"There are two kinds of people in this country, those who are in quarantine and those who will be soon."
- Duluth News Tribune

Unprecedented times

I am writing these lines from my reclusive home office, far away from everything. I have not been outside my garden for the past 2 ½ weeks and am still doing well. Unfortunately, staying at home is no guarantee that the virus won’t find you, but the risk is clearly lower, and that is good enough for me.

This month’s Absolute Return Letter was meant to be the third in a series of five, digging deeper on Five Lessons from History by Morgan Housel, but the events of the past few weeks have forced me to focus on the coronavirus instead. As it happens, letter #3 in the Five Lessons series is 90% done, so don’t be surprised if it shows up in your inbox before long.

Over the last week or two, the penny has finally dropped. Most people realise now that the coronavirus outbreak is going to have serios consequences, both in human and in economic terms, and I thought a note on the topic would be timely. The following has been prepared with a great deal of input from Pantheon Macroeconomics and Goldman Sachs, for which I am grateful.

In this letter, I will focus on the economic costs. It is not that I don’t rate the human costs – far from it, but those costs are even harder to quantify ex ante and have little to do with a financial newsletter. One more point before I start. The economic impact is so overwhelming, and the magnitude so unpredictable at this relatively early stage, that you should take all the numbers I am about to share with you with a grain of salt.

Let me provide one example as to how extreme it all is at present. In mid-March, JP Morgan and Goldman Sachs both revised down their estimate for US GDP growth in response to the outbreak. Goldman Sachs revised its Q2 GDP growth estimate down to -5% whereas JP Morgan, coming out with its estimate only a couple of days later, changed it to -14%. Now, fast forward one week, and Goldman Sachs changed its estimate again – this time to -24%. I haven’t seen any further adjustments from JP Morgan but, only one day later, Morgan Stanley entered the frame with a whopping -30%.

If any of those numbers turn out to be correct, I would put it down to luck more than anything else, but that is not my point. Whether the US economy shrinks by 24%, 30% or even more in Q2 – or a bit less if we are lucky – the reality is that the global economy is now in lockdown, and that is not going to change for weeks, probably months.