COVID-19 Economic Forecasts

A very reasonable process when confronting policy decisions is to consider the economic impact of those decisions. Recently, the suggestion of 20% unemployment has been repeated by media because Treasury Secretary Mnuchin used that number when briefing Congress. This was not an estimate based on any kind of model or thoughtful analysis as stated by the secretary himself. I am certain that in the next few weeks there will be numerous estimates of economic impact hopefully with better analysis but none of them will be adequate to support policy decisions.

Many firms have access to high-frequency data on credit card transactions from which they can estimate changes in spending. Most economists neither have access nor are familiar with these data sets. They will try to use examples from the Spanish Flu or from more minor events that have occurred in structurally different global economies through time.

One of the confounding factors in forecasts, is that the US has become accustomed to using markets as a signal for policy. While markets do provide useful information, they also incorporate changes in risk preferences and perception which are often confused with event probabilities. An accurate economic forecast must now factor in policy changes resulting from changes in risk perception which may or may not be related to actual events.

The answer to the economic impact question is that there will be heroic assumptions made on the effectiveness of unknown future health policy. Further heroic assumptions will estimate the interaction of unknown future monetary and fiscal policy with health policy. All of this will be based on the (much more likely) assumption that medical professionals will know more about how COVID-19 is transmitted and will development more effective treatments over time.

We should find comfort in the fact that the lack of certainty is not uncommon. When stakes are low, it is easy to fool ourselves into thinking that the world is certain. During times of crisis, we should remember that the world was never as certain as we thought, but that is OK.

Market Commentary: Morning of 20200316

As a finance professor, you occasionally get questions like these:

“A friend and I were wondering what your opinion was about the Fed dropping close to 0% interest rates. Additionally, we were wondering on what your opinion was on the markets reaction to everything since.”

My response is below:

Most businesses have a revolving line of credit that they draw down in case of emergencies. Banks need to provide cash when they do this and usually it is an idiosyncratic event. Right now, all businesses are maxing out their credit lines which means banks need a lot of cash. The Fed Funds market is a way to push money out to all banks and then to businesses. The reason this should be different than the Financial Crisis is that the Fed also cut the interest paid on Fed deposits which was why banks did not lend in the aftermath of the last crisis. Now, banks have a greater incentive to lend although they will be looking at risk and still may not lend to risky businesses.

Monetary policy is very useful for managing the banking system. Federal Reserve policy cannot change the consumer’s willingness to spend or ability to spend due to supply chain and distribution disruptions. Additionally, the Fed cannot fix any of the fundamental causes of this crisis. On Friday, the markets were reacting to the president’s announcement on the use of fiscal policy and measures for dealing with COVID-19. Over the weekend, it turned out that many of the president’s statements were not entirely true. The positive market reaction on Friday was reversed today. Until there is some progress on COVID-19 management and a fiscal policy response, markets are expecting a longer and more severe economic reaction.

Chicago Board of Trade

After the R/Finance conference, we had the opportunity to visit the Chicago Board of Trade Building. Brian Peterson, one of the conference committee members, gave us a tour of the building and took us up to the rooftop lounge for beers.

During the days of open outcry, the building housed the trading floor with pits for each commodity. With all trading being conducted electronically, the pits have been removed. Depictions of the Roman god of grain, Ceres, are displayed inside as well as a 31 ft statute on top of the building.

As you enter the building, there is the Ceres restaurant and an empty hallway where the pits were located. A wall of original Warhols is located further inside. I included some pictures of the Art Deco elevator doors and mailboxes but there is much more to see.

Final Countdown

I have a thing for 1920’s jazz and Gunhild Carling but much of what draws people to music has nothing to do with what they hear. Musicians often say that the audience listens with their eyes which is difficult for musicians that focus on music rather than visual performance. The idea of hair bands making a comeback might seem ludicrous and I would say that the cabaret cover version sounds more modern now. I wonder which version will seem more authentic 40 years from now. If we only played the audio, would it change?

Divine Ecstasy

This program was not nearly as popular as Tristan and Iseult earlier this week but I was pleasantly surprised by the voicing of the Gabrieli pieces. I am not sure how much that should be attributed to the arranger versus the original since the brass instruments featured in the original are not longer commonly available. Of course, Iestyn Davies was very impressive as the countertenor in Bach’s Cantata No 170. Program

Ordinary Least Squares

Let’s estimate a stock’s beta and alpha using the CAPM. First prepare the data by calculating stock returns and market returns. Subtract the risk-free rate from both and form a data.frame called “urdata” where ExRet is the excess return on the stock and MktRP is the risk premium on the market. Next, specify the formula for the estimated model and call it “m2”. Use the lm() function to estimate the model and assign the results to a variable called “ols”. Finally, use summary() to see the regression results.

m2=ExRet~MktRP
ols=lm(m2,data=urdata)
summary(ols)

If you are using a lot of fixed effects, try using coef(ols)[1:5,] to get the first 5 rows of coefficients.

Ama

Another beautiful combination of aesthetics and athletics by French freediver, Julie Gautier. “Ama” is Japanese for “woman of the sea” and refers to Japanese pearl divers. Listen carefully to the time signature of the music.

Dvorak Symphony No. 8

Dvorak8I am always pleasantly surprised when I attend a Cleveland Orchestra concert for the featured piece and discover another piece to love even more. This evening, both the Watersprite by Dvorak and Samuel Barber’s Cello Concerto were far more interesting than Symphony No. 8. I almost feel the need to look up the score for the Watersprite since conductor Alan Gilbert seemed to have trouble keeping woodwinds and strings together on some phrases. While I find it hard to believe such great musicians would mess this up, the resulting sound did not fit within the context of the piece so it is equally hard to believe that Dvorak meant for that interpretation. I do have to mention that during the Watersprite, Dvorak clearly had a fever and the only prescription was more triangle. The cello soloist, Alisa Weilerstein, was impressive as expected from musicians featured with the orchestra. Program