services, who can get help to you where you are.

Article source: https://www.zdnet.com/article/states-of-shock-assessing-the-depths-of-our-new-tech-recession/#ftag=RSSbaffb68