Stop looking to 2008, this crisis is more like 9/11

Generally speaking, we have little clarity over the magnitude and length of this recession, or what the eventual recovery looks like and how much of production, income and spending will have been permanently impaired. Remember what happened after the 9/11 attacks — the comparison is more apt than 2008-09, which was a Wall Street crisis (that hit Main Street; but be cognizant of the causation) as opposed to a Main Street crisis (which this is, and the knock-on effects will not impair the banks as much as the public debt markets that are choking on unprecedented leverage).

What 9/11 has in common with what is happening today is that this shock has also generated fear, angst and anxiety among the general public. People avoided crowds then as they believed another terrorist attack was coming and are acting the same today to avoid getting sick. The same parts of the economy are under pressure — airlines, leisure, hospitality, restaurants, entertainment — consumer discretionary services in general. Indeed, movie ticket sales have dropped to a 20-year low. After 9/11, we had the massive rebuilding and reconstruction effort that helped generate at least a brief turnaround; the Fed had plenty of bullets in the chamber; and the prior recession that began in March 2001 helped create slack and idle labour market resources and put these unemployed folks to work. Not to mention that George W. Bush enjoyed one-party GOP rule in Congress and could get things done quickly.

Keep in mind that we did not see bond yields or equity markets bottom for good until the spring of 2003, roughly 18 months after the initial shock. That is the key. A detonation to confidence and spending of this magnitude takes a lot of time and effort to repair — which means, as we have seen in the past month, the dips to be bought are in Treasury bond prices while interim rallies in equities should be used as opportunities to cleanse the portfolio of cyclicality and undue risk.

I have lived through three recessions as a professional economist and I don’t recall ever seeing the front page of the various newspapers as morose as was the case today. I wish I could say this is a form of capitulation but I will await for my recession target of 2,200 on the S&P 500 to first be achieved (and even then, a lengthy process of testing and retesting will take hold, if history is an effective guide on this score).

THE SAME PARTS OF THE ECONOMY ARE UNDER PRESSURE.