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Supply and Demand in a Pandemic

//Supply and Demand in a Pandemic

Supply and Demand in a Pandemic

On Wednesday, March 11, the World Health Organization officially declared coronavirus outbreak a pandemic. At that point, 114 countries had reported 118,000 cases of Covid-19, the disease carried by the virus. Nearly 4,300 of those patients died. The designation acknowledged what has seemed clear for a while now, that the virus will likely spread to all countries on the globe.

After being first identified in China, there are now more reported cases outside mainland China than inside as the epicenter moves west towards Europe and North America. At the same time, countries such as China, South Korea, Japan and Singapore have seen caseloads stabilize in recent weeks thanks to the same combination of aggressive containment and social distancing measures spreading here at home.

As we observe and conform to the drastic steps taken by local and national governments, the sometimes painful economic adjustments that come with sudden imbalances in supply and demand are becoming more frequent. As the quarantine spread in China, we debated possible outcomes of reduced supplies on production elsewhere as workers stayed home and factories shut down. At home, we have by now all heard of empty grocery store shelves and insufficient toilet paper supplies as we rush to replenish our pantries for an extended homestay.

Beyond meeting our daily needs, demand for mortgage refinancing is higher than some lenders can handle, wary of expanding too quickly in the boom-and-bust mortgage market. Corporations have suddenly drawn on their corporate credit lines, a bad look in normal times, to ensure liquidity amid the perceived unreliability of capital markets to fund their cash needs. At the same time, placing limits on where and with how many others we gather has dramatically reduced demand for air travel, cruise experiences, movie theaters and going out for dinner or drinks.

Collectively these imbalances serve as foundation for the decline in equity and corporate bond markets. Unsure of how changing behaviors will impact corporate earnings, sellers have created much more supply than the demand to own these securities can absorb, which leads to lower prices. It is uncertain how long this imbalance will last.

Investors are in the midst of a giant macroeconomics 101 lesson about supply and demand. Typically, businesses adjust supply to changes in demand that vary only slightly from period to period. Coronavirus wrenched the supply/demand curve of so many products and services, with such force and intensity, that those businesses and their owners are left to guesswork for the short term on how to produce, how to staff and how to invest. This is why prices are so volatile. But business exists to meet a demand and they will do so again, once the future comes into better focus. The business adjustments around coronavirus have already begun. The faster we understand its behavior and stabilize the caseload numbers outside China, the faster businesses can get back to what they do best.

Dislaimer: https://mitchcap.com/disclosure/

2020-03-20T10:32:43-05:00 March 20th, 2020|Blog|0 Comments