Graphing the Pandemic Economy

In a fast-evolving crisis like a pandemic, GDP and other conventional economic metrics are simply too slow to be useful for policymakers who need to make decisions about when to lock down and reopen parts of the economy. Fortunately, real-time mobility data has opened a window into the world that COVID-19 has wrought.

Michael Spence, Chen Long

HANGZHOU/MILAN – COVID-19 is an unprecedented challenge for human society and the global economy. The pandemic has already taken more than 360,000 lives worldwide, and inflicted massive negative shocks on incomes, output, and employment. The challenge for policymakers is to strike a proper balance between containing the virus and creating the conditions for economic recovery.

That is no easy task. While key measures such as testing, contact tracing, and social distancing happen to align well with both overarching goals, measuring real-time progress in each dimension is difficult. Direct measures like GDP tend to arrive with a significant lag, which makes it harder to determine when to reopen various economic sectors and activities.

The Mobility Window

Fortunately, there is an immediately observable, high-frequency indicator of COVID-19’s economic impact: mobility data, which can serve as a proxy for the broader contraction in economic activity around the globe. Following this insight, we have calculated mobility on the basis of aggregated, anonymized data published by Google, Apple, AMAP, and Baidu.

Google, for example, publishes mobility information on retail and recreation, groceries and pharmacies, and workplaces, which we have combined into a single index. Apple publishes mobility data on driving, transit, and walking. And AMAP and Baidu publish location-based services (LBS) mobility data. Most important, these data are updated frequently – either on a weekly or even daily basis.

We have tracked the extent of mobility (as a percentage of its level in normal times) across 131 economies. Google data was the primary source for 129 economies, Apple data for Russia, and AMAP and Baidu data for mainland China.

Among the 19 countries and regions that have announced first-quarter GDP, we find that three-quarters of the variation in GDP growth can be explained by differences in mobility during this period (Figure 1). This variability across countries results from the fact that the virus arrived at different times during the quarter, and triggered mobility responses of varying speed and intensity.

To be sure, mobility is only one indicator of economic contraction. Risk avoidance by individuals, companies, and other institutions also could play a role in depressing economic activity, even in the absence of mandated lockdowns.

But as a variable that captures the state of economic activity, mobility has several major advantages.

First, it is one of the few big-data metrics that both captures current activities and is available in more than 130 economies on a daily basis. Second, it is an endogenous variable, in the sense that it reflects both the impact of lockdowns and people’s choices, which often are motivated by risk aversion.

And, third, it appears to capture a substantial portion of GDP variation across economies and over time.


Though a “pandemic economy” is rather unusual, it has identifiable features and operates according to clear patterns. In the early stages, the outbreak must be contained at the expense of mobility and productive economic activity. Failing that, a recovery cannot be realistically considered.

Owing to the tension between health outcomes and economic goals, the recovery will be much slower than the precipitous economic free fall that occurs when lockdowns are imposed. This general pattern has been confirmed in a wide range of countries (Figure 2).

Generally speaking, a sharp and deep contraction is followed by a period (of variable duration) in which the economy remains depressed as the virus is brought under control (the trough). This phase is then followed by an S-shaped recovery – a slow but steady acceleration in growth, followed by a deceleration as output approaches its pre-pandemic levels.

This last deceleration reflects the fact that some sectors (air travel, sporting events) are difficult to restore, given the continued need for social distancing.

The main economic challenge lies in shortening the free-fall phase through early detection and containment (a challenge that most countries have failed to meet). Then the goal is to reduce the time spent in the trough while also making satisfactory progress on containing the virus.

Eventually, the economy will decouple from the outbreak as new infections subside.

An effective, widely deployed vaccine would, of course, accelerate the recovery, even allowing for a U-shaped recovery if it arrived soon enough. As matters stand, that scenario seems unlikely.

To balance virus containment with support for the economic recovery, policymakers need better tools to measure and monitor the evolution of the global pandemic economy. With this goal in mind, Luohan Academy recently launched a Global Pandemic-Economic Tracker (PET), which aims to provide government leaders, businesses, and the general public with a deeper understanding of the general patterns of the pandemic economy’s processes, the tradeoffs that occur at different stages, and other challenges that await.

Charting the Pandemic Economy

The PET offers a window into a wide range of economies. In the graphs below, the vertical axes show the magnitude of the contraction, the estimated current levels of economic activity as a percentage of pre-pandemic levels, according to daily mobility data. The horizontal axes follow the number of days it takes for confirmed infection cases to double, as of the time of measurement. Doubling days (DD) is a proxy for the rate at which the virus is spreading within the population; the larger the DD, the lower the rate of spread.

Each graph also has a dashed vertical line showing the average DD for economies that have already met our recovery condition: 19 days. When an economy has gone three consecutive days in which the number of COVID-19 recoveries exceeds the number of confirmed new cases, we take that to mean that the outbreak has been met with an effective medical response. Thus, a country to the left of the dashed vertical line is less likely, on average, to have the virus under control, regardless of what is happening in its economy.

The time dimension in the graphs is also important to grasp, because the economic damage in terms of lost income, output, and increased unemployment depends on both the depth of the contraction and its duration. If the PET graphs for two countries look similar but the speed of transition is higher for one, that country will be in better shape.

It will have experienced less balance-sheet damage; its programs to buffer the shock will be shorter-lived and less costly; and its deficits and sovereign debt increments will be lower.

As of May 20, at least 45 countries and regions had entered the recovery period, though most are still far from restoring normal economic activities. More than half of the countries analyzed still have not entered the recovery period after suffering the pandemic for more than two months.

The First Wave

The first wave of the pandemic hit mostly East Asian countries, with China’s trajectory representing the pandemic-economy curve very well. It took China 30 days to reach the bottom, at about 80% of normal economic activity, and this rapid lockdown more or less paid off.

By May 20, China had been in the pandemic economy for 124 days, during which time its DD steadily increased. Its economic activity has returned to 98% of its pre-pandemic level, and quarterly economic growth is on track to be positive in April-June. With strong stimulus packages, China should continue to register positive growth in the second half of the year. Note, however, that strong growth does not necessarily imply full recovery.

Several other East Asian countries and regions performed even better, owing to their early-detection regimes and other swift policy actions. South Korea, Hong Kong, and Taiwan have all recovered to more than 95% of normal activity levels. Their contractions at the start were less severe, and their DDs have all exceeded 50 days (meaning it takes more than seven weeks for the number of infections to double).

Overall, the lesson from East Asia (Figure 4) is that the faster and more decisively a country moves to contain the virus in the early stages, the smaller a price it has to pay, in terms of both public health and economic loss. Counterfactual models applied to other countries such as the United States reach the same conclusion.

Choppier Waters

Unfortunately, second-wave countries learned this lesson the hard way (Figure 5). Italy, for example, has been in the pandemic economy for 85 days. It took 62 days to satisfy our proxy recovery condition, and it has remained in a deep contraction for most of the 85-day period. Spain’s experience has been similar.

The US economy has been contracting for 65 days and has not satisfied the recovery condition.

If it continues at just over 90% of normal economic activity through the second quarter, quarterly GDP growth will be close to -10%, with the economy shrinking by 34% on an annualized growth, on par with the Congressional Budget Office’s prediction of -38% annualized growth.

In other words, the US is heading for a situation comparable to the Great Depression, when the annual growth rate bottomed out at -12.9%.

The United Kingdom is in a very similar situation, but has experienced a deeper estimated contraction. By contrast, Australia and New Zealand have both passed the 50-day DD threshold.

New Zealand, in particular, presents an interesting case. Though its government got the virus under control relatively quickly, its estimated contraction was large – comparable to Italy and Spain. The difference, of course, is that since it has the virus under control, it is well positioned for a faster recovery.

For their part, Germany, France, Austria, and Sweden have all remained in contraction mode for 67-71 days. But while Germany and France have gone through similar pandemic-economy trajectories, Germany’s economic activity contracted less.

Sweden’s economic activity also contracted less than some of the others, but that was because it deliberately chose a looser lockdown. Like the US and the UK, it has not satisfied our proxy recovery condition. Norway, on the other hand, initially suffered a deeper contraction than Sweden, but is now much further along in terms of its DD, and has experienced a return of economic activity to levels above Sweden’s. Austria, finally, has fared pretty well, exceeding the threshold of 50 DD.

The Coming Storm

The third-wave countries have been hit harder. Since early May, the developing world is becoming the new pandemic epicenter. More than half of daily new cases are now reported from these countries and regions (Figure 7), where public-health systems, medical supplies and production capacity, and economic-policy buffers are weaker than in the advanced economies. Making matters worse, these countries’ ability to test at the needed scale is woefully lacking (Figure 8).

In Latin America, Brazil stands out for having remained to the left of the dashed vertical line for 72 days; its DD is still around only ten. The fact that its curve is squeezed on the left side indicates that it has not found an effective way to combat the outbreak or support an economic recovery.

Brazil’s contraction was smaller than some others we have seen, but with the virus still out of control, its prospects are bleak. Mexico is in a similar situation. By contrast, Uruguay has had a much better experience than most of its South American neighbors, with a much higher DD, paving the way for a sustainable recovery.

In Africa, Rwanda has fared better than many countries, though it has not yet reached the 30-DD threshold. The trajectories for Egypt, Kenya, and Nigeria, meanwhile, have been stuck on the left of the graph, sometimes even going backward, which suggests that they are having difficulties balancing virus control and economic recovery.

As for the rest of the Asian countries, both Vietnam and Thailand have made good progress, with DDs exceeding 50 days and their economies recovering to close to or more than 95%. In contrast, the Philippines’ economic activity has contracted much more and is still lower than 85% after 68 days.

The situation in India and Pakistan – high-density countries where large parts of the population live on limited resources – is of significant concern. These countries have long been stuck on the left side of the graph, indicating that the virus is not under control. Like Brazil, their DDs are fixed at around ten days.

Their curves are going upward, suggesting modest economic rebounds that will remain vulnerable to the virus. At some point, they may be forced to restart their economies before the virus has been brought under control, owing to the mounting human and economic costs of the lockdown.

The Road Ahead

Like the recovery more broadly, the pandemic tracking project is a work in progress. Luohan Academy intends to update the data daily, in order to provide real-time information to policymakers, researchers, and think tanks, and it is inviting everyone to join in co-creating more data products. (It is also welcoming comments and suggestions on how to improve its current work.)

While a few countries detected and contained the virus early, allowing for more moderate contractions and a relatively rapid recovery, no country has been spared. The majority of higher-income countries in which the virus spread widely before there was a response have experienced deep and lengthy economic contractions. These downturns have varied in degree, but in all cases the speed of the recovery has been moderate to slow.

Meanwhile, a variety of middle- and lower-income countries have begun to display even more worrying patterns. This third wave has featured large and lengthy economic contractions and limited success in controlling the virus (with a few notable exceptions).

Looking ahead, the worst outcome would be a large contraction followed by an extended period with little or no movement either upward (the economy) or rightward (virus control). In a few of the cases mentioned above, a limited economic recovery appears to be starting without movement to the right.

Though it is too soon to forecast these cases precisely, a constrained economic recovery in the context of a largely uncontrolled outbreak seems likely. Hospitals and somewhat fragile health-care systems may end up overwhelmed, as they were in the early days in several advanced countries and sub-regions.

More generally, these tracking data and graphs emphatically confirm the need for the international community to come together to provide large-scale support to mostly lower-income countries in both dimensions of the battle: containing the virus and restoring the economy. In the pandemic economy, both axes are critical to recovery.

Michael Spence, a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University. He is Senior Fellow at the Hoover Institution, serves on the Academic Committee at Luohan Academy, and co-chairs the Advisory Board of the Asia Global Institute. He was chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World.

Chen Long, a former chief strategy officer at Ant Financial, is Director of Luohan Academy, Executive Provost of the Hupan School of Entrepreneurship, Chairman of Alibaba’s Research Council, and a member of the International Monetary Fund's FinTech Advisory Group.

Economics in Orbit

By John Mauldin

The history of humanity, at least as taught in most schools, is really about two seemingly opposite forces: human innovation and human conflict. The same intelligence that lets us accomplish great things also sets us against each other. But sometimes, we rise above it.
Last week I saw on Twitter (where you should follow me, by the way.

Seriously. I am really getting into late night Twitter as my relaxing/learning/commenting time, something I never expected), someone saying the COVID-19 pandemic may be the single most “global” event in human history. It’s happening almost everywhere, to almost everyone, at about the same time. That idea made me look for other examples.
The 1969 moon landing came to mind instantly. Yes, the astronauts were American but it was about humanity: “One giant leap for mankind.” People around the world experienced it together, as best as the day’s technology and politics allowed. For a moment, at least, other conflicts faded away.
Now in 2020, we badly need another such moment. The pandemic may be global but it’s not pleasant or unifying. So I, for one, looked forward to Wednesday’s SpaceX rocket launch. Not only because it was going to be our country’s first manned launch in years, but the first time a private company sent humans into space.
I grew up reading science fiction novels in which such scenes were common. SpaceX had to scrub the launch due to bad weather, but they will try again Saturday. We will see what was once science fiction actually happen again.

And not just happen, but happen in the middle of this otherwise awful time.

To me, this is a metaphor of renewal. Great things can emerge from the ashes. We will get through this, and we will have a better world. I know it will be hard to understand from reading this letter, but I am strangely optimistic and looking forward to the future, uncertain as it may be.
Today I’ll share some more insights from the Virtual Strategic Investment Conference. Frankly, I could go on for weeks like this, but this is going to be my last letter on the SIC.

We had so much expertise and wisdom beamed in from all over the world.

I’ll give you a few more highlights and then offer my own personal takeaway.

Fireside Chat
Last Tuesday we started with a kind of fireside (virtual) chat, moderated by me, between my favorite Irish and Scottish thinkers, both dear friends who dearly love to tweak each other. On the Irish side was David McWilliams and representing Scotland, Niall Ferguson. They are both economists. David is more of a central banker type and Niall is an economic historian.
We began by looking at the present pandemic historically. We know of 60 or so worldwide infections. Measured by the number of deaths (so far), this one isn’t in the top 10.

But economically speaking, it already rivals the Great Depression of the 1930s.
Niall believes the US response to the coronavirus has turned a mid-sized pandemic into a catastrophe. Unlike war, which is typically inflationary because it stimulates demand, pandemics suppress demand. In his view, the economy will be slow to return as lockdowns end, leaving the world in a generally deflationary environment.
David pointed to another consequence: The pandemic quickly redefined the kind of policies we will accept. Ideas that just months ago sounded radical now seem reasonable. That means we can expect more radical responses as this crisis continues, and even more in future crises.
(By the way, both George Friedman and Neil Howe expressed the same opinion, stated differently, as David.)
We moved on to discussing debt. David observed debt is unsustainable without a level of growth which now looks out of reach, so we will certainly have a problem. Niall agreed but doesn’t expect the US or Europe to move toward debt forgiveness or mutualization. 

He thinks we will simply turn Japanese and have central banks buy the debt with excess bank reserves, so it would not be inflationary. David wasn’t convinced this is possible, given big social differences between the US and Japan.
We talked a little about the US election, from their perspectives as foreigners. Niall posited an interesting scenario in which the stay-home orders and business closures become campaign issues. Generally, Democrats favor more stringent controls while Republicans want to get back to normal (though there are certainly exceptions).
Niall said one of the divides will be “the party of the lockdown versus the party of open up.” Never mind whether that is reality. It’s a political talking point. And depending on what the virus does, it could favor either party at this point. We have never seen anything like this so it’s guesswork to say what would happen.
This saddens me. The pandemic and the virus shouldn’t be political issues.

But I think Niall is right; politicians will use the situation if they think it will help score points. And since this election will likely be decided by a relatively small number of marginal votes in a handful of swing states, we will see a number of issues, including the virus, used as political fodder. It will not be one of America’s prouder moments. 
Rapid Fire
Next up was Mark Yusko with one of his trademark slide presentations. This one was 235, yes, 235 slides, all important and fascinating. He blasted through them at an astonishing pace. You have to see it to believe it.
Pro Tip: Watch Yusko’s presentation, which will frustrate you because he goes through the slides so fast. But absorb his general ideas, then go back and look at his slide deck independently. Then read the transcript. There is actually a lot of gold in his presentation, sometimes literally, as he is a big gold fan (versus fiat currencies).


The “10 Potential Surprises” in Mark’s title weren’t predictions, as such.

He describes them as variant perceptions, out-of-consensus ideas he thinks have a better than 50% chance of occurring this year. But there’s also a reasonable chance they won’t.
I can’t even begin to capture Mark’s lightning-fast style but here’s a quick outline with my parenthetical comments.
  • #1: Interest rates continue to fall, go negative globally, and defy the “rates must rise” crowd. Best trade: Chinese long bonds. (Other presenters mentioned not only China but other foreign bonds as well. Norway comes to mind.)
  • #2: Killer Ds: Demographics, Debt, and Deflation. Think they have been vanquished? Not. Central bank debt creates the illusion of growth, not the real thing. (Mark agrees with Lacy Hunt that excessive debt inevitably slows growth. Lower growth leads to lower earnings which leads to lower stock prices. We are in what he feels is at least a deep recession, with the potential to be a depression.)
  • #3: Passive Investments Will Get Slaughtered. Stocks are 90% overvalued, which means they need a 50% decline. Multiple expansion was responsible for all of 2019 stock gains. We are still 18 months from the economic and market bottom. (Note: This was not a conference consensus opinion. Leon Cooperman and Doug Kass, among others, mentioned stocks they were buying. That being said, I agree with Mark in that passive index investments will not be where you want to be. The 2020s will favor active management once again.)
  • #4: Make Volatility Great Again. 2019 was the longest-ever streak of low volatility. Stocks losses were outlawed. Buy the VIX (VXX) to protect yourself.
  • #5: Wars Have No Winners. In a race-to-the-bottom currency war, everyone loses. Gold is the world’s best currency now. We are at war, so swap paper for gold. The US dollar will probably break down, as the Fed actively tries to weaken it. (While I think the dollar will go lower, I certainly would not use the words “breaking down.” Against what? Maybe gold. But I buy gold as central bank insurance, not as an investment. Though I do agree with Mark that it is probably time to buy a little more “gold” insurance.)
  • #6: All’s Shale That Ends Shale. The Saudis are trying to put US shale producers out of business. US oil production falls to around 9 million barrels per day. (Again, that may be true for a while. Having grown up around the oil patch and crazy wildcatters, I am not sure how long it will last. Oil is increasingly a technology play as getting it out of the ground becomes less expensive. Ditto for natural gas.)
  • #7: Abe-san Needs a Bigger Pump. Japan is the best money printer in the world, yet it suffers deflation and not inflation. Japan economic indicators are falling. They must devalue the yen.
  • #8: Draghi Goes Out with a Bang. The ECB has tried everything and it hasn’t worked so of course they will get even crazier. (Christine Lagarde starts screaming for more cowbell and the EU Commission responds with €750 billion stimulus fund. Watch that number rise.)
  • #9: China Playing Go. China and emerging markets are where the growth is now. Invest in China as Asian consumers will become half of global consumption. China is integrating with the world, and it will win the trade war. In China you get twice the growth at half the price. (Color me a tad skeptical. First off, nobody wins a trade war. I agree emerging markets will be where the growth is, overall. But the US will have growth opportunities. Europe will have smaller but still significant numbers. Again, if you want to play in this world, you’re going to need managers familiar with the local markets and not just buy indexes. Paying for that expertise is no different than paying a dentist to work on your teeth. It will be money well spent.)
  • #10: Remember the Golden Rule (He who has the gold makes the rules). Real assets are better than paper assets over the long term. Every currency throughout history has gone to zero. Gold will continue to surge. Gold in Chinese Yuan may be the trade of the century. Gold and silver miners are super cheap—juniors even cheaper. The new “FANG” are all gold stocks.
(Talking about every currency in history going to zero brings “survivor bias” to mind. Certainly the Swiss franc is not going to zero, nor the Norwegian kroner or numerous other currencies still hanging around after centuries. Yes, the dollar has depreciated, but numerous investments have far outperformed gold on whatever basis you want to judge. Again, gold is central bank insurance. And while we probably need more of that insurance in these times, that still doesn’t make it an investment. (And to be fair to Mark, I don’t think that he would suggest gold is his number-one investment. He has too many companies on his list. I call it insurance and he calls it a position. Same difference.)
  • #11: Bonus. Bitcoin is the scarcest asset in the world. Buy Bitcoin. It is uncorrelated to all other assets. Put 5% into Bitcoin.
We wrapped up Thursday with a closing panel, ably moderated by Karen Harris and featuring David Bahnsen, Louis Gave, Mark Yusko, and your humble analyst. Fireworks went off almost from the first minute.
Karen began by asking us to imagine, one year from now, what one thing will we look back on and wish we had understood. The answers:
  • Louis Gave: We have seen the low in oil and a high for the US dollar.
  • Mark Yusko: Every interest rate on the planet will go negative. (I am not sure what he means by that. If he’s talking in real inflation-adjusted terms, then I can understand. But there are numerous countries that will go nowhere near actual negative rates.)
  • David Bahnsen: The Fed will avoid negative rates and less-leveraged companies will have been good buys.

Next year we will see who was right.
Karen next asked what I was taking away from the conference as a whole.

I described what I call the “Rocky Mountain Recovery,” with peaks of different sizes rising above the plains. We will need to aim carefully, and will probably do better buying the best entrepreneurs instead of looking at companies.

I’m optimistic we will get a coronavirus vaccine fairly soon, speeding along recovery, but then we will be back to the same problems we had before.
Louis Gave took issue with me on entrepreneurship.

As he sees it, the interventions and bailouts are teaching small entrepreneurs they are at government’s mercy and may be better off working for large companies (that will get bailed out) or the government itself. He thinks we will come out of this with a much bigger government footprint than before.
Then we turned to China.

As noted above, Yusko thinks China is winning the trade war and the US will never regain its lead. He thinks the Cold War rhetoric is “dumb” and disinvesting from China “idiotic.” In his view, Trump trade policies are as bad as the 1930s Smoot-Hawley tariffs and we are now on the edge of doing it again.
David Bahnsen disagreed. He believes Trump is only jawboning and won’t actually make good on his trade threats. He expects more trade with China, not less, to the benefit of both countries.
(Note this conversation happened before Beijing’s latest move against Hong Kong and the developing US response.)
We wrapped up with a haunting idea from Louis Gave. Referring to current US policy, he asked what happens when you cut yourself off from the world?

Among other things, foreigners lose interest in buying your debt. He expects the world to break into three economic zones, centered around the US, Europe, and China, and within them the self-funding countries to gain an advantage. Where that leaves the US is unclear, but it may not be Good.

Some Final Thoughts
Let me list just a few of the things that have come across my desk in the last few days that now have special poignancy.
Barry Ritholtz did an interview with Jon Taffer, who hosts a reality TV show called Bar Rescue. Since I don’t watch TV, I had never heard of him. Turns out lots of my friends have. Barry is simply a brilliant, gifted interviewer and Taffer is an expert on bars and restaurants.
Essentially, he lays out the simple business realities of owning a bar or restaurant. These are not typically high-margin businesses. The bar is often the profit center for restaurants that have active bars. Now social distancing rules simply prohibit a functioning bar in the way we know it.
Taffer thinks that 30 to 40% of the restaurants in the US will not make it. He also points out that the PPP small business aid program helps with payroll and rent, but many will also need cash to restock food and beverage inventory.
I encourage you to read the hard numbers and then think about it. Many ancillary companies depend on working restaurants. I think Taffer is right and that means (optimistically) another 3 to 4 million jobs lost. They’ll come back eventually after entrepreneurs raise money and start over in a new world. But in the meantime…?
Then think about all the other businesses in similar circumstances. Hotel and travel and tourism? Small industries like Chucky Cheese and all the businesses designed for kids’ entertainment for birthdays and so forth?

Wedding venues? Luxury spas? No social distancing there. Scores of small industries are going to be devastated. 

Will they come back? Yes. But when and who will be doing it and where will the money come from?
This week’s Federal Reserve Beige Book reported the problems employers are having enticing workers back when they are making more on unemployment than they did while working. I have no easy answer because there are none. These are the unintended consequences of good intentions.
Yesterday an article from Harvard professor Lawrence Katz crossed my desk.

He was trying to be optimistic, pointing out that 78% of unemployed workers are in the “temporary layoff” category. Quoting from the interview:
The good news is that economic recoveries are typically faster when a larger share of the unemployed are on temporary layoffs. On the other hand, my past work with Bruce Meyer has shown that unemployed individuals who initially view themselves as being on temporary layoff but who don’t get recalled to their previous job (i.e., end up being permanently displaced if their previous employer goes out of business or permanently closes their unit) end up experiencing the longest jobless spells and largest earnings losses.
A major worry is that many (especially small and medium-sized) businesses are at risk of not surviving an extended pandemic downturn. Thus, a substantial share of those currently on temporary layoff are likely to become permanent job losers.
Neil Howe does a daily demographic newswire. Quoting from yesterday’s:
One study published last year, which followed college graduates who entered the labor market after the 2008 financial crisis, found that by 2018 those who had begun working in 2010 and 2011 had a lower employment rate than people at the same age who graduated before the recession hit.

What’s more, those who were working earned less. The author, Jesse Rothstein, contends that the slow speed at which this cohort’s employment rates have recovered suggests that they will continue to feel the effects for “decades to come.”
Another recent study focused on Americans who entered the labor market during the early 1980s recession—that is, late-wave Boomers and early-wave Xers. The researchers followed the trajectory of college graduates as well as high school graduates and dropouts through midlife. Not only did all of these groups earn less in midlife than those born just before and after, but they were also less likely to be married, more likely to be divorced, and less likely to have children.

In addition, they had increases in mortality that began in their 30s and further worsened through age 50, which were driven by heart disease, lung cancer, liver failure, and drug overdoses—Case and Eaton’s “deaths of despair.” These researchers found that while the initial gap in earnings did fade over 10 to 15 years, it reopened when people reached their late 30s and stayed negative until age 50.
Scars from the Great Depression

This all brings to mind the scars that our parents and grandparents felt from the Great Depression. It led to what we now call the Greatest Generation. But the Greatest Generation came out of the roaring ‘20s, and then lived through the Great Depression.
I don’t think the current recession/depression will last anywhere near as long as the Great Depression, but I do expect it to scar this generation just as much. That is both depressing and hopeful, because in the end it gave us a leap into the future.
This is truly going to be the Rocky Mountain Recovery. Some sectors will boom, others struggle in the valleys before rising. There will be no V’s or U’s or swooshes or other simplistic metaphors. It will have exhilarating moments but also hard work and struggles.

We will all need to help those who struggle. This is beyond what government can do. It will depend on what we do as individuals.
If you can, find a few people to personally invest your money, time, and resources in. Help them get back on their feet. To my fellow Boomers and entrepreneurs: Take some time and mentor a few people to help get the country going again. Do it in your own backyard in whatever ways you can.
Given the economic, geopolitical, political, wealth, and income disparity climates, not to mention racial tensions, it’s easy to despair right now.

Don’t. And for God’s sake, recognize that in addition to COVID-19, the leading world poverty and hunger authorities tell us that between droughts and locusts and economic woes, millions of people around the world face starvation in the next few months. We have to remember them and help.
I know it sounds like a lot. And you can’t do everything. But you can do what you can do.
I started this letter talking about the SpaceX rocket launch. The astronauts it carries into orbit will have an entirely different perspective.

We discussed the world in pieces, as if China and the US and Europe are far apart. But from space, they aren’t far apart at all. Astronauts see all three within the same hour. They get the ultimate macro view.
We truly are one globe of humanity. If only we could all get that same view.

Someday, we will. And maybe sooner than you think.
Time to hit the send button and wish you a great week!
Your preparing for uncertainty analyst,
John Mauldin
Co-Founder, Mauldin Economics

The Zombie Economy

The Coronavirus Could Cripple Public Finances

The coronavirus has plunged the global economy into a new phase of uncertainty. Governments and central banks are once again trying to shield companies and banks from collapse with massive bailouts. But there is danger in stimulating the economy on credit: It could spark a post-crisis crisis.

Von Martin Hesse und Michael Sauga

Spring forecasts: EU Commissioner for Economy Paolo Gentiloni spoke of a looming recession of historic proportions
Spring forecasts: EU Commissioner for Economy Paolo Gentiloni spoke of a looming recession of historic proportions / Kenzo Tribouillard/ dpa

Johannes Slawig hasn't had a lot of down time in the past few weeks. The head of the coronavirus task force in the German city of Wuppertal has had to procure protective equipment for the health department, hire doctors for the makeshift hospital in a local gymnasium and check the financing of the fire department's new test center.

Slawig hasn't even found the time to check out the webcams on the municipal zoo's website, which have been documenting the first steps of the newborn elephant, Kimana.

The broadcast has been a small consolation for the patrons of the temporarily shuttered zoo.

But for Slawig, who normally works as Wuppertal's treasurer, it's just another source of stress when he looks at the numbers. The closure of the zoo alone had cost the city 600,000 euros ($651,000) in lost income by the end of April.

This only added to lost tax revenues due to the largely shutdown economy (about 75 million euros), lost revenues from municipal theaters (around 2 million euros) and rising expenditures for the unemployed whose incomes have dipped below the threshold for qualifying for welfare (10 million euros).

According to Slawig's calculations, the city's debt will grow to 150 million euros due to the coronavirus. "I'm afraid the pandemic will eat up all the money we've managed to save in recent years," he says.

Prelude to a Massive Crash?

Whether in cities or states, private households or companies, the pandemic is causing revenues to shrink, even as costs continue to mount. For many, the only way out is through debt. Hardly any other event in the post-World War II era has created such a dramatic level of debts as the coronavirus.

Even before the outbreak, the global debt load had reached more than $250 trillion (230 trillion euros) -- three times higher than the world's annual combined gross domestic product. Governments around the world are issuing debt-financed bailouts worth trillions. The European Central Bank (ECB) and other central banks are injecting money into the economy with virtually no limits to prevent a collapse.

But how is this new mountain of debt ever going to be paid off? And by whom? In the end, some economists worry that the bailouts could result in a fatal combination of inflation and stagnation. A sort of post-crisis crisis, the bill for which will be footed by future generations. It begs the question: Is the pandemic merely the prelude to a massive crash? A financial crisis of epochal proportions that will drag companies, banks and governments into the abyss?

It's a bleak scenario. Companies that have lost business have been forced to take on debt and lay off employees. Ordinary people who were already heavily indebted before the coronavirus hit are no longer able to pay back their loans. Particularly in the United States, the land of installment credit, there is growing concern that millions of people could default on their car, house and student loans.

But in Germany, too, consumers have paid for a lot of new things on credit thanks to low interest rates. If people, companies or even governments go bankrupt, this would hit the banks with full force and could trigger a new credit crisis like the one after the collapse of Lehman Brothers in 2008.

Uncharted Territory

Hans-Joachim Ziems has seen many companies go bankrupt. In 2002, the Cologne-based management consultant helped patch up Leo Kirch's media group. In 2009, during the financial crisis, Ziems helped prevent the collapse of Adolf Merckle's empire. Merckle's flagship companies, Heidelberg Cement and Ratiopharm, survived, though the self-made billionaire took his own life out of grief and shame over the debt he had accrued.

But a recession on such a massive scale, "from trade and industry to the service sector. This is uncharted territory for me too," Ziems says. In some sectors, the losses that are now being incurred cannot be made up. The crisis will cause companies' debt loads to rise sharply and lead to a wave of insolvencies.

Ziems is seeing first-hand how quickly liquidity can dwindle as debt piles up. A few months before the coronavirus had reached Europe, he was called in. First as a consultant for the automotive supplier Leoni, then to its restructuring board. The company produces cable harnesses and wiring systems for car manufacturers and had gotten itself into financial trouble.

Ziems was asked to help get Leoni back on track. On March 13, the companies' lenders signed off on the company's restructuring plan. Ziems could expect 200 million euros in new liquidity. "A few days later, the lockdown began and we had to come up with a new plan," he says.

Leoni had to close down some of its plants and scale back employees' hours. The company wasn't able to lower its costs as quickly as its sales collapsed, and Ziems had to again ask the banks for more liquidity. The German government ultimately provided guarantees for new loans worth 330 million euros.

No Guarantees

Like Leoni, countless other companies have been going through the same thing in recent weeks. Corporations like Lufthansa as well as some tourism, catering and retail companies have watched as their sales have plummeted by more than 90 percent.

Meanwhile, they're still on the hook for salaries, rent and other expenses. "Many companies must close the gap between revenues and costs by incurring new debts," says Jörg Krämer, chief economist at Commerzbank.

According to the Bank for International Settlements, no other recession in the modern era has hit companies around the world as hard as the shock from COVID-19. Without government assistance, half of all businesses would not be able to pay back their loans on time.

Wherever possible, firms have obtained money from capital markets or banks. The ECB has relaxed its capital rules and allowed European banks to grant up to 1.8 trillion euros in additional loans. Corporations like Daimler, Bertelsmann and Eon have issued bonds worth more than 100 billion euros since mid-March.

For companies that are unable to raise money in this way, the government is offering its assistance. Berlin is providing loans and guarantees worth more than a trillion euros through the state-owned development bank KfW. Within five weeks, the bank received more than 25,500 applications for loans worth 33 billion euros.

But this is only alleviating the immediate need for cash. The companies will eventually have to make good on their bonds and pay back their KfW loans, plus interest. Once the economy bounces back -- an outcome everyone is hoping will come sooner rather than later -- many companies will enter the next phase with a heavy debt load. And even that's not guaranteed.

A High Risk of Defaults

Credit rating agencies such as Standard & Poor's (S&P) assess the creditworthiness of companies, banks and countries. Currently, they're lowering ratings across the board due to soaring debts, indicating an increased risk of default. For companies seeking new loans, this means they'll have to pay higher interest rates to lenders, thereby further aggravating the difficult financial situation.

At the same time, if an economic rebound is going to be possible, companies will need more capital in order to ramp up their production again. "Often it's the upswing after a crisis that breaks companies' backs," says Tobias Mock, S&P's managing director for corporates in Germany, Switzerland and Austria.

Mock expects that many companies won't be able to free themselves from this vicious cycle. "Defaults will increase significantly in the coming months and are expected to peak in 2021," he says. For bonds that S&P has rated "speculative," Mock expects the default rate in Europe to rise as high as 10 percent. Last December, that rate was only 2 percent.

That kind of development is not unusual. After the bursting of the dot com bubble in 2000, the real estate bubble in 2007 and the euro debt crisis in 2012, many companies started saving as their debt loads grew. "That was a brake on growth," says Commerzbank's Krämer. He suspects this will happen again: Companies will invest less and cut back on staff, which will "noticeably slow down the economic recovery."

Whether companies will even have time to recover from the crisis will largely depend on the banks. If experts like Mock are right, bad loans will soon begin piling up on bank's balance sheets. Then, just like in 2008 and 2009, it will become apparent which banks are strong enough to support ailing companies.

Even before the coronavirus struck, European banks already had close to 600 billion euros worth of non-performing loans on their books. In Greece, bad loans account for more than 30 percent of banks' loan portfolios. In Italy, they account for 6.7 percent.

First Public Health, Then Public Finances

Concerns over banks' stability has apparently also reached the political realm. There is currently a debate in the European Union over whether rules for bailing out banks that were established after 2008 should be relaxed in order to provide ailing institutions with taxpayer money.

In the end, governments will be saddled with much of the risk anyway. Governments cannot allow a wave of bankruptcies among businesses or another crash in the banking sector. Former ECB President Mario Draghi recently admonished governments to take on the deficits of the private sector.

This would cause national debt all over the world to explode at a rate that is otherwise only seen in times of war. This year alone, the International Monetary Fund (IMF) expects government debt loads to grow by $8 trillion. That would put it at around 100 percent of annual global economic output. That would be almost as much as in Greece before the euro crisis.

Once it's finished ravishing public health, does this mean the virus will also destroy public finances?

Many economists consider this unlikely. In most developed countries, such loans are "easily affordable," says Olivier Blanchard of the New York-based Peterson Institute. Low interest rates made it easy for many governments to live on credit. Therefore, Blanchard says, there's little reason not to spend a lot of money. The more loans, the better.

But not all economists are convinced that the crisis can be overcome so easily. Hans-Werner Sinn, for example, the former president of the Munich-based Ifo Institute, considers it "appropriate to cushion the temporary crisis with higher government debt." But he's concerned by the fact that central banks around the world are helping governments by buying bonds on such a large scale.

Dangerous Inflation

The amount of central bank money in the eurozone will quadruple this year compared to what it was before the financial crisis, Sinn says. The coronavirus is causing the supply of goods and services to shrink. Too much money for too few goods -- this could usher back in an economic evil that seemed to have been eradicated: inflation. It's not a huge threat at the moment, Sinn says. "But once prices start to rise, it's hard to slow them down again."

Relieving the government's debt load through devaluation was a method that even late Roman rulers used. Since then, governments have repeatedly rid themselves of debt through inflation. Economists, including Sinn, therefore predicted a new wave of inflation even after the eurozone debt crisis was over.

But this never materialized. Instead, key interest rates fell to zero -- and in some cases, into negative territory or at least under the inflation rate. This has caused debt to shrink, albeit slowly. At the same time, however, it has caused the savings of those who invested their money in interest-bearing accounts or securities to shrink as well.

The pandemic could keep interest rates extremely low for years or even decades to come. This is the only way for states, banks and companies to bear their debt burden without going bankrupt.

The countries most in danger of going bankrupt are the ones that were highly indebted long before the coronavirus struck. Many emerging and developing countries have taken out massive loans, often in foreign currencies like the dollar.

Now the markets for raw materials are collapsing, tourism has practically come to a standstill and their currencies are losing value. All this makes it even more difficult for these countries to service their debts.

It's true that the International Monetary Fund recently temporarily suspended its interest and repayment claims for 25 of the world's poorest countries. But this is little more than symbolism.

Without drastic debt relief, economists predict that a number of states in Africa, Latin America and Asia will be forced to declare bankruptcy. The consequences for the financial industry would be catastrophic.

An 'Economy of Creeping Stagnation'

In Europe, too, the pandemic is exacerbating the economic divide. While northern countries have enough leeway to issue bailouts in the billions, many southern European states in the eurozone are being driven to the brink of ruin.

In Spain, the looming recession will cause the country's debt ratio to skyrocket to just under 116 percent of its gross domestic product this year. In Italy, that ratio will jump to around 159 percent.

Ever since eurozone members began debating coronabonds and bickering over reconstruction loans again, the old doubts over the viability of the monetary union have returned. While southern countries feel abandoned by their northern bretheren, countries like the Netherlands, Austria and Germany are worried that Italy in particular could collapse under the weight of its credit burden.

"Euroskeptics" in some important countries are "on the rise again," says Holger Schmieding, chief economist at the Hamburg investment bank Berenberg. This "political risk" for the monetary union is making financial markets nervous, he says. The interest rate differential between Italian and German government bonds has almost doubled since mid-February, increasing the danger that Europe could plunge into a currency crisis.

This new debt reality is creating a two-tiered global society. Many countries won't find it difficult to live on credit for a long time. For others, the loans they take on to get them through the coronavirus could be their downfall.

They are facing a difficult balancing act: On the one hand, economic depression and unemployment are lurking. On the other, government bankruptcy.

Some countries could also face a fate like Japan's, which for many years has lived with extremely high national debt and an ultra-loose monetary policy.

For Sinn, the former Ifo head, this could lead to a zombie economy of sorts, an "economy of creeping stagnation" characterized by ailing banks, sluggish companies and weak growth figures.

"Germany should not strive for this outcome."

Big Tech’s viral boom could be its undoing

The industry might seem unstoppable in this crisis, but ultimately it will be curbed

Rana Foroohar

Big Tech Regulation
© Matt Kenyon

Contact apps that trace where we have been and who we have touched; software that tells bosses how hard we’re working from home; face masks that light up to show whether we have a virus.

These are just a few of the technologies being deployed to help fight the Covid-19 pandemic.

Surveillance capitalism was a dirty phrase before coronavirus hit. Now, it seems to be business as usual, something investors are pricing into share valuations, as information technology has grown to represent one-quarter of the value of the S&P 500.

But although the “techlash” now seems a thing of the past, the very success of the digital giants and their role in virus fighting may eventually prove their undoing. The conventional wisdom is that Big Tech will emerge far bigger and more powerful than ever once the pandemic is over.

Amazon is unquestionably the world’s most essential retailer, hiring 100,000 extra staff to manage its quarantine-related demand surge.

New York governor Andrew Cuomo has invited former Google chief executive Eric Schmidt to help lay out how to reopen the state.

Google and Apple have teamed up to develop a contact tracing system being adopted by numerous governments.

Uber is capitalising on lockdown demand for takeout food with a bid for rival Grubhub.

Big Tech may seem unstoppable, but that is exactly why it will ultimately be curbed.

The first post Covid-19 regulatory push is already happening around privacy. Data are being created at the fastest ever rate since the virus made our lives largely virtual. A Bank of America report notes that the volume of data creation is up 50 per cent since the pandemic began in many parts of the west. Tech companies are helping dozens of governments track their citizens.

Many of them hope to hang on to the data they are accumulating and, ultimately, to monetise it, particularly in areas such as healthcare. Google, Amazon, Facebook and Oracle were already trying to make inroads in the sector before Covid-19 hit. Contact tracing is moving ahead all too quickly, although information about the efficacy of surveillance as a public health tool is limited and questioned by some academics.

In the UK, there is public scepticism about whether the IT industry can be trusted to design such products in the public interest. In the US, a recent survey showed that only half of Americans would participate in contact tracing, only one-third of them would be willing to share flight and other biometric information to fight the virus, and even fewer would want their wireless location tracked.

No wonder both Democrats and Republicans are pushing bills to ensure that any data collected for virus fighting cannot be used for other means. Some European politicians and regulators, including the EU competition chief Margrethe Vestager, are calling for stringent rules and transparency.

Content moderation is another area ripe for regulatory action.

Big Tech companies have been reluctant to police disinformation online, in part because of civil liberty concerns. They also do not want to lose the legal protection that exempts them from responsibility for what users say or do online. But the rapid spread of coronavirus has forced them to take action to delete inaccurate public health information.

As one high-level European regulator recently pointed out to me, this makes it hard for these companies to argue that they cannot police misinformation in other areas. The consequence could be that they are forced by law to do so.

That would pose a threat to the targeted advertising business model crucial to companies such as Google, Facebook and even Amazon.

The third push will be around antitrust.

Amazon may be delivering most of our essential goods, but its incredible size and power also make it much easier for activists to argue it is a monopoly. Critics will seek to have it broken up, forced to pay higher wages to its workers (a number of whom have contracted the virus), provide them with better benefits, or even be turned into a publicly-owned utility.

As Pramila Jayapal, a congresswoman from Seattle, put it recently: “Two things can be true at the same time. A company can be doing tremendous work that is incredibly valued and essential, and it can be treating workers badly.”

That is not a good look as the big companies get bigger and start to gobble up weaker competitors. Senator Amy Klobuchar, the ranking member of the subcommittee on antitrust, said last week that Uber’s potential acquisition of Grubhub raised “serious concerns” given that consumers and restaurants are now dependent on such services.

“The last thing they need is an increase in the extremely high fees already paid to these companies,” she said. Senator Elizabeth Warren has already teamed up with Congresswoman Alexandria Ocasio-Cortez to call for a moratorium on “risky” mergers and acquisitions for the duration of the pandemic. Beyond all this, the different ways countries are dealing with trade-offs between public health and economic recovery — as well as surveillance and civil liberty — pose another challenge.

We will probably see an evermore nationalistic technology sector, with different rules emerging for different regions.

The shift will limit global growth opportunities for some platforms.

Last year’s techlash may be gone, but it is certainly not forgotten.