Shocking is an understatement:
Yesterday was the second worst one-day drop in the history of the Dow Jones Industrial Average. It comes four days after the fourth worst one-day loss in history and just one week after the thirteenth worst one-day loss in history.
This is just one of those things that no one really expected. At some point, some fund that holds some crazy downside risk strategy will come forward and say how they made a killing and how they are so smart and saw it all coming. But, if you asked every single trader in the world two months ago if they saw this coming, I don’t think a single answer would be anywhere near what has occurred and is continuing to occur.
Even if there was someone who saw it coming two months ago, go back in time to November and ask everyone again. Then it is definitely no one. (Well, okay, maybe the crazy person shouting on the street outside of Grand Central every day saw it coming.) But, when the world ends up in such an insane situation that the crazy person on the street ends up being right and literally no one else saw it coming just a few months ago, you have a generation-defining event.
Even after watching the President’s address last Wednesday, where a few minutes after Tom Hanks confirmed he had COVID-19, where a few minutes after that the NBA suspended its season, where a few minutes after that the Governor of New York started talking about how cases were going to skyrocket in New York City and we’d need to repurpose parts of the city into hospitals, even after all of that, where we are today still seems shocking.
People’s expectations were already low. Every day the bad news has exceeded those low expectations. I think the market reflects that cumulative beating.
I’ve been following the coronavirus story on a daily basis since mid-January. I’ve been following reports from China, social media, and anecdotal stories from Wuhan. I’ve made forecasts and built various contagion scenarios. My career in risk management has led me to think in terms of downside risk and stress events. Despite all of that, I did not think we would be here.
If I did, I would be significantly richer. And, yes, I use actionable profit and loss (not words) as the barometer of “seeing it coming.” If someone wants to claim they predicted the future, show me your 20x returns because that was easily possible by investing in something like the TVIX as late as three weeks ago. So, let’s just all admit we did not predict the future.
If someone like myself, who has dedicated an absurd amount of time to this developing situation did not foresee this, what is the average person thinking as terrible news erupts? Maybe if you are a healthy millennial you are thinking, “sweet I can work from home and chill.” But, chances are, the average person’s sentiment is PANIC.
I don’t know what the future holds. I have no clue what to do for the short term. I think sometimes you have to be honest and, more importantly, humble. There is so much information to process. Again, I have been working through a ridiculous amount of thinking on everything and we are still somewhere I never would have expected despite all that. So, what can I really say about the future?
I don’t know. But, I can imagine some scenarios. And, a lot of my uncertainty is because I see a huge range of potential outcomes. And, I also know that what is going to happen will very likely be something that is not only different from these scenarios but also something I hadn’t even considered. That being said, let’s give it a shot:
Downside Hypothetical Scenarios
Infection of Global Figures
Imagine if Presidents, Senators, members of Congress, CEOs, the Pope, Lebron James, and/or Leonardo DiCaprio get infected. Imagine they die. What does the world look like when the most recognizable leaders and faces become victims? We have already seen this start to happen in terms of infections. Now, imagine that trend gets worse.
Boiling the Frog
The number of new confirmed cases per day continues to increase. It doesn’t stop for months. We are predicting some kind of bell curve to infections but what happens if we are just at the beginning of the bell curve? What if the real spread hasn’t even taken place yet? What if infections aren’t in the hundreds of thousands but in the hundreds of millions?
The Lights Go Out
More and more people are sitting at home, quarantined to their dwelling. It’s uncomfortable and scary but we have the internet and food and water. What if all of a sudden there is a massive cyber attack or an attack on our critical infrastructure? What if everyone sitting home suddenly loses power? You think there is panic now? Imagine that descent into anarchy.
I am not posting these downside scenarios because I want to scare people. But, in extraordinary times, when a significant risk event has occurred, we have to recognize we are vulnerable.
Uncertainty multiplies. A pandemic combined with an oil price war is really bad. Anything bad on top of that will be much greater in impact than that event happening in isolation. The multiplicative effect makes any scenario that much scarier. It doesn’t even have to be big.
But, let’s not be all doom and gloom:
Upside Hypothetical Scenarios
An Early Peak
This is the one I am holding out the most hope for. We don’t know when the number of confirmed cases will peak. But, it could happen sooner than expected. We know that a peak means there will still be lots of cases on the other side of the bell curve but we can at least get a handle on the overall magnitude if we see a sustained decline.
Maybe we don’t need a vaccine. Perhaps, there are some medicines or some combination of medicines and treatments we already have that can significantly reduce the severity and mortality of the disease. Or, perhaps there is something we will learn that can lessen the overall severity of the outbreak until we get that silver bullet.
Okay, so this one is kind of rooted in both some truth and a lot of optimism. We know that the number of confirmed cases does not represent the true number of cases. We just don’t know how many real confirmed cases we are missing. Some academics have suggested ten times as many cases right now as we have numbers for. What if we are missing a hundred times or a thousand times? What if, in our absurdly interconnected world, the disease has already touched and infected tens of millions? What if 95% of people are asymptomatic? What if our immune systems are better than we think? This also would mean the death rate is much lower. We wouldn’t know this for a while and it wouldn’t mean that the outbreak won’t severely infect or kill many people but at least our ceiling for how bad this could be would come down significantly.
These are just a few optimistic scenarios. Unfortunately, a little bit of good news will not wipe out all of the bad news we have seen thus far. In a crisis, bad news multiplies but good news is additive. We will need a lot of good news to dig us out of the hole.
What will actually happen? Well, maybe some mixture of the above scenarios combined with some things we don’t expect. In essence, no one knows for sure.
At the end of the day, humility is key. We must be humble about what we know, what we think can happen, and what we assume. Hope for the best and prepare, to a reasonable extent, for the worst.
The market offers a partial but incomplete reflection of our world. Sometimes, we have to look beyond dollars and cents and recognize the challenge ahead. What comes next goes far beyond that. These are the days future generations will ask us about. Let’s tell them the story of our resilience.
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