• Gain insight on our current thinking on the economic recovery in this live webinar. Register here

When counterfactuals are hidden and histories alternative


When counterfactuals are hidden and histories alternative

Australia’s ability to “flatten the curve” amidst this once-in-a-century pandemic appears extraordinary. Against numerous epidemiological forecasts of a healthcare calamity, including overflowing ICUs and thousands of deaths, it appears the spread of COVID-19 has been largely contained.

The economic cost, however, has been extraordinarily large and continues to grow. The true unemployment rate may already be in the double-digits and many tens of thousands of small businesses will likely close when all is said and done. Some are asking was it all worth it? If COVID-19 was not as bad as the forecasters led us to believe, did we need to impair the economy the way we did?

And therein lies the challenge of counterfactuals which are naturally unobservable. It is impossible to know the extent to which COVID-19 would have been contained, or not, in a scenario in which Australians did not go into extreme lock-down at the expense of the broader economy. And based on the experience of other countries, one could easily surmise that Australia’s extraordinary curve-flattening was indeed a direct result of the costly lock-downs. But we will never know for sure. And this makes the life of a political leader particularly challenging.

Take the issue of climate change. Left unchecked, the probability of resulting environmental catastrophe is rated anywhere from high to low, and is usually correlated with one’s political leanings. But given the severe consequences, any non-zero probability of such a catastrophe implies sensibility in taking some upfront action, incurring some economic cost, to “contain” the risk before it spirals out of control.

Back to the political leadership who chooses to incur an economic cost to take such action to mitigate the climate risk. No catastrophe emerges, but the economic costs remain visible. Some would naturally ask was it worth the cost if the forecasts of catastrophe turned out to be seemingly overstated? Again, this is the challenge of a hidden counterfactual. The catastrophe was likely avoided only because of the economic costs that were incurred. But we will never know for sure.

Finally, investors need to deal with a related concept called “alternative histories” all the time. As the saying goes: many things can happen but only one thing will happen. But whatever does happen, the fact remains that many things could have happened. Many were shocked to learn recently that Warren Buffett did not buy shares in the recent equity market selloff – and instead was liquidating many positions rapidly. How could this make sense when markets have now bounced back so strongly? One conclusion might be that he was simply wrong? Some have suggested that he is passed his prime or has lost his nerve. But perhaps he is protecting against a scenario which may or may not eventuate, but which remains possible – so is worth protecting against.

The economic impact of COVID-19 is extraordinary. The global economy has become significantly more impaired in a much shorter period of time than in the 2008 GFC. Millions of workers have lost their jobs, millions of businesses are in the process of closing; and most will come out the other side with reduced savings and higher borrowings that need to be repaid over time.

For those investing in equities today, there remains significant downside potential today. Evan Greenberg, the CEO of Swiss-based insurer, Chubb, said only days ago that this will be “the largest event in insurance history.”

Warren Buffett remains defensively positioned today because he is protecting against a stock market scenario which has not played out. Today this scenario he is protecting against is called an alternative history. Over the coming weeks and months, it may well become history.


Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


find out more



  1. “the spread of COVID-19 has been largely contained.”

    That is until people start mixing again which will be a mild test of the counter factual of what would have happened if we had not have locked down.

  2. Noel Playford

    Great article Andrew. A mixture of economics, philosophy and sociology, fit for the times. And with all that, a serious message for investors to think about.

  3. Jenni Dowzell

    Thank you. Worthwhile article that we have “no control test” in life.
    My general comments from another post I did to my UK friends complaining about their country’s response:
    Basically it ain’t over till it’s over is it? And it may be years! And boring old flu has been killing people all the time too but without the same media oxygen and lockdowns. And NZ and Australia may not be in any better than UK and US in the long run (unless we permanently ban entry to the country). No one has a perfect solution, and every solution has its costs and tmeframes. We haven’t yet seen the full economic or mental health and suicide costs (exacerbated further by the inability to even have face to face counselling). Easy to point fingers at politicians. We all have personal responsibility too (isolating, maintaining healthy weight and healthy lungs/aerobic fitness) And we are all subject to just good or bad luck what germs we come in contact with.
    Just be grateful it hasn’t been at catastrophic as the scenes in China and Italy even though it has obviously been bad and terrible for those people who have lost people.
    What I am sure of though is a great big reset for so many countries on so many levels (economic, health, wealth, social, attitudinal etc etc).

Post your comments