霍德华·马克斯最新备忘录：现在该走哪条路

　　解决社会孤立与经济复苏之间的矛盾，将是一项非常具有挑战性的任务。

　　这一次，杠杆证券化在金融体系中的普及程度有所下降，而且它们的风险资本不是由银行提供的(这要归功于“沃尔克规则”) ，而主要是由非银行贷款机构和基金提供的。

　　我们还需要有资金帮助对抗病毒的传播，越早控制病毒，就能拯救更多的生命，美国就能越早恢复活力。

　　预计资产价格将会下降，你需要做好应对和利用股市下跌的准备。

　　在过去的六周里，市场经历了最好的时期和最坏的时期:

　　2月19日到3月23日，美国股市经历了历史上最快的崩盘，标准普尔500指数下跌了33%。而在上周二至周四（3月24日~26日）又快速反弹了17.5%，创下上世纪30年代以来的最佳三日表现。

　　在2月27日至3月27日的22个交易日中，标准普尔500指数共有18个交易日的波动幅度超过了2%，11个交易日下跌，7个交易日上涨。其中，不仅包括了自1933年以来最大的单日涨幅，还包括了1940年以来的第二大单日跌幅(仅次于1987年的黑色星期一)。

　　在3月9日至3月20日，发行新的投资级债券似乎是不可想象的。但正如我们的交易员Justin Quaglia指出的，政府的一揽子救助计划让49家公司上周发行了1070亿美元的IG债券，这不仅是有史以来发行量最大的一周，也是有史以来发行量最大的一个月(106家公司发行了2130亿美元) 、最大的一个季度(4730亿美元，比2019年第一季度增长了40%)。事实上，上周的债券发行量已经超过了2019年12个月中的9个月。

　　3月26日，Justin Quaglia表示，“很难相信我在两周内使用了‘恐慌’和‘社交控’这两个词。”

　　众所周知，冠状病毒仍然在美国和其他地方流行，经济注定要陷入严重的衰退。负债经营的企业担心贷款来源和流动性问题，而石油价格也是1973年欧佩克禁运以来的最低。金融资产价格也在下降: 适度地下降，过多还是过少?换句话说，我们必须在前所未有的不确定性和完全缺乏有类比的情况下，考虑资产价格的合理性。

　　毫无疑问，政府和美联储注入大量现金改善短期状况的能力是毋庸置疑的，而且市场肯定将他们视为稳操胜券的赢家。但我认为花点时间认真讨论一下可能发生的情况是很重要的。过去一周的补救措施真的有效吗?前一周的印迹真的被抹掉了吗?谁会在短期和中期胜出：疾病、经济影响还是美联储/财政部的行动?为了更准确地分析这些问题，我决定从乐观和悲观两方面去考虑。

　　乐观的情况

　　没有人会认为现在的情况是好的，但乐观主义者的观点是围绕着坏消息的提前停止和在不远的将来好消息的到来。(你们知道，我通常避免使用宏观预测，从不自己做预测。我会借用别人的预测结果，来作为这份报告的引用数据，但这不代表我相信他们是准确的)：

　　最早有些感染“新冠”病毒的国家已经取得了很好的进展。比如韩国，新发病例的报告数据已经趋于平缓，出院的人数比入院的人数还要多。我们法兰克福办事处的负责人赫尔曼· 达姆巴赫(Hermann Dambach)也报告称，意大利、德国和奥地利的情况也在改善。

　　我看到的每个报告都在假设，病毒会在三个月左右得到控制。曲线先是变平，然后向下发展。病毒被控制，然后被消灭。

　　这种疾病对经济的负面影响是尖锐而短暂的。“V型”一词被大多数人采用，影响到第二季度以及二季度至2021年时间段。比如，一位判断标准普尔500指数成份股公司第二季度收益将下降120%的人士就认为，第三季度的收益可能较上一季度增长80%以上(即从2019年起仅下降20%)，然后在第四季度进一步增长50%。在2020年下降33%之后，2021年的收入将增加55%，并超过2019年的水平。

　　要求人们呆在家里，进而导致企业倒闭，如此做法在经济上相当于为了治疗一种严重的疾病而让病人陷入昏迷。在昏迷期间，政府将为经济提供生命支持，并在治愈后将病人从昏迷中解救出来。

　　疫情好转的消息是有助于经济复苏的，但这种改善主要还是美联储/财政部的一揽子救助和刺激计划取得了结果。他们已经宣布了前所未有的开支，并表示会不惜一切代价，这种行动在本轮危机爆发后的最初几周就已经展开了。进一步的措施可能包括人们所能想到的一切，数量上也不受限制。

　　与全球金融危机期间相比，当前银行的脆弱性大大降低，杠杆率仅为此前的三分之一。因此，对整个金融体系健康状况的担忧大大降低。

　　与此同时，美国的私营部门也为政府的公共卫生努力提供支持，生产大量抗疫物资和设备，开发测试、治疗和疫苗。

　　证券价格的下跌将吸引买家，而充足的资本将以“干粉”形式存在于基金中。

　　当我读到对当前事件更积极的看法时，我不禁回想起我最喜欢的报纸标题，其中包括”银行家乐观”这个短语，通常情况下，也许是这样，但值得注意的是，该报道发表于1929年10月30日，报道了前一天的股市崩盘。在那个乐观的日子里，大萧条还要持续11年。

　　悲观的情况

　　我总是说我们必须意识到，并且公开我们的偏见。我承认，我更多的是担心，而不是梦想，也许正是这让我成为了一个比股票分析师更好的信用分析师。可能是我防御心太强了(尽管在我的职业生涯中，当危机达到低谷时，我能够以某种方式转向积极的行动)，今天我列出的缺点比优点多是并不奇怪的(我将更详细地阐述它们)。

　　我非常担心这种疾病的前景，尤其是在美国在很长一段时间里回应都是建议或忠告，而不是命令或规则。上个周末，我特别担心大学生春假期间，在海滩上的照片，他们会从那里回到他们的社区。其他国家在减缓这种疾病方面取得的成功，是通过广泛的社会疏远、检测和测温来确定感染者，并将他们与其他人隔离开。美国在这方面工作落后了，很少有检测，也没有大规模的温度测量，因为人们怀疑大规模的隔离是否合法。

　　美国的病例总数已经超过中国和意大利，而且仍在快速增长中(由于测试不足，可能被低估了)。从周四到周六，死亡人数翻了一番，从1000人增加到2000人。

　　FDA前局长Scott Gottlieb医学博士最近在推特上说:“我对新奥尔良、达拉斯、亚特兰大、迈阿密、底特律、芝加哥、费城等地的新情况感到担忧。在中国，除了湖北，没有一个省的病例超过1500例。而美国已有11个州达到了这个总数。我们的疫情可能是全国性的。”

　　美国在医院、病床、呼吸器和物资方面缺乏应对措施。缺乏保护的医生、护士和急救人员处于危险之中。我担心，如果我们不效仿成功国家的举措，病例和死亡人数就会继续上升，卫生系统将不堪重负。

　　经济也将以创纪录的速度收缩，数以百万计的人将失去工作，人们将无法光顾企业。不仅工人会失去工资，企业会失去收入，企业的实际产出也会下降，进而意味着食品等必需品可能会短缺。上周，申请失业金人数为330万人，高于前一周的28.2万人。

　　在政府行动之前，预期还包括以下内容:失业率将恢复到8%~10%，公民很快就会缺钱花;企业将关闭;第二季度GDP将比去年同期下降15%~30%(相比历史上最糟糕的1958年第一季度下降10%)。

　　一些预测人士说，标普500指数成份股公司第二季度的总收益将下降10%，但这似乎是一个小得可笑的降幅。我看到了一个预测，标准普尔的收益将下降120%(这是正确的。总的来说，500家公司将从盈利转为亏损)。

　　政府支付加上增加的失业保险将取代许多工人的工资，对企业的援助将弥补他们失去的部分收入。但是，要多久才能把这些资金送到接受者手中呢?有多少本应成为受助人的人会被遗漏?救助会持续多久?(四口之家的3400美元维持不了多久。)在经济陷入冰点后，怎样才能使它恢复生机?它将以多快的速度恢复?换句话说，V型复苏是一种现实的预期吗?

　　解决社会孤立与经济复苏之间的矛盾，将是一项非常具有挑战性的任务。我们怎样才能知道这种病是否值得治疗?人们呆在家里的时间越长，经济恢复就越困难。但是，他们越早返回工作岗位和从事其他活动，就会越难控制这种疾病。

　　首先，每天新增病例的数量必须要减少。其次，新发病例的数量必须要逐日下降(即增长率必须变为负数)。然后每天不能再有新病例出现。(当然，我们需要加强检测和强制隔离。)只要每天都有新病例，就说明存在传染病的人。如果他们与其他人接触，这种疾病就会继续存在并传播。如果我们抓住新病例数量下降的机会去恢复经济活动，我们又可能会面临感染率反弹的风险。

　　大多数情况下，收入下降的公司可以减少开支的，但由于许多开支是固定的(如租金)，他们不能像收入下降那样迅速减少开支，这也是为什么第二季度的利润会缩水、枯竭或转为负数的原因。对于一些行业(如娱乐业)来说，收入可能会很快恢复，但另一些行业(如邮轮公司)的收入恢复则会相对较慢。

　　许多公司在进入这一阶段时都负债累累。管理层利用低利率和慷慨的资本市场发行债券，一些公司通过股票回购，减少股票数量，提高了每股收益(也许还有高管薪酬)。这两种做法的结果都是提高了债务与股本的比率。一家公司的债务与股本之比越大，其股本回报率在经济繁荣时期就会越高……但在经济不景气时，股本回报率就会越低(或损失越大)，从而度过困难期生存下来的可能性就越小。企业杠杆使收入和利润损失的问题变得复杂化。因此，我们预计未来几个月违约率将会上升。

　　同样，近年来，宽松的资本市场环境，以及在低利率世界寻求回报，促使杠杆投资实体的形成。与杠杆化公司一样，债务增加了它们的预期回报率，但也增加了它们的脆弱性。因此，我认为，我们很可能会看到杠杆实体违约，其依据是降价、评级下调，或许还包括其投资组合资产的违约; 贷款方增加“折扣”(即减少对1美元抵押品的贷款额) ; 以及追加保证金、资产组合清算和强制抛售。

　　在全球金融危机中，像抵押贷款债券和债务抵押债券这样的杠杆投资工具出现崩溃，会给持有次级债务和股权的银行带来了损失。银行系统的重要性使得政府有必要对其进行纾困(这种不满在很大程度上导致了今天的民粹主义)。这一次，杠杆证券化在金融体系中的普及程度有所下降，而且它们的风险资本不是由银行提供的(这要归功于“沃尔克规则”) ，而主要是由非银行贷款机构和基金提供的。所以，我觉得政府不太可能为他们提供紧急援助。(顺便说一句，并不是构建这些杠杆实体的人犯了错，他们只是没有在他们模拟的场景中加入一个像现在这样的情节。他们怎么可能？如果每个商业决策都必须考虑到疫情的蔓延，那么几乎没有交易会发生了。)

　　最后，除了疾病及其对经济的影响，还有一个更重要的因素: 石油。由于消费减少和沙特阿拉伯与俄罗斯之间的价格战，油价已从年底的每桶61美元跌至如今的19美元。石油价格相比1973年石油输出国组织禁运之前还要低一点。尽管许多消费者、企业和国家受益于油价下跌，但也有国家会因此受到严重负面影响：

　　石油生产企业和国家损失惨重。

　　失业：石油和天然气行业直接提供了美国5%以上的工作(更间接地)，自全球金融危机以来，它对失业率的下降做出了巨大贡献。

　　该行业的资本投资大幅下降，最近在美国的资本投资中占了相当大的比例的总数。

　　产量减少，因为消费下降，原油/产品的储存能力正在耗尽。

　　当产量减少或停止生产时对储油层造成的损害。

　　美国石油独立性的削弱。

　　如上所述，负面案例包括，感染和死亡人数的不断上升、医疗体系承受的难以承受的压力、数百万人的失业、广泛的商业损失和不断增加的违约。如果出现这些情况，投资者可能会从上周的乐观情绪转向普遍存在的悲观情绪。影响因素包括:对经济和生活本身构成威胁的消极心理，对更多的恐惧，以及抑制消费和投资的非常消极的财富效应。

　　政府救助的影响

　　上周，政府颁布了《CARES(冠状病毒援助、救济和经济安全)法案》，获得了大约2万亿美元的救助和支持。与此同时，美联储还将再花费数万亿美元来提供流动性和支撑金融体系，并“承诺使用其所有工具”。我不会列举《国际护理法案》的所有条款，只是注意到长达八页的JP摩根的描述。正如上面所提到的，种类和规模可能还会增加。

　　我将分享对经济形势的有用描述，以及布林资本(Brean Capital)的经济学家康拉德· 德夸德罗斯(Conrad DeQuadros)对政府的回应：《国际关怀法案》不应被视为财政刺激方案，而应被视为稳定经济的一揽子计划。2020年3月经济活动的崩溃不是一个正常的周期性衰退，而是政府强制个人和企业“暂停”的结果。该法案的许多条款旨在防止私营部门解体，以便在疫情控制解除后，活动能够恢复……

　　因航空公司、旅馆、餐馆、电影院等的收入都在减少，经济衰退在所难免。就在一个月前，熟练劳动力还是一种稀缺资源。因此，关键是要保持劳动力和企业之间的联系。对企业的支持实际上是对劳动力的支持，因为如果企业无法从现金流中支付工人薪酬，裁员数字将使最新的申请失业救济数据变得不好看。

　　这些措施会有多大效果？

　　在最近一个季度，劳动报酬为2.9万亿美元(实际的，非年化的) ，并且，考虑一个纯粹的说明性数字，劳动收入下降20% (实际的)达到5770亿美元，这大约是家庭直接收入支持的规模，而不考虑对企业的支持，这将防止劳动收入的急剧下降。财政刺激方案将从美联储获得超过4万亿美元的资金支持。此外，我们还需要有资金帮助对抗病毒的传播，越早控制病毒，就能拯救更多的生命，美国就能越早恢复活力。我们猜测，经过几个月的封闭生活，将会有大量需求被压抑。2020年的财政赤字可能达到2.5万亿美元，但如果一揽子计划失败，经济衰退将持续更久、更严重，财政成本将更高。

　　和往常一样，我不知道哪些经济学家观点是对的，但我很乐意接受康拉德的总结。

　　从理解到目前为止的行动，我想谈谈这一努力的前景。正如康拉德所说，政府似乎有能力支持和稳定经济。以我简单的观点来看，我想它可以印出足够的支票，来弥补每个美国工人的工资损失和每个企业的收入损失。换句话说，它可以“模拟”经济对收入的影响。但我有两个疑问：这样可以吗？这样够了吗？

　　首先，正如我上面提到的，我们实际上需要工人和企业的产出。如果所有的企业都倒闭了，我们将得不到我们需要的东西。例如，现在人们都依赖于食品杂货店送货和外卖。但是有没有人想知道食物从何而来，又是如何到达我们身边的呢?国库可以弥补人们失去的工资，但人们需要工资购买的东西。因此，仅仅弥补损失的工资和收入是不够的，经济必须生产商品和提供服务。

　　其次，我们假设政府用开支票来永远取代工资和收入，而经济继续以最低但足够的水平生产，所以我们需要的东西实现了。那么，长期的影响是什么？与石油储备一样，长期不活跃对经济生产能力有怎样的影响? 恢复经济并使其恢复到以前的运行水平需要多长时间？

　　最后，财政部继续每季度增加数万亿美元的赤字(甚至在病毒袭击之前就已经达到了1万亿美元)和美联储继续向货币体系注入数万亿美元的影响是什么？去年六月，我讨论了现代货币理论，这次又有所不同，简单地说，联邦赤字和债务无关紧要。它不再只是一个理论，我们现在必须处理它的含义:

　　上述情况会对美元价值，以及美元作为世界储备货币的地位产生怎样的影响？(当然，在这种环境下，其它国家的表现可能与我们大致相同，这意味着美元相对于其它货币可能不会贬值。)

　　美元储备货币地位的降低，是否会使我们更难为赤字融资，并提高我们必须为此支付的利率? 大规模印钞举措是否会导致通货膨胀？

　　全球原材料和产成品产量下降引发的供应冲击，是否会加剧通胀？

　　造成通货膨胀的因素确实很神秘，但这些因素看起来都是合理的，尤其是当它们结合在一起的时候。

　　现代货币理论可能没有经过严格的审查和有意识的决定就采用了它。不管我们喜不喜欢，我们都会比想象中更快地看到它的影响。(请记住，芝加哥大学布斯商学院(University of Chicago Booth School of Business)调查的“顶级学者”中，100%的人不同意MMT的一些说法)。

　　总结

　　为了向你展示其他人是如何看待这种情况的(尽管方式与我的观点相似) ，我重复一下memorial sloan kettering的首席信息官杰森·克莱恩(jason klein)的观点:

　　看涨的理由似乎是，货币政策将发挥作用，财政政策将发挥作用，估值将重新调整，社会将遵循有效的医疗政策(例如，社会疏远) ，这些政策将是有效的，实体经济将适应，地缘政治将保持低调。纵观最近发生的所有事件，我发现在某些方面最有趣的是，沙特阿拉伯选择在美国能源需求已经因为 covid-19限制措施而受到冲击的时候，挑起了一场针对美国页岩油的供应冲击。它强调了事件的不可预测性。

　　我的橡树资本联合创始人兼常驻股东理查德· 马森(Richard Masson)可能会说，推特不是一个有价值的信息来源，但不管怎样，我还是想在推特上加上@yourMTLbroker发布的一份简明总结:

　　对牛市预测:6周后一切都将重新开启。失业者可以回到以前的工作岗位，或者成为真正的美国人。经济在6个月内恢复正常。低油价和0%的利率将给经济注入活力。

　　对熊市预测:失业率升至20%以上。至少在一两年之内，一切都不会恢复正常，与此同时，需求受到了巨大冲击。封锁对企业的影响以及石油危机，造成类似于萧条的情况。

　　在全球金融危机中，我还担心有一连串不利于金融市场的新闻，以及金融机构连续破产对经济的影响，但是日常生活并没有改变，也没有对生命和肢体造成明显的威胁。

　　如今，正如上面所述，负面影响的范围似乎要大得多。社会隔离、疾病和死亡、经济萎缩、对政府行动的巨大依赖，以及长期影响的不确定性，这些都与我们息息相关，但最重要的问题是，它们还能延续多久？

　　目前来看，资产市场价格已经对事件和前景做出了反应(在一个非常微观的意义上，我觉得上周的反弹反映了太多的乐观)。虽然乐观者认为，周五的资产定价是合理的，但没有为可能出现的恶化情况留出足够的空间。因此，我对上述情况的反应是，预计资产价格将会下降。你可能认为，在潜在的负面事态发展之前，还有时间来增加防御性。但重要的是，你需要做好应对和利用股市下跌的准备。

　　世界总有一天会恢复正常，尽管今天看起来不太可能一成不变。从健康和财政两方面来说，最重要的还是我们在此期间的态度。安全第一！

　　（注：本文经过有道初级翻译后精编）

　　以下为原文：

　　Latest memo from Howard Marks: Which Way Now?

　　In the last six weeks the markets have seen the best of times and the worst of times:

　　From February 19 to March 23, the U.S. stock market saw the quickest meltdown in history, for a loss of 33.9% on the S&P 500. Then its 17.5% gain from Tuesday through Thursday of last week made for the best three-day stretch since the 1930s.

　　Of the 21 trading days between February 27 and March 27, a total of 18 days saw moves in the S&P 500 of more than 2%: eleven down and seven up. They included the biggest daily percentage gain since 1933 and the second-biggest percentage loss since 1940 (exceeded only by Black Monday in 1987).

　　From March 9 through March 20, issuing a new investment grade bond seemed inconceivable. Then, as our trader Justin Quaglia points out, last week’s news of the government’s rescue package enabled 49 companies to issue $107 billion of IG bonds.That made it the biggest week for issuance on record; part of the biggest month on record ($213 billion from 106 issuers); and part of the biggest quarter on record ($473 billion, up 40% from the first quarter of 2019). In fact, there was more issuance last week than in nine of the 12 months in 2019.

　　Finally, on March 26, Justin wrote, “It’s hard to believe I used the words ‘panic’ and ‘FOMO’ within two weeks of each other.”

　　Looking at the above, it’s important to note the degree to which people (and thus markets) seem to think long-term phenomena can change in the short run.

　　It’s common knowledge that the coronavirus is still gaining ground in the U.S. and elsewhere; the economy is destined for a serious recession; leveraged entities have to worry about their sources of loans and liquidity; and the price of oil is among the very lowest since the 1973 OPEC embargo. But the prices of financial assets have moved down as well: appropriately, too much or too little? In other words, we have to consider the outlook and the appropriateness of value, in the context of unprecedented uncertainty and the total absence of guidance from analogies to the past.

　　There’s no doubt about the ability of the government’s and the Fed’s massive cash injections to make things better in the short run, and certainly the market has treated them as sure winners. But I think it’s important to take time out for a serious discussion of possible scenarios. Are this past week’s remedies certain to work? Are the prior week’s negatives really erased? Which will win in the short and intermediate term: the disease, economic ramifications or Fed/Treasury actions? To try to think about these things in a responsible way, I’ve decided to try cataloging the optimistic and pessimistic elements.

　　The Positive Case

　　No one thinks things are good right now, but the optimist’s view is built around the early cessation of bad news and the arrival of better news in the not-too-distant future. Here are the components. (As you know, I usually avoid using macro forecasts and never make my own. I will borrow from others for the purposes of exposition in this memo, but not because I have reason to believe they’re correct):

　　The earliest countries to contract the virus have shown good progress. The reported data on their new cases has flattened, and in South Korea, more people are being released from the hospitals than are entering. Hermann Dambach, head of our Frankfurt office, reports that the numbers are improving in Italy, Germany and Austria.

　　Every forecast I’ve seen assumes the virus will be brought under control within three months or so. The curve is flattened and then turned downward. The virus is contained and then eliminated.

　　Testing identifies those infected, and isolation/quarantine keeps them from infecting others.Herd immunity develops, reducing the number of people capable of transmitting the disease.Warmer weather causes the disease to recede.Treatments are found that aid recovery.A vaccine is developed.

　　The negative impact of the disease on the economy will be sharp but brief. The term “V-shaped” dominates most forecasts, both between Q2 and H2 and between 2020 and 2021. Thus, for example, one forecaster who has the earnings of the S&P 500 companies down 120% in Q2 thinks they may rise roughly 80 % in Q3 on a quarter-over-quarter basis (that is, to down just 20% from 2019) and then rise by a further 50% in Q4. And after a decline of 33% in 2020, earnings will rise by 55% in 2021 and exceed what they were in 2019.

　　Telling people to stay home and thus causing businesses to close is the economic equivalent of putting a patient into a coma to facilitate curing a serious disease. The government will provide life support to the economy during the coma and bring the patient out of the coma after the cure has been effected.

　　The economic recovery will be abetted by better news about the disease, but the improvement will mainly be the result of the success of the Fed/Treasury package of rescue and stimulus. These organizations have announced unprecedented expenditures and have indicated that they’ll do whatever else it takes. Actions that were taken after months of deliberation in the Global Financial Crisis have been rolled out in the early weeks of the current episode. Further steps are likely to include everything anyone can think of and be unconstrained as to amount.

　　The banks are much less vulnerable than they were during the Global Financial Crisis, with only a third of the leverage.Thus concerns for the health of the overall financial system are greatly reduced.

　　The U.S.’s effective private sector will supplement the public health efforts of government, producing massive amounts of supplies and equipment, and developing testing, treatments and vaccines.

　　The price declines of securities will draw in buyers, and ample capital is available in the form of dry powder in funds.

　　When I read the more positive views regarding the current episode, I can’t help but think back to my favorite newspaper headline, which included the phrase “Bankers Optimistic.” Usually the case, perhaps, but it’s worth noting that the story in question was published on October 30, 1929, reporting on the prior day’s stock market crash. On that day of optimism, the Great Depression still had eleven years to run.

　　The Negative Case

　　I always say we have to be aware of and open about our biases. I admit to mine: I’m more of a worrier than a dreamer. Maybe that’s what made me a better credit analyst than equity analyst. On average I may have been more defensive than was necessary (although somehow I was able to shift to aggressive action when crisis lows were reached during my career). Thus it shouldn’t come as a surprise today that my list of cons is longer than my pros (and I will elaborate on them at greater length).

　　I’m very worried about the outlook for the disease, especially in the U.S. For a long time, the response consisted of suggestions or advice, not orders and rules. I was particularly troubled last weekend by pictures of college kids on the beach during spring break, from which they would return to their communities. The success of other countries in slowing the disease has been a function of widespread social distancing, testing and temperature-taking to identify those who are infected, and quarantining them from everyone else. The U.S. is behind in all these regards. Testing is rarely available, mass temperature-taking is non-existent, and people wonder whether large-scale quarantining is legal.

　　The total number of cases in the U.S. has surpassed both China’s and Italy’s and is still rising rapidly (and is likely understated due to under-testing).

　　The number of deaths doubled from 1,000 to 2,000 between Thursday and Saturday.

　　From a recent tweet by Scott Gottlieb, MD, former commissioner of the FDA: “I’m worried about emerging situations in New Orleans, Dallas, Atlanta, Miami, Detroit, Chicago, Philadelphia, among others. In China no province outside Hubei ever had more than 1,500 cases. In U.S. 11 states already hit that total. Our epidemic is likely to be national in scope.”

　　The U.S. is under-equipped to respond in terms of hospitals, beds, ventilators and supplies. Under-protected doctors, nurses and first responders are at risk.

　　I’m concerned that the number of cases and deaths will continue to rise as long as we fail to emulate the successful countries’ actions. The health system will be overwhelmed. Triage decisions including who lives and who dies will have to be made. There will be a point where there doesn’t seem to be an end in sight. I’m afraid the headlines are going to get much uglier in this regard.

　　The economy will contract at a record rate. Many millions will be thrown out of work.People will be unable to patronize businesses. Not only will workers miss paychecks and businesses miss revenues, but businesses’ physical output will tail off, meaning essentials like food may run short. Last week, 3.3 million new unemployment claims were filed, versus the previous week’s 282,000 and the weekly record of 695,000. Prior to the government’s actions, expectations included the following:

　　unemployment would return to 8-10%, and citizens would soon run short of cash;

　　businesses would close;

　　second-quarter GDP would decline from the year-ago level by 15-30% (versus a decline of 10% in the first quarter of 1958, the worst quarter in history);

　　some forecasters said the combined earnings of the S&P 500 companies would decline 10% in the second quarter, but that seems like a ridiculously small decline. At the other end of the spectrum, I’ve seen a prediction that S&P earnings would decline by 120% (that’s right: in total, the 500 companies would shift from profits to losses).

　　Government payments plus augmented unemployment insurance will replace paychecks for many workers, and aid to businesses will replace some of their lost revenues. But how long will it take to get these funds to recipients? How many should-be recipients will be missed? For how long will the aid continue? ($3,400 to a family of four won’t last long.) What will it take to bring the economy back to life after it’s been in a deep freeze? How fast will it recover? In other words, is a V-shaped recovery a realistic expectation?

　　It will be very challenging to resolve the conflict between social isolation and economic recovery. How will we know whether the disease merits the cure? The longer people remain at home, the more difficult it will be to bring the economy back to life. But the sooner they return to work and other activities, the harder it will be to get the disease under control.

　　First, the growth in the number of new cases each day has to be reduced. Next, the number of new cases has to begin to decline from one day to the next (that is, the growth rate has to turn negative). Then new cases have to stop appearing each day. (Of course, we’ll need increased testing and mandatory quarantining for these things to occur.) As long as there are new cases each day, there are people who are infectious. If we send them back into the world and into contact with others, the disease will persist and spread. And if we seize the opportunity provided by a decline in the number of new cases to resume economic activity, we risk a rebound in the rate of infection.

　　For the most part, we have companies whose revenues are down and companies whose revenues are gone. They can reduce their expenses, but because many of them are fixed (like rent), they can’t reduce expenses as fast as revenues decline. That’s why second-quarter profits will shrink, dry up or turn negative. Revenues may come back relatively soon for some industries (like entertainment), but less rapidly for others (like cruise lines).

　　Many companies went into this episode highly leveraged. Managements took advantage of the low interest rates and generous capital market to issue debt, and some did stock buybacks, reducing their share count and increasing their earnings per share (and perhaps their executive compensation). The result of either or both is to increase the ratio of debt to equity. The more debt a company has relative to its equity, the higher the return on equity will be in good times . . . but also the lower the return on equity (or the larger the losses) in bad times, and the less likely it is to survive tough times. Corporate leverage complicates the issue of lost revenues and profits. Thus we expect to see rising defaults in the months ahead.

　　Likewise, in recent years, the generous capital market conditions and the search for return in a low-interest-rate world caused the formation of leveraged investment entities. As with leveraged companies, debt increased their expected returns but also their vulnerability. Thus I believe we’re likely to see defaults on the part of leveraged entities, based on price markdowns, ratings downgrades and perhaps defaults on their portfolio assets; increased “haircuts” on the part of lenders (i.e., reduced amounts loaned against a dollar of collateral); and margin calls, portfolio liquidations and forced selling.

　　In the Global Financial Crisis, leveraged investment vehicles like Collateralized Mortgage Obligations and Collateralized Debt Obligations melted down, bringing losses to the banks that held their junior debt and equity. The systemic importance of the banks necessitated their bailouts (the resentment of which contributed greatly to today’s populism). This time, leveraged securitizations are less pervasive in the financial system, and their risk capital wasn’t supplied by banks (thanks to the Volcker Rule), but mostly by non-bank lenders and funds. Thus I feel government bailouts are unlikely to be made available to them. (As an aside, it’s not that the people who structured these leveraged entities erred. They merely failed to include an episode like the current one among the scenarios they modeled. How could they? If every business decision had to be made in contemplation of a pandemic, few deals would take place.)

　　Finally, in addition to the disease and its economic repercussions, we have one more important element: oil. Due to a confluence of reduced consumption and a price war between Saudi Arabia and Russia, the price of oil has fallen from $61 per barrel at year-end to $19 today. The price of oil was only slightly lower immediately before the OPEC embargo in 1973, and in the 47 years since then it has only been lower on two brief occasions. While many consumers, companies and countries benefit from lower oil prices, there are serious repercussions for others:

　　Big losses for oil-producing companies and countries.

　　Job losses: the oil and gas industry directly provides more than 5% of American jobs (and more indirectly), and it contributed greatly to the decline of unemployment since the GFC.

　　A significant decline in the industry’s capital investment, which recently has accounted for a meaningful share of the U.S.’s total.

　　Production cuts, since consumption is down and crude/product storage capacity is running out.

　　The damage to oil reservoirs that results when production is reduced or halted.

　　A reduction in American oil independence.

　　As recounted above, the negative case encompasses rising numbers of infections and deaths, unbearable strain on the healthcare system, job losses in the many millions, widespread business losses and mounting defaults. If these things arise, investors are likely to shift from the optimism of last week to the pessimism that was prevalent in the rest of March. Contributing factors may include:

　　negative psychology surrounding the combination of threats to the economy and life itself,fear of more, anda very negative wealth effect that depresses spending and investing.

　　The Government Programs

　　Last week the government enacted the CARES (Coronavirus Aid, Relief, and Economic Security) Act, with roughly $2 trillion of rescue and support. At the same time, the Fed will spend several trillion more to provide liquidity and buttress the financial system, and it has “committed to using its full range of tools.” I will dispense with listing all the provisions of the CARES Act, and merely note that J.P. Morgan’s description runs to eight pages. And as mentioned above, the list of ingredients and their magnitude are likely to grow.

　　I’ll share a useful description of the economic situation and the government response from Conrad DeQuadros of Brean Capital, an economist I’ve taken to quoting:

　　The CARES Act should not be thought of as fiscal stimulus but as an economic stabilization package. The collapse of economic activity in March 2020 is not a normal cyclical recession but is the result of a mandated “time out” of individuals and businesses by the government. Many of the provisions of the Act are designed to prevent the private sector from unraveling so that when the containment of the virus permits shutdowns to be lifted, activity can bounce back. . . .

　　There is no avoiding recession because the output of airlines, hotels, restaurants, movie theaters, etc. is lost. However, these programs will support businesses so that when the virus permits the resumption of activity, we can see a sharp rebound in activity. Skilled labor was a scarce resource just one month ago and the key is to keep that labor and businesses connected. The support for businesses is really support for labor because if companies cannot pay workers from cash flows, the layoff figures will dwarf the numbers suggested by the latest jobless claims data.

　　How effective will the measures be? In the latest quarter, labor compensation was $2.9 trillion (actual, non-annualized) and, to consider a purely illustrative number, a 20% (actual) drop in labor incomes amounts to $577 billion, which is about the magnitude of direct income support to households without considering the impact of support for businesses, which will head off a steeper decline in labor incomes. The fiscal package will unlock upward of $4 trillion of capital market support programs from the Fed. In addition there are the funds to help combat the spread of the virus and the sooner the virus can be contained, the more lives will be saved and the sooner America can get back to work. After a few months of being housebound, we suspect there will be plenty of pent up demand. The fiscal deficit in 2020 could be of the magnitude of $2.5 trillion but if the package fails, the recession would be longer and deeper and the fiscal cost would be greater.

　　As always, I don’t know which economists are right, but I’m happy to go with Conrad’s summation.

　　Moving on from understanding the actions to date, I want to talk about the outlook for this effort. The government seems able, as Conrad says, to support and stabilize the economy. In my simplistic view, I imagine it can print enough checks to replace every American worker’s lost wages and every business’s lost revenues. In other words, it can “simulate” the effect of the economy on incomes. But I have two questions: is that okay, and is it enough?

　　First of all, as I mentioned above, we actually need the output of workers and businesses. If all businesses shut down, we won’t have the things we need. These days, for example, people are counting on grocery deliveries and take-out food. But does anyone wonder where food comes from and how it reaches us? The Treasury can make up for people’s lost wages, but people need the things wages buy. So replacing lost wages and revenues will not be enough for long: the economy has to produce goods and services.

　　Second, let’s assume the government writes checks to replace wages and revenues forever, and that the economy continues to produce at a minimal but sufficient level, so the things we need materialize. What will be the long-term effect? As with oil reservoirs, what will be the impact of long-term inactivity on the ability of the economy to produce? How long will it take to restart the economy and bring it back to its previous level of functioning?

　　Lastly, what would be the effect of the Treasury continuing to add trillions of dollars each quarter to the deficit (which was running at $1 trillion even before the virus hit) and of the Fed continuing to pump trillions more into the monetary system? Last June, in my memo This Time It’s Different, I discussed Modern Monetary Theory, which to simplify says federal deficits and debt don’t matter. It’s no longer just a theory; we have to deal with its implications now:

　　What would be the effect of the above on the value of the dollar, and thus on the dollar’s status as the world’s reserve currency? (Of course, in this environment, other countries are likely to behave much the same as we do, meaning the dollar may not be debased relative to other currencies.)

　　Might a reduction of the dollar’s reserve-currency status make it harder for us to finance our deficits and raise the interest rates we have to pay to do so?

　　Might money-printing to that degree bring on an increase in inflation?

　　Might a supply shock stemming from reduced global output of raw materials and finished goods add to the increase in inflation? The factors that create inflation are truly mysterious, but these certainly seem like reasonable candidates, especially when combined.

　　Possibly without serious vetting and a conscious decision to adopt it, Modern Monetary Theory is here. Whether we like it or not, we’ll get to see its impact much quicker than I had thought. (And remember, 100% of the “top scholars” polled by The University of Chicago Booth School of Business disagreed with some of MMT’s claims).

　　Summing Up

　　Rather than reinvent the wheel and to show you how others are viewing the situation (albeit in ways that parallel my view) I’m going to share the workload by recycling the conclusion from a note I received from Jason Klein, CIO of Memorial Sloan Kettering:

　　The bull case from here seems to be that monetary policy will work, fiscal policy will kick-in, valuations have reset, society will follow effective healthcare policies (e.g., social distancing) that will be effective, the real economy will adapt, and geopolitics will remain subdued. The bear market seems to be the flip side of each issue, and has the potential to be much darker as the prospects of a hot war with China, or even Iran, seem rather ominous. Across all recent events, I find it in some ways most interesting that Saudi Arabia chose to instigate a supply shock targeting U.S. shale at a moment when the demand for U.S. energy was already reeling from the demand-side shock from COVID-19 restrictions. It highlights the unpredictability of events. As you’ve said, nobody knows.

　　Richard Masson, my Oaktree co-founder and resident scold, might say Twitter isn’t a worthy source, but nevertheless I want to include a concise summary tweeted by @yourMTLbroker:

　　Bull case: everything opens in 6 weeks. The unemployed can go back to old jobs or as true Americans, bootstrap. Economy back to normal within 6 months. 2T $ in PE dry powder, low gas prices and 0% interest rates pour fuel onto on the economy. The roaring 20’s mean the 2020\\\\\\\'s now.

　　Bear case: Unemployment goes to 20% . Everything does NOT go back to normal before at least a year or two, and in the meantime, there is a huge demand shock. The effects of the lockdown on businesses as well as the oil shock create depression-like conditions.

　　In the Global Financial Crisis, I worried about a downward cascade of financial news, and about the implications for the economy of serial bankruptcies among financial institutions. But everyday life was unchanged from what it had been, and there was no obvious threat to life and limb.

　　Today the range of negative outcomes seems much wider, as described above. Social isolation, disease and death, economic contraction, enormous reliance on government action, and uncertainty about the long-term effects are all with us, and the main questions surround how far they will go.

　　Nevertheless, the market prices of assets have responded to the events and outlook (in a very micro sense, I feel last week’s bounce reflected too much optimism, but that’s me). I would say assets were priced fairly on Friday for the optimistic case but didn’t give enough scope for the possibility of worsening news. Thus my reaction to all the above is to expect asset prices to decline. You may or may not feel there’s still time to increase defensiveness ahead of potentially negative developments. But the most important thing is to be ready to respond to and take advantage of declines.

　　The world will be back to normal someday, although today it seems unlikely to end up unchanged. What matters most in terms of both health and finances is how we do in the interim. Stay safe!

　　March 31, 2020