Denial

Shock’ can be aptly used to describe the impact which COVID-19 is having on the economy since it is consistent with the prevailing definition of macroeconomic shocks by former Fed Chairman Bernanke as a primitive, exogenous and economically meaningful force.

The particularity of the coronavirus shock lies not only in its severity but also in its novelty. In The unprecedented stock market impact of COVID-19 from the National Bureau of Economic Research published this week, the authors show that in the 120 years leading to February, not a single daily stock market jump could be attributed to a serious disease outbreak. While the implications for health play a role in making COVID-19 exceptional, the violence of the shock is essentially attributed to the drastic policy response, and more specifically to the lockdowns. For some individuals, COVID-19 triggers an overreaction of the immune system that may cause more harm to the patient than to the virus it is fighting. Remarkably, the Governments’ autoimmune response carries the same damaging risk for the collective well-being.

Sigmund Freud and Joseph Breuer pioneered the concept of trauma in Studies on Hysteria(1895) when they stated: ‘The psychical trauma - or more precisely the memory of the trauma - acts like a foreign body which long after its entry must continue to be regarded as an agent that is still at work.’ In the present case, society has experienced a traumatic loss: that of time spent with loved ones, entertainment, mobility, income and jobs; and, at a higher level, bankruptcies and the loss of economic output. With a shattered sense of safety and security comes the distinct feeling that nothing will ever be the same again. The world is grieving.

Grief is a well-documented process which made a brief appearance in a 2012 Sunday note entitled ‘Acceptance and Healing’. Back then, it was argued that the 2008 world seizure was so extraordinary that it affected economic actors more deeply than generally admitted. It analyzed retrospectively the grieving stages subsequent to the Great Financial Crisis as follows:

  1. Shock (2008/09) – Risk appetite in the panic zone: ‘This is the end

  2. Denial (early 2010) – Risk appetite close to euphoria: ‘It wasn’t that bad after all’

  3. Acknowledgment (late 2010) – Risk appetite flirting with panic: ‘Actually, let’s be cautious, the situation might be quite serious after all’

  4. Depression (2011) – Risk appetite at record low level, consistent with deep panic: ‘This in a black hole and no one might be able to save the world’

  5. Acceptance (2012) – Risk appetite stable in neutral territory: ‘It will be fine - not great, but fine’

  6. Healing (2012+) – Risk appetite on the rise: ‘Let’s move on’

According to this thesis, a similar process may lie ahead. In fact, the current financial markets’ dynamics suggest that this process is in its denial phase, which would be consistent with the definition of a bear market rally. Needless to say, no one can look forward to the depression stage, but it is on the path to acceptance and healing, by which time M&A activity will fully recover as the bid-ask spread will have sufficiently narrowed.

Could the process unfold faster than over 2008-12? It is not possible to see past the grieving process without being prepared to go through it. To quote the family facing multiple obstacles on its mission in the classic British kid story ‘We’re going on a bear hunt , ‘We can’t go under it, we can’t go over it, we have to go through it!’ Except that in this case, it is a bull hunt.


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