Swine Flu: Don't Panic! (Seriously. Don't.)

A few years ago they terrified us with chicken.

In 2009 it's pork, bacon and ham. Once again, the world's tastiest creatures appear bent on revenge.

Yes, we have another potential pandemic on our hands, this one goes by the name of Swine Flu. And like most every medical scare, the response is all out of proportion to the facts as we know them.

Since Swine Flu touched down here in New York City, it's all people seem to want to talk about. And the media reports rather than dowsing fears, have predictably poured gasoline on the fire.

"New virus"... "no known cure"... "quarantines"... "stockpiling Tamiflu"... and now this "money quote"; "I fully expect we will see deaths from this infection." (Richard Besser, acting director of the CDC.)

Scary, right?

A little perspective is called for here.

Yes, there may be deaths resulting from the Swine Flu in the United States. There have been 150 deaths (at last count) in Mexico.

But there are ALWAYS deaths from an outbreak of influenza. (Sad but true) How many? The CDC estimates that complications from influenza kill approximately 36,000 people each year.

Thirty-six. Thousand.

Today I read "Fears of Swine Flu" were the reason the DJIA gave its gains back. If this episode seems like a repeat (perhaps of repeat of Quincy), it is. A few years ago it was Avian (Bird) Flu that captured the imagination of the media. It weighed on the necks of the world markets, like an infected albatross.

Let's check the stats on that "Superbug". In the last 10 years (according to the World Health Organization) it has killed 248 people (as of January of '09).

Look, I am not making light of Swine Flu. It has already inflicted horrible suffering on people. It is truly a killer and all out effort to combat it should be taken with the utmost alacrity.

But if people feared the mundane killers out there a fraction as much as they fear these inflated medical scares, they'd never leave the house.

My wife, (bless her heart) worries when I take a plane. "Let me know when you get you there, honey", "Call me when you get in", she says to me.

What I (wisely) no longer bother to point out is that the most dangerous part of my journey arrives after I get into JFK.

Flying is amazingly safe. So safe, that when something bad happens amidst the millions of flights that take off every year, it makes news. More than that, it IS news. Cars on the other hand...

You know what kind of flying isn't safe? Flying down the Long Island Expressway at night and weaving in and out of traffic on the Triboro bridge at 75 miles an hour, while your Russian taxi driver is screaming epithets at his girlfriend over the phone.

That's legimitately terrifying.

Turbulence? Piece of cake.

So let's not lose sight of the baseline here.

We have enough real economic indicators out there scaring us already.

Do we really need the Pig Flu torpedoing our rallies?

Fear Index Highest in History

Our MarketPsych Fear Index is the highest in its 28 year history (the prior high was in March 2008). See our index page for the graphic.

As I've said in previous blog posts, it's important not to "catch the falling knife" in the markets. Don't buy the stocks that are plummeting until there is some news that addresses the underlying cause of the share price collapse.

Maybe that's why the markets continue to be so spooked. No one is addressing the root causes of the uncertainty. We've heard U.S. government officials say two things:
1. "We'll save you if you're too big to fail, otherwise too bad (example: Lehman)."
2. "We won't save anyone because that's socialism and uses taxpayers' money and these guys on Wall Street are soulless greedy louts anyway" (heard from presidential candidates and Senator Richard Shelby chairman of the U.S. House Banking Committee)

I think #1 doesn't go far enough. All these firms are interdependent, as we're again seeing with the collapse of Goldman and Morgan Stanley shares today.

I fundamentally disagree with #2. I'm a physician by training. When a patient is dying from a myocardial infarction (heart attack) it's not appropriate to teach them a lesson about eating well and exercising. If they survive, with your assistance, then yes you can lecture them after they've recovered, but while they're dying it's considered bad form.

In my opinion, we need to create a "Resolution Trust Corporation" type slush fund to absorb dodgy debt as we did with the S&L crisis. Yes, it will be extremely expensive. Perhaps we can have a special tax on financial companies to help pay for it. I suspect they would agree in order to stop the crisis.

As psychology experts, Frank and I know that the pain will continue as long as no one steps up to the plate and takes charge. Effective focused action is needed to root out the rot and identify the uncertainty. All the bad debt needs to come to light and be segregated from the good stuff.

In many cases the "bad" debt is in a descending positive feedback loop which reduces balance sheet values, which then causes further need for capital, then forced debt (CDS) sales, and again even lower market values due to more fire sales, etc.... If we waited a year or two, the CDS defaults wouldn't be as bad as anticipated. But with quarterly "mark to market" accounting rules, the companies holding this debt in the U.S. are in death spirals. And without real leadership, this has become the hurricane Katrina of the financial industry.

It's sad to see, because a little psychological saavy and leadership could have prevented this. Clear out the bad stuff, set it aside, and charge companies a lot (a dedicated tax) to manage it while markets stabilize.

But no one wanted to suffer the political consequences of being branded a "pinko." Too bad, because the rapid shock we're currently experiencing probably isn't the best for the country (or the world) in the long run. Psychological studies show that "ripping off the band-aid" causes more psychological distress and unhappiness than removing it slowly and gently. High finance has done an enormous service in globalizing and increasing the efficiency of our economy. Sad to see it left to waste in the name of ideology.

Richard