Yesterday we ran a survey of our subscribers. We asked you to tell us which economic scenario you believe is likely for the COVID-19 pandemic and post-pandemic economy. There were four options… The percentages in brackets show the distribution of votes for each expected scenario.
Volatility is what people expect, and the majority certainly expect a recovery of some sort in the long run… But 25% of us are pessimistic!
We’ll provide some additional analysis at the end of this note, but first, we want to share the news from the last few days.
We’re now seeing staggering impacts on people’s employment:
What’s a “jobless claim”? These cover both permanent job losses and temporary layoffs.
How are companies surviving this period? The playbook we reported on earlier continues to get played...
If you’re an investor, consider how your target companies are applying the playbook above. While I don’t give investment advice, I will say that you should review the playbook your investments are using to respond to COVID-19.
This past week was “make or break”. On March 29, the WSJ said this week was America’s “make or break” week. So far, it’s looking more like a “break” than a “make”.
First, let’s make a list of things we know when it comes to the long-term economic prospects of our society.
How would this work? Imagine if governments commit to high deficit spending to support unemployment benefits, struggling companies, and so on. This leads to higher debt levels, which leads to debt servicing obligations multiple years out. Maybe governments can afford this now, but can they afford it 5-10 years from now?
Will this be like a Greek government debt crisis of the 2010s? This scenario feels like an “L”...
On the bright side, there’s the post-World War 2 recovery scenario (“U”). Western governments had hiiiigh debts after World War 2, and the subsequent decades of economic prosperity, budget planning, and inflation led to debt ratios dropping. The US went from a 112.7% debt-to-GDP ratio in 1945 to under 30% within a 35 year period. So, it’s possible. This scenario feels like a “U” or a “W”.
One other important question is how quickly a recovery in employment, revenue generation, etc. can actually take place. For example, it’s one thing to close a restaurant temporarily, but another thing to shut it down. In the latter case, reopening the economy will still require a month, two months, or longer for businesses to be re-founded rather than re-opened. This will lead to a slower, less sharp recovery.
My prediction: we’re heading for a “U”. Taking the above together, I believe we’re entering a ‘U’ situation that will last 3-5 years before recovering. It will take time to get people working again, especially while the longer social isolation policies last.
...but there’s a risk of an “L”. The post-COVID-19 recovery will dictate how long the bottom of the “U” is ,and how quickly the 'U' rises on the other end. We’ll need very good policies to ensure companies recover, government debts get repaid without high levels of inflation, and people find meaningful work. In short, significant trust in our governments, and responsible fiscal policies.
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