Is The Economy Coming Down With Something?
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It's been a crazy couple of days, and we showed up at the office Monday morning with as many questions as anyone. And we've been reading as fast as we can to try and figure out how to understand a spreading pandemic, a spiraling oil market, warnings of a coming recession, and the largest drop in the S&P 500 since the 2008 financial crisis. So here's a few of the best answers we found from around the econ universe.
What Does the Coronavirus Mean for the Global Economy?
We've been talking a lot in the office about supply and demand shocks, which is econospeak for forces that knock economies off their trajectories. And we're starting to see them firsthand. A trendy noodle shop opened up across the street last summer. We haven't been able to get in because of the lines. On Friday, the city was pretty empty, and so was the noodle shop: That's a classic demand shock. We took advantage and got our noodles in five minutes. Monday we returned for more of the same. There weren't that many customers, but it took 30 minutes to get our noodles. Why? Half the kitchen staff stayed home. "People are paranoid," said the guy at the register. When an economy can't make goods because of a labor shortage, that's a supply shock. The noodle shop is getting shocked both ways, and so, maybe, is the economy.
The most authoritative discussion we found of this is from Gita Gopinath, chief economist at the International Monetary Fund. She lists potential economic policies for governments to help deal with these shocks right now.
How Bad Is the Coronavirus?
One of the most helpful things that came across our feed recently is Justin Fox's piece for Bloomberg View, "." As he puts it, "The coronavirus outbreak has been turning a lot of us into amateur epidemiologists." Though it's an opinion piece, it doesn't have a take. It just has numbers.
And as budding amateur epidemiologists ourselves, we read carefully about the medical term "R," which denotes the infection rate. Fox writes, "Could Covid-19 really spread as widely as the flu? If allowed to, sure. The standard metric for infectiousness is what's called the reproduction number, or R0. It is usually pronounced 'R naught,' and the zero after the R should be rendered in subscript, but it's a simple enough concept. An R0 of one means each person with the disease can be expected to infect one more person. If the number dips below one, the disease will peter out. If it gets much above one, the disease can spread rapidly." Right now, Fox says, the R0 of the COVID-19 coronavirus is 2.8, meaning it is on average spreading from one person to 2.8 people. But it is below one in communities like Wuhan, China, where it started. We think we're going to be hearing more about "R-naught," and we're hoping it goes below one.
How Should We Think About the Market?
We don't do buys and sells and pops and drops and all that market-watching, but sometimes you can't look away. These last couple of days have been those kinds of days. Things got so disheveled today we actually turned on the television. But we learned more from the Wall Street Journal's Andy Kessler, who was an investor before he was a writer, and he does a nice job how he (and the market) thinks about and prices risk. He argues that the risk is essentially a timeline projected into the future, and the pricing of the market reflects how long we think things are going to be uncertain. It's why as the COVID-19 coronavirus looks to be sticking around for longer, the markets are reacting more strongly.
Saudi Arabia Did What?
Oil prices plunged on Monday as Saudi Arabia declared it would increase production even though prices were falling. This basically never happens. Julian Lee, an oil strategist for Bloomberg First Word, what the heck is going on with the oil market. Global oil prices are influenced by the Organization of Petroleum Exporting Countries, and Saudi Arabia, an important member, appears to be mad at Russia, which is not in OPEC but is in a less tightly knit group known as "OPEC Plus." Lee says Saudi Crown Prince Mohammed bin Salman aims to drive oil prices down "so far and so fast that Russia realizes it made a terrible mistake in refusing to agree to deepen output cuts at Friday's OPEC gathering."
We'll let you know as we learn more. And send us your questions! We can be reached at email@example.com. We might be able to answer them either in our newsletter or on the show.
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