Covid-19 shock is not yet crisis

Perhaps is this is already a recession, and a crisis, both, or at least it’s becoming one. We might also as well be ready for the fact that what we’ve been through so far in the last 2 to 3 months might only be the shock. And the full ramifications of its impact are still spreading out.

I was born in 1973, probably for the modern era the time when “crisis” became a sort of continuity in economic terms, a way to describe what I happened since. And 1973 “shock” is a great way to explain what we’re going through. In a very short period of time, oil producers decided to make much more money out of the “black gold”. There’s been nationalization of oil production, alignment through a Cartel (which is a term that make my free-economy mind buzz), and a steep increase in the price of oil. And they were immediate consequences, across the world. All of of sudden, some activities were not affordable anymore — people felt the pain filling up at the pump, fuel became scarce. France engaged into a “zero energy waste” campaign, la chasse au Gaspi, as the Cartel did it again in 1979… Learning was that was societies had to adapt, but could not absorb such a big impact to their value chain in such a short time. There was the cohort of the consequences we’ve become since pretty accustomed too — economic slowdown inducing recession, bankruptcy, and unemployment. Gradually all sectors of economy started to lose ground… and loosening of monetary policies that come when governments try to “inject blood” in a dying economy induced inflation, that has plagued the world for another 10 years…what started as an increase in cost of energy — hence mostly transportation — had deep impacts on all sectors of a globalizing economy.

Another example closer to lots of us is the 2008 financial crisis. It was a burble busting. Low grade mortgages that was fueling it was the closest the whole economy could be from a big Ponzi scheme… please watch again the big short if you forgot how people were buying homes they could not afford, making money selling them, buying cares and luxury services with the proceedings… there was too much cash around, and at some point, when there’s doubt, when someone asks “hold on — wait a minute, what are we doing” the castle made of card is collapsing. But the collapse was too big, to deep, not to drag the overall economy behind… Poor people lost their jobs and homes, but no one was immune. Banks defaulted, bankers lost their jobs, bonuses got cancelled, they had to adjust their lifestyles, and personal coaches and private chefs were without a job, overnight. Unemployment skyrocketed. Major companies too big too file were bailed out by nations who said many times that economy had to decide who were winners and losers… It’s clear that in a global, interconnected, interdependent economy, even a relatively focused event (US mortgage defaults induced by greed and recklessness of couple of mortgage risk managers) had the potency to bring the whole financial system to its knees — and drag the whole economy to the ground. It took nearly 10 years for some sectors — such as automotive in North America and Europe — to go back were it was before the crisis.

The shock we go through is no different. In spite of how it might feel, as it’s affecting each and everyone of us. Impact so far is very segmented, and you can find some examples… Some sectors — such as air transportation — ground to a halt. We rode with our bikes around Singapore island a few weeks back, and it was impressive to see an armada of brand new airplanes (mostly A350 and 787) parked on Changi Airport, in what looks a winter for them. But goods continue to be transported everywhere in the world to support essential services — so if you have a fleet of trucks transporting vegetables, you’re still probably not too hardly hit. Supermarkets that had adopted and invested in curbside are thriving, but some others are closing shops. High end restaurant are closed, while pizza parlors with delivery services can’t keep up with demand. Burger joints might survive, but other brands like Sweet Tomatoes in the US (self-service salad and soup buffet) are ceasing operations.

I have a friend working in processed food industry, and it’s a tale of two cities in her company. Half of their plants are running fuller than full, and struggle to keep up with demand: their packed breads with long shelve lives are music to the ears of home deliveries and curbside ordering, and generalized hoarding. Their problem is more about finding enough people to come to work, and follow safe handling regulations. The other plants that makes more “premium products” such as fresh pastries and croissants is decimated…Most of their production used to go to collective restaurants (like office cafeterias or schools), that are closed. The rest being distributed in the “deli aisle” of supermarkets, and those are today deserted, and they require handling that is too delicate for curbside (and even more complex given the safe health practices around food stored.

So some shut down… especially in the “hospitality sector”, that has no revenue to report at all — hotels, mountain guides, professionals sports people, restaurant personnel such as waiters etc… This explains largely the unprecedented increase of workers filing for unemployment in the US, as this sector is an integral part of “modern life convenience there”, and behind the Starbuck’s barista there’s a whole supply chain that’s idling. Some actually continue to run, or even prosper (digital sectors, people supporting essential services such as medical PPEs etc…). But at some point, everyone will see an effect…

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So what could it be? Pretty undoubtedly economic crisis. Like in “domino day”, there will be ripple effects all across the world, each segment will be affected. In a darker scenario, furloughed or sacked employees will not pay their mortgages… their banks will start to be spiraling into “red territories”, and they will have to react, restructuring, cutting spending and investments leverage, destroying more jobs. All this wealth loss will pretty rapidly limit investments going forward, less houses will be built, construction workers will have trouble finding back a job, not going to restaurants, driving less etc… Nations will do their best to cope and prevent a hard landing, but let’s face it, it has not prevented crashes in the last 100 years.

Assuming past is a good indication of what can happen, the consequences of Covid19 can’t be limited to just 2 months of shock — it might be years of struggle. Will we walk the green curve (not much problems), the yellow V curve, the red U curve, or the black L curve… not so clear, no one knows. But prepare yourself, depending on where you are in the supply chain, and the segment you’re in, there might be more upsides or downsides coming your way depending which of these different scenarios play out. What you do with the opportunities offer by the rebound are all yours to grab.

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