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Many terms can be used to describe the Covid-19 pandemic.
Virulent. It has been, spreading to 475,052 people as I type this, faster than SARS.
Unprecedented in its economic impact? Certainly. It has delivered the deepest, fastest economic shock in history, according to Nouriel Roubini.
Earlier this month, it took only 15 days for the US stock market to plummet into bear territory (a 20% decline from its peak) – the fastest such decline ever. Now, markets are down 35%, credit markets have seized up and credit spreads (like those for junk bonds) have spiked to 2008 levels. Even mainstream financial firms such as Goldman Sachs, JP Morgan and Morgan Stanley expect US GDP to fall by an annualised rate of 6% in the first quarter and by 24% to 30% in the second. The US Treasury secretary, Steve Mnuchin, has warned that the unemployment rate could skyrocket to above 20% (twice the peak level during the financial crisis).
In other words, every component of aggregate demand – consumption, capital spending, exports – is in unprecedented freefall. While most self-serving commentators have been anticipating a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next – it should now be clear that the Covid-19 crisis is something else entirely.
But there is one thing that it certainly isn’t.
It isn’t a Black Swan event. As defined by Nassim Nicholas Taleb, this is an extreme, unforecastable, rare event, a genuine “no-one could predict this” occurrence.
[A]n event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme 'impact'. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
This was predictable and predicted.
Not just by Bill Gates four years ago at some level of generality. But at the very specific level of detail. Take this paper pointed to me by my friend Vishal Gulati, Severe Acute Respiratory Syndrome Coronavirus as an Agent of Emerging and Reemerging Infection by Cheng, et al from 2007.
As Vishal says:
Indeed, Taleb concurs:
such a global pandemic is explicitly presented there as a white swan: something that would eventually take place with great certainty. Such acute pandemic is unavoidable, the result of the structure of the modern world; and its economic consequences would be compounded because of the increased connectivity and overoptimization. As a matter of fact, the government of Singapore […] was prepared for such an eventuality with a precise plan since as early as 2010.
Even at times of this, analysis and specificity, matter. The responses we make today, fire-fighting and battlefield triage, are essential until we get on top of this pandemic. But what happens afterwards, the decisions we take to shape the future, are also vital. Understanding how the major parties in our economies (governments, investors, corporations, boards) prepare for a predictable event is a critical piece of the puzzle.
If our custodes, our governments, were genuinely blindsided by a black swan, that is one matter. If they recoiled, fumbled, at a white one, that is another.
Stay very safe, KEEP YOUR DISTANCE and wash your hands.
P.S. 478,283 confirmed cases as I hit send.
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