And, in case you haven’t been paying attention to the markets, we are now in a global recession. James Dimon, CEO of JPMorgan, Wall Street’s largest bank, on our current situation, in his annual letter to shareholders, released just days ago:
There is no denying that we are entering an economic recession. And we are just at the start. The natural next question is: “How long will it last?”
Looking at past markets gives insight on how long we should expect to remain in the doldrums.
Spoiler alert: Don’t believe what you’re being fed by the media, this is going to last awhile.
What we really care about recovery time (months to break even above). If we go with the average recovery time since 1946, it’s 25 months. That is an average – so it could be shorter…but it could be longer too. Even if we forecast an optimistic scenario in which recovery occurs rapidly in 18 months…no one should be expecting the economy to begin to fully recover until Q4 2021.
And people were able to physically go back to a place of work in all the previous recessions. “Social distancing” throws a wrinkle in all of this (more on this below).
The broader macroeconomic trends in the world are grim.
As was noted in the WSJ two weeks ago by leading economists, “The current collapse is poised to shatter records for crisis depth. Duration is still an open question.”
Let’s go to McKinsey & Company, one of the premier business consulting firms in the world, for their projections on recovery scenarios.
McKinsey’s forecasting model provides a number of recovery scenarios, dependent upon both the effectiveness of the public-health response, and the effectiveness of government economic policy. Countries around the world are responding in a variety of ways. After an exhaustive review of significant amounts of medical/economic material, speaking with experts, industry leaders, and regular people, and given the state of the public health apparatus and economic response, I estimate that we are on course for a recovery in this area:
Recoveries usually take on one of the following shapes:
But what about “flattening the curve?!” And social distancing!
At this point, you’ve probably heard something about flattening the curve. “We’re flattening the curve! That means we’re going to be able to get back to normal quickly right?”
“Coronavirus is not going away. We’re not going to eliminate it. We’re going to have to face the prospect that it is always going to be around, but hopefully in small numbers until we can identify an effective treatment or vaccine.” – Ben Cowling, epidemiologist at the University of Hong Kong
Doctors and researchers are still learning about the virus. It is dangerous because it is a “stealthy” virus. It can exist in people for up to 18 days without symptoms. Which is why Covid-19’s viral reproductive value is so high. Viral reproductive value is a fancy way of saying how many other people an infected person is likely to spread the disease to. In epidemiology, it is referred to as the basic reproduction number. You can see estimate of how Covid-19 stacks up here.
That’s not to say that we shouldn’t use social distance to flatten the curve. But flattening the curve is not a one and done event. To keep the curve flat, social distancing must remain a continual, ongoing event.
Then you say: “But what about all those flattening the curve graphs I’ve seen with the infections going all the way down?” What you should really be asking is why do all those graphs end in August or September? And what happens when, using those models, they show the graph all the way into Q1, 2021. That’s what Wesley Pegden, Associate Professor, Department of Mathematical Sciences, Carnegie Mellon University, asked in his call to honesty in pandemic modeling (Spoiler: infections flare back up.)
Until we are able to sufficiently push the basic reproduction number to a significantly low state, some measure of quarantine / social distancing measures must remain in place for extended periods of time. Because without herd immunity (more below) even if one person is infected, they have the ability to transmit the disease to a significant number of people, which then spikes another viral spread. Again, let’s look at some McKinsey forecasts:
Using the above framework, even Stage 1 regions with the highest rates of recovery will continue to travel restrictions and work from home is recommended. And the upper limits on public assembly, even for the most significantly recovered regions, are 200 or less. That means institutions like: school, universities, conferences, concerts, events, sports, and large corporate settings are no more. Or will have to undergo radical, fundamental change in order to accommodate society as we struggle to overcome this virus.
Further exacerbating the situation is that at least 51 patients diagnosed as having fully recovered from the coronavirus in South Korea, have tested positive a second time after leaving quarantine according to officials from the Korea Centers for Disease Control and Prevention. Further research is needed to understand what is happening, but there is the chance that the virus is so stealthy, that it can exist in your body in a dormant state for a period of time after infection and recovery.
The recession is here to stay. The virus is here to stay. So what does economic recovery look like?
Reviewing literature from epidemiologists, virologists, and speaking with doctors, the consensus is that there are really only two ways for the planet to move past this:
Let’s briefly discuss both.
Vaccine development is a lengthy, complicated process, costing billions of dollars. Not only is it expensive, it is slow. On the history of vaccines, from the College of Physicians of Philadelphia: “Vaccine development is a long, complex process, often lasting 10-15 years and involving a combination of public and private involvement.”
Vaccines take a very, very long time. Even as we attempt to speed up every effort in development, let’s suppose we reduce typical development time by 75% (highly unlikely). We’re still looking at 2.5-3.75 years before we have a vaccine. That being said, doctors and scientists around the world are working non-stop on the problem. So maybe we will get to a vaccine in the “12-18 months” number that is being touted in the media. But experts are extremely skeptical of the claim.
Most people understand vaccines, and have likely had one. But herd immunity is a new and foreign concept for many. Here’s a relatively straightforward explanation of the concept from Professor Rowland Kao, Sir Timothy O’Shea Professor of Veterinary Epidemiology and Data Science, University of Edinburgh:
“Herd immunity is a potentially confusing term because it really has nothing directly to do with the immune system. When everyone in a group (i.e. a ‘herd’) is susceptible to a disease, and able to transmit it once infected, this means that once anyone in the group becomes infected, then everyone else is at risk. And so the disease has a good chance to propagate. However, if some of the group are protected, for example by vaccination, then this means that at least some of the time, a contact that would have been infectious, isn’t infectious, because the contact was with someone who couldn’t get infected. Because the number of contacts over the lifetime of an infection is limited, this therefore means that the disease’s ability to reproduce is impaired. If there are enough individuals protected so that, on average, the disease when introduced can infect less than one other, this means that the disease will infect maybe a few, but won’t spread broadly through the population.”
You’ll notice the mention of vaccines above. That’s because that is the most effective way we have to induce herd immunity in the population without actually forcing massive numbers of people to get sick and die. But…we also just discussed that we are likely years away from a vaccine. So…
“The major problem with coronavirus is that this is a novel virus that has never spread before, which means that everyone is at risk for infection. Herd immunity can only be reached by widespread vaccination (but there is currently no vaccine, and it may take a long time before an effective vaccine becomes available) or by individuals falling ill and recovering thereby developing natural immunity against the virus….unfortunately, a very rough estimate suggests that we will only reach herd immunity to Covid-19 when approximately 60% of the population is immune (and remember that immunity is currently only reached by getting the infection as we have no vaccine!). While Covid-19 is not as bad as the Spanish flu, which had a considerably higher case fatality rate, it is probably going to be comparable to that outbreak in terms of the societal impact and how it will affect our daily lives for the foreseeable future.” – Prof Willem van Schaik, Professor of Microbiology and Infection, University of Birmingham
Unless we develop a vaccine in record time, herd immunity is only going to be achieved through:
Again, this is going to take a long time. There is no shortcut. There is no quick recovery. We are going to be stuck with this for awhile.
Now that we have a common understanding of what the future likely holds, let’s turn our attention to the legal industry.
That will be another significant post, already in the works. I hope to have it ready within next week. There will be more posts in the future, along with a series of Zoom calls/webinars. We’ll keep you updated on progress.
But here’s a preview:
(For an extended preview on my thoughts, keep an eye out on Jack Newton’s podcast next week, where he and I discuss how the legal industry can survive though this crisis.)
“When the facts change, I change my mind; what do you do?” – John Maynard Keynes
Everything written above, are my conclusions from dozens of hours of research and conversations. But I am not a trained economist. Nor am I an epidemiologist, let alone a medical professional in any regard.
I’m a lawyer. That means I’m good at: research, writing, critical analysis, and reasoning. The above post is my effort to coalesce my research and thoughts into a singular point, so that I can begin to make predictions about potential outcomes regarding our situation, and develop strategies to address them, based upon my current understanding. If you’d like to read some other people’s predictions, try Conference Board, Deloitte, BCG, Morgan Stanley, or EY. (Spoiler! They largely match my predictions above.)
Predictions are useful, because they provide you a framework for action. Otherwise, you are left blindly guessing without any sort of plan in place…but as Mike Tyson famously said, “Everyone has a plan until they get punched in the mouth.”
Or perhaps you’re a fan of Burns – “The best-laid plans of mice and men often go awry.”
Strategic planning is useful because it allows you to conceptualize multiple outcomes and begin to make preparations for what you estimate is the most likely scenario. But the world is fluid. Just because you develop a plan, does not mean you must be wedded to a plan. As Emerson observed: “A foolish consistency is the hobgoblin of little minds.“
That is to say, the above is my current best understanding and framework of our situation. I am making plans and developing strategies based upon this framework. But if the situation changes – miraculously a vaccine is developed, or joblessness skyrockets even further – I will adapt and update my framework, and meet the world as it is. Not as it was, or I wish it to be.
Perhaps all of this is best summed up with the simple and classic phrase of most pragmatists:
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