Considering the New Normal in a post COVID world
This was originally published on the N49P website
How have our lives changed permanently?
Eventually we will defeat COVID and the world will return to a new normal. This new normal will emerge over months and years and will impact all aspects of our lives. As someone that invests in the future, I am always trying to understand what will change. Right now, it is clear to me that we will see drastic changes in at least four major aspects of our lives: healthcare, finance, society/social contracts and global politics.
The COVID pandemic is first and foremost a health tragedy. Across the globe the current healthcare systems were not prepared for a pandemic. It doesn’t matter if you have a completely private or public approach to health care every system has been overwhelmed
to healthcare failed us.
The common root problems in all systems seem to be:
Reactive instead of proactive approach to health: Global healthcare systems are built to deal with patients that are ill instead of preventing patients from becoming ill. Over the past few years there has been a movement to change this, but it has been slow due to the complex value chain built to support the current approach to healthcare. This reactive approach has made the current situation worst by having a system that isn’t used to testing for issues beforehand and making people more susceptible to COVID if they have underlying issues that were not identified and treated already.
Physical/proximity-based healthcare: My family has always said if you want to get sick go to a hospital. The incidence of health care associated infections have steadily been increasing over the past few decades. This issue has been especially pronounced with COVID which is highly contagious.
Limited ability to withstand surge demand: Due to high costs, healthcare systems have been focused on reducing the length of hospital stays and focusing on developing specializations in each location (e.g. hip replacement). I believe this has reduced the overall inventory of equipment and people that know how to use any specific equipment. This can be acutely felt in the COVID crisis by the lack of ventilators and personnel trained on using ventilators.
False scarcity: The value chain that has been created to provide healthcare has many stakeholders who have protected their power and the power of their stakeholders by instituting licensing and other requirements to improve the quality of healthcare. This has restricted the ability for supply to meet demand. Due to the current situation many of these restrictions are being removed. Tele/video consults are being allowed. Doctors are practicing in states where they are not officially licensed.
The new normal here is the easiest one to picture but most likely the one that needs the most help to actually achieve. The issue with any change in healthcare is that we have built an intricate and complex value chain that has little desire to change. Insurance companies don’t want to change their business model, government bureaucracies don’t want to give up power and health professionals have been trained to work in the current system.
Differences in health care in the new normal may include:
A mandated push to preventive medicine in the form of required health tests. Employers and government institutions will require an up-to-date listing document showing what vaccines you have taken and test results for specific diseases (e.g. COVID). This may seem far fetched but many universities and schools already require this. What will change is that this becomes much more widespread and that over time it will start to track other non-viral issues (e.g. blood pressure, cholesterol and sugar levels)
The decentralization and digitization of healthcare. This will build upon the desire to cut costs in the system and reflect people’s experience with COVID. The early change here will be the move to digital consultations. It will start with simple consultations and diagnostics. As IoT improves it will move to more complex remote diagnosis. Over the long run you will also see the physical aspect of care change. Instead of mega hospitals more and more medium sized / multi use locations will be built.
Regional licensing standards will allow doctors and nurses to practice remotely. Prior to the pandemic there was a global shortage of nurses and doctors. To combat this shortage during the pandemic governments encouraged medical professionals to come out of retirement and permitted them to work in jurisdictions where they were not licensed. Post pandemic the shortage may continue to worsen to an aging population (more demand while many professionals reduce supply by retiring). To deal with the shortages, many jurisdictions will work together to create regional licensing standards allowing the flow of talent (especially via digital means) while guaranteeing the quality of service.
Currently the media is focused on the near term impact on the economy and government indebtedness (which I will discuss in social contract) but not much discussion on how individual attitudes toward money and finance will change.
Prior to COVID there were a few major trends that may now reverse:
High levels of indebtedness: Both consumers and corporations continuously levered up (took on more debt) since the Great Recession. This has made many individuals and corporations extremely susceptible to sudden financial changes. We will see a significant number of bankruptcies due to this leverage and it will increase exponentially each month.
Lack of yield: Prior to COVID, interest rates were near historic lows. This encouraged the use of debt and also made it hard for investors to find returns or yield. With the current deflationary pressure interest rates will stay low and make returns hard to come by.
Periods of stability followed by a large spike in volatility: Since the mid 90s it appears that the world has fewer but more pronounced down turns. The Dotcom crash, the Great Recession and COVID all followed relatively long periods of economic growth and each one had a larger and faster contraction than the last one. These periods of calm followed by quick painful recessions have made many individuals not trust what their own financial progress.
The new normal here is the least drastic change and I can easily be overestimating it as people have a habit of reverting to old habits.
The new normal will include:
A new consumer frugality. Consumers in the mid-thirties to mid-fifties have taken on significant debt for education and housing and have seen their equities portfolio significantly impaired a couple of times. My guess is you are going to see a disproportionate amount of bankruptcies in this group. This will cause them and their kids to be significantly more frugal about what they buy and invest in. They will also be more skeptical of non-cash returns. I think this will impede consumer lead growth, hurt post-secondary education and change how these people save.
Institutional investors will see their allocation to alternative assets grow. They will find it even harder to find required returns in public markets and real estate and will re-balance to “less volatile” “higher return” asset classes. This also implies that valuations will continue to rise over the long run.
Use of debt? This one I have little clarity on. I believe frugality will mean that less consumers will want to use debt (leading to less demand) and that investors will be less comfortable with high amounts of leverage (leading to less supply). Nevertheless, investors are seeking yield and will push the price of debt down and make it more appealing to individuals. Not sure what this all means.
3. Social contract society/social contracts and global politics.
Each society lives with implicit assumptions between its citizens, enterprise and government. I believe many of these social contracts are being re-written right now.
Pre-Covid we had several strong assumptions:
Government moves slowly and tries to take into account the needs of all stakeholders: Over the last few decades we have gotten used to government entities moving slowly due to the influence of many stakeholders trying to influence actions, divergent political views and bureaucracy. Over the past two months we have seen many governments take drastic and quick actions (including procurement). You can debate if their decisions are the correct one but our expectations about speed have changed.
Many countries were moving to more libertarian and capitalist views of government: For decades across the globe we have seen the move to deregulation, privatization and the push to get governments out of our private lives. While we had seen some reversal to these movements over the past decade it has been nothing like the past two months. The government is now telling people when to operate their business and where they can physically be at any given time and we are accepting it.
Government debt levels: Prior to COVID many governments were already running deficits and not prepared for a recession. Let’s just say things got much worse due to COVID.
Enterprises are responsible to shareholders before other stakeholders: Over the last decade we have been seeing a slow movement to enterprises paying attention to other stakeholders but over the past two weeks we have seen many large enterprises put their employees, customers and communities first. Examples include prioritization of production or shipping of items needed for healthcare and when possible promising to not lay off employees. Not every enterprise is doing this but many are and I believe they will see significant gains due to this.
Wealth disparity: I believe COVID will impact the physical and financial health of households with less than median income disproportionally despite these households being essential to providing basic services. This will put more pressure to decrease the wealth disparity in society.
These relative drastic changes during COVID will change what we expect and how we interact with each other. The only thing that may stop many of these changes are the US election in the fall which I believe will be crazier than normal.
The new normal will include:
A New New Deal and more socialized services. While government actions may have avoided many deaths people are going to blame the government for not reacting first and for the economic damage. There is going to be expectations of more monetary support to ensure people have food on their plate and a roof over their head. They will also expect the government to provide help with re-education, healthcare and financing of new enterprise. This means government is going to get bigger and more involved in our lives.
Higher taxes disproportionately applied to the “rich.” Government has to pay for the new programs and pay off its debt. This means that global taxes will need to go up. My expectation is that we will see taxes applied to sectors of the economy associated with the wealthy including real estate transactions, capital gains and inheritance.
The acceleration of stakeholder capitalism. Over the past decade we have seen a move away from shareholders interest above all other stakeholders. During the crisis many enterprises have either focused on the needs of their communities and employees and another subset have asked for financial assistance from the government. These two trends will compel or force business to care for other stakeholders as we emerge from this pandemic.
Less public consumption of wealth. The wealthy will be more private and want more space. This will be reflected in many small changes. Fewer social media postings, more private consumption (e.g. at home gym vs Equinox and private clubs) and new businesses will be started to serve their needs.
Public vs private sector employee fights. The one group of employees who have seen limited change during the crisis are the public sector employees. Over the last several decades public sector employees have continued to see improvement in overall pay and work relative to private sector employees. As taxes rise and people struggle, there will be resentment towards the rank and file public sector employees. There will be pressure to reduce pay or number of public sector employees.
4. Global Politics
The pandemic will leave most countries in the world with high unemployment and massive debts. It will also have shown vastly different approaches to handling this crisis (centralized and proactive vs decentralized and reactive).
The new normal given this is the one I am least excited to write about.
The further acceleration of closed borders to movement of people and goods: Governments are going to try to improve employment at home by reducing the accessibility to their markets. The one counterpoint to this is the digitization of work which allows people to offer their services globally.
Inflation or war and I expect it to be war: The way to reduce your debt is to make your debt less valuable by encouraging inflation. There is so much slack in the system now that I don’t believe this possible. The next best way to reduce debt (and unemployment)? War. We will see more wars over the next decade. I don’t know what form of war that we will see but we will see it.
A new cold war: China versus USA. The US looks disorganized, weak and isolationist right now. Expect China to take advantage of this and fill the void and explicitly challenge the US. You can already see some Eastern European countries talking about what a great friend China is.
The above are my initial thoughts based on current events, my understanding of similar events in the past and reading of the emerging sentiment on social media streams and in other blogs and articles. Many of the ideas will be wrong and the list is not exhaustive, for example I did not discuss remote work/the new digital life. My goal of sharing these ideas is to encourage discussion and evolve our collective thinking on the new normal.