[Upbeat music]
-JP Eggers: All right, everyone, welcome.
Hopefully everybody can hear me.
Maybe I can get at least, Haran,
can you give me a thumbs up
to confirm you can hear me?
There we go, good, perfect,
just wanted to check.
Welcome, everyone, very excited
to welcome you here today
for this first in what we hope
will be a significant series
of faculty opportunities to
share insight and perspective
on the impact of COVID-19
on different aspects
of the economic system.
There'll be more information
coming around about that shortly.
But we're excited that you're
able to be here to join us.
Before I start, though,
I just wanna make sure to just say
that I hope everyone is safe.
I hope everyone is healthy.
I hope your family and friends
and loved ones are all safe.
These are scary times in many ways.
I think many times, we kind of forget
that we're not just locked in
our living rooms or bedrooms
or whatever it might be
for no apparent reason,
but because of the
significant health challenges
that the world is facing right now,
and we're all trying to do
our parts by remaining remote,
trying to stop the spread of this disease.
If you have any questions, any concerns,
any needs that we on the
MBA side can help out with,
please feel free to reach
out to me or anyone else
in the MBA programs team
at any point in time.
That said, we're really excited today
to help kick off this series.
We're excited to have, well,
so let me actually talk about
logistics quickly first.
This is gonna go for about a
half an hour once Haran starts.
There's the Q&A window that you
can use to submit questions.
I will then use things submitted in there
or through the chat to
maybe ask some questions
after the talk is done, so feel free
to put any questions you have in there.
We won't get to everything, but I'll try
and do the best I can to
cover many of those questions.
You can also use the chat window
to share ideas, perspectives, thoughts.
If you have questions
just for the panelist,
which is kind of the people
running the sessions,
submit 'em there, or to everyone,
submit to panelists and attendees,
to engage in a more general conversation.
Please, that's a public good,
so please only share things
that are really relevant
to the conversation we're having here.
With that, I'm really excited to have
Professor Haran Segram here
to today to talk with us
about his perspective and
background on this crisis
and on the implications it
has for the financial sector.
Professor Segram has his PhD in economics
from the University of Sydney.
He also has a long
career as a practitioner
in the financial services sector as well,
so brings both kind of the academic
and the practitioner perspective on this.
I will turn it over to Professor Segram,
and he will be able to take it from here
to share with you his perspective.
We're thrilled to have you
here, though, thank you so much.
-Haran Segram: Thank you, JP.
Can everybody hear me?
All righty, good afternoon, everybody.
Thank you for being here.
I'm thrilled to be here,
especially sharing this
with our MBA students
and the broader community.
Special shout-out to my MBA
Foundations of Finance class.
Hi, if you're watching, and
I'm gonna start my presentation
by looking at the PowerPoint slides,
and I'll also take you
through a website I often use
on a weekly basis or on a daily basis.
So, this is the topic
of the session today.
You all know we are almost
fighting an invisible enemy.
We don't know where this is,
and I'm very proud to be
part of this lecture series
as the inaugural presenter
of this lecture series.
So, we'll start off by
looking at the impact
of COVID-19 on the US financial markets.
If you especially see, let
me just pull up my pen,
see this is where the
trouble is right there,
in the last six weeks to eight weeks.
I updated this slide yesterday,
but things have changed
so drastically in the 24 hours,
I find it hard to keep up.
So that is the impact on
the US financial markets.
The next one I would
like to share with you
is the worst performing
industries for this year,
where you can see, it's blatantly obvious,
any people-facing business is struggling.
You take the airlines, retail, hotels,
everything's shutting down
and sending the employees on
leave, paid leave sometimes.
So we'll get to that bit.
Give me one second.
Let me go back to the
previous slide, remove this.
That's better.
So, my pen has disappeared,
and my circle has disappeared.
So that is where we are,
specific industries.
I wanted to also give
you a global perspective.
You see I have graphed out
two graphs, two time series.
One is the S&P 500, which is
in sort of an orange line,
and light blue line is the
MSCI World Market Index.
So what we observe is
they're tracking each other
all the way down to the
bottom and rebounding
off the bottom, and you
notice that both markets
have lost close to 24%
in market capitalization.
24% market capitalization translates
to about five to six trillion
for the S&P 500 companies
that has been wiped off.
US markets being 25%, give or take,
of the global equity markets,
I would say we have wiped off
roughly 20 to 25 trillion
globally in equity.
So, but you will see a high correlation
between the world index I have used,
which is the MSCI World
Index, and the S&P 500 Index,
because S&P 500 is 25%
of the global index,
so it's no surprise to us.
The next thing I would like to look at
is a historical lesson going back in time.
So I started my career at Stern in 2009.
I've been working in
the industry since '99.
I know I'm dating myself.
So I went through the dot-com bubble.
I went through the financial
crisis of '08, and here we are.
I wouldn't call this a recession,
but an economic crisis.
So what I wanted to point
out to you all today is,
gimme one second, let me
get my annotation right.
So this is the period I
would like y'all to look at,
where the global correlations
amongst 20 largest equity
markets in the world,
they went up together in tandem.
So the average correlations
for global equity markets
are around 55 to 60%, but
during this financial crisis,
it went up to close to 90% correlation.
So you have taken your stats class,
you have taken your foundations class
in finance and economics, so you see,
there is nowhere to hide when the markets
are highly correlated the way
they were correlated in 2008.
So the next thing I would like to show you
is an updated version of
this correlation analysis.
So let me undo that first and click back.
Give me one second.
I'm gonna stop the share,
and I'm going to a website
which I use often on a daily basis.
So JP, you can see this website?
Okay, thank you, thank you.
So, this is a website that's very famous
because it is created and founded
by Professor Robert Engle.
He's a Nobel laureate
in economics in 2003,
so I would really encourage
you all to bookmark
this vlab.stern.nyu.edu
site, where he and his team,
they update this site every day.
So I would like to show
you is the volatility
in the global markets going back 30 days.
This is up to the minute, live site.
So I'm gonna just move my tracker to see.
When it's less red, the
volatility's lower around the world.
That is what it has been
over the last 30 days.
So I'm gonna move this
tracker close to today,
and you see how volatility has increased
over this period of last 30 days.
Here we are at time zero.
Even I can look forward 30 years.
Another thing I would
like to share with you,
which I focus because I'm an
enthusiast of global equities,
and this is my passion, so I
would like to go and show you
the updated current
version of the correlation,
which is very interesting, right?
It is as of this morning, if you can see.
The correlation, I would like
you to focus on this number.
That is the number we have to focus on.
That is the average correlation.
So this correlation is not
up to 2008 correlation,
but pretty much,
there's nowhere to hide
in the equity markets.
I would encourage you to
look at a specific series
of the correlation analysis
Professor Engle puts out,
which is this model,
this dataset right here.
So, he won the Nobel Prize
for GARCH and ARCH models.
So that is his passion, and he
has created this time series
using his expertise in the
field over the last 35 years.
So I would really encourage
you to focus on the GR,
just GJR time series, which is
a GARCH model you can look up
when you have time as to what
GARCH and ARCH models mean.
So, I'm gonna go back to
my PowerPoint presentation.
I wanted to share this live site with you.
I would really encourage you
all to make use of this slide
in your career, in your day-to-day
lives and your investing,
if you have any investment thesis.
So, I'll stop sharing this site,
and I'll go back to sharing
the PowerPoint slide where we left off.
So I showed you the 2020
correlation, pardon me.
So, the next thing I would
like you all to understand
from a stats perspective is the difference
between normal distribution
and fat-tailed distribution.
Let me illustrate as to what
was the normal distribution
and the fat-tailed distribution,
if I just borrow my pen one more time.
So, what you see here is this
is what I'm talking about.
So the tail events could be both positive,
i.e., right-tail events,
and left-tail events.
We are concerned about
the left-tail events.
That is what this graph illustrates.
So when you think about
normal distribution,
the probability of an
highly unlikely event
is next to nothing in normal distribution.
The financial markets
and the financial models
are based off normal
distribution assumptions,
what we learn in our portfolio theory,
what we learn in Black-Scholes
option pricing model,
they are all based off
normal distribution.
So the issue with the normal distribution,
or I would call it a challenge,
with normal distribution,
is we underestimate
the highly unlikely
events, improbable events.
But human behavior,
emotions, animal spirits,
that is the human emotion
that drives the markets,
they tend to give us a
distribution that is a fat tail.
So if you think about the fat tail,
I'm gonna draw this.
Let me see if I can
find a different color to illustrate this.
to illustrate this.
See, the highly unlikely
events happening out there
is more than what we think or realize
and we like to acknowledge
in this real world.
So that is the main takeaway
from this fat-tailed distribution
and the normal distribution.
Let me just undo.
So, I just wanted to
give you the highlights
of this normal distribution.
So if you think about it,
it's plus or minus three standard
deviations from the mean,
you're saying 99%, almost
99.7% of the movements
lie plus or minus three standard
deviations from the mean.
So, this is something very important
for us to acknowledge here.
So we're saying the probability
of a highly improbable
event is next to nothing.
But in the real world,
the world the market works and
the world events distribute
sometimes can be fat-tailed distributions.
So, plus or minus three
standard deviation events
can happen more than what we
think or we expect or model.
So those are the events I
call the "invisible losses,"
which we cannot model for.
You can hedge against the tail
event, but the hedging cost
would be greater than what you
might lose in a tail event.
So people are hesitant
to hedge those events,
because they're very expensive
to remove that tail events.
So why is that important for us?
Just let me give you an example.
So we talk about, I wanted
to compare and contrast
the Great Depression, 2008
recession, versus the COVID-19.
So, you see the flow of Great Depression.
It lasted over 10 years,
nearly 12 years, from 1929.
It's purely a financial problem.
When you think about the Great Recession,
the Great Recession did not start,
in my humble opinion, in 2008.
The foundations were
laid back in the late 90s
when they started repealing regulation
that prevented this excess and greed,
especially the Glass Steagall
Act in 1999 was repealed.
So, my thesis on this is
the financial crisis started actually,
the foundations and the seeds
were laid back in the late 90s
and early 2000s through
financial regulation that led
to this financial crisis,
and the financial crisis
in turn became a Main Street crisis.
So you see that sequence
of flow, where it started
as a financial deregulation,
financial crisis to economics,
but COVID-19 is a different issue.
It's a global health crisis
that impacts the Main Street
that leads on to a financial crisis
and economic crisis we are facing today.
So I would like you to distinguish
what we are going through right now.
I know people and the financial press
are talking about a
recession and depression.
I don't think that is what
it is, in my humble opinion.
I don't want to sound like
the megachurch preacher
on a Sunday, but I'm optimistic
that our economy will recover
faster than people think.
So, let's look at the recoveries.
I would like to break the
recoveries into two categories.
The first category I would like to call
is the economic recovery.
People mistake the economy
of the Main Street with the markets,
and the markets with
the Main Street economy.
That is completely incorrect.
We were bound together 15, 20 years ago.
Now if you think about
the S&P 500 companies,
45% of their revenues come from overseas.
Therefore, S&P 500 index is reflecting
the global economic growth,
rather than specifically
the economic activities
in the United States.
It's a key point a lot of
practitioners tend to miss.
So, we'll decouple that and
look at the economic recoveries.
I went back nearly 100 years
to look at the recession.
I looked at, I'll just
point this out to you.
See the data source?
I would really encourage
everybody to also bookmark
the National Bureau of
Economic Research website.
A ton of data, a ton of
information available
for practitioners like myself,
academics, business students.
So I would really encourage you
to also bookmark this website.
I don't profit from this;
I'm not providing this.
So what I note here is
I went back to 1919, nearly 100 years,
and found that the average
recession lasted for 15 months.
In other words, what they're saying
is that economic recovery begins
after 15 months from
the date of recession.
It's marked by NBER,
which is the National
Bureau of Economic Research.
But 2008 lasted 18 months, a bit longer,
because we had a deeper recession.
So what you would like to note here
is how much we lost in the
index in 2008-2009 period.
We lost 50% of the market capitalization,
and it took us eight more
years to go back to the peaks
we reached in 2008, eight
more years, everyone.
Sorry, that is the
dot-com, I'm very sorry.
I'm talking about the dot-com bubble,
in which the index lost 50%.
It took us eight years to go
back to the pre-recession peak.
Apologies for that.
2008 crisis, we lost 55%,
and it took us six years
to go back to the peak we reached in 2008.
So let me just repeat
myself and clarify myself.
Dot-com bubble, we lost 50%,
and it took us eight years
for recovery for S&P 500.
2008 financial crisis, index lost 55%,
and it took us six years to recover
and reclaim the pre-recession highs.
So what you notice here
is in the financial world,
we call this "the lost decade."
Had you invested in S&P 500
in June of 2000 until 2012,
you have made nothing out of
those 12 years of investment.
Of course you received your
dividends, two percent,
but inflation was two percent.
So on an inflation-adjusted
basis, if you had invested
in 2000 to 2012, 100k remained the 100k,
just devalued after 12 years.
So let's think about the
COVID-19, what we are facing.
I compared this to a blizzard.
Blizzard doesn't last three
months, so I would compare this
to what happened during Hurricane Katrina
and how long the recovery process took.
I would like you to think about
this from a national level.
Think about Hurricane Katrina
impacting the entire United States.
So that is the way I
would like you to think
about the COVID-19, and
in my humble opinion,
I don't think it's prudent
for us to associate COVID-19
with previous recessions and depressions,
because it's a forced
shutdown of the economy.
It is not because of greed.
It is not because of excess.
It is a forced shutdown
to invest in the health of the Americans.
That is what it is.
So please do not misconstrue this
to be a recession or a depression.
So, let's look at the numbers.
What is the impact on the GDP?
So let's take our GDP
approximately, about $21 trillion.
So, I know I showed you why
my form says the quarter GDP,
but let me make an assumption,
a crude approximation,
of around five trillion
dollars per quarter.
So according to the Federal
Reserve Bank of St. Louis,
it's one of the regional Feds,
we have 12 of those, in
addition to the Federal Reserve
where it is chaired by J. Powell,
there will be a 50% reduction
in economic activity.
So that translates to roughly
2.5 trillion over quarter two.
That is what we are entering
on April first, and guess what?
The stimulus package, the fiscal response
by the United States government,
is two trillion dollars.
So it's pretty much filling the gap
and keeping our economy running
for the next three months,
and I would also like to highlight to you
that the global response
is roughly, roughly,
eight to 12% of the country-specific GDP,
country-specific GDP.
That's right here.
And so, you think about
it, our two trillion
is roughly between 10 and 12% of our GDP.
So this is the global response.
So your country's economy is a trillion.
10% or 12% of that is
being put into the economy
back by the governments,
respective governments.
So let's talk about the process
of what is the labor market.
Think about the labor market activities
in the United States.
Roughly 160 million people are employed.
Out of that, what we categorize
as the low-risk category,
knowledge workers like yourself,
myself, who are working,
what has happened is I have learned
and discovered my
ability to work remotely,
and I feel this is the dress
rehearsal for future work
in the age of artificial
intelligence, right?
Everybody has figured out
how to efficiently work
remotely through this exercise.
That is the only positive thing
that came out of this disastrous event.
So, what you notice here is
54% is the knowledge category.
I am being biased.
I'm calling us and you as
the knowledge workers here.
So, and the average salary
in the United States
for the low risk category
workers is roughly $64,000.
It doesn't reflect a doctor's salary,
but this is the overall average
for low-risk categories.
We have something where the
job losses will be substantial
in the high risk category
in the United States.
The salaries, annual salaries
for that group is about $36,000 per year,
and I also looked more deeply
into the high-risk category.
What I have found is about 27
million of 16% of 164 million
in the workforce are in
ultra high-risk category.
That's where the substantial layoffs
and unemployment is bound to happen.
So, let me just repeat myself.
Low-risk category, 54%,
46% is high-risk category,
and then I drilled deeper
into the high-risk category,
and I found about 16% of
the 164 million workforce
are in very great risk
of losing their jobs.
So, but that's not to
scare everybody or anybody.
I wanted to put the facts out
there and be real about it.
We need to know what we are facing.
Therefore, we can overcome
this quickly, rather quickly.
I'm just clearing my screen
so that it'll be cleaner when
we move to the next slide.
So, what is the fiscal response
by the United States government?
You've heard about the
2.2 trillion of funding
that's available to the US economy.
The highlights are direct
payments to the household,
you know, the $1,200 check if
you're earning below 75,000.
Unemployment insurance has been extended
from 26 weeks to 39 weeks, right?
So the idea here is,
remember the average salary
of the high-risk group is 36,000?
The government of the United
States is trying to replace
roughly 70% of their
income so that if they have
something known as a moral
cushion, moral cushion,
so that they will have enough
money to buy their groceries,
do their daily shopping,
take care of the kids,
put food on the table,
which is very important
for us to have a speedy
recovery to the economy.
Everybody has to be healthy.
This is a health crisis.
We have to take care of each
other and American citizens
so that we can be back to
work as soon as possible.
We all know the tax deadline
has been extended until July.
Small business loans have
been substantial to backstop
the small loans, aid to states,
depending on the population,
a mini-airline bailout,
which is roughly $30 billion.
Those are the highlights
coming out of a two trillion
fiscal policy response
from the government.
So the next thing I would like to look at
is the monetary, give me one second,
the monetary policy response
by the Federal Reserve,
which is what we are
learning in our classes.
So the race to the bottom,
cutting the interest rates to zero,
quantitative easing, buying
back assets of companies
that might be issuing bonds
and commercial papers.
Nobody's out there to buy.
Federal Reserve will step in to buy them.
That is the quantitative easing.
This is the fourth round
since financial crisis.
I would like you all to focus
on this Emergency Lending Act
Federal Reserve 13(3) power.
That says the short-term money market
and short-term borrowing
will be taken care of,
will be funded by the Commercial
Paper Funding Facility,
which comes under the Emergency 13(3) Act
of the Federal Reserve, which
is very important for us,
because in 2008, this market froze,
and it led to a lot of financial crisis,
and it created a lot of
chaos in the marketplace.
We want to avoid that.
But, my opinion on this
monetary policy response,
it will not take effect until Q3.
You can give us any amount
of money you want to,
but if you don't want to
go out and spend the money,
there's no way the economy
will kickstart again.
So the monetary policy
response will kick in in Q3,
when the isolation and the lockdowns
are minimized or completely removed.
That is what you have to focus on.
JP, how am I doing for time?
- You've got a few more
minutes, if you want.
- Yes, please, I have a couple
of more slides, that's it.
- Go for it.
- Okay, thank you, JP.
So, what I would like to summarize,
these are my observations,
and this is my opinion only.
So, I look at the banking
system over the last 12 years.
We seem healthier than ever
before compared to 2008.
I would even go on to argue
that we are substantially better.
But for our economy to recover,
put people back to work,
my opinion is the
country has to go through
a complete lockdown
between six to eight weeks.
I believe that will avoid or minimize
the second wave of the
COVID-19, possibly in fall.
That will be eliminated
if we go through this lockdown process,
and it will also kickstart
up our economy faster.
It's like an athlete who has
broken or injured their knees.
They have to go through rehabilitation
before they start running
again or placing tennis.
Therefore, we have to take
care of our health first,
and the economy will be back on track.
That's my humble opinion.
So Q3 and Q4 will have
some sort of a transition
to the normalcy we have experienced,
going out, enjoying the restaurants.
The employment is back, so
economic activities are back.
So my prediction is for growth to return,
it'll be Q2 of 2021.
2021 is when I'm expecting that
we'll come out of this lull.
So, you ought to worry broadly.
I know we have a town hall next
on employment opportunities.
My humble request to you
is to just hunker down for
the next eight to 12 weeks.
We will be fine in Q3, and
everybody will be happy then.
So, this is where I'll
finish my presentation today.
I truly, truly appreciate your time here,
and thank you, many thanks
to JP and Dean Paula.
Thank you all.
- Thank you Haran, thanks.
So I've got some great
questions that came in,
between the Q&A and the chat
that I'd love to kind of
throw out here for you,
and as there are more coming in,
I'll try to kind of monitor
it a little bit as well.
Let me start with this.
"Specifically how long of a shutdown
"do you think we would have to have
"for us to go into a full-on recession?"
How long would this self-quarantine
or social distancing
have to run for it to
affect things in that way?
- If there's shutdown, complete shutdown,
I'm not talking about partial shutdown.
If it prolongs for more than three months,
that will lead us into
a so-called recession.
But I would not classify this COVID event
as a recession or a depression.
- Okay.
Second, thinking about the impact globally
and the interdependence
among the different countries
in the world, it feels like,
given that this initially, the
outbreak started in China,
and China's obviously so important
for global supply chains,
we were gonna be feeling some
significant impact of this,
even if it never left the Wuhan province
in China in all likelihood, right?
- Correct, absolutely right.
- And so, how much should we be thinking
about what's going on in this country
is driven by kind of shutdowns
and supply chains that are kind of global,
versus shutdowns on Main
Street and things like that
that are much more local to
our own economic environment?
Is there a way to disentangle
them, or not really?
- It is very difficult to do that,
but we would feel a lag
effect of the supply chain
by between six and eight weeks.
So in every term, we are
behind the curve of China,
Wuhan province, by give
or take 10 to 12 weeks.
- Okay, so to some extent, that
would almost kind of suggest
that us shutting things
down here in New York City
and the kind of lag impact
of shutdowns in China
almost showed up at the same time,
in the sense of two
and a half months or so
after some of the initial
major outbreaks in China,
things like that.
- I concur,
completely concur with that.
- Okay.
There were a couple different
flavors of questions
that came in about some of
the long-term implications
of this, and I think specifically,
the two main things that came up were
thinking about the actions
by the Federal Reserve,
and thinking about the overall debt levels
that are kind of going on here.
I think a lot of our younger students,
a little bit younger than you and I
who maybe are looking a
little farther in the future
are worried about the implications.
- Substantially younger,
JP, substantially younger.
- I'm trying to be nice
to both of us, right?
- Substantially younger than us.
- But still, you're absolutely right.
So what do you think about these things?
- [Haran] I am not worried.
- How much should 28-year-olds
be concerned about these issues?
- I would not be worried,
not because I'm not 28.
Deficit spending should be done now.
We have to go big.
2.5 trillion is not sufficient.
We need more relief for the economy.
If everybody is healthier,
we will get back on our feet faster.
We had immense deficit
spending during World War II.
We inflated our way out of it.
We can do that again.
We are borrowing money for nothing,
in real terms, inflation adjusted;
therefore, please don't
be worried about it.
United States has done it before.
We will get out of it as
we have done it before.
- Okay.
Trying to kind of go through a bunch
of these other questions that
have been coming in here.
So, maybe I'll start to transition
to some things that are
maybe a little more,
things that people might wanna know about
for their personal stock
portfolios and things like that.
Maybe I'll start with that one.
What should people do?
Should people be looking
at, some people tell you
that you should be just not
even paying any attention to it,
and you just ride it out.
Some people are saying
there's an opportunity to buy.
Some people are telling you
to hide your money in a mattress.
What should people do?
And obviously there's a
common good problem here.
It's like, if everyone
pulls their money out,
then obviously we know what will happen.
But if you're gonna advise
an individual person,
what would your recommendation
be for someone right now?
- Doing nothing is the
best course of action.
- Why?
Go ahead.
- We will recover through this crisis,
and the markets will rebound.
I haven't looked at my statements,
my individual statements or
401(k) statements in six weeks.
I haven't bought a single security.
I haven't sold a single security.
My humble request to you is,
do not look at your 401(k)
or Roth IRA, IRA statements
until end of June.
Just turn a blind eye towards it.
If you're contributing towards 401(k),
continue to do it.
Don't increase the allocation.
Don't reduce the allocation.
Just pretend nothing happened
in terms of your portfolios.
- Okay, that's a bold statement.
- One more, if you don't mind, JP.
Mr. Buffett has lost 50% of his portfolio
four times in his career.
That's how he's worth $80 billion.
Stay the course.
We have to be in it for the long-term.
- Okay, if we're thinking
about potential moments
when it would be the right
time to buy and jump in,
what are some of maybe
the growth indicators?
What kind of things should
people be looking for
in order to track when we should expect
to start seeing things moving up?
What are those leading
indicators we should see
three, six months down the road?
- The COVID numbers,
infectious cases numbers,
have to start going down.
Number of deaths in the United
States start to go down,
that is the indication that
everything will be recovering.
So, it is a health and
a virus-driven recovery,
not through any economic indicators.
- Okay.
There's a follow-up
question on the comment
about the overall not
looking at your 401(k)
or whatever it is that you may have.
"Aren't there certain company sectors
"that might be more effected by this,
"even long-term to some extent?"
Should we be selling
cruise industry stocks
or things like that,
or is this kind of a blanket
statement, you would say?
- I would say it's a blanket statement.
99% of us, including myself,
this is not relevant.
If you're invested in a
broad index portfolio,
stay with it.
We are not stock-pickers.
Unfortunately, I do it, but
99, 98% of us don't do this.
So unless you have a small portfolio,
you can afford to lose the
money, maybe 5,000, 10,000,
then you can pick the industries
that have been beaten down.
But be cautious about it,
very cautious about it.
- Okay.
Are there things like the
significant decline in oil prices
that we're seeing that may
have other ripple effects
on the economy that we should
be paying attention to,
or is this, I mean, back to your statement
that your leading indicator
is gonna be the number
COVID-19 infections?
Is this really simply
about a health thing,
and you expect all different
aspects to rebound?
- Oil industry is different.
It's an artificial fight
between Saudi Arabia and Russia.
Therefore, oil industry
plays by different rules.
It is not mainly due to the COVID-19.
It's the Saudi/Russia, some
sort of a friendly fight.
That is what's leading to it.
But they will come to their senses,
and they'll come back on supply.
It's a different ballgame.
- Okay, so one question that just came in
thinking about this investment,
and then I'll go back to
one broader topic here.
Comment about saying, "I
understand staying the course
on what you've already invested,
"but for those who may actually
be getting bonus checks,"
I'd like to know what
employers you're working for
that are giving bonus
checks right now, but still,
if you're getting a bonus check
or you found a pile of
money under your mattress,
should you be buying now?
Should you buy in two weeks?
Should we be buying in a month?
What would your best guess be
at when we're gonna hit bottom?
- Nobody has ever picked the bottom right.
Market timing is the most dangerous game.
I'm talking from my experience.
Therefore; please set a set amount
and a monthly amount to invest.
You can start tomorrow,
but don't go in 100%. Wet your toes.
If you have $1,000, invest
$50 and progressively start doing it.
Picking the market bottoms
is a fool's errand.
- Yeah, I'll kind of offer a note on that,
which is basically, a lot of
research looking at the idea
that the people who actually
get the really rare,
kind of almost
impossible-to-predict things right,
because someone's always
gonna get it right
in some way, shape, or form,
usually aren't doing so from
a place of deeper knowledge.
It's just, someone's gonna get it right.
Someone's gonna actually find that bottom.
We then laud them as
being brilliant afterwards
because they were the ones that got it,
but there was no real reason
that they were able to nail that right.
- JP, 100% right.
- So, I think there was
a couple other ones,
but the broader perspective that came in
through a couple different questions
was thinking about whether
we wanna call it Main Street,
small and medium enterprises,
a lot of this has been talking
about individual families
and consumer purchases
as well as airlines, big
companies, and things like that.
I know there's this small business
loan and grant portion of the package,
but what should we be
looking for as far as impact
on smaller companies
versus larger companies?
How do you see that playing out
over the course of the next year plus?
- Large companies with
stronger balance sheets
are going to benefit from this COVID-19.
I'm very sad and sorry to share
that several small businesses
will never recover.
They will never come back online.
So we are going to have a
small amount of bankruptcies,
but the general economy will recover.
- On that note, do you expect
that when some of these,
so, small businesses going bankrupt
is a pretty normal aspect of the economy,
and clearly, it will go
up in this situation,
but in many cases, they're
replaced by new small businesses
that look to kind of capitalize
on a different opportunity
in that same space.
Do you expect that we're
gonna see more big companies
taking the place of small companies,
or will we still see that wave
of new small companies coming in here?
- Unfortunately, large
companies like Amazon
and Google are gonna benefit.
Once that demand is taken
over by Amazon and Co.,
we are not going to see
many small businesses
coming to replace the small businesses.
- I think to some extent,
at least in my perspective,
it really becomes around
a question of whose money
jumps in first when there's
new opportunity that comes in,
and I think in many cases,
the ability to spend money
of an Amazon or an Apple or
a Google is gonna outstrip
what might come through bank
lending, private equity,
even venture capital money in some ways.
So, I would tend to agree unfortunately
kind of pessimistically with that view.
- Unfortunately, JP.
- Yeah, I'm thinking
about kind of, you know,
what may happen to the
restaurant scene just around NYU,
just to be very local for a second.
We might expect to see
more chain restaurants
starting to come in when
we start seeing things
opening up again to replace
many of the smaller ones.
- It is a possibility, but I
would think not around Stern.
But smaller businesses
in the middle part of America are gone.
They're never coming back.
- Yeah.
Is there anything you can
think of that the government
should be doing to try
and save those businesses
that would be the right approach to take,
or is this kind of inevitable right now?
- Unfortunately, it's inevitable.
My hope is the current liquidity crisis
for small and medium-sized businesses
won't turn into a bankruptcy
or a solvency crisis.
Hopefully, the government
can backstop them
for the next three months with the loans
so that they can survive and thrive.
- Okay, and so maybe I'll try
to move towards ending with this one.
So, policy makers or business managers,
how should we be trying to prevent
a corporate liquidity crisis
like this in the further?
What are the things
that we should be doing,
again, either from a policy point of view,
or if you're the manager of
a small/medium enterprise,
or even a larger one going forward,
what would you recommend
that we should be doing?
- Unfortunately, we have to
deal with it when it happens.
We don't have deep pockets forever.
Unfortunately, we have limited resources.
The companies cannot plan
for the liquidity event.
Let me give you an example
of the restaurant industry.
They have two weeks of cash buffer.
If they don't have business for two weeks,
they have to shut down.
So nobody works with the cash buffer,
unless you're Apple,
Microsoft, Google, or Facebook.
Therefore, the policy makers
cannot have anything in place right now
for a crisis that might happen
10 years down the track.
We cannot treat an injury
before the injury happens.
- You know, one argument you could make
would be that, right, right.
The question should be, one
way to think about it is,
should we be requiring businesses
to keep a larger cash buffer,
and what would be the
implications of doing so?
I guess it would be hard
for some of these businesses
to even survive in the first place
if they had to have five, six
weeks of cash lying around.
- Absolutely right, JP.
- But would that weed out
just the bad organizations?
That might kill off the bad ones faster
if they had to have a certain
amount of cash on-hand.
Is that even a reasonable
policy to even think about,
or again, should we just not
even be worrying about that
and treat it when it happens?
- I wouldn't be worrying about that.
Holding onto cash for six weeks,
it doesn't earn enough returns on them,
so it should be mixed in
the business activities.
I wouldn't recommend that.
- Okay, I would assume, though,
you might feel differently
about some businesses
that may be back to the
2008 financial crisis,
kind of "too big to fail"
kind of organizations
who maybe should be forced
to maintain liquidity
somewhat differently than a restaurant?
- We have substantially
improved with that scene.
The government has put
regulation into place
where it wouldn't happen again, hopefully.
- Okay.
Nick asked a great question in the Q&A
that I was looking at here.
- Nick whom?
- Sorry, Nick Foster.
- Oh, Nick Foster, one
of my favorite students.
- You know, you said that about a lot of,
oh, sorry, no, no, I'm sure.
(both laughing)
But Nick asked a great question here,
because you were talking earlier
about how the COVID-19
infection rate, mortality rate,
hospitalization rates, whatever it is,
would be one of the important
indicators in this case.
Are there concerns, do you have
any concerns about the fact
that some of that data is
not always that transparent?
I mean, we can think about
the challenges early,
when China was maybe,
we don't really know,
but was not fully sharing
data from that perspective,
and the problems in the US
where the lack of testing
makes our guesses at infections
actually kind of a shot in the
dark at this point in time.
- It is an issue.
The testing is an issue,
that we don't know
the real numbers, but as the
testing capacity improves
in the next six to eight weeks,
we'll have a better grasp
of the numbers, and
we'll have a better idea
as to what the true infection rates.
At least we can make a
probability statement
about what the true numbers
are, based on the sampling.
- Okay, so sampling
would be certainly a way
to try an address that.
- Absolutely.
- All right, we're still a
couple more minutes before one,
so I'll go ahead.
We were never quite sure
when we were supposed to end
this thing, but there's a couple
of other questions in here
that I'll go ahead and throw out here.
Were valuations too
high before this crisis,
kind of similar to the
2001 internet bubble,
and therefore, should we
expect that valuations may fall
even farther in response to that,
or do you think we were fairly
valued, this is a shock,
and then we'll recover to that level?
- We will recover.
Before the COVID-19 episode,
my year-end target for S&P
500 was 3,200 to 3,400.
So I was very optimistic about this year.
It was about a six, seven,
eight percent return
from the markets, because
we returned 30% last year.
I'm not 100% convinced
we would reach the 3,400
by the end of the year, but the markets
weren't exactly overvalued
prior to this episode.
- Okay.
And maybe because I'm
an innovation person,
I will end with this question
that came in here as well.
Kaori raised this really nice point,
kind of saying that
during the last recession,
'08 to 2010, there were a
number of companies founded,
Uber, Airbnb, Slack,
Pinterest, Square, Venmo,
things like that that became
big aspects of the economy
and really reshaped the
economy going forward.
What kinds of businesses
do you think will come
out of this crisis that
will, and don't give me Zoom.
Zoom already existed.
We know that, right?
But what else do you think's
gonna come out of here
that you would be betting on,
the big outcomes of this
crisis 10 years from now?
- Biotech industry, finding
cures for these viruses,
the unknown viruses, coming
up with vaccines faster.
It takes about a year
and a half right now.
We can shorten it to 12 months.
So I'm very optimistic about it.
So, anything to do with
pandemic prevention,
because governments
are going to pour money
into this in the next few years.
If we spent 100 billion today,
we don't have to write a check
for two trillion dollars in 10 years.
Korea learned this from SARS.
They were better prepared.
Zika, Ebola, other countries
were better prepared.
We didn't have such a
pandemic in the United States
in a long time, so this is
the time for us to invest
into healthcare and anything
to do with the antiviral drugs
or vaccines, biotechnology.
That would be the
innovative place, I believe.
- Okay.
Alright, so with that, let's go ahead
and close this first session
of kind of looking at
the impact of COVID-19
on different aspects of the
US and the global economy.
I know everybody can't actually do this
because of the way we set this room up,
but a huge virtual applause
for Professor Segram
for volunteering to take the
time and talk with all of us
about his perspective on these things.
I learned a lot.
I hope everybody else did as well.
We will be in communication
with everyone on future events
in this series, hopefully coming up soon.
But again, a huge thanks
to Professor Segram
for being our guinea pig and doing this.
Huge thanks to Paula Goldfarb and team
for helping set this up,
and as always, huge thanks to the IT team
that makes all of this stuff possible
in a world where we're all
sitting in our bedrooms,
living rooms, basements,
whatever it might be.
But again, it was great
to talk with you, Haran.
Thanks so much for doing this.
- Thank you, JP, my pleasure.
- Look forward to connecting
with you again soon.
- See you all, thank
you for taking the time.
(ambient musical flourish)
