Economic Scenario 2: Recession

Economic Scenario 2: Recession

The second scenario that could possibly happen is an economic recession. A recession is characterized by a sustained economic decline, which manifests in two consecutive quarters of negative GDP (Gross Domestic Product) growth. Furthermore, the time line for a recession is usually between one and three years. An example of this is the last recession in 2007/ 2008. The high of the market was formed  in October 2007 and the lowest point of the decline was reached in March 2009. So the entire down move lasted for one and a half years. This falls exactly within the timeline we established earlier and if the corona virus was to start a recession we would expect a similar timeline.

There are a couple of aspects, that could prevent a quick recovery and aid the economy going into a recession. First of all, interest rates are already at, or very close to zero percent in the US and Europe. Because of this Central Banks have less options within the realm of monetary policy. They can’t lower interest rates as they did in 2007/ 2008. Before the start of the recent decline in the markets the FED, contrary to the ECB, had some room left to lower interest rates, but they immediately used this option at the beginning of the downturn. The only option left to central banks is the use of direct monetary stimulus. Among these options are the use of helicopter money as well as lending directly to companies in need. However, even the effect of these direct stimuli is highly controversial among economists, especially for high public debt ratios. Nickel and Tudyka find: “From a policy perspective, these results lend additional support to increased prudence at high public debt ratios because the effectiveness of fiscal stimuli to boost economic activity or resolve external imbalances may not be guaranteed.”* Ironically this paper was published by the ECB, the same institution that has been relying on the use of stimuli for years. 

Interest rates already being at zero and the possible ineffectiveness of stimuli in the context of high public debt ratios massively limit the effectiveness of the central banks. These are also factors favoring the scenario of a recession.

Another aspect to consider is the virus itself. If the corona virus was to appear in waves over a couple of years, as the spanish flu in 1918 did, it might be necessary to disrupt supply chains for much longer than we assume at the moment, thereby also sending the economy into recession. 

*https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1513.pdf

Economic Scenario 1: Quick Recovery

Economic Scenario 1: Quick Recovery

Quick Recovery

This scenario most people tend to forget. You only hear the media talking about the crash and companies that might experience difficulties because of the Corona Virus shock. However, a quick recovery, with a timeline of a couple of months, is definitely on the table. Most of the losses in the S&P 500 could be recouped, even though we probably won’t be at new all time highs soon. In this scenario the government provides aid to especially affected companies. Also, this scenario can be fueled by a decline in the number of infected people due to quarantine in many parts of the world. China is already reopening Hubei province and picks up production in their factories. 

Moreover the quick passing of a $2 Trillion stimulus bill by the US government could stabilize markets and initiate a recovery. The bill consists of a loan program for small businesses, an aid fund for cities and states and the use of helicopter money. Many Americans will receive checks directly from the government, thereby creating demand and stimulating the economy. However, only time will tell if this stimulus really has the effect politicians hope it will.

Finally we can conclude that an economic recovery over the course of the next months is a possibility. Also we should not get too pessimistic about the future. Even though the virus outbreak is a huge catastrophe this, too, shall pass.

Corona Crisis: Economic Scenarios

Corona Crisis: Economic Scenarios

Stock markets have dramatically gone down over the course of the past few weeks and investors are highly uncertain about the future. Long term investment strategies, like Compound Investing, can profit a great deal in volatile times. Using low prices to buy has a huge positive impact on the strategy’s return over the next years. However, times like these can also lead to bad decisions, because experiencing losses evokes a strong emotional response. In order to avoid such a response I will publish a series of posts on possible economic scenarios. Finally the goal is to provide the reader with a broad range of future scenarios. That will enable him to maintain an open mind and not freeze in light of his fear of an economic depression.    

Monster Beverage Summary

Monster Beverage Summary

Below you will find the summary of my analysis on Monster Beverage. What really stands out to me is the possibility to visually recognize a company that does a good job compounding their earnings. Just looking at the chart of earnings per share you can see the exponential growth. They were able to post higher earnings for each year with a compound annual growth rate of 17.69% over the last ten years.

Please note: Because of the big stock market movements in light of the recent corona virus crisis I included a 20% margin of safety in the calculation of my entry price. So instead of 58$ I am now looking to buy at 46$. I am also aware of the fact that we could see a much bigger decline. Therefore I hold back some liquidity to be able to buy at lower prices. The second level at which I will be buying Monster Beverage is 31$ a share.