Monday, March 23, 2020

Where to hide in this bear market

There is little doubt that we are in a recession induced bear market. Goldman Sachs published their GDP forecast late last week of a V-shaped slowdown and recovery.

For some context, New Deal democrat raised an important point about a framework for thinking about the recession by flipping the well-known "flatten the curve" chart upside down:

The problem with this from a strictly *economic* point of view is that, so long as we don't know who is infectious, everybody needs to stay in self-quarantine. This will be catastrophic economically if it must continue for 12 to 18 months.
The inverted curve shows the stylized effects of economic growth based on a government's choice of public health policy. Do nothing and allow the virus to run wild, and you get a short, sharp slowdown at great human and electoral cost (pink curve). Flatten the curve, and you get a lower death count but longer recession (grey curve), with the hope that a vaccine can be found in the future to cut off the right tail. For an idea of how the Trump White House is grappling with this dilemma, see the WSJ's "As Economic Toll Mounts, Nation Ponders the Trade-offs", and Bloomberg's "Trump Weighs Easing Stay-at-Home Advice to Curb Economic Rout".

Even the experts are only guessing. FiveThirtyEight conducted a survey of infectious diseases experts, and the poll showed wildly varying opinions. Since we know neither the depth nor the length of the slowdown, it's very difficult to estimate the nature of the recession, and the equity bear market. In that case, where can investors hide?

The full post can be found here.

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