COVID Economy

Talking to people and reading [some] news, I feel like watching The Big Short [Reloaded]. A huge disconnect between what is ahead of us and how people think and act. Barely anyone admits the lockdown and the economic downturn will last throughout 2021. Most think this is a painful, but rather short event and things will soon be back to normal.

Jamie Shipley: People hate to think about bad things happening so they always underestimate their likelihood.

Last Friday U.S. payrolls were reported to fall by 700 thousand (vs the analysts forecast of 100 thousand). And this data covers only the early part of March, before the mandated shutdowns. The jobless rate is expected to surge above 10%, probably to the levels comparable to the 1930's Great Depression.

Economy is a chain. One link breaks and it falls apart. It started with travel restrictions, taking down passenger transport, hospitality, services, retail. And essentially everything that is non-essential. It is not hard to imagine people focus now on preserving their savings when uncertainty rises, so sales of all luxury goods fell to zero too.

As almost every economic crises, this one too was preceded by a surge in optimism, which was transforming itself into overconfidence. Economy was growing, people had jobs, there was very little incentive to save. It was hard to imagine a sudden global event to ruin that party. There was also huge confidence in the powers of the [western] civilization, as the China outbreak was largely ignored. Yes there was always a chance of the WWIII, but nobody was preparing for that, thinking all would die anyway.

The world we live in now is different and will remain different. There will be no going back to "February 2020" times. This is a global war against virus and will leave a mark on everyone. The overconfidence will be gone for long and consumption (in general) will be significantly rationalized.

Which brings me back to the original thought about the disconnect of people's state of minds and the reality. For example, I'm reading that Apple may still release a 5G iPhone this year. Or that Tesla restored production. Frankly, this does not matter anymore. Nobody will by that new iPhone or that new Tesla. Because nobody needs the luxury goods these companies make. For any business now it is not the question if they can last through the storm. They probably could, with some aid from investors or governments. The question is if there are customers at the end of the day....

Ben Rickert: If we're right, people lose homes. People lose jobs. People lose retirement savings, people lose pensions.

Apple has been riding the vanity wave of people willing to spend huge premiums on cool stuff. A phone that has rounded edges or is 0.1mm thinner. Admittedly Apple products are art. But they cost premium, and as such are clearly in the luxury segment. So this is this huge disconnect: we are facing prolonged double-digit unemployment, while some analysts worry if the next iPhone will still arrive this year.

It will be interesting to watch if Apple can reinvent itself. Now, and even after the virus is gone, the premium products it makes will be a very tough sell.  Many other companies addressing the premium segment. Aside from the general downturn, there will be a huge market rotation.