We’re months into the pandemic, yet the debate on the shape of the recovery rages on. The potential trajectory of recovery has been a cornucopia of letters: L, U, V, I and W.
The “V” shaped camp is the most optimistic. The “Ls” believe that prolonged economic pain will ensue. And an “I” — which I had to look up — is apocalyptic.
Post multiple economic bailout packages and with the Federal Reserve “flooding” the market with liquidity, many “V” shapers have stuck to their guns. Still, confusion and differing opinions remain.
Let me try to simplify things. We’re emerging from the “I” phase. Things will only improve from here. And despite the Government’s massive money dump, I still consider those predicting a “V” living on the planet of Trumptopia.
There are myriad reasons why one cannot logically believe an immediate economic snap-back is in the offing, not the least of which is the origin of the downturn. Just as the cause wasn’t a result of economic fundamentals, the recovery is also predicated on factors unrelated to the economy.
If you can answer the following questions, you can predict our economic future:
- When will an effective treatment for COVID-19 be available?
- How long will it take to bring a vaccine to market?
- How much will our shelter-in-place experience materially alter long-term social behavior?
Answering the first two questions is far simpler than predicting future human behavior.
The antiviral medicine, remdesivir, has shown some promise and points researchers in a direction to explore. But we’ll need a treatment that preempts the very worst outcomes, and not just shortens them. Optimistically, maybe something will emerge toward the end of the year.
The consensus among the medical community is that a vaccine will take 12-18 months to develop. In fear of being subjected to the “wrath of Trump,” many experts will be reticent to position the President’s “Operation Warp Speed” vaccine effort as a pipe dream. Keep in mind that phase 3 trials require testing thousands of people. A vaccine is only possible by year’s end if the testing process is short-circuited.
The good news is there are a plethora of vaccines in development. Moderna’s preliminary phase 1 results were encouraging and the Oxford variation has shown early promise. One caveat on Moderna: Its approach is somewhat revolutionary, and the company has yet to bring a single drug to market.
Given what we know, even if a candidate is fast-tracked, we’d be very lucky to have something available in the necessary volumes by the first half of 2021.
Then there’s the sparsity of testing. Granted, widespread testing is a “nonsensical” idea, right? We’d have to test everyone every day. Clearly, there is no value in identifying asymptomatic carriers. Thank you press secretary du jour, Kayleigh McEnany, for helping us avoid that rat hole. (Yet another member of Menza from Fox News.)
The early medical findings may not yield results in 2020, but they do mean it’s no longer a question of “if” but “when” the medical challenges will be solved. However, the “when” is what will determine the pace of the recovery.
The reluctance or inability to return to pre-virus life will likely result in 10-20% of small businesses permanently closing. Lack of working capital — a perennial small business challenge — will, in many cases, be the culprit. But demand destruction will play a role.
A cursory “six degrees of separation” exercise illustrates the dilemma:
- The restaurant and entertainment industries have virtually come to a halt.
- The direct impacts are felt by the workers and owners.
- Indirectly affected are their suppliers: food processors, distributors, farmers and fishermen.
- With entertainment venues, throw in concession and souvenir vendors for good measure.
- And the ripple effect from the cessation of private gatherings, such as weddings and holidays, must also be considered.
- These are the obvious impacts. Others include equipment suppliers, ticket brokers, credit card companies, advertising platforms, parking operators, utilities, transportation providers and state tax revenues.
Move another degree of separation, and you’ll see the impact on the real estate market as tenants default on lease and rent payments. And lest you think that all landlords are Donald Trump fat cats, many regular people own rental properties. It won’t be anything like the 2008 debacle, but you get the idea.
If this were just a 90-day event, much of the long-term impact could be avoided. But it isn’t.
The Paycheck Protection Program (PPP) helped, but its first phases were flawed. The program should have considered a company’s cash needs to ensure funds went to the neediest. And its structure was ill-suited for the restaurant sector. It simply isn’t practical for shuttered restaurants to pay staff to sit home. If they did that, they would lack working capital to fund their restart. Thus, many restaurants won’t be able to have their loans forgiven.
Then consider that restaurants and similar businesses will be required to open at 50% or less of capacity regardless of demand. And demand won’t be at pre-virus levels. Young people may, by and large, return. But most baby-boomers will, by and large, not — at least until the medical problems are solved.
The largest venues will be hit particularly hard. We may not see attendance at major events until next year — lump education and tourism into this bucket. California has already announced its universities will conduct the fall semester online.
The above-described economic impacts are all before considering long-term behavioral changes. Will the migration to online shopping accelerate? How many businesses will downscale their office space, and how might this transform the commercial real estate market? Once high flyer, WeWork, is dead company walking.
This might be depressing to read. But isn’t it better to conclude that the economic bounce-back will be more prolonged and plan accordingly? Or better yet, isn’t it better to understand what is likely to transpire and attempt to leverage the opportunities?
My crystal ball says we’re looking at an elongated U recovery. One analyst aptly described it as a Nike swoosh-like recovery. And a “W” shaped double-dip recovery resulting from a second round of outbreaks is a distinct possibility.
At some point, the stock markets will come to its senses and suffer another leg down. I’m guessing in late Q2 or early Q3. It might even happen before this article publishes.
Let’s end on a high note, however.
As quintessentially Darwinian as this event may be, it’s not all negative. Some industries will grow, and new markets will emerge. Companies will become more efficient. Unnecessary travel will somewhat diminish. This will help reduce our dependency on fossil fuels and result in a cleaner environment. Our savings rate may also increase. And we’ll arguably be better prepared for the next “black swan” event.
This may be little solace for those who suffer the financial pain, but isn’t that life? Those who are unable to help themselves should receive support from the government and private sector charities. For the rest of us, there are two basic choices. Will this bring out our best? Or will we fall by the wayside? It’s up to every able-bodied individual to choose which path they will follow.