In the first part of this post, I will look into exogenous shock events of the past that seem to offer lessons on how we collectively are responding to the pandemic respiratory ailment that is Covid-19.  The later half of the post will focus on the my implementation of the famous Baron Rotschild quote, “Buy when there’s blood in the streets, even if blood is your own“!

Most of the material presented below is derived from a recent wall street article titled, Lessons for the Coronavirus Crisis From Six Other Disasters.

I will try to summarize some of the examples presented in the above mentioned wall street article in terms of policy response of federal agencies at the time of the crisis.

For starters, lets briefly tallk about the policy tools available to federal entities. These are, in no particular order:

• Monetary policy: as the name suggests, monetary policy has to do with money and is mandated by central banks. The essential role for monetary policy is to regulate the supply of money in the economy and keep tabs on interest rates. The Federal Reserve is the central bank of US and it was created to serve two macro objectives, maximum employment and price stability in US markets
• Fiscal policy: It falls within the purview of Federal Government. Fiscal policy deals with taxes and spending  mandates of the federal government. Fiscal policy is decided by the Congress and the Senate and the Fed or central bank has no role in influencing the fiscal policy.
• Healthy policy: It is a different beast altogether and it usually is at odds with monetary and fiscal policy. The goal for health policy is to protect and promote health of citizens and communities. State governments with their own legislative, judicial and executive branches in addition to federal government play an important role in regulating health policies.

Lets look into  how a combination of these three policy tools or the lack thereof influenced the scale of economic contraction following each of the past exogenous shock induced crisis.

Before we begin though, I want to summarize the 3 key lessons (from the aforementioned wall street article) that we can derive from the past crisis of similar nature

• there is always a trade-off between economic policy and health policy. The more government tries to prioritize one, the other suffers
• at the onset of crisis policy makers are coping with a high degree of uncertainty. Bold actions to confront crisis head on are delayed due to political wrangling, essentially producing a timid response to the crisis until it gets out of hand
• crisis leads to change of habits that far outlast the crisis, but for society as a whole the scars heal remarkably fast

Spanish Flu of 1918:

• Infected 500 M people globally, killed 50 M or more including 675,000 in the US.
• Did not impact economic activity significantly
• Federal government had very little role in fighting the infectious disease, with exceptions at local governmental levels (see here)
• No monetary policy or fiscal policy or health policy of any consequence implemented to seriously fight the pandemic
• Was not a direct contributor of recession, which lasted from Aug 1918 to Mar 1919

Asian Flu of 1957:

• Killed more than 1 M people world wide including 100,000 in the United States
• Pandemic coincided with recession that lasted from Aug 1957-April 1958, but not a factor for recession
• No mandate for social distancing or any other aggressive health policy as a result very little impact on economic activity

Terrorist Attack of 2001:

• While different in nature, it still was an exogenous shock that hit at the core of American life
• The impact of this shock was quite similar to what we are currently facing with Covid-19.
• Heightened security concerns slowed trade, kept shoppers away from malls and reluctant to fly
• Was  not a harbinger of recession, which had already begun about six months prior to the attacks.
• Federal government as well the central banks intervened aggresively. Feds lower the interest rates, and congress approve $40 B of emergency rebuilding and defense fund
• The difference relative to the present crisis, when terrorists attacked, government urged public to not be afraid and lead life as normal. With Covid-19, the message is for folks to lead anything but a normal life

Global Financial crisis:

• This was the first exogenous crisis that led to a recession and triggered a massive government bailout
• Much like Covid-19, the crisis began in a obscure corner of financial markets, sub-prime mortgage, however soon engulfed the global economy in to a downward spiral.
• Both Fed and Congress acted aggresively, though some would argue belatedly, allowing Lehman Brothers to go bankrupt, triggering the worst recession since the great depression of 1929.
• Fed reduced interest rates, close to zero, and encouraged banks to borrow at discount window.
• Congress under President Bush approved $700 B of Troubled Asset Relief Fund and President Obama ushered through a $758 B stimulus plan
• Strong monetary and fiscal policy response averted the recession from turning into depression and provided a blue print of sorts to tackle exogenous event driven events that lead to economic instability

What are the implications for Covid-19? Flu pandemics per se do not lead to recession if aggressive health policy mandates are not put in place. However, the consequence can be disasterous loss of life. When it comes to a choice between life over economic prosperity, life wins all the time, the question remains, how long can economy suffer before economic woes become the source of death!

Thus far, we have seen governments globally adopting aggressive health policies to reduce fatalities caused by Covid-19 and motivated by learning from the experience of global recession, are simultaneously implementing aggressive monetary and fiscal policy so as to minimize the damage to economy. Lets hope the three pronged policy attack is sufficient to tame the beast that is Covid-19 sooner than later!

Be Greedy When Others are Fearful

Some would argue that market sell-off is completely justified given the unprecedented nature of present crisis. That may be so, however, for investors with long-term horizon, I believe this is an opportunity of a life-time to purchase good businesses on the cheap. My belief underlies the lessons from the past and the aggressive policy actions of present. I have been purchasing through the down turn with the hope that 5 to 10 years down the line, Covid-19 will be a distant memory.

Below is a summary of my trading activity over the last one month.

Some observations:

• I completely missed the signals on how bad corona virus pandemic would turn out to be. As a result, I front loaded lots of my purchases at a time when the crisis was in its nascency in the United States.
• I was able to deploy lots of cash sitting idle in my active portfolio. A sign of difficulty I was having deploying cash in a hyper elevated market
• Through the downturn I have kept on investing in a select few firms, whose business I feel I have a reasonable grasp on

My time horizon is relatively long and I am hopeful that if not all, most of these purchases 5 years down the line would seem like true bargains to be had!

Video/Book/Article/Audio for the Week

After a very long time, this past weekend, I spend time binge watching. In particular, two netflix documentaries, Tiger King and Dont F**k with Cats. I must say, if you think we are living in crazy times with Covid-19, these documentaries hit the ball out of park in terms of the strange world that we live in!

On to other forms of entertainment, this weeks list include

• Podcast: Where do we get 2 Trillion Dollars, fascinating NPR podcast on the magic wand of Fiscal stimulus
• Article: What to Buy First, interesting article looking into opportunities in the high yield bond markets
• Article: James Montier of GMO capital on the fear and psychology of bear markets
• Article: The bull case for  Berkshire during the covid-19 pandemic