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From an economic perspective - how do you think this plays out?


LongHaul
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Impossible to say how it works out economically.  Governments have been brave enough to impose 25% or 30% unemployment on their citizens, and that seems to have been accepted by the people for at least a couple of months.  Will governments continue to find the budget to impose those sorts of measures and will citizens continue to accept 25% or 30% unemployment for several months?  And that's saying nothing about whether citizens will continue to accept considerable restrictions on their non-productive activities (no soccer for the kids, no movies, no workouts at the gym, no nothing).

 

 

SJ

 

 

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Lots of money have been given to people and businesses. I suspect some of this will not be asked back. Higher deficits and debt...higher inflation? I mean what happens the next crisis? Debt jubilee? How this doesn't turn out inflationary is beyond me. Governments think they will claw back the benefits, but unfortunately I suspect they will not be able to and have to go in the other direction even more.

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I think the "virus" bottom is in stock market wise. Where we go from here depends on when the country opens. NY is rolling over big time so is it 4/30? Is it before 4/30? Restrictions placed afterwards on restaurants, theaters, plane capacity, etc? I think thats what determines how fast we bounce back. For a bit we will get those that will ridicule others that do not show an abundance of caution while in public. Said group will delay spending on a large scale until they either forget or feel comfortable again.

 

Most seem to think we are going to have a slow economy, sluggish, lagging etc. That being said it will likely be the opposite. Its almost too easy to look at the situation and say it will be a slow rebound doesn't it?

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I think the first-order effects are well known and probably easily imagined. Things like, large unemployment and subsequent "frictional" re-hiring. Missed debt repayments leading to bankruptcies, loan modifications, or other financing arrangements (i.e. debt-for-equity/PIKs etc.)

 

My question is what will the second or third order effects be?

 

Will we see manufacturing exit China at an accelerated pace, due to "concentration risk"? (I don't think so)

Will we see companies globally de-leverage and hold more cash on the B/S? (Perhaps - I think moreso in "vulnerable" industries)

Will we see international trade relations deteriorate, to ensure critical industry is maintained "at home"? (I think no)

Playing off that, will we see countries allocate funds to build critical industry (think PPE, pharma production) "at home", to the same end? (I think maybe in the short term)

What will the political fallout be? Higher taxes to ensure national supplies of critical equipment, bolster unemployment funds?

 

 

There were two major world-events in the new century (at least from the myopic American view): 9/11 and the GFC. In both cases we saw decade-long consequences (never-ending war in the Middle East ; massive TARP spending, increased regulation etc. for the finance industry globally).

 

Will COVID elicit the same reaction? If so, what will that reaction look like and how will it affect economies?

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IMO - the oil bust alone was probably enough to result in a U.S. recession even if we ignored all of the damage and uncertainty surrounding the virus.

 

The stimulus has been unprecedented which is a positive, but the global economy was slowing down in Q4 which already had me concerned. Now we have an oil bust and the COVID shut-down on top of that. There will be oil bankruptcies, there will be commercial real estate bankruptcies, travel and leisure bankruptcies, and local small business bankruptcies primarily in food. These are jobs that are going away that wont be coming back immediately.

 

That means defaulted mortgages, credit cards, personal/corporate loans, etc. This is going to be just like every other recession in that regard with impacts being felt long-past the bottom of the stock market.

 

This is why I don't believe it will be a V-shaped recovery. And God help the S&P 500 if the Democrats get elected and push for raising the corporate tax rate back to where it was at given that the tax cut didn't seem to do ANYTHING to buffer cash balances and employment when it was needed. They'll have a helluvalot more support for it after trillions in bailouts for corporations....

 

 

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Seems to me that there is a very wide range of uncertainty (I am master of the obvious) regarding what happens.

 

1.  11 year boom

2.  Pandemic hit (likely near the top)

 

That is a double hit to the economy.

 

So in 1 -2 months the economy reopens - then what - Covid come back and we do another round of shutdowns?

Covid is extremely contagious.  Let people out and if they continue as before I think it comes back. 

So we have this situation around the world where social distancing is here until herd immunity.  I think that means the economy sucks until herd immunity.

How bad does it get?  Credit is being tightened in many areas by banks.  Consumers are cutting back, businesses are cutting back, banks tightening, etc. 

 

I don't know where the bottom of this is?  I think many people are hoping for a quick return to their lives and the economy in 2 months but I don't see it at all.

 

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The problem is not just that we get the biggest depression like economy of our lifetime, the bigger problem is the equity valuations even based on pre-Covid-19 multiples are quite elevated. I concur that late 2018 was a way better buying opportunity because at that time, at least the economy was in a reasonable shape. Right now, who knows what we got.

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I think it's difficult to know how this plays out because it's path dependent on how/why we get past it. It's like a matrix. You have to figure out (A) speed of finding a path out, and (B) method of finding a path out.

 

(B) is somewhat linked to (A).

 

For instance, if we find a cure/anti-viral that works to treat it soon? Economic hit is much less hard. Fewer SMB bankruptcies etc.

 

If it takes us 12-18 months to find a vaccine, then the economic hit is different, and it'll be dependent on whether we can open up in the interim or if, somehow, we end up not being able to open up in the interim.

 

The cone of uncertainty is quite wide here.

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Guest cherzeca

messaging is important in exiting from this shut down.  I have posted that the shelter in place advice for all concerned was unnecessary in severity and scope, and it took away focus and resources from the most at risk...elderly and immune-compromised.  tyranny of the models, common sense jettisoned.  now, if we try to get back to normality in halting and half-measured steps, this recession will become prolonged.  at some point I expect potus to tell the epidemiologists that the curve is flat and their job is done, and we will confront the fear of return to normality with vigor.  but to do that, you are going to have to stop seeing Fauci on the press briefings.  high time that he goes back to his lab imo.

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Guest cherzeca

Impossible to say how it works out economically.  Governments have been brave enough to impose 25% or 30% unemployment on their citizens, and that seems to have been accepted by the people for at least a couple of months.  Will governments continue to find the budget to impose those sorts of measures and will citizens continue to accept 25% or 30% unemployment for several months?  And that's saying nothing about whether citizens will continue to accept considerable restrictions on their non-productive activities (no soccer for the kids, no movies, no workouts at the gym, no nothing).

 

 

SJ

 

"brave" is not the word I would have used.

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This virus isn't going to magically disappear when we go back to work. It'll be out there, and there will be flare ups in locations all around the world which will be met by continuing shutdowns and social distancing. This is going to happen for the balance of 2020 and until we get a vaccine. In the meantime we can also hope that treatment options become more proven and that will remove some of the fear of catching the virus. But I don't see us getting back to "normal" for almost another year. We'll likely be in a recession until that time, but I'm expecting a strong recovery if we can prevent too many businesses from going under by various measures in the meantime.

 

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Guest cherzeca

This virus isn't going to magically disappear when we go back to work. It'll be out there, and there will be flare ups in locations all around the world which will be met by continuing shutdowns and social distancing. This is going to happen for the balance of 2020 and until we get a vaccine. In the meantime we can also hope that treatment options become more proven and that will remove some of the fear of catching the virus. But I don't see us getting back to "normal" for almost another year. We'll likely be in a recession until that time, but I'm expecting a strong recovery if we can prevent too many businesses from going under by various measures in the meantime.

 

if getting back to normal is no covid-19 virus in circulation, then we can all go back to the Stone Age now.  but after every flu season, when millions are infected and 10,000-50,000 die in US of pneumonia etc, we get back to normal without missing a step. 

 

this is easy peasy. 

 

 

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This virus isn't going to magically disappear when we go back to work. It'll be out there, and there will be flare ups in locations all around the world which will be met by continuing shutdowns and social distancing. This is going to happen for the balance of 2020 and until we get a vaccine. In the meantime we can also hope that treatment options become more proven and that will remove some of the fear of catching the virus. But I don't see us getting back to "normal" for almost another year. We'll likely be in a recession until that time, but I'm expecting a strong recovery if we can prevent too many businesses from going under by various measures in the meantime.

 

if getting back to normal is no covid-19 virus in circulation, then we can all go back to the Stone Age now.  but after every flu season, when millions are infected and 10,000-50,000 die in US of pneumonia etc, we get back to normal without missing a step. 

 

this is easy peasy.

 

Imagine still comparing this to the flu

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This. I think it plays out like this. (Sound ON)

 

https://twitter.com/APompliano/status/1246961987994759168

 

 

I've tried to be more serious, trying to argue how the only thing certain is that we'll get volatility and we should just swing trade value stocks but then it seems that if the Fed injects assets with so much liquidity it can also go straight up.  Can't figure it out.

 

 

 

 

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Guest cherzeca

This virus isn't going to magically disappear when we go back to work. It'll be out there, and there will be flare ups in locations all around the world which will be met by continuing shutdowns and social distancing. This is going to happen for the balance of 2020 and until we get a vaccine. In the meantime we can also hope that treatment options become more proven and that will remove some of the fear of catching the virus. But I don't see us getting back to "normal" for almost another year. We'll likely be in a recession until that time, but I'm expecting a strong recovery if we can prevent too many businesses from going under by various measures in the meantime.

 

if getting back to normal is no covid-19 virus in circulation, then we can all go back to the Stone Age now.  but after every flu season, when millions are infected and 10,000-50,000 die in US of pneumonia etc, we get back to normal without missing a step. 

 

this is easy peasy.

 

Imagine still comparing this to the flu

 

this is the flu.  similar infectious rate, similar mortality rate, similar pathology (respiratory illness).  less than 2% who die do not have another underlying condition.  average mortality age is over 75.  insufficient data to compare symptomatic rate.

 

this is the flu.

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Guest cherzeca

Probably much more contagious.

 

we dont now that.  you may be right though.  during flu season, many people obtain a vaccine predictive for the viral strains to be expected, and US still has 10,000-50,000 deaths attributed to flu each year.  without any vaccine protection, we are not yet at 9,000 with corona in US.  and I believe that number would have been MUCH lower if we had focused all of our resources on elderly etc as opposed to our precious selves.  if I were to speculate, I would say that this virus has a higher rate of asympomatic infection than other flu viruses, perhaps because there is some basic commonality to other corona viruses we have all had.  that will become apparent perhaps in the vaccine development project

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1)We will rebound possibly 75% of The GDP quickly, but the rest will be much harder. A 25% gap will steel feel like an awful recession.

 

2) more intervention and higher taxes.

 

#1 for sure. Many businesses like to run things with maximal capacity in mind--and they have leveraged income statements (operating leverage) and balance sheets as such. Few anticipate not having full restaurants, airplanes, hotels, etc in perpetuity.

 

And few managers keep excess capacity on hand like Buffett is trained to do--be it cash or operating margins or inventory. MBA "balance sheet management" means lever up to 2-2.5x EBIDTA (and project that EBITDA to grow 3% per annum in perpetuity). As we see MBA level "inventory management" means keeping just enough on stock to get through tomorrow. If there is a squeeze--for ventilators or masks for example, it creates all kinds of headaches and extreme outcomes.

 

As Warren's Noah Rule says: "Predicting rain doesn't count. Building arks does."

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Guest cherzeca

I think the first-order effects are well known and probably easily imagined. Things like, large unemployment and subsequent "frictional" re-hiring. Missed debt repayments leading to bankruptcies, loan modifications, or other financing arrangements (i.e. debt-for-equity/PIKs etc.)

 

My question is what will the second or third order effects be?

 

Will we see manufacturing exit China at an accelerated pace, due to "concentration risk"? (I don't think so)

Will we see companies globally de-leverage and hold more cash on the B/S? (Perhaps - I think moreso in "vulnerable" industries)

Will we see international trade relations deteriorate, to ensure critical industry is maintained "at home"? (I think no)

Playing off that, will we see countries allocate funds to build critical industry (think PPE, pharma production) "at home", to the same end? (I think maybe in the short term)

What will the political fallout be? Higher taxes to ensure national supplies of critical equipment, bolster unemployment funds?

 

 

There were two major world-events in the new century (at least from the myopic American view): 9/11 and the GFC. In both cases we saw decade-long consequences (never-ending war in the Middle East ; massive TARP spending, increased regulation etc. for the finance industry globally).

 

Will COVID elicit the same reaction? If so, what will that reaction look like and how will it affect economies?

 

this is a good post.  in terms of first order effects, I think you will see a lot of pain in the oil patch, but that is mostly geopolitical rather than corona.  I have no reason to believe that other industries will not eventually return to normality, but we will need an behavior/attitude adjustment from the hysteria created by the epidemiologists.  right now, people have been led to believe they cant go out to the grocery store without a mask and gloves. while this precaution makes sense in NYC (and it makes sense for elderly generally), it doesnt make sense for the rest of the nation where shelter at home has been blindly imposed. this advice will have to unequivocally change, and it must be given by the same "experts" who have induced this hysteria. 

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This virus isn't going to magically disappear when we go back to work. It'll be out there, and there will be flare ups in locations all around the world which will be met by continuing shutdowns and social distancing. This is going to happen for the balance of 2020 and until we get a vaccine. In the meantime we can also hope that treatment options become more proven and that will remove some of the fear of catching the virus. But I don't see us getting back to "normal" for almost another year. We'll likely be in a recession until that time, but I'm expecting a strong recovery if we can prevent too many businesses from going under by various measures in the meantime.

 

if getting back to normal is no covid-19 virus in circulation, then we can all go back to the Stone Age now.  but after every flu season, when millions are infected and 10,000-50,000 die in US of pneumonia etc, we get back to normal without missing a step. 

 

this is easy peasy.

 

Imagine still comparing this to the flu

 

this is the flu.  similar infectious rate, similar mortality rate, similar pathology (respiratory illness).  less than 2% who die do not have another underlying condition.  average mortality age is over 75.  insufficient data to compare symptomatic rate.

 

this is the flu.

 

BFXAZzW.jpg

 

Not the flu

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