INFECTIOUS PESTS
by Marc Faber
Although SARS does not appear to be as contagious as the
1918 Spanish flu, its mortality rate is higher. The current
pandemic shows that in the future, new infectious diseases
will increasingly be a global problem. Modern air
transportation can spread a disease all over the world
within a very brief period of time.
In other words, as was the case with food-borne epidemics,
antibiotic-resistant bacteria, insect-borne diseases such
as the West Nile virus and AIDS, an outbreak anywhere in
the world is soon a threat everywhere.
As we experienced with the Hong Kong bird flu in 1997, when
more than a million chickens were slaughtered, the dense
mingling of humans, wild and domestic birds, and livestock
- principally pigs - in southern China provides a natural
breeding ground for genetically new pandemic flu strains
that will continue to threaten Hong Kong, due to its
proximity to China and its porous border, which around
400,000 people cross each day. (The number of people
crossing the border has recently fallen by 50%.)
The current SARS outbreak is a devastating blow to the
already fragile Hong Kong economy, as well as to other
Asian economies where tourism makes up around 10% of GDP.
In Hong Kong, retail sales have tumbled by 50%, and hotel
occupancy rates are running at around 20%! Restaurants and
bars are suffering, airlines are reducing the number of
flights into and out of Hong Kong as well as around Asia,
and a very large number of conferences and conventions in
the region have been cancelled.
In fact, the SARS scare (whether justified or not) has
affected the Asian economies to a far greater degree than
the war on Iraq, which hardly affected the apolitical Asian
populations. That infectious diseases can influence
economics and geopolitics is hardly news, since there have
been a number of instances in the past when plagues shaped
the course of history.
I am not suggesting that the current SARS scare will have a
long-lasting and major impact on the global economy, but if
this highly infectious disease spreads unchecked, or if
another even more virulent infection emerges sometime in
the future (as is likely, according to some experts), then
we should at least be aware of the risks involved.
But I should like to point out, in this respect, that in
one of its very rare moments of intellectual glory, the Far
Eastern Economic Review (owned by Dow Jones & Co.)
published, in June 2001, an article by David Lague entitled
"A Deadly Flu Ready to Strike". The article made the point
that there are three prerequisites for a real viral
pandemic in humans: a population without enough exposure to
develop immunity; sufficient virulence to lead to deadly
disease; and the ability to jump easily from person to
person.
Referring to the 1997 bird flu, Lague explained - quoting
Graeme Laver, a retired professor of virology and a pioneer
in establishing that influenza strains infecting humans
originate in animals - that the bird virus only scored two
out of three, since it did not spread from person to
person. The decision to kill all the chickens in Hong Kong
may have averted a "global tragedy", because if the virus
had "learned to transmit between people, it would have
killed millions of people". Well, now the SARS bug has
learned how to spread among humans and, therefore, serious
future pandemics should certainly not be ruled out.
According to Graeme Laver, "this is a dress rehearsal for a
real pandemic. If it was a lethal flu, there would probably
be hundreds of thousands of people dead by now."
An infectious disease that did have a lasting impact on the
global economy was the Pest (also called the Oriental
Plague or Black Death) caused by the above-mentioned
Pasteurella pestis. It was primarily a disease of rodents,
and epidemics in human beings originated through contact
with infected rodents, most commonly rats or their fleas.
The disease in man had three clinical forms: bubonic,
characterized by swelling of the lymph nodes; pneumonic, in
which the lungs are extensively involved; and septicemic,
in which the bloodstream is so strongly invaded by
Pasteurella pestis that death ensues before the bubonic or
pneumatic forms have had time to appear.
It appears that the plague had already made its appearance
at the time of the Philistines in the 11th century BC. It
reappeared in the sixth and seventh centuries AD in Europe
and then, with great virulence, in the 14th century (as the
Black Death). The 14th century version most likely
originated in Mongolia and traveled with the overland
caravan movement across Asia, reaching its peak under the
Mongol empires founded by Genghis Khan (1162-1227). At the
peak of its power, the Mongol empire extended across China
and almost all of Russia, as well as Asia, Iran and Iraq. A
vast communications network, with messengers capable of
traveling 100 miles per day and slower caravans and armies
moving across the enormous expanse of the empire, knitted
the empire together. But along with this movement of people
and horses, it is believed that burrowing rodents, which
had become carriers of the Pasteurella pestis, reached
parts of China and eventually Kaffa in the Crimea. (The
Mongols probably brought back infected rodents from their
invasion of Yunnan and Burma in the 13th century.)
The Black Death, after having decimated a large portion of
the population of China (in 1331, an epidemic in Hopei is
believed to have killed 90% of the population) and
Turkistan, made its first serious appearance at the Genoese
port city of Kaffa in 1346, when it was besieged by the
army of the Mongol leader, Kipchak khan Janibeg. The plague
wrought havoc among his troops and compelled his
withdrawal, but not before he had catapulted plague-
infected corpses into the city in order to infect the
population. (This is the first use of "biological weapons"
in the history of warfare, that I am aware of.)
>From Kaffa, the plague spread rapidly to the Mediterranean
port cities on Genoese ships and then inland to the north
of Europe. It moved at high speed from city to city (Sicily
suffered in 1347; North Africa, Corsica, Sardinia, Italy,
Spain and France in 1348; Switzerland, France, and southern
Germany in 1348; and England in 1349) and was halted
neither by prayers, and all sorts of alchemy and physics,
nor by the mass burning of Jews, who were popularly
believed to have spread the plague by poisoning the wells.
Contemporary archives and detailed research carried out
about mortality rates in England suggest that Europe's
population declined by approximately 30% between 1346 and
the end of the 14th century.
Moreover, by 1500, the population of the whole area
including Europe and North Africa was still markedly lower
than it had been just before the Black Death, more than 150
years earlier. It was only in 1550, more than 200 years
after the outbreak of the pest at Kaffa, that Europe's
population again reached pre-plague figures.
In China, it is estimated that the population declined from
123 million prior to the Mongol invasion in 1200, to only
63 million at the end of the 14th century following the
final expulsion of the Mongols from China and the
establishment of the Ming Dynasty in 1368. It should be
noted that, in general, cities with a dense population
suffered far more than the countryside and dry areas in
Europe. In addition, following the outbreak of the plague
in 1346, numerous recurrences took place in 1361-1363,
1369-1371, 1374-1375, 1390 and 1400, and then with less
frequency after the 15th century. (Venetian statistics show
that in 1575-1577 and 1630-1631, a third of the city's
population died of plague.)
The Great Plague of London occurred in 1665 and was
followed by the Great Fire of 1666, which accelerated the
replacement of thatch roofs by tiles, thus reducing the
habitats of rats and fleas and therefore, also, the
incidence of the plague epidemics. (The last great plague
in the western Mediterranean occurred in Marseille in 1720-
1721.)
One can only imagine the economic impact of a 30-40%
decline in Europe's population between 1346 and the early
part of the 15th century, and of an even greater fall in
some of Europe's thriving commercial centers. A declining
population must have put severe pressure on property
prices, and considerably reduced trade and commerce.
Moreover, grain prices collapsed by close to 70% between
the start of the 14th century and the end of the 16th
century, as demand for food diminished.
However, there were also beneficiaries of the plague. Due
to a contracting population, laborers were in short supply,
which meant that real wages rose. Port cities introduced
the quarantine regulations whereby ships arriving from any
port suspected of plague had to anchor for 40 days in a
secluded place and without physical communication with the
land. This practice was a heavy burden for trade and was
not particularly effective, as rats and fleas could usually
still make their way to shore.
In addition, "consumer confidence" must have suffered a
serious blow in times of plague outbreaks, which would have
further reduced consumption, traveling, and visits to
crowded places such as inns and fairs. It isn't hard to
imagine what would happen if in today's economic
environment, a "mildly" infectious disease were to reduce
the population of a city, a region, or, given the intense
connectivity between the various world economies, the
entire world by, say, 5% - let alone 30-40%! And while I
certainly would not wish this to happen to humanity, it
would show just how ineffective is Greenspan's and
Bernanke's economic "wisdom", which seems to rest on the
belief that all economic ills can be cured by monetary
policy measures!
The history of infectious diseases is all very interesting
to you I'm sure...but what does it have to do with whether
the stock market will rise or fall next week, or over the
next 12 months? I believe that investors who focus strictly
on economic and financial statistics may not be
sufficiently informed to make sound judgments about the
course of stocks, bonds, real estate and commodities in the
years to come.
I was recently in transit at Hong Kong's airport and was
shocked to find it like a ghost town. I am not
exaggerating! There were hardly any passengers in this
usually hyperactive and crowded place. And it is no wonder:
as of the time of this writing, 164 flights per day have
been cancelled. Cathay Pacific, the Hong Kong-based
airline, is presently carrying just one-third the passenger
numbers of a year ago. Many hotels and restaurants are, for
all practical purposes, empty. Unless the SARS pandemic is
eliminated immediately, more economic hardship is likely to
follow. Under normal conditions, one might be tempted to
buy tourism-related shares in Hong Kong and the rest of
Asia, since they have been sold off following the SARS
outbreak.
However, if SARS continues to spread and leads to further
travel restrictions, then lower prices are only a matter of
time. I might add that, in a bizarre twist of events, China
- where SARS originated - has banned its citizens from
traveling to Singapore, Malaysia, and Thailand in
retaliation for these countries' accusations that SARS
started in China!
For destinations like Thailand, Singapore, and Hong Kong,
where tourism and business travel account for a large
proportion of their economies, the effects of SARS or any
future infectious disease can be catastrophic and may have
a long-lasting impact on the valuation of real and
financial assets. This would particularly be true for Hong
Kong, as its economy is gradually integrated into the
southern China region, which is, and will remain for a long
time, the epicenter of infectious diseases.
Regards,
Marc Faber,
For The Daily Reckoning
P.S. While I am tempted to use the present weakness in
Asian hotel and airline companies as a buying opportunity
because of their very favorable growth potential in the
long term, I am equally very concerned that, the Middle
Eastern situation aside, we are dealing here with a very
negative development for the overall valuation of equities.