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So Many Questions, Hardly Any Answers

So Many Questions, Hardly Any Answers

Update: 2020-03-10
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What a difference a few weeks can make. A month ago we were in an economic boom. Unemployment was low. The stock market was at all-time highs. Sure there were a few cases of Covid-19 in China, but all was good in Europe and in North America.


In a few short weeks we’ve seen the travel industry’s world turned upside down. The first airline casualty was FlyBe, a regional airline in the UK that represented about 38% of domestic air capacity in the UK. They flew to smaller centers like Manchester, Birmingham and Liverpool, serving 139 routes. They declared bankruptcy and likely won’t be returning to the air.


Oil prices started to fall when it became clear that economic output was going to be disrupted from China. There’s a direct link between one unit of economic output and one unit of energy consumption. OPEC was trying last week to propose production cuts in order to prevent a glut on the market and to protect oil prices. Russia refused to comply and now we have an all out price war happening in the oil industry.


In response, we’ve had oil prices fall nearly 40% in one week and 25% in just one day. If there is a protracted drop in oil, we can expect bankruptcies in the oil industry.


Stocks have fallen 20% in value in a couple of weeks including a 2000 point drop in the Dow Jone Industrial Average, the largest single day drop in history. We know there are supply chain disruptions that are going to ripple through the economy over the coming months. So that’s all happening in the broader economy.


So let’s say you have a market report in front of you that’s two months old, or six months old. Is it any good? How do you plan?


Do you assume reductions in employment? How many of your tenants will be impacted?


Do you assume that there will be disruptions in the bond market which will ripple through the banking industry?


You see we’re used to thinking linearly. When there are massive dislocations and there is a delay between the warning signs and all the downstream consequences to the economy, it’s hard to connect the dots.


I was reading the Marcus and Millichap Office market report for 2020. It’s only a few weeks old. But as I was reading the report, it was clear that the report was written in a completely different environment. That was then, this is now. Would the report be written the same way if it was published today, only a few weeks later?


We think about cities like Dallas, Houston, Nashville, Toronto, that have been attracting tremendous growth in population. Will that growth be disrupted? If it is disrupted, will that disruption be temporary or longer lasting?


There are too many questions for which there are no answers. The only answer is to wait and see how all of this shakes out.


The web of interconnected dependencies in our global markets are incredibly complex and the relationship between them hasn’t even been modelled, let alone understood.


I was watching a TED talk that Bill Gates gave back in 2015. In that talk, Bill Gates predicted that we are globally unprepared for the outbreak of a virus. We have spent trillions on military preparedness in order to protect against a catastrophic global conflict, but our health care systems have not adopted the same wartime footing to prepare for a surprise attack.


The problem isn’t that our system for handling these outbreaks is breaking down. The problem is that we don’t have a system at all. Our system of testing in the US required medical samples that have a shelf life of less than 6-9 hours to be sent to a central lab in Atlanta. Even if you could get the sample to the airport by courier within minutes, the 5 hour flight to Atlanta, through the backlog in testing, the chances that the test sample is still viable diminishes rapidly.


Nobody can tell you the impact of what happens when you mass quarantine 60 million people, or 700 million people.

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So Many Questions, Hardly Any Answers

So Many Questions, Hardly Any Answers

Victor Menasce