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It's Risky to Rely on the Economist's Vaccine

It's Risky to Rely on the Economist's Vaccine

Thursday, 16 July, 2020 - 05:45

There is an old joke about economists, and how badly they compare with real scientists. A physicist, a chemist and an economist are shipwrecked on a desert island, with nothing to eat, other than a crate of tins of baked beans which has also washed up on shore. But there is no tin opener. What to do?

The chemist suggests leaving the tins to soak in the water until the metal erodes. The physicist wants to heat them up until they burst open. Then comes the economist’s turn: “Assume a tin opener….”

Economists produce great models on the basis of interesting assumptions, but they don’t necessarily match conditions in the real world. We can all work out that a tin opener would help. The point is to produce one.

By the same token, a number of optimistic commentary underpinning markets at present seems to be based on a new premise: “Assume a vaccine...”

That at least is what appears to be going on as the S&P 500 posted a new Covid-era high, putting it in positive territory for the year, only to give it up again within minutes. The action in the index over the last three days both demonstrates the importance of psychological landmarks for markets, and the possibilities of vaccines.

Two separate vaccine stories justified the early excitement. Moderna Inc. reported positive results for its latest phase of tests, while Robert Peston of ITV News in the UK said there would also be good news to come in The Lancet on the vaccine being developed by Oxford University. Naturally, any positive development is beneficial for us all, in ways that go far beyond financial prices. But there is a reason why research like this is usually carried out in the relative privacy of academic journals with an intense peer review process. The information is technical, and it comes nowhere close to proving that there is a vaccine ready for us all to take any time soon.

There are also reasons to question how effective any vaccine can be. Immunity might not last long. That at least was the implication of this study from King’s College, London, reported here, which found steep falls in patients’ antibody levels within three months of infection. Meanwhile, accounts of patients who have already had Covid-19 suffering it again call into question whether the pandemic can be trusted to die down once “herd immunity” has been achieved.

Beyond that, the call by a group of world leaders for “vaccine equity” should be a reminder that discovering a workable vaccine is only the first step. There was enough difficulty earlier in the pandemic when it came to sharing out mundane items like masks, gowns and ventilators; that is as nothing compared to the challenge of distributing a vaccine, for which the demand will be global, and on which the inventors will reasonably expect to make a profit.

Note finally that there is a reason why the process of developing a new vaccine tends to be slow and drawn-out. It has to be. The intensity of pressure for an early vaccine, and the scale of the money at stake, heightens what many public health workers regard as the true “nightmare scenario” — a botched vaccine, that goes out before it is ready, has side effects, and convinces the public that the anti-vaccination movement was right all along. That’s a disaster scenario.

Piecing together all of this evidence to work out how long it is likely to take before we can distribute a vaccine capable of ending the outbreak is a feat beyond anyone in the field of pharmaceuticals or public health, and there is certainly no way normal financial investors can undertake that task.

It remains good news if vaccine development proceeds well. But pressing “buy” every time a piece of unreviewed academic research comes out isn’t a good idea. Do this, and the chances are that you create an opportunity for someone else, not yourself.

Looking to the longer term, the chances are that this crisis will have some winners to go with the losers in the investment world. University endowments often give us a handle on the future, and they suggest problems for alternative assets.

Led by Yale University’s endowment under its Chief Investment Officer David Swensen, the big US colleges moved into alternative assets, such as private equity and hedge funds but also esoterica such as farmland, forestry and litigation finance. The logic was that it was hard to do better than the market if that market was liquid and well understood, but there might be opportunities in less liquid places. This policy did spectacularly well for a while, turning Swensen, who suggests that retail investors should restrict themselves to index investing, into one of the world’s most famous money managers.

The returns of the biggest endowments have looked lackluster of late. Now, an excellent research paper by Richard Ennis, which can be found on SSRN here, shows that there was a clear turning point, that came in June 2008 — the eve of the GFC. Ennis builds a composite of 43 major US college endowments, and maps how they did each financial year (ending in June to match the end of the academic year) since 1999, compared to a simple benchmark based on stocks and bonds. They did far better than the benchmark in the first decade of this century, with massive outperformance as the dot-com bubble was bursting. And they have done terribly compared to the benchmark, with only minor respites, during the post-crisis decade.


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