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V, U or L? Three views

V, U or L? Three views



Will the recovery be V shaped, U shaped or L shaped?

The 1918 influenza stood in most economists' memories as the paradigm -- a short, small V shaped slowdown, despite massive mortality. But 1918 was different. People and public policy went about their business ignoring the death toll to a large extent.

François Velde writes about the 1918 Influenza.
Burns and Mitchell (1946, 109) found a recession of “exceptional brevity and moderate amplitude.” I confirm their judgment by examining a variety of high-frequency data. Industrial output fell sharply but rebounded within months. Retail seemed little affected and there is no evidence of increased business failures or stressed financial system... Interventions to hinder the contagion were brief (typically a month) 
Of course the fact that interventions were brief has a lot to do with the mildness of the recession. Still,  it was on this historical evidence that most economists thought in February that this might be the great vacation.
I then use high-frequency cross-sectional data to confirm the visible but brief impact of the epidemic and of the intervention measures (closings of certain businesses) that were adopted at the time. Banking data shows a financial sector functioning as it should (increasing loans). Conspicuously, there is no evidence of stressed balance sheets in the nonfinancial sector: business failures were on an uninterrupted downward trend, and cross-sectional data fails to find any effect of mortality....
Here is the picture of a short sharp V shaped 1918 -- followed by the deeper but equally V shaped 1921, not influenza related

And here is the absence of business failure, all before the CARES act, stimulus, massive Fed lending, and so forth. 

François constructs
an index of local business conditions from weekly qualitative reports and use it, along with measures of payments volumes, to examine if the speed with which economically costly interventions were put in place made a difference in economic outcomes. I find clear evidence that interventions changed the dynamics of the epidemic and affected economic activity by reducing the number of infected, though broader effects (through a reduction in demand or activity) proves elusive.
Things are not always the same
[Interventions] imposed mostly by cities but sometimes at the state level, took a wide variety of forms ranging from shutting down public gatherings and crowded places to staggering business hours, closing schools, imposing quarantines for infected people, requiring masks, etc. No intervention went as far as closing non-essential businesses, as have the lockdowns of the 2020 pandemic.
Velds goes on to make an important point. There are lots of pandemic macroeconomic models being built at breakneck speed right now. They should fit not only this one -- a massive recession -- but also fit the milder earlier ones. 


Looking across the US, 
more exposed areas experience a sharp and persistent decline in economic activity. The estimates imply that the pandemic reduced manufacturing output by 18%. ...
This differs a bit with Velde. In part they emphasize the longer lasting cross sectional effects, but I'm not sure if that totally accounts for the difference. 
We find that cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over. Our findings thus indicate that NPIs not only lower mortality; they may also mitigate the adverse economic consequences of a pandemic.
This is surely true. The way to nip exponential growth in the bud is to stop it early.


Scott Baker, Nick Bloom, Steven J. Davis and Stephen J. Terry COVID-Induced Economic Uncertainty are much more pessimistic. They use their measures of economic uncertainty, derived from newspaper reports and (panicked) financial markets, fed through a model that relates uncertainty to economic outcomes, to forecast a long, deep recession.

Here too, the past may or may not be a guide to the future. The hope is for a swift all-clear, people return to the jobs they had and businesses reopen, without the agonizingly slow dynamics of a usual recovery. Well, that's the hope.


Robert J. Barro, José F. Ursua, Joanna Weng "The Coronavirus and the Great Influenza Epidemic" look across countries,
Regressions with annual information on flu deaths 1918-1920 and war deaths during WWI imply flu-generated economic declines for GDP and consumption in the typical country of 6 and 8 percent, respectively
The death rates were enormous relative to now
150 million deaths worldwide when applied to the world’s population of around 7.5 billion in 2020. 
and they note that we are choosing much more economic dislocation to save lives.
However, extreme mitigation efforts—such as widespread cancellations of travel, meetings, and major events—will themselves contribute to the depressed economic activity.
I'm not sure what implications to take for our question.


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Risk of volcano catastrophe ‘a roll of the dice’, say experts

The world is “woefully underprepared” for a massive volcanic eruption and the likely repercussions on global supply chains, climate and food, according…



The world is “woefully underprepared” for a massive volcanic eruption and the likely repercussions on global supply chains, climate and food, according to experts from the University of Cambridge’s Centre for the Study of Existential Risk (CSER), and the University of Birmingham.

Credit: Dr Mike Cassidy

The world is “woefully underprepared” for a massive volcanic eruption and the likely repercussions on global supply chains, climate and food, according to experts from the University of Cambridge’s Centre for the Study of Existential Risk (CSER), and the University of Birmingham.

In an article published in the journal Nature, they say there is a “broad misconception” that risks of major eruptions are low, and describe current lack of governmental investment in monitoring and responding to potential volcano disasters as “reckless”. 

However, the researchers argue that steps can be taken to protect against volcanic devastation – from improved surveillance to increased public education and magma manipulation – and the resources needed to do so are long overdue.

“Data gathered from ice cores on the frequency of eruptions over deep time suggests there is a one-in-six chance of a magnitude seven explosion in the next one hundred years. That’s a roll of the dice,” said article co-author and CSER researcher Dr Lara Mani, an expert in global risk. 

“Such gigantic eruptions have caused abrupt climate change and collapse of civilisations in the distant past.”

Mani compares the risk of a giant eruption to that of a 1km-wide asteroid crashing into Earth. Such events would have similar climatic consequences, but the likelihood of a volcanic catastrophe is hundreds of times higher than the combined chances of an asteroid or comet collision.

“Hundreds of millions of dollars are pumped into asteroid threats every year, yet there is a severe lack of global financing and coordination for volcano preparedness,” Mani said. “This urgently needs to change. We are completely underestimating the risk to our societies that volcanoes pose.”

An eruption in Tonga in January was the largest ever instrumentally recorded. The researchers argue that if it had gone on longer, released more ash and gas, or occurred in an area full of critical infrastructure – such as the Mediterranean – then global shock waves could have been devastating.

“The Tonga eruption was the volcanic equivalent of an asteroid just missing the Earth, and needs to be treated as a wake-up call,” said Mani.  

The CSER experts cite recent research detecting the regularity of major eruptions by analysing traces of sulphur spikes in ancient ice samples. An eruption ten to a hundred times larger than the Tonga blast occurs once every 625 years – twice as often as had been previously thought.

“The last magnitude seven eruption was in 1815 in Indonesia,” said co-author Dr Mike Cassidy, a volcano expert and visiting CSER researcher, now based at the University of Birmingham.

“An estimated 100,000 people died locally, and global temperatures dropped by a degree on average, causing mass crop failures that led to famine, violent uprisings and epidemics in what was known as the year without summer,” he said.

“We now live in a world with eight times the population and over forty times the level of trade. Our complex global networks could make us even more vulnerable to the shocks of a major eruption.”

Financial losses from a large magnitude eruption would be in the multi-trillions, and on a comparable scale to the pandemic, say the experts.

Mani and Cassidy outline steps they say need to be taken to help forecast and manage the possibility of a planet-altering eruption, and help mitigate damage from smaller, more frequent eruptions.

These include a more accurate pinpointing of risks. We only know locations of a handful of the 97 eruptions classed as large magnitude on the “Volcano Explosivity Index” over the last 60,000 years. This means there could be dozens of dangerous volcanoes dotted the world over with the potential for extreme destruction, about which humanity has no clue.

“We may not know about even relatively recent eruptions due to a lack of research into marine and lake cores, particularly in neglected regions such as Southeast Asia,” said Cassidy. “Volcanoes can lie dormant for a long time, but still be capable of sudden and extraordinary destruction.”

Monitoring must be improved, say the CSER experts. Only 27% of eruptions since 1950 have had a seismometer anywhere near them, and only a third of that data again has been fed into the global database for “volcanic unrest”.

“Volcanologists have been calling for a dedicated volcano-monitoring satellite for over twenty years,” said Mani. “Sometimes we have to rely on the generosity of private satellite companies for rapid imagery.”

The experts also call for increased research into volcano “geoengineering”. This includes the need to study means of countering aerosols released by a massive eruption, which could lead to a “volcanic winter”. They also say that work to investigate manipulating pockets of magma beneath active volcanoes should be undertaken.

Added Mani: “Directly affecting volcanic behaviour may seem inconceivable, but so did the deflection of asteroids until the formation of the NASA Planetary Defense Coordination Office in 2016. The risks of a massive eruption that devastates global society is significant. The current underinvestment in responding to this risk is simply reckless.” 

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Where Are Interest Rates Headed? Is The Fed Correct Or The Eurodollar Curve?

Where Are Interest Rates Headed? Is The Fed Correct Or The Eurodollar Curve?

Authored by Mike Shedlock via,

The Eurodollar curve…



Where Are Interest Rates Headed? Is The Fed Correct Or The Eurodollar Curve?

Authored by Mike Shedlock via,

The Eurodollar curve implies four quarter-point cuts are on the way starting in 2023. The Fed believes otherwise. Let's discuss stock market implications.

Data from CME and Fed via Wall Street Journal.

Eurodollar Curve

The eurodollar curve has nothing to do with euros or dollars. Rather it is an interest rate curve and one of the world's most widely traded futures.

After peaking at about 3.9% this year, eurodollar betters believe the Fed will then cut rates all the way down to 2.8%. 

Five Not-Quite-Impossible Things the Market Believes

Wall Street Journal Contributor James Macintosh discussed the above chart in Five Not-Quite-Impossible Things the Market Believes

  1. Inflation is transitory. 

  2. The Fed realizes this in time.

  3. The jobs market cools enough to slow wage rises. 

  4. But not so much it means falling household spending.

  5. So consumer spending rises in real terms. 

In reference to the led chart, Macintosh says "The first assumption is the hardest to believe."

I disagree. The hardest thing to believe is the overall goldilocks scenario and that the current rally makes any sense at all. 

Inflation may easily come down if the Fed tightens too much too fast causing a severe recession. What would that do to corporate profits? 

But assume otherwise, that inflation does not come down more. What would that do to corporate profits? 

While any of the first three points may easily be correct, the combination of all five being correct and that stocks will rise in a goldilocks scenario is what I find hard to believe.

Is the Market Forward Looking?

Goldilocks proponents will tell you that the market is forward looking. 

The market isn't forward looking and never was. It is a coincident indicator of current sentiment, wildly wrong at major turns.

If the market was forward looking, what precisely was it looking forward to at the November 2007 peak with recession starting the next month? 

What was it looking forward to at the 1929 peak, the 1933 bottom, the 2009 bottom or any other top or bottom?

The Fed Will Hike Until It Breaks Something

I believe the eurodollar curve is more likely to be correct than the Fed. When has the Fed gotten much of anything correct?

The eurodollar view has two ways to win. The first is the Fed actually does tame inflation to the degree that it wants.

That's possible in a severe enough recession. And the global picture is easily weak enough for that to happen.

The second way the eurodollar curve might be correct is if the Fed breaks the credit market. 

The Fed would immediately reverse course, regardless of inflation, should that happen. 

Neither a credit event nor strong recession would be good for the stock market.

The least likely thing is that the Fed achieves a goldilocks soft landing. Yet, assume that happens. 

Macintosh says, and I agree, "The bull case that stocks and corporate bonds are pricing requires the combination of low joblessness and wage rises to allow spending to rise faster than inflation even after pandemic savings run out. But not so much faster that it hits capacity constraints and accelerates inflation."

The problem with goldilocks is stocks are priced so much beyond perfection that they may decline anyway. 

Globally Speaking 

  1. China Does Surprise Rate Cut to Help Its Economy, But It Won't Work

  2. German Costs to Ship by Barge are up Twenty Times and May Soon Be Impossible

  3. UK Average Electricity Cost Will Soar to $5,370 Per Year By 2023

  4. US Industries Are Buckling Under Pressure of Surging Electricity Costs

Good luck with goldilocks, especially with the Fed still hiking. 

*  *  *

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Tyler Durden Wed, 08/17/2022 - 09:45

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Investors Continue to Fund Data Over Ideas In Current Biotech Downturn

The United States is in the early days of a recession and the biotech industry is in a bit of a slump. CEOs can take heart, however, by applying the lessons…



Investors Continue to Fund Data Over Ideas In Current Biotech Downturn

Published: Aug 17, 2022

By Gail Dutton

The United States is in the early days of a recession and the biotech industry is in a bit of a slump. CEOs can take heart, however, by applying the lessons of previous recessions to business today and understanding what is different about the current situation.

“This downturn isn’t that much different from previous downturns, except that capital is available today,” Ed Kaye, M.D., CEO of Stoke Therapeutics, told BioSpace. “In the Great Recession (2007-2009), there was little available capital because of the banking crisis. Today, however, investors have money and are looking to deploy capital, but they’re much more conservative than they have been. They’re not looking for early-stage, hypothesis-driven companies, but for companies that are generating revenues or companies that are close to data so they can derisk their investments.”

A notable example would be Merck, which was reportedly awaiting a data readout from Seagen’s bladder cancer drug Padcev before moving ahead with plans to acquire the company.

“A Healthy Pipeline”

 Dusan Perovic, a partner at Two Sigma Ventures, commented on the differences in today’s situation.

“What was unique about some of the prior downturns is that they were driven by high valuations – people getting excited about biotech – but some of the translation (into drug approvals) wasn’t there,” he told BioSpace.

“The FDA has approved an average of about 50 new drugs each year between 2018 and 2021,” Perovic elaborated. “That’s up from about an average of about 38 between 2011 and 2018. “That suggests a healthy pipeline.”

Dusan Perovic_Two Sigma VenturesThat doesn’t mean fundraising is easy. People who have been in this industry a long while know that downturns are cyclical and tend to prepare.

In 2019, Kaye anticipated an economic downturn, so, “I was very focused on raising money to make sure we had the capital to continue development.” In the current downturn, he advised companies to shepherd their cash and invest in their research (versus a beautiful facility), at least until they are generating a steady revenue flow. In this way, they are more likely to have the funds to reach the next inflection point.

One strategy involved keeping a tight rein on hiring. Kaye linked hiring to reaching milestones. “If we reached a milestone, we would hire people appropriately,” he said, which minimized the risk of having to lay people off if those milestones were delayed.

Perovic likewise counseled biopharma companies to “try to extend the runway,” by concentrating on the assets or approaches that are most likely to succeed. “That is healthy in that it contributes to a founder or CEO being much closer to the data and therefore paying more attention earlier on to what’s showing promise and what’s not.”

Gaining earlier insights also means “being smart about how you generate the data,” Perovic added. That could mean partnering strategically to obtain data points sooner or relying on the increasing number of publicly available sources to supplement in-house data.

Historically, downturns usually have lasted a couple of years. “I think this will be shorter than the Great Recession,” Kaye said, which he said ended around 2012 for biotech. He said he’s optimistic for improvement in the fourth quarter of 2022, “although there are a lot of external events that we can’t control,” like inflation, the response of the Federal Reserve Bank and the repercussions of the Inflation Reduction Act on the pharmaceutical industry.

Already he sees indications that the recession may be bottoming out. For example, the SPDR S&P Biotech ETF (XBI) dropped below $63 in May, and now is in the low $90s. (The 52-week high is above $136.) Likewise, the seasonally adjusted inflation rate held steady at 8.5% in July, according to the Bureau of Labor Statistics.

M&A is Starting to Pick Up

“There’s a feeling that people are getting more comfortable,” Kaye said, as shown by the financings, mergers and acquisitions that still are occurring.

Perovic said he also thinks the economy may be turning the corner to better times. “We’re starting to see a little bit more M&A activity than in the first half of the year. A lot of large pharma companies have a lot of cash,” he pointed out, and that’s very different from prior downturns. “Now, they’re thinking about the next therapeutic, realizing that the pandemic is somewhat behind us.”

Just in the past two weeks, Merck has invested heavily in partnerships with Cerevance and Orna Therapeutics, for Alzheimer’s disease and circular RNA-based vaccines and therapeutics respectively. Pfizer made a statement in the sickle cell disease space with its $5.4 billion buy out of Global Blood Therapeutics and Amgen bolstered its inflammation and nephrology position by acquiring ChemoCentryx for $4 billion.

Venture capitalists, however, are still being cautious. They are concerned about ensuring they have the capital for follow-on financing for their existing portfolios. Therefore, Perovic said, “They are saving some of their assets for that, rather than investing in new companies.” Consequently, the bar to attract venture funding is higher than it was a few years ago. “People are asking more questions about when the asset will enter the clinic and its path to commercialization, whereas a few years ago it was more about the big idea and the science behind it.”

The lessons from prior economic downturns are, at their heart, simply good business:

– Always be prepared for a downturn.

– Know how you will respond.

– Spend wisely.

– Hire based on milestones achieved.

– Be a good steward.

Despite the downturn, “Deals are happening, and there’s definitely a lot of activity,” Perovic said, though not at the same levels as last year. Companies have cash to invest but are being cautious about where to invest. “Downturns are cyclic.”

Source: BioSpace

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