Dear Partners, Colleagues, Friends,
I started writing this over the weekend, but, unfortunately, I was shaken out of bed Sunday morning by the strongest earthquake to hit Zagreb in 140 years, sending scared people to congregate in the unusually wintry streets, as if God was saying, “Forget isolation, get out there and mingle…” So, after a couple of days assessing damage, dealing with inspectors, helping neighbors, thanking well-wishers and jumping nervously at each aftershock, I am back to thinking about the potential aftershocks of “the crisis”.
I am sure that each one of you has read numerous messages and assessments by CEOs, banks, consulting firms, think tanks, etc. Most try to provide a thoughtful analysis, but many seem to be in the category of “we have to say something”. Consider that it was just three short weeks ago that we were anxious about cancelling the IMAP Spring Conference in Denver, and no one was talking about recession. This morning my phone reminded me about my (cancelled) flight, and the question is no longer about whether there will be a world recession, but whether or not there will be an extended depression.
There is no use to look at economic indicators – they haven’t had a chance to even catch-up with the global speed of the economic slowdown. And each day estimates are getting worse, as if Goldman Sachs and Morgan Stanley are trying to outdo each other on how bad it’s going to be. Soon after you read this, total initial jobless claims will be reported in the US (Thursday, 8:30 am EST). Estimates range from 1-2 million,* and developing markets are being decimated by falling commoditiy prices and a major dollar liquidity squeeze.
Can the world make a quick turn-around?
The only real example that we have is China. They have only been able to bring the crisis under control only though complete and drastic isolation, extensive testing and now, and for the foreseeable future, population monitoring as people slowly get back to work. Recovery in China will be a slow process, not a V-shaped miracle. Furthermore, unfortunately, or not, most Western advanced economies don’t work with that level of social control.
Will government intervention work?
Central banks have unloaded more monetary stimulus in the shortest period than in any other time in history. The US Fed is in QE infinity mode and every central bank is following. Now, as I write this, the US has passed a $2 trillion fiscal stimulus passage, and the stock markets have gone bonkers. But, consider that each $1 trillion represents about 5% of GDP. This means that, on top of the current 5% budget deficit, and with reduced tax receipts, we are talking about a budget deficit in the US for this year approaching 20% of GDP.
This is the highest level since WWII and about twice that of 2009. And every country in the world is trying to provide as much stimulus as they can. So, we are truly in unchartered waters, and making any kind of predictions at this stage about the timing of the recovery or what the market will look like at the other end is just a guessing game. The best we can do is follow the data day by day and look for trends that might develop over the coming weeks and months. One of the few things that we can predict with certainty is that there will be a new normal, and it may be very different from what we were used to just a few weeks ago.
This Friday, the first day of the postponed Denver conference, we will try to just act normally. We will be holding a virtual Board Meeting, followed by a virtual Designated Partners’ meeting. Hopefully, we will also have some time to discuss what steps everyone is taking to weather this crisis, and we are also planning a series of virtual roundtables over the next few weeks to share as many opinions and practices as possible.
There have been some outstanding transactions completed in the first quarter (see them on the IMAP website), and in talks with a number of IMAP Partners, it seems that advanced transactions are still closing. But many on-going processes and new mandate discussions are now on hold, and firms are in the process of deciding how to organize themselves over the coming period, however long it may take. There is still a sense of cautious optimism – that no matter how things change, our deal-making expertise and professionalism will be more required than ever.
One thing that this crisis is showing us is that no matter the geography, no matter the level of economic activity or wealth, all of us are inter-connected, facing the same problems and concerns. Neither viruses, nor economic shocks (nor earthquakes, for that matter) recognize borders. We may be facing some difficult times, but if we stick together, respect and help each other, we will be stronger when this is over. That’s one of the other things I can predict with certainty.
Finally, let’s collectively give a thought to those who are sick, or have loved ones or friends that are sick or even have passed away, to those who have lost their jobs, or are about to lose their jobs, to our heroic healthcare workers, to the researchers that are frantically looking for a vaccine and cures for the effects of the virus, to the public servants that are grappling with problems way above anything they have dealt with before, and to all those whose lives have been upended in one way or another. Pray for all of them in your own way.
Stay safe, stay in touch, use your time productively, and let me know directly what more you think we should be doing, and how we should be preparing for a changed world.
25th March 2020
*The actual figure announced on 26 March came in at 3.3 million, the highest weekly figure in US history.