I tell anyone who asks (and many who don’t) that one of my favorite books of all time is Nassim Taleb’s The Black Swan. In it, he argues that unpredictable phenomena have a much greater impact on our lives and history than we give credit. Three easy examples from the past three decades: the fall of the USSR, 9/11, and now, Covid-19.
What do these three events have in common?
- They had a tremendous worldwide impact that changed the course of history.
- This impact was completely unpredictable.
This isn’t to say that people didn’t discuss the possibility of these events occurring. We knew a terrorist attack could happen, we knew that a worldwide pandemic was possible. But we didn’t know when they’d happen, and we didn’t know how large their impact would be.
So let’s get back to the subject of this post. What does the economic recovery look like? Will the recovery be a V: quick and easy; or will it be a long, painful, slow U?
The sticking point in answering this question is whether or not Covid will continue to spread and wreak havoc on health systems. Maybe some states and countries open too early, leading to a resurgence of the disease. Or, as was the case with the Spanish Flu, the second wave of the disease hits even harder next fall.
My hypothesis, based on the principles of Black Swans, is that the economic devastation of the virus is largely behind us. What data do I have to base this off of? How can I be so confident as to put this in bold?
I’m simply relying on the principles of Black Swans: the greatest shocks to systems, economic or otherwise, are those we can’t predict. Since Covid is now a known risk, a white swan, its potential impact can be accounted for and mitigated.
We’re developing vaccines and treatments. Businesses are now better able to prepare. More importantly, governments and health systems are learning what the most effective forms of preparedness, mitigation, and treatment look like. Ventilators and PPE are being produced in surplus. We now have models to predict demand of hospital beds, expected fatalities, and infection rates: we won’t be caught by surprise again. And the more we learn, study, and prepare the more derisked Covid becomes. So what do I think the recovery looks like?
Overall a quick V, but a Quick V in Some Places, a Long U in Others
I know, what a cop-out, right? This time I’m basing my assumptions on my understanding of macroeconomics. The government has pumped more money into the economy than ever before, and while the unemployment rate is at Great Depression levels, the safety net is not. In some states and income levels, people are making more money unemployed than they would be working. Aggregate demand is going to be fine, even if consumer sentiment is down for a month or two. In terms of supply, most sectors can get back to where they were pre-Covid without major structural changes. While there have been massive layoffs, these people have skills and can find jobs in different sectors of the economy.
Just using Boston as an example, displaced workers from Toast and Tripadvisor can find new opportunities at ecommerce companies like Amazon, Chewy, and Wayfair.
A few major exceptions: bars, restaurants, and entertainment/events. Retail will recover quickly although the structural shifts from physical stores to online shopping will only accelerate. Bars, restaurants, bowling alleys, concerts, conferences, and movie theaters are going to have a longer recovery – removing stay at home orders and opening economies back up is not going to make people immediately feel comfortable navigating crowds and bumping elbows.
Political Risk is Everywhere
There’s a ton of uncertainty in terms of government response. China is now largely viewed as a global-antagonist: are we going to have World War I style reparations or further tariffs? That could further impact our supply chains, and even as we look for other options, nations like India are currently suffering worse from Covid than China.
If vaccines and treatments are developed, but suddenly becomes conspiracy-ridden (have you seen what the internet crazies are saying about Bill Gates lately?), public health initiatives are going to be less effective.
There’s also perverse political incentives to potentially prioritize public health over economic well being unnecessarily and portray it as a false dichotomy. Current media narratives are forwarding a health vs. wealth argument, even though there are significant implications for physical health and well-being that are rooted in economic security. There’s a price to driving 65 miles per hour on the highway, and it’s accepting a certain amount of traffic accidents per capita. At the same time, we make people wear seatbelts. We trade safety for opportunity on a daily basis, and it’s no different in this case: we as a society need to decide the optimal balance between protecting the most vulnerable and keeping the economy running.
The good news from all of this is that many countries are employing different methods of mitigating the spread of the disease with various degrees of efficacy and economic impact. We should be able to see which methods strike the optimal balance, and be better prepared in the future. Black Swans, by definition, only happen once.
What Does It Mean For You?
The long term impacts of Covid-19 are impossible to predict now, but I think it’s common sense to say that if your job takes place largely over the computer or phone, your career is less likely to be impacted. Similarly if your job is essential and un-scalable: plumbers, hair dressers, nurses, and doctors; then your job might look slightly different (more safety protections) but ultimately people need these services and these are less likely to be impacted.
If you work for a restaurant, travel agency, wedding planner, or concert venue, this part of the economy is going to recover more slowly. Eventually, though, I think we’ll see these come back to pre-Covid levels. According to the WSJ, it took six years post-9/11 for the travel industry to fully recover.
There’s opportunity here as well. Now that more people have been exposed to remote work and maintaining relationships over video chat, there is going to be a continued increase in demand for products and services that make working from home and remote relationships easier and more enjoyable. As there’s a gap in group entertainment and social events, there’s an opportunity to replicate some of these experiences, either in AR/VR or online.
If you’re someone who is in a ‘U’ recovery job or industry, what should you do? One option is to go back to school or join a bootcamp in order to learn skills (like coding) that will only be in higher demand now that the digital transformation is being accelerated. Even without new skill-building, most people in ‘U’ industries have customer-service and relationship-management skills which can be applied in account management and customer success teams.
There are also always capital-light ways of going into business for yourself. You don’t need to spend hundreds of thousands of dollars in order to start a side-hustle or diversify your income. Reddit is full of success stories of people starting their own cleaning businesses. Selling products online and starting a niche blog are also low-risk ways to build a business.
Welcome to Fire
I can’t stress enough that events like these only highlight the importance of the FIRE movement. Even the simple idea of having a six month emergency fund is incredibly valuable in preventing the negative impact of Black Swans. I’m looking forward to a new generation of people being interested in Financial Independence as we work our way out of the impact of Coronavirus.