• Shayne Veramallay

Unprecedented Times. Uncertain Outcomes.

In the wake of COVID-19, the public markets, small businesses, startups, and alternative investing landscapes have been brought to their knees for the time being.

In several of our recent discussions (day traders, asset managers, equity research analysts), they think we have an additional 10-15% more to drop on the DOW from lows to date (~19,900). They are expecting a lot of volatility, investor pullback... looking for a huge hit to GDP growth in the first half of the year and then a return to positive growth in the second half.

- Expect rebounds like 08-09 but all happening in the first and second half of this year

- Many are employing dollar cost averaging strategies for clients

So, what historical downturns does this crisis map to? The early 1973-1974 oil embargo and 9/11 event 2000-2002 seem to be mirroring the closest. We are hoping that the stimulus package will prevent a financial crisis, but at a minimum, we’re looking a year to a year and a half trough to recovery. Expecting -1.5% growth in the US in 2020, and 3.5% growth in 2021.

Very few places outside of China are looking for positive GDP growth, approximately maybe 2-5% growth globally. In China specifically, last week’s traffic and electricity usage are returning to 2019 levels (getting back to normal) and several of our colleagues/friends are triangulating information within China’s claims rather than trusting the claims from the government directly.

The US has generally been slow and at a disadvantage regarding decisiveness of the action that we’ve taken compared to China/Italy. China took 10 weeks to get back to normal levels with a more authoritarian regime (if the US had shut down 2 weeks ago, we might be in a better place). Several traders have placed puts on oil given the drop in travel and commuting. Flights are dead - airlines are flying 15% full airplanes. Going to have to see a significant slow down if not shut down in the flight industry at some point (for a couple weeks or longer… tbd)

The US is on the worse trajectory of any country in the world and we’re lacking a lot of decisive action (increasing uncertainty especially in NYC). We still have 10 weeks at least with a lot of uncertainty. Additional decline: thesis is there’s going to be significant slowdown in demand in the US, a lot of unemployment, lack of travel, lack of oil demand, through July.

Think another 4-6 weeks for the real impact of this virus to be felt or even understood (looking just at growth of the pathogen). Challenge to contain it looking at Italy, warm weather doesn’t have much of an impact. As ambiguity clears out and scientists begin to understand what we’re up against. India locked down entire country cause they don’t have the resources to contain this if it hits the way that Italy did.

Italian government connection says issues multi-faceted

· Oldest population on earth

· Smoking history, eat fatty food, etc.

· Reporting issue: Italy isn’t reporting deaths the same as other countries (any other causes of death mixed with corona are called Corona deaths in Italy while other countries are not doing this (i.e. might attribute it to the underlying risk factor rather than corona itself), this is inflating Italy’s numbers)

Some places are discovering COVID-19 in the sewer water (not drinking water) or anywhere it can be developed into vapor. If it becomes waterborne, it becomes scary at a whole new level.

Other Regions:

Switzerland has been on full lockdown for a week and a half

· Numbers are flattening out there, Switzerland follows the rules (unlike the US)

Taiwan Finance industry expert

· Taiwan learned their lesson from SARS, have the most advanced system in the world for dealing with this. Always felt China would have the next super bug and that they were at risk with Chinese border.

· Infrastructure has been prepared for years, and shut down flights in January. Now feel they have it under control, and kids are going to school

In terms of small business there is a whirlwind of observations. Receivables are becoming questionable and liabilities are being pushed as far out as possible. Accounting businesses have a lot of clients pending payment, but they are not sure if those businesses will come back in a few months (same for all service industries, lawyers, etc.)

In my home state, Indiana, they haven’t taken many precautions, whereas Ohio has done fantastic, as have Kentucky and Illinois. Certain people are very cognizant/aware but since it’s not being taken seriously by the government, it’s not being done as it probably should.

Startups are in a whole other world at the moment. Many are being told to max out their credit lines and try to have 12 months of cash available. A number of internal financing rounds being discussed, while LP’s are sitting on the sidelines, waiting to figure this out.

May see a shift from Public to alternatives (were underweight previously, may shift back). We believe impact investing is going to be an “in-favor” category as people have been normalized down... facing the same issue cause microscopic organism doesn’t care about your economic status, race, etc. We think this may put a renewed focus on what’s really important, the things that matter.

For example, one of our CARBON portfolio companies, Thinkster – an AI EdTech company, has doubled their conversion rates over the past few weeks without doing anything. Customers are hungry to make sure their kids don't fall behind. For many of the remote educational solutions, offered by schools, are being coined "worthless" by a number of parents that I have spoken to. This is great opportunity to bring a better solutions to the market.

I'm expecting to see a rise in the quality of deal flow as lackluster companies fall away and fail to survive. As we saw after 2008, only strong, standalone opportunities will be entertained that are demonstrating significant traction. All the favor has shifted from the entrepreneur to the investor and will remain so for the foreseeable future. Risk aversion will be extremely high and checks most likely will be smaller going forward given the uncertainty.

These are challenging times but we want to stay on top of what's going on. We will be holding additional discussions on the markets, lifestyle, impact, and global recovery as things evolve.

An in depth podcast discussion can be found here: CARBON MYCROECONOMICS


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