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I think this is pretty good evidence that we're likely to see a rapid V-shaped recovery. The recession will be be deep, but it's unlikely to be prolonged. There

I think this is pretty good evidence that we're likely to see a rapid V-shaped recovery. The recession will be be deep, but it's unlikely to be prolonged. There's no fundamental reason we can't simply roll back the clock to Q4 2019. Most business cycles are different, because they involve the accumulation of mal-investment during the exuberance of the late-stage expansionary phase. During the boom people make a lot of bad decisions. In 2007 people were allocating way too much capital to housing and the banking sector. In 1999 they were investing in Pets.com and Enron. In 1980, existing business models could not handle the rise of rates from 8% to 16%. In many ways the hardest part about recovering from a recession is for the economy to figure out how to climb back to its pre-recession GDP highs, without falling into the same pitfalls from before. That necessarily involves a period of learning and trial, which makes it a long process. However this recession is very different. It wasn't caused by speculation or malinvestment in the expansionary phase. It was caused by a totally exogenous shock to the economy. Once you remove that shock, there's no reason that GDP shouldn't snap back to its previous peaks.

nickfromseattle 6y ago
But we are 10 years into a bull cycle. Shouldn't we see a recession soon regardless of COVID?
- adventured 6y ago
  If you have the Fed artificially buffering the expansion & recession forces (as we have, with their zero rates forever, QE infinite), you could see a slow overall rate of growth stretched out over a long period of time instead of a sharp & brief recessionary contraction and sharp bounce back as typical in the past. Their never-ending stimulus may smooth out that expected event. In that scenario, the only thing likely to cause a meaningful recession is an (perhaps inevitable) epic asset bubble popping, from some very high price point that gets so high in a parabolic run that it's unsustainable even if pumped by 0% Fed rates (think Bitcoin crashing down from the rapid run toward $20k or the last quarters of the dotcom bubble run).
- anm89 6y ago
  It took me a long time to swallow this pill but these things are arbitrary when they are up against certain levels of intervention. Gravity is real and this bubble will crash and it will be catastrophic but they could inflate and reinflate this bubble for decades if the macro environment cooperates. You really can't time or predict this stuff.
- dcolkitt 6y ago
  There's not really any evidence that bull markets die of old age.[1] For example prior to 2020, Australia had 29 years of robust economic growth without a recession.[2] [1] https://www.cnbc.com/2018/03/07/bull-runs-dont-die-of-age--this-one-can-continue-says-strategist.html https://www.cnbc.com/2018/03/07/bull-runs-dont-die-of-age--t... [2] https://edition.cnn.com/2020/06/03/economy/australia-recession/index.html https://edition.cnn.com/2020/06/03/economy/australia-recessi...
vannevar 6y ago
There's no fundamental reason we can't simply roll back the clock to Q4 2019. Well, other than the global pandemic that is still extant and killing nearly 1000 people a day in the US. And all of the bankruptcies and small business closings. I think we're still whistling in the graveyard here. People aren't good at thinking about systems with feedback lags, and we are in uncharted territory with a massive global economic system that has lots of feedback loops in it.
anm89 6y ago
A massive number of small businesses are likely to never reopen,the corporate paper market is in total disarray even with massive intervention, unemployment is still way up, and the virus isn't over. All this after we shot our bazooka monetarily: fed funds are hovering at 0, the fed balance sheet has increased something like 300-400% I believe and the M2 graph looks like an upward cliff. Meaning if there is another big dip we have much harder decisions to face. We are not by a long shot where we were in February. Invest on that thesis at your own risk.
- dcolkitt 6y ago
  Equity markets don't reflect your viewpoint. There's a reason the S&P is now less than 10% below its previous highs. Regarding monetary stimulus being exhausted, the Fed Chairman specifically says that's not true[1]. Even at the zero bound for short-term rate the Fed can push overnight rates negative, or purchase long-dated bonds, corporate bonds, municipals, or even equities. The only fundamental limit on monetary stimulus is inflation or a balance-of-payments crisis. Inflation expectations are significantly lower than before the stimulus. And rather than a devaluation of the dollar, there's a global shortage of dollars. The reality is the Fed can print far more money before running into constraints related to inflation or currency devaluation. [1] https://finance.yahoo.com/news/jerome-powell-federal-reserve-not-out-of-ammunition-by-a-long-shot-60-minutes-233614558.html https://finance.yahoo.com/news/jerome-powell-federal-reserve...
  - anm89 6y ago
    Sure, throw your money in near all time highs with all this going on. Good luck with that.
    - dcolkitt 6y ago
      To be fair, I went long when S&P was around 2500. My reasoning was/is that if you run a DCF on large-cap US equities, then only about 10-15% of the NPV is derived from the next eight quarters. So even if corporate profits go to zero until 2022, the underlying assets are still valuable in a post-pandemic world. For example in 2007, we were paying $500 billion for Citigroup, and it turned out that it just wasn't worth anywhere near that. It's still 90% off its 2007 high. My sense is that even if Disney World is shut down today, in 2022 it will still be worth what Disney World was in 2019. Besides maybe Boeing, I don't see any equivalent to Citigroup or Enron in today's market.
nutjob2 6y ago
Your comment is typical of the wishful thinking that is going on right now. You didn't mention the virus once. The inescapable calculus is that the more people go back to normal, improving the economy, the more likely it is for the virus to spread and the more likely people will withdraw from normal activity due to fear or official action. The virus hasn't been defeated. It was only suppressed because of a harsh lockdown, and it's still circulating and will still kill people. There may be a delay before cases ramp back up or it may stay suppressed until the fall or winter, but the situation has not fundamentally changed.
- dcolkitt 6y ago
  Most states have ended lockdown down. Some for more than a month. Covid deaths in the US are still declining. The difference between now and March is that we have a much better understanding about the nature of super-spreading events.[1] We know that a very high amount of spreading comes from a disproportionately small amount of activities. Like choir practice, unventilated subways, and nursing homes. The upshot is that any future lockdown will be much more tailored and have a much smaller impact than the full-scale shutdown we saw in April. [1] https://www.businessinsider.com/super-spreader-events-account-for-most-coronavirus-transmission-2020-6?r=US&IR=T https://www.businessinsider.com/super-spreader-events-accoun...

nickfromseattle 6y ago

But we are 10 years into a bull cycle. Shouldn't we see a recession soon regardless of COVID?

adventured 6y ago
If you have the Fed artificially buffering the expansion & recession forces (as we have, with their zero rates forever, QE infinite), you could see a slow overall rate of growth stretched out over a long period of time instead of a sharp & brief recessionary contraction and sharp bounce back as typical in the past. Their never-ending stimulus may smooth out that expected event. In that scenario, the only thing likely to cause a meaningful recession is an (perhaps inevitable) epic asset bubble popping, from some very high price point that gets so high in a parabolic run that it's unsustainable even if pumped by 0% Fed rates (think Bitcoin crashing down from the rapid run toward $20k or the last quarters of the dotcom bubble run).
anm89 6y ago
It took me a long time to swallow this pill but these things are arbitrary when they are up against certain levels of intervention. Gravity is real and this bubble will crash and it will be catastrophic but they could inflate and reinflate this bubble for decades if the macro environment cooperates. You really can't time or predict this stuff.
dcolkitt 6y ago
There's not really any evidence that bull markets die of old age.[1] For example prior to 2020, Australia had 29 years of robust economic growth without a recession.[2] [1] https://www.cnbc.com/2018/03/07/bull-runs-dont-die-of-age--this-one-can-continue-says-strategist.html https://www.cnbc.com/2018/03/07/bull-runs-dont-die-of-age--t... [2] https://edition.cnn.com/2020/06/03/economy/australia-recession/index.html https://edition.cnn.com/2020/06/03/economy/australia-recessi...

vannevar 6y ago

There's no fundamental reason we can't simply roll back the clock to Q4 2019. Well, other than the global pandemic that is still extant and killing nearly 1000 people a day in the US. And all of the bankruptcies and small business closings. I think we're still whistling in the graveyard here. People aren't good at thinking about systems with feedback lags, and we are in uncharted territory with a massive global economic system that has lots of feedback loops in it.

anm89 6y ago

A massive number of small businesses are likely to never reopen,the corporate paper market is in total disarray even with massive intervention, unemployment is still way up, and the virus isn't over. All this after we shot our bazooka monetarily: fed funds are hovering at 0, the fed balance sheet has increased something like 300-400% I believe and the M2 graph looks like an upward cliff. Meaning if there is another big dip we have much harder decisions to face. We are not by a long shot where we were in February. Invest on that thesis at your own risk.

dcolkitt 6y ago
Equity markets don't reflect your viewpoint. There's a reason the S&P is now less than 10% below its previous highs. Regarding monetary stimulus being exhausted, the Fed Chairman specifically says that's not true[1]. Even at the zero bound for short-term rate the Fed can push overnight rates negative, or purchase long-dated bonds, corporate bonds, municipals, or even equities. The only fundamental limit on monetary stimulus is inflation or a balance-of-payments crisis. Inflation expectations are significantly lower than before the stimulus. And rather than a devaluation of the dollar, there's a global shortage of dollars. The reality is the Fed can print far more money before running into constraints related to inflation or currency devaluation. [1] https://finance.yahoo.com/news/jerome-powell-federal-reserve-not-out-of-ammunition-by-a-long-shot-60-minutes-233614558.html https://finance.yahoo.com/news/jerome-powell-federal-reserve...
- anm89 6y ago
  Sure, throw your money in near all time highs with all this going on. Good luck with that.
  - dcolkitt 6y ago
    To be fair, I went long when S&P was around 2500. My reasoning was/is that if you run a DCF on large-cap US equities, then only about 10-15% of the NPV is derived from the next eight quarters. So even if corporate profits go to zero until 2022, the underlying assets are still valuable in a post-pandemic world. For example in 2007, we were paying $500 billion for Citigroup, and it turned out that it just wasn't worth anywhere near that. It's still 90% off its 2007 high. My sense is that even if Disney World is shut down today, in 2022 it will still be worth what Disney World was in 2019. Besides maybe Boeing, I don't see any equivalent to Citigroup or Enron in today's market.

nutjob2 6y ago

Your comment is typical of the wishful thinking that is going on right now. You didn't mention the virus once. The inescapable calculus is that the more people go back to normal, improving the economy, the more likely it is for the virus to spread and the more likely people will withdraw from normal activity due to fear or official action. The virus hasn't been defeated. It was only suppressed because of a harsh lockdown, and it's still circulating and will still kill people. There may be a delay before cases ramp back up or it may stay suppressed until the fall or winter, but the situation has not fundamentally changed.

dcolkitt 6y ago
Most states have ended lockdown down. Some for more than a month. Covid deaths in the US are still declining. The difference between now and March is that we have a much better understanding about the nature of super-spreading events.[1] We know that a very high amount of spreading comes from a disproportionately small amount of activities. Like choir practice, unventilated subways, and nursing homes. The upshot is that any future lockdown will be much more tailored and have a much smaller impact than the full-scale shutdown we saw in April. [1] https://www.businessinsider.com/super-spreader-events-account-for-most-coronavirus-transmission-2020-6?r=US&IR=T https://www.businessinsider.com/super-spreader-events-accoun...