COVID-19 may be the black swan that pushes the global economy into recession

If there is one thing that businesses and individuals hate even more than bad news, it’s uncertainty. Even if you scour the literature and CDC releases (such as this latest one from February 21 ) little is known about how contagious COVID-19 actually is, its ultimate level of mortality (viruses have a tendency to become less lethal over time), and its final impact on the global economy. As a result, it makes sense for companies to be more risk averse: to delay hiring more staff and making new investments. Likewise, individuals logically delay making big purchases of cars or houses and change their behavior to decrease exposure: they don’t travel, go to restaurants, stores or movies. If things get severe, they stop going to their jobs. If schools are closed, healthy workers may have to stay home with their children. Individually this makes sense, but collectively can lead to a huge decrease in corporate and consumer demand which can easily tip the economy into recession.

In other words, the second order impacts of a pandemic due to risk aversion dwarf the first order impacts (which are more easily measurable) such as the costs of treating infected people or the lost wages of people not working because they are sick or avoiding infection. For instance, a 2009 study by economists at the Brookings Institution analyzed the direct economic impact of closing schools during a flu pandemic. Since about one-quarter of civilian workers in the United States have a child under 16 and no stay-at-home adult, closing all the nation’s K-12 schools for two weeks would result in between $5.2 billion and $23.6 billion in lost economic activity; a four-week closing would cost up to $47.1 billion dollars — 0.3 percent of GDP.

This purely counted lost wages, but people whose income falls because they don’t work, cut their spending, and the people who don’t receive that spending in turn curtail their expenses creating a negative snowball. Worse, while the decrease in demand is deflationary in nature, the disruption to supply chains could lead to shortages and hence increased prices and inflation in the short run further pinching consumers’ wallets.

Right now, airlines are rapidly cutting capacity, tourism is taking a beating, and places like Macau look like a ghost town. All this while we are still in the first phase of the epidemic. It’s unclear where it will go from there – whether it will be contained like SARS which killed just 916 people, lasted a year and reduced global GDP by only $33 billion or will look more like the Spanish flu of 1918.

The 1918 influenza epidemic infected 500 million people around the world or around 27% of the world’s population at the time and killed between 40 and 100 million people. It infected people everywhere including on remote Pacific islands and in the Arctic. Because it caused unusually high mortality rates in individuals aged 18 to 40, it had a particularly strong impact on the workforce and pushed the economy into recession. While the data from the time period is sparse, according to the NBER business cycle chronology, there was a cyclical peak in the US in August 1918 and a trough in March 1919. These dates are almost exactly coincident with the epidemic that began in August 1918 and had nearly run its course by March 1919.

There are two possible scenarios at this point. The first is that COVID-19, while significantly worse than SARS, is contained and does not lead to more than a few million deaths globally (vs. up to 646,000 flu annual death). It’s the most likely scenario – not because I have any confidential data on infectiousness and mortality – but because most epidemics are not as dire as the 1918 influenza if only because we now have vaccines, anti-virals and antibiotics that can treat secondary bacterial infections.

The Asian flu of 1957-1958, the Hong Kong flu of 1968-1970 and the Swine flu of 2009-2010 killed less than 2 million people each even though the latter infected up to 21% of the world’s population at the time (up to 1.4 billion people). In this case, many countries may experience recessions: two consecutive quarters of negative growth, but would quickly recover as the pandemic burnt out. Companies would replenish their inventories and consumers would eventually make the purchases they had merely delayed in the face of uncertainty and increase their spending again as their income recovered when they returned to work. The Asian flu and Swine flu are estimated to have cost around 1% of GDP in affected countries, but the economies of those countries quickly recovered.

A more severe scenario is possible given how contagious COVID-19 seems to be. If it infected as many people as the Spanish influenza with what seems to be its current 2% mortality rate, over 2 billion people worldwide would be infected and 40 million would die. This would lead to a massive global recession. Researchers at the Federal Reserve Bank of St. Louis and the World Bank calculated that a pandemic as severe as the 1918 influenza could contract GDP from 4.25 to 5.5% in 1 year costing more than $3 trillion and take years to recover from, especially if people of working age were disproportionately affected as anecdotal evidence suggests may be the case.

I am obviously praying for the first scenario to be true, which if mild enough might just allow the global economy to avoid a recession. That said some countries like Japan seem to be destined for one. The Japanese economy already shrank at a 6.3% annual rate in the final quarter of 2019 due to a consumption tax increase. This will only be compounded in the first quarter by the impact of Typhoon Hagibis and COVID-19.

What seems certain is that most companies on a go forward basis will rethink their supply chains to create more redundancy. Let’s also hope that China bans live wildlife markets once and for all given that they are the likely source of both SARS and COVID-19 and are an ongoing source of risk.

The Best Gadgets to Film your Ski Exploits

As many of you know I am addicted to skiing fresh powder. Every winter I head to the Revelstoke area British Columbia which has the best backcountry tree skiing in the world.

We would occasionally stop and film each other with compact superzoom camera, but in general we did not like the time it would take to setup or freezing our hands to control the camera. At the same time, we lusted for the type of footage we would see in Warren Miller movies or in the films featured at the Banff Film Festival. However, those were usually taken by professional camera crews in helicopters flying over the terrain making it both impractical and unaffordable. Enter the Skydio 2.

It’s by far the best self-flying drone in the market. It’s significantly improved on the R1 and is the best at navigating trees. It’s still not perfect as it can take a while to navigate tight trees and if you are going too quickly it will lose you, but it has the best auto-tracking features by far putting the DJI Mavic 2 Pro to shame. I captured this epic video with it.

Note that getting the Beacon is an absolute must as it will allow the Skydio to track you even if it cannot see you while you are in the trees. I would also recommend having a tail guide who can grab the drone should it get stuck. You should have radios so the tail guide can tell you if the drone gets stuck in which case you can use the Beacon to tell the Skydio to land. If you don’t have the Beacon you will most likely be out of range and your phone won’t be able to control the drone and you will just have to wait for the battery to run out. I would also strongly recommend having at least one extra battery.

If you are skiing in trees, it’s best to tell the drone to follow you. If the terrain is more open a more side view looks more impressive.

I also love complementing the drone footage with footage from the GoPro Hero 8 Black . I tried many positions. Ultimately, I like it best helmet mounted in Superview Mode capturing at 2.7K in 60 fps. Superview shoots in 4:3 so you see more of the height capturing both your skis and the terrain without angling the camera down too much. It gives you a better sensation of speed and steepness than in the regular mode. It’s also best to be in 60 fps. Because the GoPro does not yet support Superview in 4K with 60 fps, it’s worth decreasing the resolution to 2.7K which still looks epic as you can see in the following video.

I would avoid chest mounting the GoPro as it seems to move more and tends to give me motion sickness while looking at the video. The batteries tend to freeze so it’s best to keep them in your gloves on the way up and to only put them in when recording. Extra batteries are also highly recommended. To avoid freezing your hands enable voice commands and just start recording by saying: “GoPro Start Recording”. The GoPro will beep. When you are done, just say “GoPro Stop Recording” and it will beep again to indicate it complied.

To edit the videos, I download the originals to my iPhone and edit them in iMovie. I also occasionally use Quik.

All Things Marketplaces

Listen to “All Things Marketplaces with Fabrice Grinda” on Spreaker.

I had a very in depth conversation with Erik Torenberg of Village Global about marketplaces. We discussed:

  • What I believe about marketplaces and the trend towards verticalization that VCs don’t believe.
  • How FJ Labs evaluates investments and the four criteria that we use to determine whether we will invest or not.
  • A breakdown of some of the failed marketplace startups.
  • What you need to know if you’re building a marketplace business in 2020.
  • An analysis of marketplaces for home school, child care, therapy, construction, and more.
  • How this intersects with the future of work and the future of food.
  • Why certain legacy marketplaces have managed to stick around.