The Great Outbreak

The Great Outbreak

RADU NEGULESCU  (April 10, 2020)

The Dilemma

“This is your last chance. After this there is no turning back. You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes” - Morpheus / Matrix

Today, I’m more certain that we are on the verge of a historic event: A dire combination between the Spanish Flu, the Great Depression and a World War. An event of historical and global magnitude, the worst socio-economic crisis of our GENERATIONS, utter uncertainty, worldwide anxiety and widespread fumbling camouflaged by makeshift actions.

This is a scenario most likely seen by those who witnessed the beginning of the Great War or the Great Depression. Except in our times everything is much more dynamic, and more intense. The fall is from a much greater height.

Our generation finds itself in a better position, though. We possess the knowledge gathered from previous crises and, above everything, we possess tools beyond the wildest dreams of our forefathers all brought together by a continuous global informational build-up. We possess all we need to gracefully get out of this Great Outbreak. As humans, as countries, as a society.

The sooner we embrace the new paradigm and head towards the right direction, the more efficiently we will manage these troubled times. Unfortunately, we are not doing the right thing yet. We cling to a comfortable end-of-2019 which still shapes our thoughts and actions.

There is still an inertia when it comes to the collective perception of reality. We expect a V-shaped rebound and a great party this summer; we perceive this as a planetary vacation. And we act accordingly.

But it sure doesn’t look like an intermission; as days go by, the feeling that ‘we have crossed the point of no return’ is getting stronger, as days go by we have a more and more acute feeling that everything has changed, that everything is changing, but we are not yet able to clearly put our finger on it.

Just like Neo from Matrix, we are facing a big dilemma. Do we keep on taking the blue pill and muse on our familiar past? Or do we take the red pill and start building a new future? Unlike Neo, who was not very much affected by the stake, we have a lot to lose. The more we delay taking the red pill, the harder the recovery is. The more we, as a society, refuse to comprehend the emerging reality, the harder to deal with what we are about to live. To deny the new reality we have found ourselves in only for a few months only pulls us back and delays the readjustment.

One Step Back

A few weeks ago when there were only around 200,000 cases, I published an article on Linkedin: Operating in the Coronavirus age - Trencadis General Strategy Update - 18.03.2020 . It was a strategic view for the company I lead, aiming at providing a bit of clarity for a future which we unwillingly have been put in, not just us as a company, but from a collective perspective, we as human species.

All that is irrelevant in the new context will disappear, firstly because the forces behind consumption will be profoundly altered. No one (from the individual to the systems) will have the same economic and social behavior. Never.

That is why the main question we have to ask ourselves is not ‘What do we have to do to get through this time? ’, but, ‘What do we have to do in order to cope with the new context the world will settle in, once the initial phase of the Coronavirus effect will be overcome?’. In the short term we need to survive – in the most basic and relevant way possible. All together. In the long term, if we want to survive, we have to rethink our entire business philosophy. Not only us, Trencadis, but everybody.

This is why, from my perspective, in order to be able to navigate meaningfully through these times, we must look at the crisis dynamic and separate it into distinct evolutionary stages, with distinct approaches for each of them.

Taking into account the way things are evolving so far, we can structure three stages of the crisis evolution:

The first, which we are in - (1) The shock stage. Right after, the second - (2) The recovery stage. Finally, the new normal state - (3) The growth stage

The Great Outbreak

If the purpose of my previous article was to identify a red line based on which to be able to define our company’s strategy, now I will focus on the impact of the current events. Especially in Romania.

A Concept

In order to figure out this global development in terms of its impact, it must be seen as a whole, evolving over time. The health crisis will result in an economic crisis, the economic crisis will result in a social crisis, the social crisis will probably worsen the health crisis. A perfect causality type-circle, difficult to break.

There is no doubt that the socio-economic event we are experiencing today originated from the COVID-19 pandemic, but this is only a trigger for the immense challenges yet to come. Besides the omnipresent health impact of the pandemic, the economic shockwave will be titanic, even though we still notice a lot of prudence in the estimations of the economists and business consultants. Events are unfolding at such a high rate that bureaucratic market reports are yet unable to accurately define them and their effects.

Instead, the signs are obvious:

The signals are not given only by these dramatic shifts. As a global economy, we already are in a major imbalance. Ray Dalio told us in November 2019: This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift (cnbc.com...bridgewaters-ray-dalio-on-economy-worlds-gone-mad-system-is-broken.html)

The public debt for most of the world’s countries has reached a record level, the direct consequence of state interventions to combat the effects of the financial crisis of 2008-2009. At the same time, the level of corporate debt reached 29 trillion globally, by far the highest level in history. (wikipedia.org/wiki/Corporate_debt_bubble#Potential_role_of_corporate_debt_in_a_future_recession)

The world economy is in an increasingly unsustainable situation of inequality at the level of that seen before World War II. Worldwide, 1% of the richest people own 44% of the global wealth while 56% of the people possess only 2% of it (credit-suisse.com/about-us/en/reports-research/global-wealth-report.html) this distribution being pretty much the same for people, companies and nations.

Besides the pandemic related economic shock followed by the sudden disruption of the supply and demand chain, the economy will take advantage of this momentum to correct itself. This will put us in a health-economic scramble, followed by social and political instability which is difficult to anticipate.

With perfect timing, during the last years we have witnessed the rise of populism from both the left and the right and the decline of democracy. Political analysts have been talking for a long time about a ‘democratic recession’. The pandemic and the economic crisis will only make things even more dynamic.

Health crisis. Economic crisis. Social crisis. Political crisis. On and on it goes. All this, put together, define The Great Outbreak: the effects of the intersection between the socio-economic context in which we were in December 2019 and the pandemic that caught us completely unprepared at the beginning of 2020.

Characteristics

To assess the impact, considering the dynamic of the events as well as the starting context, I think we can lay on the table some characteristics and implications this Great Outbreak will have at global level:

01. Economies can be restarted, lives cannot.

Although the correct approach would be fast forward, almost all the world's governments will slowly reach the same conclusion: Economies can be restarted, lives cannot.

This principle is of utmost importance in the dynamic of the events, not only because it is fundamentally correct, but especially because it will be the guiding light in dealing with the pandemic. The economies will be restarted according to the evolution of the pandemic, progressively, synchronized with the states’ capacity to manage and minimize the health impact upon the populations.

02. Even if we restarted the economies, it would still be for nothing.

The fundamental reason for which things will implode economically is a psychological one.

The paradigm to which the society, almost in its entirety, has relocated to is that of an sieged stronghold. This profoundly distorts the economic circuit.

This is why:

The global economy might seem a complex, scary concept, almost abstract, and when it comes to its expression, it really is. But, basically it can be described as the sum of all transactions & exchanges between individuals.

The rest consists in variations & permutations, ways to maximize the dynamic of transactions and complicated methods by which we set forth the resulting interactions.

Through utter abstraction, the capitalist economy, one of the variations, can be presented by the following model:

The Great Outbreak

People buy products and services from companies, products and services the companies produce by buying production time from the people.

The volume and speed of these transactions are strictly related to the social and psychological context people find themselves in. When people are optimistic, when they feel safe, people trade. When some are optimistic and trade, others buy time (trade) from other people in order to generate even more transactions.

Today we feel neither optimistic nor safe. An invisible enemy is assaulting us today. Almost at a planetary level.

Today we are not trading and we will not trade until the assault is over. This will further disintegrate our economies and will further alter your lifestyle, individually and collectively.

03. The health crisis will last until the vaccine.

The economic crisis long after. Regardless of the measurements each state will take and the way it is locally managed or not, the health crisis will not be generally solved until the population of the planet will be vaccinated. It is not enough to develop the vaccine, it has to be delivered and administered. This will probably take 18 months or more.

Meanwhile, some countries will contain the epidemic, but this will be done to the detriment of those failing. Countries with less resources and countries with weaker public systems will, naturally and inevitably, be discriminated against by others. Just like economies, the cooperative relationships, whether bilateral or multilateral, can be reset. Lives still cannot.

Precisely this lack of uniformity in managing the health crisis will be the one to accelerate the profound economic crisis that follows. The resulting vicious circle will be extremely difficult to control and success will most likely be achieved only by resetting agreements like Bretton Woods (which is the basis for the IMF, WB, WTO) and implementing international plans of the magnitude of the Marshall Plan, but globally.

No matter the amount of individual answers of other countries, the solution has to be global. The alternatives are hideous. Whatever money will be injected into the economy, it will evaporate, as long as the system as a whole is not restarted. And the system is global.

Romania

Romania Like other countries, Romania will eventually overcome the health crisis. The gradual decrease of the domestic number of cases – together with an efficient management of arrivals in the country from the affected areas - will allow us to declare the pandemic under control at some point. But this will take a long, long time, and it will devastate us economically if we do not change our perspective and approach quickly.

The Great Outbreak finds us deeply integrated in the global economic circuit, even if not in a very good position, being totally dependent on the political-economic decisions that others will make. Our well-being is dependent and subordinated to the well-being of others.

The Romanian financial capital is small in volume and fragile in structure. It cannot withstand such a shock. Romania is not even close to being an innovation producer or having a comparative advantage , at least, will be extremely exposed (wikipedia.org/wiki/Comparative_advantage).

The psychological impact and the restrictions related to the health crisis have decreased and will continue to decrease the global consumption at the fastest pace in history. Unfortunately, we are a country orbiting around consumption: we feed our economy with consumption, and what we produce, we produce largely for consumption.

For example, the 30 billion Euros exposure in the car manufacturing industry alone, one of the hardest hit industries. And the economy will be hit in the long run. Force majeure clauses are already invoked in contracts one after another for already paid cars, and no new cars are sold. And will likely not be sold for a while.

Many other manufacturing industries will be hit in the long run and austerity measures will be taken for them too - exactly as the Government correctly suggests. But this will create unemployment, beyond just furloughing workers.

For many economic sectors, the subsidies provided during the emergency situation will not suffice, as long as a V-shaped recovery is out of the question. Many economic sectors will find that easier restrictions do not mean a return to normal and that their usefulness will be low for a long time. And that will create unemployment, a lot of unemployment.

The pressure on the budget will become higher, while the state’s revenues will get lower and lower. And from here, a massive shit storm. I don't even want to go into details.

What is to be done?

Nothing more than to wake up. To stop denying or embellishing the new reality, to properly evaluate ourselves and to assume the losses, to understand that we are all in the same situation and that together is the only way to get out of this business.

It is time for the self-preservation instinct, the clear mind and courage to come together to work through this huge disruptive event for humanity.

Only then can we act with calm, sense and discipline.

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