If global lockdowns were only for around 1 month, the world would probably bounce back with minimal impact.
If as looks likely they trail on for months, the second order effects will mean that unemployment and misery spread from industries like travel to every other industry (for example no airlines means no advertising on travel, which means Google takes a huge hit on profits Q2, which means they freeze acquisitions, which means funds are reluctant to invest in startups as there are no exits, which means startups in every industry stop advertising, which means Google suffers more).
So recovery may not be quick unfortunately, even well after Coronavirus is mostly over.
1) most Americans can’t afford an unexpected $400 expense. This multi-month lockdown will be much more than that. I doubt landlords will simply forgive rent, so any Americans will owe several months of rent without any revenue. That will mean several months of no disposable income to go spend at a bar or a restaurant. That means small businesses like those will suffer longer than essential staples like grocery stores.
2) Travel And tourism are dead and will be dead until a vaccine is available. Are you going to risk getting sick in a foreign country, especially when travel insurance likely won’t cover pandemics anymore? Tourism is definitely a large source of revenue for bars and restaurants will be a huge impairment on revenues as well.
3) People aren’t necessarily going to come back to the same jobs post-coronavirus. They might flock to jobs that pay better or have better health benefits. There might be a significant delay in getting staff up and running or they may need to pay higher wages.
4) more to point 1, many people have multiple part time jobs to afford to live. Losing even one of those jobs will affect them deeply. If they can’t replace their income or get those same number of jobs post-coronavirus, their spending will also be curtailed.
All of these contribute to lower revenues for business owners once the economy “starts back up”. I don’t think it will be a fast recovery. A lot of people will be financially hurt for a while. Owners will need some very thick skin and deep pockets to wait out for revenues to come back. Some may see impaired revenues for months longer, which probably isn’t enough to keep the business afloat.
Before coronavirus when a company missed earnings it was battered on the public markets.
With Coronavirus 90%+ of companies will be directly affected in reduced revenue. Either directly like companies that are focused on retail, or indirectly, companies that are affected by challenges in logistics.
Was the market perhaps inflated, in my opinion yes, but I don't see how people can say this crash wasn't caused by coronavirus.
Could we have had a crash or reset in the future without the virus? Most likely. But that unknown reality didn't happen. Instead we have a global pandemic, where the only real working solution is to institute various levels of lock down and social distancing, which will slowdown economic spending dramatically.
If the entire global market has to take 2-months off from generating revenue, that is a huge blow to the system. Then you have the secondary effects. Job losses, businesses closing, rent, evictions, closures, etc.
The economic impact of this will take 6 months to play out to see where the bottom is. Not all companies and industries will be affected the same way, but generally speaking only a small handful of companies will really get through this without some sort of impact to their business.
Actually, this pandemic can go away forever with a month of global lockdown, it's not like from now on people must stay at home forever or they will die. With good coordination, most things should be able to continue as normal. Many countries, rich or poor, have religious holidays that stop the economy for up to a week or two and nothing happens.
Besides, even if somehow the economy crashes it's not the end of the world. It's simply not a big deal as long as the society doesn't crash.
After a month of low economic activity, people will still be engineers or scientists or artists, the infrastructure will still be in place and the output it will quickly pick up.
It doesn't have to have any real costs, except maybe some goods to expire.
Losing 2 months of global GDP because of a virus which would reduce the earnings of most companies directly and indirectly seems like a pretty solid foundation for a reduction in market cap.
It's like saying we believe that the market was overheated due to zero interest rates, but we were hoping to have the market head into a recession on it's own, rather than have an outside event cause the global GDP to stop for 2 months. But since that is so obvious, we won't accept it.
How many households have two months of savings. How many businesses can go for 2-3 months with 80% reduction in revenue and if they have the savings to cover that.
I think this event is much larger than a simple recession that would have occurred as a result of speculation and low interest rates.
This is literally stopping the world economy for 2 months and seeing how many households and businesses have enough savings to counter balance that while stress testing the governments ability to intervene, not at the top end, by providing funding to banks, but at the bottom end, of figuring out how to get all of the people who work as waiters and waitresses to go without revenue for 2-3 months and not get evicted or rack up debt that they can never escape from.
I think you are underestimating the impact of this.
I agree. There is substantial economic damage being done and it won't just undo itself. Lots of businesses are going to fail, those people will not find work so easily as they would have before the crisis. Also, I think this is going to last longer than most people realize. Countries that use this time to get their act together so that they can use South Korea style controls maybe will get their economies restarted sooner. Places where the only strategy is to shelter-in-place until there is a vaccine will see economic disruption for 9-12 months. The damage from that will be staggering.
Most signs show that lockdown could easily stretch through the summer. A freeze in consumer spending would cause multiple industries to fail causing a ripple effect. Why does it seem like no one is concerned about an economic collapse due to the coronavirus?
To be specific, if lockdown lasts through the summer, and a second virus wave occurs in the fall as expected, then lockdowns will continue further into the year. The timeframe for a vaccine is 12-18 months earliest. Then, the vaccine must be manufactured and distributed. Since the virus is so widespread that it is now assumed that it will reach a global critical mass, this essentially guarantees the collapse of the restaurant, airline, tourism, and hotel industries as they cannot sustain prolonged losses in a capitalistic structure. If they fail, their suppliers fail, and so on. History has shown that large systems are prone to failure time and time again, esp. when accountability is obfuscated (e.g. the Titanic, the World Wars/Holocaust, and now this). In the past Egypt fell, and then Rome fell. What is to say our current systems won’t fail, even if as a slowly sinking ship?
In the long-term it might also be important to look at the economy at least a few years down the line. It might be that some countries will find it very difficult to recover from the crisis because the lockdown hurt the economy too much. That has a cost in lives too.
There will be no fast recovery, period. We have deprived businesses of oxygen for 3 months. Cash flow is the life blood of businesses. We've sucked all the cash flow out of the worldwide economy. The bankruptcies will start rolling in and we will lose at least a decade of economic growth just to recover to where we were. 40+ million unemployed in the U.S. Near record levels. WWII caused 50+ million deaths. Are we on that track now? Hard to say. But I certainly fear worldwide economic instability more than I do Covid-19. My reading of history is that those events cause far more death and destruction than viruses. We know by now that Covid isn't the plague.
are you saying that everyone taking a 2 week pause would irreparably damage us economy, really? more like you will see a V shaped movement in stock market.
the main problem right now is that there is a lot of fear and uncertainty in everybodys mind partly because of Italy & spain. and as cases mount that fear will only harden so regardless of whether there is a lock-down or not people wont go out an shop until a sizable portion of population is infected and recovered OR we determine with american data that CFR is indeed quite low (doesn't look like from hospital testing data & they wont do widespread tests).
but regardless I do agree bailout package is not gonna be enough.
The real world is not as simple as "economy vs lives saved". Most of the businesses that are having problems because of COVID will not recover when the government "opens up". The government can say whatever it wants - people know the virus is out there, and many of those people will not go back to consuming like they did before the pandemic. Most people are not going to go back to dining out at restaurants, going to bars or taking flights all over the place just because the government says that the lockdown is over.
The only way people will go back to consuming like they did before is if the cause of the lockdown is gone. Releasing the lockdown will make the coronavirus spread more, and in turn could very well make the economic effects worse as people get more scared and consume less and travel less for a much longer period of time, as the virus continues to roam free.
The important question is whether the recession due to the lockdown (which is at least useful for stopping the virus) will continue after the virus has passed and the lockdown is lifted.
Looking at Europe (but the US seems to be taking the same direction). All restaurants, shops, entertainment, tourist industry are closing, and will remain closed for several months. Large businesses will fire people (see airlines now), small businesses will go bust.
If these health policies undershoot their targets in term of number of people infected, then we may have to deal with this virus again next fall/winter, so add a few more months of similar pain.
I just don't see how this will not have lasting effects. Even in Dec 2008, at the very worst of the crisis, you had deep discounts in shops, but at least you could consume. But here all malls will be basically closed.
We know lockdowns help keep the growth rate manageable. What we don't know is what will happen to the economy once the lockdowns fade.
My gut is that short of more direct Federal aid to individuals (in the form of checks), we'll see people forced back to work as businesses re-open. Consumer spending will still be shit, since no one but fools will be going to football games, theaters, anywhere with crowds. And people will be clinging to their money. So the velocity of money will dwindle.
And unless the government indemnifies businesses against lawsuits arising from COVID infections, businesses will be slow to re-open as well. Wrongful death lawsuits for failing to provide a safe work environment will be very popular.
The textbook case is the 2004 tsunami and tourism in Thailand. Most of the destroyed infrastructure was replaced in about a year and tourist numbers (measured by number of passengers to Phuket Airport) recovered shortly thereafter.
The short-term effect of Covid-19 on Chinese manufacturing have been absolutely devistating - I honestly can't think of another feasible event that would cause the same level of slowdown that you saw last month. However the recover is in progress, and while it's going to take some time, odds are that everything will more or less return to normal in another couple of months.
- Short term we need government to step in and avoid a large-scale meltdown of businesses that would be more catastrophic than the virus itself. This will likely involve taking equity stakes in airlines etc. Warren Buffet might also be willing to help here again, he has 128 billion USD saved up for times like these :)
- Stock market likely hasn't seen the bottom yet. There will be more deleveraging and panic selling. Long term (10+ years) it's still a good point to buy (perhaps with one third of the capital you do not need anyway)
- Western countries might lose some civil rights that are necessary to quickly control new outbreaks (e.g. analysis of cell movement data to
locate all places an infected person visited)
- There will be long-term impact with regards to stricter controls necessary to quickly contain new outbreaks. This will increase costs for a few, potentially a lot of industries (everything travel, potentially logistics)
- I have some fear that some countries which are simply not able to get the virus under control will be disconnected from the rest of the world economy, since no one wants to risk importing the virus from them again.
I hope most of the countries go the way China went in Hubei: Take the most radical measures immediately - i.e. total lockdown, government backs the economy. This will make it possible to lift them after a very short time and affect the economy the least while controlling the spread of the virus.
My thoughts are that amidst the fear, the thing is, this economy was slowed solely due to the lockdown. If there was a bubble, it hasn't popped yet. There really is no reason for the economy being in the position its in except for the virus. I doubt there will be 3rd order effects that are too devastating. The lockdown will end soon enough and the economy will thaw and start moving again, maybe even to the roaring pace it was at before all this happened ... and after all that is when we will likely see the actual once-a-decade market-correction/recession/depression.
Agree. The scary thing here is that we're talking about completely pausing the world economy for one quarter? Or two quarters? Or a year? There's really no way of knowing what the effects will be and the longer this gets stretched the more drastic the economic effects will be. I don't know what perspective your comment comes from but I think it's important to open a discussion on the long term effects of this type of quarantine. For example, if this leads to an unprecedented level of recession it's very possible that more people end up dead due to the quarantine.
If as looks likely they trail on for months, the second order effects will mean that unemployment and misery spread from industries like travel to every other industry (for example no airlines means no advertising on travel, which means Google takes a huge hit on profits Q2, which means they freeze acquisitions, which means funds are reluctant to invest in startups as there are no exits, which means startups in every industry stop advertising, which means Google suffers more).
So recovery may not be quick unfortunately, even well after Coronavirus is mostly over.
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