The Economy Is Ready For Recovery!

“What doesn’t kill me makes me stronger” is a well-known saying from the 19th century philosopher Friedrich Nietzsche which also provides a very constructive way of looking at life, the economy and markets in light of the Corona virus (CV) pandemic. In fact, Nietzsche’s own self-described “motto” was a rather optimistic Latin phrase which translates to: “With a wound, spirits soar and virtue thrives.” While a discussion of Nietzsche and metaphysics is well beyond the scope of what we are working on here, it is nevertheless encouraging to take comfort in these uplifting phrases and to appreciate a philosophical approach to the unprecedented situation that we, as people and investors, face. With the economy and markets having been upended by the government mandated shutdown of all non-essential businesses and “stay at home” policies across the country, we are facing the first ever self-inflicted recession. Since the problem we are facing is health-based, it elicits significantly different reactions from different people. This is why we saw the spring-breakers down in Florida who were taunting the virus versus the elderly or those with existing health conditions who are afraid to leave their homes, and then everyone else who lies somewhere in-between. Because of this, we can’t just follow the typical recession and bear market playbooks. This time, it’s especially important that investors think for themselves and outside of the box. So, by taking an approach that questions the information, its sources and why people are having different reactions to this situation, we can formulate a view that is based on logic and rational behavior instead of hysterical emotion.

Given that we are dealing with a situation which strikes at the heart of some people’s greatest fears, behavioral biases can become even more prevalent in the information presented to the public and in how people interpret that information. While death is universally feared by all rational people, not everyone has the same fears. Some people have a fear of flying but no problem using public bathrooms while others enjoy flying but are afraid to have direct contact with any surface that could potentially have germs. Even though fact based arguments can be made that should diminish either fear, that’s not how the human psyche works when it comes to biases elicited from those fears. With that, we can take some solace in there being at least one familiar element in this situation, which is that there are markedly differing views on the same subject for investors to choose from. And to borrow an old Wall Street expression, that’s what makes markets.

With the understanding that some level of bias is present in any work as every author forms their views through their own lens which has been shaped through their own experiences, we can still sift through vast amounts of research to find that which seems most rational and has a common sense approach to it. However, we need to be aware of not just biases but also the technical validity of the research. Fortunately, as investors we are accustomed to working with data and models and are very aware that slight changes to model inputs can have significant changes to the output. In financial modeling, we have the luxury of using existing asset prices as a sanity check on any model output so that any egregious variance can be deemed a “modeling error” and cause a reassessment of the inputs. Conversely, when public policy makers and health professionals are dealing with analyzing a new virus, it’s very easy to become prone to modeling errors since there is no reliable context. Then, the modeling errors can be compounded by behavioral biases and the psychological stress of having to make immediate and significant decisions on an unfamiliar situation. All of which when combined can result in inappropriate decisions.

Back in early March when the CV situation turned from being just a China story into a global pandemic, the first widely recognized hospitalization and death estimates came out of a study from Imperial College in the UK. The study gained immediate notoriety with its shocking prediction of a possible 2.2 million deaths in the US from CV. Closely following that study was one from the University of Oxford that took a significantly different view which proposed the virus as having already been significantly widespread and that the mortality rate was actually very low. Given the actual results that we now have, the Oxford study was clearly more accurate and also reconciles well with what has occurred in the New York City metro area (NYC). In fact, when we combine actual NYC virus results with recent research from MIT which focuses on the subway system as being a primary source of virus spread and data out of UCLA which Governor Cuomo alluded to last week on how the virus can live on plastic and steel surfaces for up to 72 hours, we can form a rational and science-based view of what has happened, and more importantly, on what can happen going forward. Therefore, if we take the subway and surface research in the context of average daily subway ridership of 5.4 million people, it stands to reason that there is a significantly higher amount of positive cases in NYC than the 156,000 currently reported and a significantly lower mortality rate. This is an important aspect of the data that doesn’t get much coverage in the media most likely because it doesn’t stoke fear. That said, should the high infection, low mortality thesis continue to play out, that is exactly what will produce a V shaped recovery.

Since the Imperial and Oxford studies, the US has been getting its guidance from the University of Washington based Institute for Health Metrics and Evaluation (IHME). Even the IHME has seen its own projections be considerably off from what has actually happened. In early April, the IHME had a range of 100,000 to 240,000 predicted deaths which has now been revised down to 45,000 to 124,000 deaths. The IHME revisions are partly the result of an input error with respect to the March 1 start date used for their estimates. Based on the unrestricted travel from China that happened until January 31, it’s likely that CV was spreading unchecked throughout the country since at least January and probably earlier. In which case, an earlier model start date would have produced results more in-line with what really occurred.

With such frightening data that was originally predicting a collapse of the healthcare system, it’s understandable that the decision was made to temporarily shut down the country. Thankfully, we are seeing with each passing day that the actual CV results have not been anywhere near as dire as what was predicted. It has been these results that have allowed some states to begin lifting restrictions and start returning to some sort of normalcy. Unfortunately, it still may be quite some time before the 26 million people and rising who filed unemployment claims over the last 5 weeks get back to work. Even with reopening, the CV has caused such substantial changes to life and work that we really don’t know what the business landscape is going to look like when the country fully reopens. This is where Nietzsche’s motto “With a wound, spirits soar and virtue thrives” comes into play.

Since the shutdown started, we have seen the most significant job losses in accommodation and food services, retail trade, non-essential healthcare services, manufacturing and temporary workers associated with these and other sectors. Compounding the job losses is the lack of visibility for when people can get back to work. Thankfully, we have numerous government programs that are in place to help mitigate the financial pain being felt by all these people, but that will not be enough to revive the animal spirits of the economy. The question that investors and media are trying to answer is, what will the economy look like when the country is open again? The truth is no one really knows for sure because of all the variables from state to state. And, until a vaccine is developed, there is a part of the population that will not be comfortable without social distancing guidelines in place for anything that they do. This means that the end result could be businesses redeveloping themselves to serve a given risk tolerance of a particular clientele. As the anti-shutdown protests have shown, there is a segment of the population that has assessed the health risks and is comfortable without stringent social distancing guidelines. There is also a view in the scientific community, as discussed above, that the virus isn’t nearly as deadly as what was predicted and is actually something similar to an influenza virus. Thus, once the business community has worked through the various reopening guidelines, the free market will be in control again and consumers will vote with their wallets as to what is acceptable for them. Given the move in equities from the March low, it’s clear that investors are already pricing in a benign economic outcome.

Where we could see spirits soar and virtue thrive is in the changes that have come about because of CV. The recent shortages we experienced of medical supplies and other basic goods has shown how vulnerable our country is to foreign powers as a result of decades of offshoring manufacturing processes. It has been a testament to American ingenuity that our corporations were able to quickly retool existing facilities to produce the lifesaving equipment that our country and the world desperately needed. It has now become a matter of national security to rebuild domestic supply chains for essential goods. That rebuilding will be a renaissance of American manufacturing that will bring back jobs to areas all across the country and rejuvenate the economy’s animal spirits. People will argue that increased domestic supply chains will lead to inflation, but that may not be the case. Thanks to technology like open source software, 3D printing and the Internet of Things (IoT), new manufacturing processes can be developed with lower costs and higher productivity than what existed before. Since we have an administration that has already shown its support for domestic industrial development, the economy is set up to absorb the job losses that have resulted from the shutdown and potential changes in consumer preferences. So, amidst all the hysteria that the virus has caused, we know that by taking a data focused and open minded approach to what is happening, we can see that it’s not just spirits that are set to soar, but the economy as well.

Marco Mazzocco is an associated member of T3 Trading Group, LLC (“T3TG”), a SEC registered Broker-Dealer & Member of the NASDAQ PHLX Stock Exchange. All trades made by Marco are placed through T3TG. Marco has no positions.