“The greater the suffering, the greater the peace” – Agent Walker (the character played by Henry Cavill in Mission Impossible Fallout).
Something that got stuck in my mind as I binge watched the Mission Impossible series cooped up in my apartment thinking about when and how we may go back to normal and what a new Normal may look like.
The key variable in answering this question is UNCERTAINTY what does it mean and when we will have solution for that. In this case the biggest risk is contagion and we will be rid of social anxiety only after we have a treatment for the virus.
Therefore, I think there will be 2 levels of uncertainty we have to deal with.
Level 1 – When we get on the other side of the bell curve. This would help forecast when we could go back to work. Based on current data I think that a significant number of businesses may open up in the June timeframe in a staggered manner
Level 2 – When will we get back to “normal”. This as I mentioned above can only happen after we have a treatment on the horizon.
This begs the question what will normal look like, will it be different from what used to be. I think it will. This is the more complex question. I believe true “Normal” will be achieved only after a cure/treatment is developed followed by a vaccine. This is easily at least an 18-month process if not longer.
Now to the economy. A number of people have made forecasts about unemployment levels before we can pull back up. I like the forecast by Goldman Sachs and Robert Kaplan of the Dallas fed, both of whom forecast low to mid teens so lets say 14%.
I have plotted 2 scenarios below. The image shows the good scenario playing out, seen from the lens of the market as the economy would take much longer to recover.
Good scenario (This is a very optimistic scenario): Retest the lows of Mar 23rd, perhaps a bit lower, but then the country opens up, there is social anxiety however businesses find creative operating models with part of the workforce working remotely. There is another possible stimulus and a slow, steady and staggered recovery. Once a treatment and a vaccine is on the horizon then we can all go back to “Normal” with relaxed yet pragmatic social distancing by the 2nd half of 2021.
Bad scenario: Retest March 23rd lows, another flare-up of the virus, paranoia ensues, social distancing back in force, and the economy stalls, >20% unemployment, more stimulus required and perhaps stricter lock downs to prevent infection and spread, Consumer confidence plummets, economic recovery is slow. In this scenario a “Normal” would perhaps be pushed out by another 6-8 months (H2 2022).
Let me also point out that from 2001 to 2007 GDP grew by 17.5%; Markets (DJI) grew by 53%, over twice as much as GDP growth. In 8 years, DJI market value was over twice GDP growth during that period.
From 2009 to 2020 GDP grew by 20.4%, Markets (DJI) grew by 345%. In the past 12 years, market value was 20 times GDP growth during the same period.
THAT’S A LOT OF FLUFF!!!
Hopefully after this downturn we will have saner valuations of assets.
A few other things we can look out for going forward
- More nationalism
- More insourcing of manufacturing and supply chains.
- More government programs and intervention in healthcare, minimum wage, infrastructure and data gathering.
- More regulations.
- Better national preparedness and central coordination capabilities for extreme events like pandemics.
- Near zero interest rates for a long period of time.
More on that stuff later
Stay safe, stay healthy.