Do you think this will be worst than the Great Recession?

[valueinvestor]

First of all, I hope I'm wrong, however, I do think this will be worst than the Great Recession for one reason - spending.

 

When your country is in lockdown, where individuals can be fined to the tunes of hundreds, if not thousands of dollars for non-essential travel - it's kind of hard to spend. Even without the fines and lockdown, the social distancing that still takes place makes it inconvenient to go to stores where they only allow one adult per family/household. This does not work in a world where 90% of our spending is done in-store since the systems in place are not able to take on that level of spending online right away. If it does, it's not without great consequence/volatility.

 

With that being said, I'm not one for detailed analysis, however, spending was key to get out of all our downturns. If you compare this downturn with many others, this one is reminiscent of the Great Recession and Depression, because it's literally (figuratively) hard to see the light at the end of the tunnel. Other downturns such as the dot-com bust, we were at least able to see how we are going to get out of it. At the end of the day, it's hard to see where this will go, but even if it turns out that the curve flattens this week or the next, it still does not matter. It is not unfathomable to see a 4-5% decline in GDP decline for the year which may not be worst than the Great Recession but still is in line.

 

If this turns out to be true (which I hope it does not), stocks are quite expensive to say the least, even with QE.

 

If anyone can disagree and provide a solace of comfort - it would be much appreciated. Not that I am scared, because I'm fortunate that my parents, immediate family, and most of those I love can weather this storm - hell, I may even profit from this - but it still breaks my heart seeing those affected by this terrible pandemic.

 

However investing-wise, I still think stocks are expensive relative to the economic background despite QE. If this becomes in line with the Great Recession, then valuations should be around what we saw in 2008 - maybe a little better because we still have a functioning credit market.

 

Do I think I should go 100% cash? Personally I'm not because I cannot trade in and out of the market like the big firms while knowing 80% of my returns come from 4-10 days of the year - however, I would invest in a few stocks that are trading inline or less than 2008 levels, or at least cheap on an absolute basis and sell accordingly. Despite knowing that Ray Dalio mentioned that we may be going into a depression not as bad as the Great Depression, but we'll experience multi-year declines in GDP.  Either way, I think investing in stocks that cheap on an absolute basis will still work out while waiting for compounders at a bargain.

[Guest cherzeca]

I am sure I am a product of living in NYC for last 40 years, but I expect New Yorkers to embrace the return of eating out, spending more for the latest thing (so as to tell best friend of purchase if for no other reason) etc.  I think social patterns are difficult to change, and I see no reason why New Yorkers, those hardest hit by covid, would not return to prior spending patterns with a passion

[valueinvestor]

I am sure I am a product of living in NYC for last 40 years, but I expect New Yorkers to embrace the return of eating out, spending more for the latest thing (so as to tell best friend of purchase if for no other reason) etc.  I think social patterns are difficult to change, and I see no reason why New Yorkers, those hardest hit by covid, would not return to prior spending patterns with a passion

 

Relying on habit is a slippery slope since it only takes 21 days to 1 year to break or rather change a habit into something else. For most people, it's already 30 days since the lockdown. People have been changed imho.

[jeffsreng]

FYI:

 

[Jurgis]

It depends how Covid pandemic ends.

 

The best case: THE PILL! Antiviral that treats the disease is found. You get symptoms, you take the pill, you are cured. Everyone goes back to 2019 behavior. We win.

The next best case: Near 100% (think measles) preventative vaccine is created. Same as above though probably takes longer than above.

 

The not so good case: 70-80% (think flu) vaccine is created. People may go back to 2019 behavior but who knows.

 

The bad case: No vaccine. Wait for herd immunity. Drawn out process, tons of deaths, people may go back to 2019 behavior, but not very likely.

 

The very bad case: No vaccine or 70-80% vaccine, but virus mutates like flu virus does. Social distancing forever or a risk of dying through social contact every year. This is probably very unlikely case.

 

IMO, we will end up with "not so good case" (although I am not a vaccine expert - perhaps "the next best case" is also likely). IMO it's very hard to predict how people will deal with this. Quite possibly economic outcome will be bad.

Apparently Bill Gates is somewhat optimistic about THE PILL. So maybe it's gonna be better than I think.

 

 

Edit: I did not cover the case of "no vaccine, no cure, just track and test". IMO that's not a sustainable solution long term. I might be wrong though.

[Cigarbutt]

I am sure I am a product of living in NYC for last 40 years, but I expect New Yorkers to embrace the return of eating out, spending more for the latest thing (so as to tell best friend of purchase if for no other reason) etc.  I think social patterns are difficult to change, and I see no reason why New Yorkers, those hardest hit by covid, would not return to prior spending patterns with a passion

Wages, dividends, progress and prosperity says a chicken in every pot

has become

Wages, dividends, progress and prosperity says the latest thing on your doorstep

:)

[buffetteer1984]

I think human nature is wanting to be around others whether it's eating out or going to the movies or any social gathering.  People are already violating the lockdown rules because of cabin fever.  I'm from Toronto and there's a $1000 fine for violating social distancing.  The fact that such a huge penalty has to be implemented to prevent people from doing it implies we're desperate for it.  If the all clear sign is given i think economy rebounds and then some with all the stimulus.  The more important question is how people deal with the slow roll out of getting back to things.

[Castanza]

I am sure I am a product of living in NYC for last 40 years, but I expect New Yorkers to embrace the return of eating out, spending more for the latest thing (so as to tell best friend of purchase if for no other reason) etc.  I think social patterns are difficult to change, and I see no reason why New Yorkers, those hardest hit by covid, would not return to prior spending patterns with a passion

 

Relying on habit is a slippery slope since it only takes 21 days to 1 year to break or rather change a habit into something else. For most people, it's already 30 days since the lockdown. People have been changed imho.

 

And they can't change back?

[valueinvestor]

I am sure I am a product of living in NYC for last 40 years, but I expect New Yorkers to embrace the return of eating out, spending more for the latest thing (so as to tell best friend of purchase if for no other reason) etc.  I think social patterns are difficult to change, and I see no reason why New Yorkers, those hardest hit by covid, would not return to prior spending patterns with a passion

 

Relying on habit is a slippery slope since it only takes 21 days to 1 year to break or rather change a habit into something else. For most people, it's already 30 days since the lockdown. People have been changed imho.

 

And they can't change back?

 

Not the point. I didn't say spending will end, I said it may be a possibility for it to dry up for the mid-to-long term. If that's the case, it will have tangible effects.

 

EDIT: So even if they can change back, it does not invalidate my argument.

[shhughes1116]

How much changed after the Spanish Influenza?  Not a whole lot, in fact we saw an explosion in GDP as life returned into normal.  And keep in mind there were three waves of that influenza. Everyone knew someone who was seriously affected.  Also note that there was no vaccine or therapeutic.  After the third wave, it faded away and never returned.

 

We have a reasonably healthy banking system, a Fed that will literally do anything to keep things afloat, and a Congress/President that realizes some fiscal stimulus is going to be necessary to get ourselves out of this hole.  I think we are going to see a painful six months, and then an acceleration as things return to normal.  Maybe movie theaters are gone for good, maybe class c malls are gone for good, but these were trends already underway that will be driven to completion by the quarantine.

 

[Viking]

Yellin said the key is the duration of the current recession. The longer economic activity is shut off the more severe the economic down turn. More businesses shut their doors permanently. Unemployment moves from temporary to permanent.

 

China, Taiwan, Hong Kong and Singapore provide perhaps the best examples of what the next phase looks like. And it definitely does not look like V shaped recovery. However, recovery in every country was enabled by executing a nationally coordinated test (priority with rapid results), contact trace (built large organization to do this) and quarantine. Personal freedoms were restricted to enable recovery. And culturally the populations follow the governments orders. Even with all these efforts some countries like Singapore have had relapses and had to resort to lock down again. So it looks like this solution is difficult to execute and still not guaranteed to be successful.

 

Most countries are going to struggle to execute an Asian strategy post-lockdown. Either they do not have the testing resources, are not prepared to infringe on personal freedoms or culturally are not able to execute (or some combination of the 3). This likely means their lock downs will last longer, their re-opening of their economies will be slower and new outbreaks of the virus will be more likely (with resulting return to lock down). This situation will be very difficult and will result in negative GDP growth.

 

As Jurgis points out our best short term hope is treatment via the Pill. Timing? How effective? A vaccine is much further out (12-18 months).

 

Bottom line, until we get a treatment (or some medical breakthrough) we will likely be screwed (from an economic growth perspective) resulting in month after month of negative GDP growth. Social distancing measures will remain in place. Older and high risk people will remain in quarantine. Airline, cruise, hotel, sit down restaurants, travel industries will remain in depression type conditions. Group activities (sports entertainment) will continue to be shuttered. Universities will likely remain on line in the fall. International travel will be minimal. Air bnb owners? All of these activities will put enormous numbers of people out of work.

 

Regarding financial markets, all of the Feds actions may in the short term juice stock prices. QE always seems to result in higher stock market prices. And we are getting QE on steroids. Earnings and business prospects do not matter. I think it is likely that the Fed will be buying stocks should financial markets take out recent lows; they are ‘all in’ at this stage. And the White House/Treasury will be pushing them to do this.

 

The good news is the US consumer is in pretty good shape. US banking system is well capitalized. Fed and Congress has been quick to respond.

 

Canada is in a much more difficult economic situation: consumers are highly indebted, oil is big part of national economy, housing bubble. If the current recession causes the housing bubble to pop then Canada is in deep shit.

 

[Jurgis]

If the all clear sign is given i think economy rebounds and then some with all the stimulus.

 

But that's the key point, isn't it?

 

Sure, if (when) all is clear, we all happily go to 2019-normal.

 

But what exactly is "all clear" and when is it going to happen? The economic impact will depend on the answer to this question. The effects are going to be very different if "all clear" is in June 2020 vs if it is in December 2021.

 

Also

 

How much changed after the Spanish Influenza?  Not a whole lot, in fact we saw an explosion in GDP as life returned into normal.  And keep in mind there were three waves of that influenza. Everyone knew someone who was seriously affected.  Also note that there was no vaccine or therapeutic.  After the third wave, it faded away and never returned.

 

Yes, and it took 2+ years. If Covid takes 2+ years to resolve, then the economic impact will be worse than Great Recession for sure.

 

And yeah 5-10+ years into the future the economy will likely recover and grow. But if you think that 2 years of social isolation is not going to be bad for economy, then you are very overoptimistic.

 

So really anyone expecting mild impact is just betting on "all clear" within couple months.

For me the partial-tentative "reopening" without a vaccine and/or cure is not "all clear". JMHO.

[UK]

https://www.bloomberg.com/news/articles/2020-04-12/fed-s-kashkari-says-u-s-may-face-18-months-of-rolling-shutdowns

[valueinvestor]

Regarding financial markets, all of the Feds actions may in the short term juice stock prices. QE always seems to result in higher stock market prices. And we are getting QE on steroids. Earnings and business prospects do not matter. I think it is likely that the Fed will be buying stocks should financial markets take out recent lows; they are ‘all in’ at this stage. And the White House/Treasury will be pushing them to do this.

 

It's hard to say - when we had the bust in 2008, QE worked because implementing it would've helped the US in the short-to-mid term. Banks free up capital, they lend that capital and businesses spend. However, if banks lend capital, and business doesn't spend because they don't know what the world will look like in 6-12 months, then what happens? Fed can't pump an unlimited amount of money in the system, otherwise, it will cause hyperinflation or deflation.

[Viking]

How much changed after the Spanish Influenza?  Not a whole lot, in fact we saw an explosion in GDP as life returned into normal.  And keep in mind there were three waves of that influenza. Everyone knew someone who was seriously affected.  Also note that there was no vaccine or therapeutic.  After the third wave, it faded away and never returned.

 

We have a reasonably healthy banking system, a Fed that will literally do anything to keep things afloat, and a Congress/President that realizes some fiscal stimulus is going to be necessary to get ourselves out of this hole.  I think we are going to see a painful six months, and then an acceleration as things return to normal.  Maybe movie theaters are gone for good, maybe class c malls are gone for good, but these were trends already underway that will be driven to completion by the quarantine.

 

WW1 was happening. Spanish Influenza was one of the factors that ended it. The troops returned home. The global economy shifted from war time to peace time and was starting from a pretty low base. International trade and government spending was much lower. Rural economy versus industrial economy. I think it is pretty hard to compare.

[Viking]

Regarding financial markets, all of the Feds actions may in the short term juice stock prices. QE always seems to result in higher stock market prices. And we are getting QE on steroids. Earnings and business prospects do not matter. I think it is likely that the Fed will be buying stocks should financial markets take out recent lows; they are ‘all in’ at this stage. And the White House/Treasury will be pushing them to do this.

 

It's hard to say - when we had the bust in 2008, QE worked because implementing it would've helped the US in the short-to-mid term. Banks free up capital, they lend that capital and businesses spend. However, if banks lend capital, and business doesn't spend because they don't know what the world will look like in 6-12 months, then what happens? Fed can't pump an unlimited amount of money in the system, otherwise, it will cause hyperinflation or deflation.

 

Valueinvestor, QE is the part of investing that i have the hardest time understanding over the past 10 years. I think it also messed Fairfax up for many years. My learning (without understanding the mechanics) is every time the Fed begins a new round of QE shortly thereafter we get stocks increasing in price. The Feds goal appears to be asset price inflation to create a wealth effect so people spend more in the larger economy.

[Spekulatius]

In my circle a lot of people have pulled back spending and longer term plans to do so. The reason is two fold - right now it is really hard to actually spent money except for necessities and maybe work from home stuff and utilities and the second one is that the economic numbers are so bad (unemployment etc) that it is only prudent to reduce spending, since it is impossible to know if one still has a job in two month and getting a new one is going to be quite a challenge.

 

I do not think we will have a Great Recession though, but we probably have a worse recession than 2008/2009 with the duration being the question.

[rb]

I do not think we will have a Great Recession though, but we probably have a worse recession than 2008/2009 with the duration being the question.

Wasn't that the Great Recession?

[Spekulatius]

I do not think we will have a Great Recession though, but we probably have a worse recession than 2008/2009 with the duration being the question.

Wasn't that the Great Recession?

 

Tru. I mixed up Great Depression and Great Recession. I do think that the coming recession could be worse than the Great Recession.

[SharperDingaan]

We aren't going into another GD. Every CB in the world is doing everything they possible can to prevent it.

It's pretty obvious that we will have recession, the mystery is which industries, how deep and for how long. The cruise, adventure travel, and airline industries, are not coming back to former levels for a good 2 yrs+. Bars and restaurants, maybe 6 months.

 

The mystery is the re-start. Multiple infra-structure mega-projects, around pipelines, refineries, power grids, ports, etc - and we should do well. Tepid responses, and we could be in recession for a long time. The big difference today is that war-time legislation can be used to make it happen, which was not possible even just 4 months ago.

 

SD

 

[rb]

Sorry Spek, I didn't mean to sound like a prick, it just came out that way.

 

It'll be definitely interesting to see how it plays out. Just like with the great recession this is a shock and an aftermath (deleveraging). With the great recession we didn't do much during the shock period except pile sand bags (AIG etc). During the aftermath we did some but not enough. There was some stimulus but not as much as needed because "we couldn't afford it", China actually did way more stimulus and they bounced back pretty quick.

 

Now we're doing lots of stimulus during the shock part. Somehow we can afford it despite being in a significantly worse fiscal position than back then  ???. But the shock is much bigger this time and it's not clear whether stimulus would be as effective - can't spend money at a bar if there is no bar. How we deal with the aftermath is gonna be key though. Is there gonna be another $2 trillion bill stimulating the economy 1+ years from now or are we gonna go to we did what we had to but now we can't afford it? Somehow I don't have a lot of faith in the US Congress.

 

It'll be pretty hard to duplicate the Great Depression as long as you banks stay healthy though.

[Gregmal]

Dont worry, congress will do plenty. As long as they can trade ahead of it. I heard Kelly Blowfer is buying X and EXP... get ready for an infrastructure bill!

 

 

*(just kidding about individual stock names)

[rb]

Something stopped them from trading in 2009/2010?

[Gregmal]

This whole episode has been an insiders wet dream. 2008/09 no one really knew what was going on. From China initially hiding this until after their New Year parties, to the congressional hearings in Jan/Feb, to the orchestrated shut downs, now with the stimulus, and then reopening, and yes, an eventual infrastructure or further stimulus bill, if you are in the loop this time around, its much easier than ever before.

[LC]

I am sure I am a product of living in NYC for last 40 years, but I expect New Yorkers to embrace the return of eating out, spending more for the latest thing (so as to tell best friend of purchase if for no other reason) etc.  I think social patterns are difficult to change, and I see no reason why New Yorkers, those hardest hit by covid, would not return to prior spending patterns with a passion

 

Relying on habit is a slippery slope since it only takes 21 days to 1 year to break or rather change a habit into something else. For most people, it's already 30 days since the lockdown. People have been changed imho.

 

I disagree and think once lockdown is lifted we may see a 1-2 week period of "tentative" behavior but will revert rather quickly afterwards, as people are quite frustrated with sitting home all day and night.