Peter Zeihan on China, Coronavirus Recovery and the Economic Impact of a Second Wave

Peter Zeihan recently told FS Insider listeners why he doesn’t trust any of the data coming from China and why he expects they have a hard political and economic crash ahead of them. He also shared his thoughts on what the economic recovery from the coronavirus will look like for the U.S. and which industries will be hit the hardest. Read below for excerpts from his interview on FS Insider. If you’re not already a subscriber, click here.

See China Preparing for a Hard Economic Crash, Says Peter Zeihan for audio.

What is your assessment of the situation at present?

Well, we know for sure that the virus is at least three times as communicable as the flu. And we know that one in five cases results in hospitalization, or at least that's our best understanding right now. That tells us until we get a vaccine in fall at the absolute earliest, or until we get a functional treatment that can be mass produced, which we don't have right now, the best that we can hope for is that we can get our testing system up to at least a million cases a day. That would allow us to test beyond the hospitals and if we can achieve that, then we can start getting back to normal by September.

That might be overly optimistic. When we kind of peek out from under our rocks and stop the stay at home orders, you'll have the virus start to pop up in additional cities. Then you'll get outbreaks in Denver or in New York or in Boston—it won't be nationwide. When that happens, those cities will have to lock back down. That means we're looking at probably a third to half of the workforce at any given time under some degree of restriction, and probably 10 to 20% of the population and under some degree of lockdown. Under normal circumstances, that would cause a recession. So, we're not going to get back to where we were in February anytime soon, until we have a vaccine.

Now, it's not all bad news, because it's not going to be just us. Everyone else is going to be dealing with this as well. And honestly, other countries are far more likely to have secondary epidemics that go nationwide than we are. Because our mass transit system sucks. If people are afraid to fly, the only way to get around is to drive, which means that we can actually contain this. Whereas if you're in Europe or Asia, if it gets into a major city, it's probably going to go national in a matter of days.

As we talk about secondary outbreaks, that seems to be what’s happening in China. The curve was flattened there, but now there's an outbreak in a different city.

Actually, I disagree with that. We know for sure, in the best of days, assuming everyone's trying to be honest, the Chinese data is crap. They're not trying to be honest anymore. They're not even pretending to try to be honest. I would strongly discourage anyone for treating any Chinese data on anything that has to do with this crisis at face value.

You've got to look at countries that are much more open and honest when it comes to any sort of details. I would argue that the best comparison we have right now is Spain. They've got a similar geographic spatial layout to us. They're a first world country. They're struggling with many of the same issues that we are. They’re a couple weeks ahead of us in terms of the epidemic, but honestly, that's the closest comparison that we can make right now.

What areas or sectors of the economy do you see getting hit the worst?

Well, tourism and aerospace are obviously number one. Nobody is flying right now and what flights are continuing are basically the minimum that is necessary. There are many flights that have one or zero passengers right now. It’s probably going to be the last industry to come back because a lot of people who fly tend to be a little bit older and in the retiree category—they're not going to be coming back until it's safe. So, they’re either going to have to survive COVID-19 or they have to wait for a vaccine to come out. And that's at least a year away.

If you're in tourism, again, the majority of tourists are retirees. If you're a country like Portugal, or a place like Miami that relies on tourism, it's just not going to happen for the near future. Beyond that, though, and I don't mean to minimize the seriousness, but a lot of people are missing some of the opportunities here.

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The epidemic in the developing world is going to be far worse than it is here. The populations are more crowded, it's impossible in some cities like Jakarta or Manila to social distance at all. You actually can't get six feet away from everyone, even if you wanted to, which means that these places are going to be offline for much longer than the United States. And because they form the base material, do the base manufacturing for a lot of global manufacturing, that capacity is just going to be offline.

So, here in the United States, we will have the choice between not having manufactured goods or building them ourselves. So over the summer, we're probably going to see just rocketing growth in any manufacturing sub sector where an American is able to bring a machine shop online and start to retool, to take advantage of the demand that is no longer being filled. We are going to see growth in industries we haven't seen for a while.

Now that is going to obviously change the economic complexity of the economy and anytime that happens, jobs are created, jobs are lost. We're certainly seeing a level lost right now. We will find a new rhythm here; it's just not going to be what we're used to. The social distance in one form or another is with us for at least the next six months, probably quite a bit more.

When you were on our podcast in January, you discussed problems you were seeing in China. How has the coronavirus impacted the country economically and politically?

We have a little bit more data now— not from China—but from people who have been in China. It looks like in calendar year 2019, combinations of things like infrastructure, labor availability, the shale revolution, property costs, food costs, you know all the normal things that go into determining whether a society is successful, all of them have induced huge flows of investment in company activity out of China, to the wider world, and especially to the United States. Part of that you can credit Trump for the trade war which has had an impact.

COVID-19 is accelerating all of this. When Wuhan got hit by the epidemic, the citizens of China learned very, very quickly how little they could trust the central government. And the reason that the Chinese are starting all these conspiracy theories about where the virus came from, and blaming America or God forbid, the Italians, has really resonated in the wider world. Chinese European relations have never been this bad, because the Europeans all sent aid to China when Wuhan was hit. The Chinese said, we'll take the aid, but do not publicize it because we don't want to lose face.

Now that the Europeans are having the epidemic, the Chinese are not only sending the aid back but charging for it, and then proclaiming it to the rooftop about how China's saving the world. That is just absolutely wrecking the relationships with everybody. But that's not why they're doing it. They're doing it because it allows them to beat the national strum back home. They're trying to hold the system together.

In the first quarter China was offline and so they had the first recession in modern recorded history. In the second quarter, the rest of the world is offline, so they have no place to export to and so they're getting hit on both sides. There's no version of recovery in China that does not include the rest of the world pulling out and there's no recovery for the rest of the world that doesn't involve the Americans pulling out. The Americans are busy re-industrializing, so they don't have to be reliant on the rest of the world. I don't want to suggest that China is one of those countries that is going to never hit the plateau. Again, I don't think we're quite that far yet.

The degree of structural imbalances in China that we have always known are there are now being laid bare. And 2020 is going to be a year of next to zero, if not negative, growth for the country. I don't think that they have the social fiber, if that's the right term, to make it through this without a complete political overhaul, and since they've now consolidated all political power into Chairman Xi, I don't think that's even a consideration. They're gearing up for a hard political and economic crash. I'm not sure that's going to happen this calendar year. But it is coming very soon.

I’m interested to get your take on some of the conspiracy theories out there, like that the coronavirus was an accidental leak from the Wuhan Institute of Virology.

No, it is not. All those conspiracy theories are just that and they're complete crap. Everyone that I've ever had a conversation with who has a background in genetics, who has examined any part of this virus has yet to find a single piece of it that suggests anything other than this being a pure physiological phenomenon that just jumps species. I don’t buy these theories at all.

Click here to listen to this full interview with Peter Zeihan and to get his take on the energy sector and oil prices. You can find his newest book here. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe on all things economics, finance and markets...

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