Coronavirus Update 🦠 — Optimism in a Time of Crisis
It’s common during panics and manias (of any kind) for people to latch onto the worst or best-case scenario and overestimate the probability of it coming true. The coronavirus pandemic is no different. It could result in the loss of lives globally on a scale we’ve never seen. And, it could send us into a global depression as a result of our efforts to contain it.
But, the probability of that happening is relatively low. The panic selling you’re seeing in financial markets today drastically underestimates the alternative scenario: it could not.
There are a number of things happening today that could quickly alter the trajectory of this crisis. And, there’s some evidence to suggest that the recession we’ll encounter from our containment efforts could be incredibly deep, but also very short.
I wouldn’t call myself an optimistic person by nature, but there’s plenty of reasons to believe the worst-case scenario isn’t what we’ll experience. This isn’t the end of the human race or the global economy.
“Every past market crash looks like an opportunity, but every future market crash looks like a risk.” — Morgan Housel
Containing the Virus
How do we contain this virus? I’ll be honest — I don’t know. But, so far the human race is undefeated against plagues and infectious diseases. And right now, the entire world is working on developing rapid testing techniques, treatments, and vaccines. Don’t believe me? Check it out:
Chloroquine and hydroxychloroquine (effective treatment for COVID-19?)
Zhejiang University (best practices for treatment and prevention)
At the same time, countries are completely shutting down to prevent the spread of the virus. This is unprecedented, bold action that will help contain the spread of the virus. We’ve all seen the graphics — the actions we’re taking today will flatten the curve. This will save lives!
Unfortunately, there are economic trade-offs that come with “social distancing.” When you shut down restaurants, bars, gyms, and other businesses, it causes real economic harm. When consumers are afraid to travel, it undermines the economic viability of entire sectors like airlines and cruise ships.
Once we have testing capabilities in place, it’s possible that we’ll be able to soften some of our “distancing” policies in favor of a more “testing-centric” approach, where anyone with a fever is rapidly tested and quarantined. The thought of this might make you uncomfortable, but it would mitigate the harsh economic consequences of a shutdown. The U.S. has been a laggard in terms of testing for COVID-19, but there’s hope that could rapidly change:
Roche begins shipping COVID-19 tests (March 16, 2020)
Trump enacts Defense Production Act (March 18, 2020)
The enactment of the Defense Production Act is significant. It grants the President war-time powers to use the industrial capacity of our nation in the fight against coronavirus. We have a dire need for masks, ventilators, and other medical supplies.
If you doubt what we’ll be able to produce under pressure, look back at the remarkable production feats we accomplished in World War II. The U.S. started with five aircraft carriers. In four years, we built 141 more.
In 1942, we broke ground on a factory to build B-29 bombers. A year later, the 82-acre, 6.3 million square foot, 19-building complex was finished. The plant used 4.3 million bricks, housed 6,000 machine tools, had 23 cafeterias for thousands of employees, and was able to handle 10 million gallons of water per day.
We’ll be able to make masks, ventilators, and testing kits. The speed and scale of the production might surprise you (and the market).
Backstopping the Economy
In times of economic crisis, there are generally two ways in which governments can provide a spark to get the economy moving again: monetary and fiscal stimulus. You probably recognize these terms from your flashbacks to 2008.
Here’s a quick refresher:
Monetary stimulus by central banks: lowering interest rates (to encourage investment) or engaging in quantitative easing (a fancy term for when central banks buy financial assets, like bonds or stocks, directly).
Fiscal stimulus by governments: increasing government spending (everyone remember when we repaved all the roads? or “cash for clunkers?”), lowering taxes, or enacting other policies to stimulate growth.
Once the virus is contained, there will be global coordination to stimulate the economy. We’re already seeing monetary stimulus announcements:
Federal Reserve cuts interest rates to 1.0% (March 3, 2020)
But, these measures won’t be effective until we’re seeing signs that the virus is truly contained. Businesses aren’t shutting down because interest rates are too high — they’re shutting down because employees are spreading coronavirus throughout the country.
The most effective form of stimulus for coronavirus may be fiscal stimulus because of the way shutdowns disproportionately affect small business (restaurants, bars, gyms, etc.). As I’m writing this, leaders in our government are finalizing the details of a massive economic stimulus.
Some common themes: “helicopter money” — checks mailed to individuals, small business loans and tax credits, student loan forgiveness, corporate bailouts (airlines, other distressed sectors), and others.
House of Representatives proposal (March 18, 2020)
Treasury proposal (March 19, 2020)
Whatever form it takes, it’s likely to be huge. And, it should be. This is an unprecedented crisis and it demands an unprecedented response.
Some of you might worry about the long-term effects of such an intervention. I can promise you, it’s better than the alternative.
Remember what we learned from the financial crisis. Many were concerned about rampant inflation and an economic collapse from the Fed’s “money printing” policies. We were dead wrong. We didn’t experience hyperinflation. In fact, we barely experienced any inflation at all. Instead of economic collapse, we saw the economy recover at a gradual pace and participated in the longest bull market in history.
Have we reached bottom?
The recent market decline has been one of the sharpest in history. Perhaps this is expected since the root cause wasn’t slow-moving economic malaise, but a fiercely contagious virus that brought the world to its knees in just three short months.
What’s interesting about this crisis is that it’s happened before. In 1918, a global influenza pandemic killed 40 million people worldwide, including 675,000 people (0.8% of the population) in the U.S. Our economy is much more global now, but it’s worth considering what happened to the economy in the years that followed.
This 2007 report by the Federal Reserve Bank of St. Louis provides newspaper clippings from 1918 that paint an eerily similar picture to what we’re seeing in the news today:
“Merchants in Little Rock say their business has declined 40 percent. Others estimate the decrease at 70 percent.” Arkansas Gazette, Oct. 19, 1918
“Bed rest is emphasized in the treatment of influenza. As a result, there has been an increase in demand for beds, mattresses and springs.” Arkansas Gazette, Oct. 19, 1918
“The Cumberland Telephone Co. reported more than a hundred operators absent from their posts. The telephone company asked that unnecessary calls be eliminated.” The Commercial Appeal, Oct. 5, 1918
The conclusion of the report is that the economic effects of the 1918 influenza pandemic were short-term in nature. Many businesses, especially those in the service and entertainment industries suffered double-digit losses in revenue. But, the recession during this period was one of the shortest in history, lasting only 7 months.
What’s this mean for the crisis we’re facing now? I have no idea. But, there’s historical evidence to suggest it could be a deep, but short recession. If that’s the case, financial markets could recover just as quickly as they’ve fallen. That’s why it’s so important to remain disciplined during times of panic.
Be optimistic. Help one another. We’ll get through this (most likely). 😀
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