What Have We Learned Here?

A few things revealed in recent months.

Most businesses operate on razor-thin margins. Financial advisors recommend people have a six-month emergency fund. But many businesses faced bankruptcy after losing a few weeks of sales. This is less about poor preparation and more about revealing the tightrope walk of business operations.

Some of the lowest-paid workers are the most essential. Garbage collectors, janitors, grocery store clerks, food delivery, truck drivers, farmers, daycare providers – with few exceptions (doctors) the jobs that are most vital during a pandemic are ones that got little respect before it.

The two most important economic stories are the size of the business collapse and the magnitude of the stimulus. It’s easy to focus on the former because it’s personal and devastating while ignoring the latter because it’s political and hard to contextualize. But they are equally huge. Despite 15% unemployment, Goldman Sachs estimates household income will be higher in Q2 2020 than it was in Q2 2019, largely because of stimulus.

No business model or investing strategy is proven until it survives a calamity. Even then, nothing’s guaranteed. I don’t think we’ll hear the words “recession proof” after this.

Done right, forecasting is a delicate balance of probabilities. But people want certainty, especially when the stakes are high. The people who make forecasting models probably have less faith in their accuracy than those who read them, if only because things like confidence intervals are rarely discussed in the media.

Opposite outcomes currently seem equally plausible. So whatever happens to the economy it will look obvious in hindsight. If we collapse into years-long depression people will say, “Of course we did. 20 million people lost their jobs in one month. What did you expect?” If we quickly develop a vaccine and optimism returns people will say, “Of course we figured this out. Every pharmaceutical company in the world was focused on defeating one virus. What did you expect?”

Some people intuitively grasp the dangers of leverage. Others learn it the hard way. The cost of debt is the interest rate plus the requirement that at various points in the future (when interest payments are due and when the debt matures) you will be in control of your cash flow. The former is easy to calculate; the latter can be impossible.

There are no atheists in foxholes and no deficit hawks in meltdowns. The $2.2 trillion CARES Act passed the senate 96-0. People suffering from sudden, unexpected catastrophe are likely to adopt views they previously thought unthinkable.

Catastrophe can be larger than you ever imagined but adaptation can be bigger than you ever considered. Two months ago, the idea of shutting down most businesses would have seemed impossible. The idea that many could continue operating – even thrive – with every employee working from home would have sounded equally ludicrous.

History is only interesting because nothing is inevitable. The biggest lesson from the last three months is that whatever your view of the future is, it’s probably wrong. Things change in ways people can’t imagine at times they never considered.