 Well, welcome back. Can the actions of central banks limit the economic impact of the coronavirus? Are financial markets predicting a global recession? Professor Low will address the challenging global economy since the outbreak of the coronavirus. Its impact on global financial markets and what executives need to watch for is the coronavirus crisis plays out. Andrew Low is the Charles Z. and Susan T. Harris professor at the MIT Sloan School of Management, director of the MIT Laboratory for Financial Engineering, a principal investigator at the MIT Computer Science and Artificial Intelligence Laboratory, and an affiliated faculty member of the MIT Department of Electrical Engineering and Computer Science. He is also an external faculty member of the Santa Fe Institute and a research associate of the National Bureau of Economic Research. Professor Andrew Low. Hello, everybody. Thank you very much for joining this webinar on the financial implications of COVID-19. I want to start by thanking Randall Wright and the MIT Industrial Liaison Program for sponsoring this webinar. And I want to thank Yossi Sheffi and the Center for Transportation and Logistics for hosting this event. And last but not least, I want to thank Arthur Grau for helping to arrange all of the logistics and he'll be mediating some of the polls that we're going to do today. So by way of full disclosure, I want to say that I am no expert in epidemiology or virology. And so my focus is going to be really on trying to understand how the financial markets are reacting and how we need to be thinking about financial markets in light of the COVID-19 pandemic. So with that in mind, I want to start with a bit of a summary of the perspective that I bring to this as a finance faculty member here at MIT. And that perspective really has to do with the fact that we have a very different paradigm that we need to be using right now. And that paradigm has to acknowledge the fact that traditional markets and traditional financial frameworks are really limited in how they approach this particular pandemic. The framework that we know and love is not wrong, but it's incomplete. And it really comes from the physical sciences perspective of economics, which definitely has some value, but it really doesn't capture the entirety of what we're seeing. And in particular, the traditional framework is fine in a stable environment. Under things like the efficient markets hypothesis and rational expectations, stable financial policies make perfect sense. But in a dynamic environment, you need to have dynamic financial policies. And that's what the adaptive markets hypothesis is about. And I'll tell you a bit about that in just a few minutes. The point is that the current environment is highly dynamic. And we really have to adapt to those changing market conditions. You know how politicians are fond of saying that it's the economy stupid? I've often thought that that should be changed to point out that actually, it's the environment that really drives behavior and the various kinds of market dynamics that we see. And the adaptive markets framework that I'm going to tell you about provides a way for us to think about how to respond to all sorts of challenges in our environment, including COVID-19. So let me start with a little bit of background and talk a bit about what investors really want and what they're afraid of. To begin with, what do investors really want? I'm going to use an example that I give to my first year MBA students. And the example has to do with looking at four different financial assets. Now, I'm going to ask Arthur to do a poll right now and ask all of you online to choose one of the four investments that I'm going to show you. I'm not going to tell you what the investments are or even over what time period they span. But these are four financial investments that have rates of return that look like this. A dollar invested in the green asset turns a dollar into $2 over this unspecified multi-year investment horizon. The red line turns a dollar into $5, more rewarding, but way more risky. The blue line turns a dollar into $8, way more rewarding, but way more volatile. And the black line somewhere in the middle. So can you please make a choice in the poll that Arthur is holding, which is the various different investments? Which one would you pick if you could only have one and you could not mix and match? Well, just from the poll results that I'm seeing right down from my screen, the answers are pretty clear. Very few of you have chosen the green line. And I should tell you now what the time period is. The time period goes from 1990 to 2008. That's the investment horizon. And the green line is US Treasury bills, the safest asset in the world, but it's not particularly rewarding. So if you put your money in US Treasury bills in 2008 as of today, you would have earned pretty much nothing in terms of the incremental rate of return. The red line that not very many of you picked either, that's the S&P 500, the stock market, way more volatile, lots of ups and downs. But if you had picked it in 2008, right in the middle of the financial crisis, congratulations, you would have done just fine. The blue line is the single pharmaceutical company Pfizer. That's even more volatile, huge swings up and down. But if you had invested in that in 2008, congratulations, you did well. By far the most popular choice, I'm looking online right now and the results are 66% of you are picking the black line. And that's usually what I see in my class. It turns out that that is the return for the Fairfield Century Fund. And what is that? That's the fund that was the feeder fund for the Bernie Madoff Ponzi scheme. So if you had picked that, like many of the unfortunate victims of that Ponzi scheme, you would have lost everything. Now, I use this example to illustrate something about human nature. All of us are drawn to investments that have high yield and low volatility. And in finance, we have a term that captures that phenomenon and it has to do with something called the sharp ratio after William Sharp, professor at Stanford, who won an Nobel Prize for his work in this area. The sharp ratio is simply the excess return of an investment above and beyond T-bills divided by the risk as measured in this case by the standard deviation. So it's the reward to risk ratio and investors love high sharp ratio assets. So before the Ponzi scheme blew up, if you calculate the sharp ratio of the three assets beyond T-bills, you can see that Pfizer and the S&P 500 have sharp ratios about the same, a third. And the Madoff Ponzi scheme before it blew up had on paper a sharp ratio about an order of magnitude higher. And that's what drew all of the victims to this unfortunate disaster. So that's what investors want. We want high yield, low risk, high sharp ratio investments. What are investors afraid of? You probably know given what's going on in the market, we're afraid of loss, but more than loss, what we're afraid of is the unknown. And I'm gonna give you another investment choice in just a minute, so be ready to respond. Imagine that we have an urn that contains 100 balls. Now you can't see inside the urn, but I'll tell you right now that there are 50 red balls and 50 black balls. And you and I were gonna play a game. And the game is this, you're gonna pick a color, red or black. And after you pick a color and write it down on a piece of paper, I'm gonna reach into the urn and draw a ball out of this urn. And if the color of the ball that I draw is the color you wrote on your piece of paper, I'm gonna pay you $10,000. But if the color isn't the one that I drew, I'm gonna pay you nothing. And we're gonna play this game exactly once. So you don't get to do this over and over again just one time. So the two questions that I ask my MBA students when I show them this problem is this. First of all, which color would you prefer, red or white or red or black? At this point, the students all say, well, you know, it doesn't matter, 50 red, 50 black, either way. The second question that I asked them is a little bit more challenging. I'll ask them, how much would you pay to play this game with me exactly once? So I'd like you to choose on the second poll, what would you pick in terms of the price you would pay for being able to choose this? And three choices are, would you pay less than $5,000? Or exactly $5,000? Or more than $5,000 to play this game with me exactly once. Now, I suspect that a number of you are a little bit concerned about the risk. So you're probably not willing to pay $5,000, but most of the students that are involved in making professional business decisions, which is to say our MBA students, they've been trained to say, oh yeah, definitely we'll be paying $5,000. Why? Because that's the expected value. And in fact, in the polls, we see that a number of you, a significant fraction are willing to pay $5,000 for this. But now, let me show you a second choice. A second choice is earned B, also 100 balls, but in this case, I'm not gonna tell you what the proportion is. It could be 100% black balls. It could be 50, 50, it could be 100% red balls, anything in between. And I'm gonna ask you the same two questions. We're gonna play the exact same game. You write down a color, I pick a ball, if it's your color, I'll pay you $10,000. If it's not, I'll pay you nothing. In this case, how many of you would pay less than $10,000 for this one? How many of you would pay, sorry, how many of you would pay less than $5,000 for this one? How many of you would pay exactly $5,000? How many of you would pay more than $5,000 for this? Well, it's interesting, in this example, a lot fewer of you are saying that you would pay $5,000 for this. The thing that's weird about this example is that this second example has exactly the same odds as the first one. Now, you might say, wait a minute, how do you know that? Because there are no odds in the second example. Well, I told you that it could be 100 red balls or 100 black balls or anything in between. And if you don't have any reason to think that it's any one particular proportion, and you average over all the possible proportions, what you get is 50-50. And so the expected value of this is $5,000. But students, even professional business students are not willing to pay nearly as much for this earn as the previous one. And when you ask them why, they'll tell you, it's because in this case, I don't know the odds. Even if I try to convince them that the odds are the same, they still say, well, I believe you're mathematics, but it doesn't feel right to me. What they're saying is that the behavioral reactions to uncertainty, the unknown unknowns, is really significant. Investors don't like risk, but they really hate uncertainty. And in economics jargon, those two words, which most people consider synonyms, are actually not the same. Risk is meant to represent the randomness that you can quantify, like a standard deviation of 20%. Uncertainty is the kind of randomness that you cannot quantify, the so-called unknown unknowns. And that's what's going on right now. COVID-19 is one of the biggest unknown unknowns that we're dealing with. I'll come back to that in a minute. But the bottom line for all of these considerations about what investors want and what they fear is that there's a trade-off between risk and reward. And so let me show you historically what that trade-off looks like. Using data from 1928, so we're talking about a very, very long period of time, if you go down the list and just look at all of the expected returns that are generated by these four different asset classes, and then take a look at the risks that you're bearing, you see a pretty clear relationship. The higher the risk, the more the average return. So stocks, for example, which is the most risky as measured by standard deviation SD, stocks are generating a return on average historically of about 10% per year. Corporate bonds, 7%, but lower volatility. US Treasury bills, safest asset in the world, even lower. And that's really the risk-reward trade-off that finance professionals focus on. Over long periods of time, there is a relatively straightforward relationship between risk and reward. Another way of putting it is that investors have to be bribed to take on these risks. They have to be rewarded for being willing to take on these ups and downs. And so risky assets generally have to pay more in terms of their average returns. Now, that makes a lot of sense in the long run, but the problem is that if you look at the short run, that's not the case. Here's a graph that I think illustrates that principle. And in a minute, I'm gonna ask you to take a poll for this as well. So there are two lines drawn here, red line, blue line. The red line represents the volatility of returns over five year rolling windows. So I'm using data from 1926 all the way up to the present, but I'm doing it using five year chunks, calculating the volatility of the US stock market during that five year window. And then I'm also gonna calculate the average return of that stock market during the same five year window. And that's in blue. So red is volatility, blue is average return over the five year window. And then I'm moving it up by a day and I'm calculating the same things. And then another day, same thing, and another and another and another. And using these five year rolling windows, I'm graphing risk and reward. By eye, what do you think the correlation is between these two lines? I just described to you in the previous slide that the higher the risk, the higher the reward. So take a look at this graph and tell me how many people think that the correlation between the red line and the blue line is greater than 50% or equal to 50, 25, zero, negative 25 or less than negative 50%. Now correlation, remember is a number between minus 100% plus 100%. Positive numbers means things move together. If it's 100% correlation, things move in lock step together. And negative correlation means that things move in opposite directions. Well, I'm seeing that from the poll, a number of you are picking up on the fact that, you know, this looks like it's negatively correlated. In fact, those of you who picked the last choice, less than negative 50% correlation, you're correct. It turns out that the correlation between the red line and the blue line is minus 60%. Now, clearly that result is driven by a number of extreme episodes. And it turns out that we're actually living through one such episode right now. So let me now turn to present day and give a bit of a market recap of what's been going on over the course of the last few weeks. I'm gonna show you a graph of two quantities. One is something called the VIX index, VIX. And the VIX index is a forward-looking measure of volatility. To be precise, using option pricing theory, it is a formula that calculates what the market thinks the volatility is of the S&P 500 index, broad-based index of US stocks. It looks at what the volatility is implicit in options prices on the S&P. And so historically the volatility of the S&P has been around 15 to 20%. So a VIX index that is pricing options at that historical volatility should read somewhere in the 15 to 20 range. Let me show you what the VIX index is from the beginning of this year, January, all the way up to last Friday. You can see that for the first few weeks of the year, the VIX index was right around that average 10, 15, 20%. But look at what's been going on over the course of the last two or three weeks. The VIX index has spiked up to some really, really high levels. Wall Street traders often call the VIX index the fear index because when volatility is really high, people are scared. And because the VIX is a forward-looking measure, it's a measure of what options traders are thinking the volatility is. What this is saying is that the market is viewing volatility as very, very high right now. Now, what about the stock market? How has that been doing? Well, I think all of you probably know this, but let me show you what the S&P 500 index looked like over the course of the last few weeks. For the first few weeks of the year, S&P was pretty much stable, not moving a whole lot. But over the course of the last two or three weeks, it's actually been going down pretty significantly. And even as we speak, the S&P is declining. As seems pretty scary. And in fact, it is scary because if you look at the top 10 worst days for the S&P from January of 1926, all the way to last Friday, this is a list of the top 10 worst days. Number one of that list is October 19th, 1987. In one day, the S&P dropped by about 20%. But if you go down that list, you see that last Thursday, the S&P went down 9.5%. That's number five on this top 10 list. So yeah, things are scary. Markets are moving a lot. That's not the only market that's reacting. If you take a look at US Treasury securities, as I said, among the safest assets in the world, you can actually look into them to try to understand what the market is thinking about economic prospects. So this is a so-called yield curve which shows you what US Treasury securities are yielding across the various different maturities. Now, this is a piece of paper that our IOUs from the US government, when we buy them, we're lending the US government money and the government is paying us interest. And based upon what the market will bear, that interest will change across various different market conditions. Now, here's a curve from January the 2nd of this year that shows for one month Treasury bills, you're gonna get about 1.5% per year on average. As you get into longer maturity Treasury bills, Treasury notes and bonds, that interest rate goes up. So on January the 2nd of this year, if you were willing to lend the US government for a 30 year period, you would get paid almost 2.5% a year instead of 1.5. Typically, when we loan money to other counterparties for a longer period of time, we're gonna actually be getting paid higher interest because, well, when you're loaning money for a longer horizon, more things can happen, there's more risk over that longer horizon and so you're gonna get rewarded for that risk, risk reward trade off as we saw before. But on occasion, this upward sloping yield curve can shift. And let me show you what this yield curve looked like just a few weeks later on February the 18th. So now at the short end of the yield curve, meaning for shorter maturity bonds, you're getting about the same yield. But as you go into longer maturities, actually the yield has declined. So contrary to what I just told you about longer maturity loans getting a higher yield, in this case we have what's known as an inverted yield curve. There are periods of longer horizons where the yields are actually lower and that's telling us something. It's telling us that people who buy these bonds are thinking that we may be heading towards a recession, that interest rates are gonna be going down farther into the future. And as a result, we're gonna see these inversions. Now, it's not a perfect forecast but over the course of the last several decades, when you have inverted yield curves more often than not, you have had recessions one, two and three years later. So this is a source of concern. But if you look later on in the year at the yield curves, you see something else happening. Still an inversion and even a deeper dip but then over the course of just the last week, you see that the short end of the yield curve has dropped dramatically. What's going on there is that the Fed has been cutting rates, trying to stimulate the economy. The Fed has also been reflecting on the fact that more and more people are now wanting to buy shorter term US Treasury securities. Typically, when you buy the securities, you bid up their price, that actually lowers their yield. So as the yields get lower and lower, what that's telling you is that there's more and more demand for shorter term securities for the US government. And that's a consequence of people putting more money into that, presumably taking it out of more risky assets. As the yields go down, you're seeing what's called a flight to quality or flight to safety. So these markets are telling us that something serious is going on and that financial market participants are reacting. Yet another illustration of the fact that we're going to a flight to quality, flight to safety, is the difference in yield between corporate bonds, which have the risk that companies can go bankrupt so the bonds can default versus US Treasury securities. This is a graph that shows the spread between BAA corporate bonds, bonds that are investment grade and those that are Treasury bills. And you can see that over the course of the last few weeks, we've gone from about a two percentage point spread between US Treasury securities and corporate bonds to a spread of 3.2%. That's quite a big difference just in the course of a couple of weeks. So to put it bluntly, people are freaking out. They're putting money into safer assets from more risky assets. Now, if we go back in time and look at the financial crisis, we actually see some similarities. So let me show you the yield curve that occurred on January the 2nd, 2007. That yield curve much higher in those days, but nevertheless, you still see an inversion at the beginning of 2007. Now, it turns out that the economy was going into a recession at that time and clearly this inversion showed that. But if you look at the course of the yield curves during that fateful year of 2007, 2008, what you'll see is progressively lower and lower yields at the short end. And in January 2nd of 2009, the yield curve actually showed that at the very short end, you're actually at zero. In fact, there was a brief period of time where the yield dipped below zero, a negative yield for US Treasury securities. That's a pretty shocking state of affairs because what that's saying is in effect, I, an investor, am willing to pay $1,001 today in order to get back from you $1,000 three months from now. Why would I pay more money today in order to get back less three months from now? It's because I'm really worried that I'm not gonna be able to get my money back. And so I want the safety of US government securities. So we're not there yet, but I suspect that there's a chance that over the course of the next few weeks or months, we may get to a zero interest rate and possibly negative yield environment because of the market reaction. So let me give you a bit of perspective now having described the current state of affairs. First of all, in terms of where we are now, let's keep in mind where we came from. So I'm gonna show you the same fear index and the S&P 500, but not just year-to-date. I wanna go back to 2016. And when you look at the fear index, you see that there are a number of periods over that multi-year horizon where the fear index has shot up. Maybe not as high as it is today, but a little bit later on, I'll show you where there are periods where it's gotten even higher. But more importantly, let me show you what happened to the S&P 500 during that period of time. We've had a pretty significant drop over the course of the last couple of weeks in the S&P. But remember where we came from. In January of 2019, the S&P was at about 2,500. And over the course of 2019, the S&P went up by about 36%. So we may have lost a lot of those gains. We may have lost all of it, but the S&P is not at zero. We've lost the gains from over the past year, but many have argued that over that past year, those gains were really way too high and not sustainable. And so the market is correcting as it does from time to time. Now you'll notice that there was a little bit of a wiggle back in 2008, sorry, 2018. And this wiggle is something that doesn't look like a whole lot compared to where we are, but at the time, the newspaper has made a big deal of it. At that particular date, which was February the 5th of 2018, turns out that the Dow went down by 1,175 points. The worst point decline in history. That sounds really scary until you realize that the reason that it's the worst point decline is because the Dow Jones index is at a very high level. And so when you translate into rate of return, that decline was about 4.5%, which in the grand scheme of things is not that big a deal. It is large, but it's not outrageously large. It certainly can happen from time to time. And so newspapers will fix on really shocking news, whatever way that they can put it. And that's part of what's going on right now. People are being scared because these numbers are breaking certain records like the Dow Jones back in February of 2018. The fact is that markets do go up and down. There is risk and markets will recover. Let me give you a bit more perspective and focus on it's true that the fact that last Thursday was a pretty bad day. We lost 9.5% in the S&P in one day. And it is true that the VIX index was among the worst. If you rank the VIX index since it began in 1990, then Thursday was probably in the top five. And in fact, here it shows the top four in terms of how high the VIX was. So naturally you might think, well, we should be getting out. And in some cases for certain individuals, it makes sense to get out. The question is, do you know when to get back in? Because the markets do recover. And unless you're watching them like a hawk and it's very hard to do that unless you're a financial market professional with all of these various tools, you may not know when to get back in. So let me illustrate to you that with what happened last Friday. If you take a look at the top 10 best days of the S&P from 1926 to March 13th of 2020, here are the top 10 best days. And it turns out that last Friday, the 13th ranked number seven in the very best days of the S&P. I'm not sure if any of you have read The Tale of Two Cities. It was the best of times. It was the worst of times. That's kind of sort of what we're living through right now. Markets are very volatile. And unless you actually know how to time them, it is very difficult to pick the times when you should get out and the times when you should get back in. In fact, we know that they're gonna be winners and losers. Many of them having to do with new technologies versus traditional technologies. Let me give you a couple of example. Cruise ships, like Carnival Cruise Lines, have been hit pretty hard. Not surprisingly, if you look at the stock price of Carnival Cruise Lines, one of the largest cruise lines in the world, at the beginning of this year, they were trading at about $50.72. As of Friday, Carnival Cruise Line was trading at $17.58. They're obviously one of the losers in this current situation. How about one of the winners? Well, Zoom Video, we're coming to you through Zoom technology right now. Beginning of the year, Zoom Video was at $68.72 as of Friday, $107.47. So what's happening is market dislocation because of concerns about COVID-19 and there are opportunities, tremendous opportunities being created right now for active managers. So if you're an active manager, congratulations. You're in a period of time where you will be able to make your name in this business by identifying the winners and losers and trading accordingly. Well, what about for the rest of us? For the rest of us, it's about diversification, making sure that you've got your bets spread across a number of different assets and about dealing with your own emotions and how to react to these market gyrations. I'll get to that in a few minutes. Now, it's often helpful in thinking about what we ought to do to compare across time at other scenarios that may be similar to what we're going through now. Now, it's often said that history doesn't repeat itself but it often rhymes. It's been attributed to Mark Twain but nobody can seem to find a definitive point where he actually said it. In any case, the truth of it is really what I wanna focus on. Thinking about the past doesn't always tell us exactly what's gonna happen but it can give us ways of at least providing guidance and how we react. So I wanna compare what we're going through to two particular scenarios, the 1918 influenza pandemic or so-called Spanish flu. I'll tell you in a minute why that's in quotes. And then second, the 2008 financial crisis. Now, before you get frustrated about this comparison because I'm gonna tell you right now that the comparison is not perfect. There are all sorts of reasons why the current situation that we're going through is not like the 1918 pandemic or the 2008 financial crisis but these are the closest things that match where we may be going through over the course of the next few weeks. So that's why I wanna spend a few minutes talking about them. So let's start with the 1918 influenza pandemic. First of all, there's been some research done on the economic consequences of that pandemic and the research paper that I wanna point you to is an article that came out from the Federal Reserve Bank of St. Louis in November of 2007 by Thomas Garrett. Now, there's not a lot of economic data from 1918. So this article couldn't say a whole lot about what was going on but it's kind of instructive in terms of what they are able to cover and I'll tell you a bit about that in a minute. The first point I wanna make is that the reason that we don't call it the Spanish flu any longer is because it turns out that it really was not from Spain. We're not exactly sure where the flu came from but the reason that people call it the Spanish flu is that 1918 was during World War I and the countries that where the infections took hold initially were under a news blackout and they did not wanna publicize the influenza because they didn't want people to panic, they wanted to maintain morale and Spain was neutral at the time so they didn't have a news blackout so the first reports that people read about the flu came from Spain, hence the term Spanish flu. So this article summarizes the economic consequences of the 1918 influenza and there are three conclusions that I'll talk about in a few minutes. The first is that most of the economic effects of the influenza were pretty short term. Now we have to acknowledge that the human consequences were tremendous. A large number of people anywhere from 20 million to 50 million, I've heard figures as high as 100 million died because of that pandemic. So I don't wanna minimize that tremendous human tragedy. But from the business perspective, what we found is that businesses that were involved in services and entertainment, they were affected pretty severely, they lost but other businesses, for example, those specializing in healthcare, they actually did much better. So it's a mixed bag and as long as you were well diversified over that period of time, even though there were short term losses, eventually it recovered. Second, there was some shortage of labor obviously because a number of people were stricken with this pandemic and that actually resulted in wage inflation. So certain areas that were hit hardest had the fewest number of people that were able to work. Those are the areas that experienced the greatest wage inflation. And finally, there was some evidence that women that were pregnant with children during that period of time, those children suffered afterwards for a variety of reasons and you can read about it in the paper and what's cited there. But what I wanna talk about is the stock market experience during that period of time. Now I said we don't have a lot of data going back that period that far but there is a stock market index that Bill Schwert, a finance professor at the University of Rochester created and that index goes from the 1800s all the way to the present. It's the Dow Jones composite index from the 1800s up to around 1928 and for our purposes that works just fine. So I'm gonna show you that Dow Jones composite index from 1916 all the way to 1922. So that really captures the period before, during and after the 1918 pandemic. Now there are a few dates that I've drawn on this graph, April 2nd, 1917. That's when the United States declared war on Germany when we entered World War I. At the time there was about 127,000 members of the US Army that were involved. By the time we ended the war in 1919, over 4 million Americans ended up serving in the war and another 800,000 in other branches of the military. So a lot of people were involved. They were traveling around the world. And as you can imagine, that did a lot to spread the flu. So here's a chart of what happened during that period of time. And you can see that from the time that war was declared until April 5th, 1918, that was the first news story of some kind of an infection here in the United States. It came from a military base in Kansas. The stock market went down, but I wouldn't call it a crash. It did go down probably about 20%. So that's fairly significant, but it recovered. And so net net over the course of a year, down 10%, market fluctuations certainly can do that. The pandemic of 1918 is divided into three different periods. The first period, starting around March of 1918, going through the summer, that was the first wave. But the second and third waves were much more serious. The second wave occurred between September and December. And during that second period, which is the most deadly, we lost a tremendous number of lives. In the month of October alone, we lost 195,000 people in the United States, 195,000. To give you some perspective, the H1N1 pandemic of 2009, the total number of deaths estimated in the U.S. from 2009 to 2018 is about 75,000. The 1918 pandemic killed 675,000 when all was said and done. And so that third wave that took us all the way to June of 2019 also killed several hundred thousand lives. Throughout this terrible period, when we see that enormous loss of life, tremendous danger to society, what happened to the stock market, it went up. Now I know it may sound obscene to be talking about business in the context of this great human tragedy, but the point I'm making is that while tragic, from an investment point of view, there's a very different market dynamic. Now, you can't compare exactly because of course that was the end of the war. There were other things going on in the U.S. economy. There are some very big differences between back then and today. But as close as we can tell, it is clear that even in something as devastating as the 1918 influenza pandemic, even in that case, the economy recovered and went on to do really well after that. So we're running short on time, so I'm gonna skip ahead and go to the point about the financial crisis of 2008. And in this particular case, we can see that there are some very clear parallels with the exception that the real economy got hit very hard. Many, many millions of jobs were lost and it was incredibly disruptive because the entire financial system looked like it was on the brink of collapse, although that may have been overblown but certainly from a financial perspective, it didn't seem that way. So when you look at the fear index back to 2008, you can see that while the VIX index is high now, it was even higher during 2008 and it stayed high for a period of time and there were a number of difficult challenges. Also the SMB500 went down. It looks like it didn't go down as significantly, but if you look at it on a log scale where on a log scale, the same vertical distances correspond to the same rates of return on a return basis, it was much worse back in 2008. Now, we're not done and so there may be some difficulties going on that will remain to be seen, but we look at credit spreads way higher in 2008 and the amount of intervention that was undertaken was unprecedented. Initial bailout plan was rejected in September of 2008. It was ultimately approved in October. We're talking about something like $700 billion of intervention and there are many different programs that were undertaken in order to deal with that kind of a crisis. Lots of things happen over a very short period of time and it was really that kind of spending that ultimately much of which has been repaid, that spending that ultimately ended up changing the dynamic to the point where we did not have the same kind of depression that we experienced in the aftermath of the 1929 market crash. Why did we do all of this? We did all of this because we wanted to prevent madness of mobs. We wanted to prevent people from engaging in this kind of crazy behavior of letting your emotions run wild and making a run. We've seen that kind of herd mentality before in animals, obviously it happens and there are many good reasons why it can happen, but when you think about the sale in which trials or bank run, those are examples where that kind of herd mentality does not help. We see this right now, we're going through this with hand sanitizer. If you're trying to get that hand sanitizer, good luck. There's been a run on that and some other things. And in these cases, we need to think a little bit more rationally and try to understand that in the short run, there will be dislocation even if it turns out that these methods aren't necessarily helping. In the case of hand sanitizer, although we all agree that hygiene is important, the FDA has actually put out a clear statement that using hand sanitizer does not necessarily reduce your chances of getting a virus. And so while it's good practice to use hand sanitizers and to wash your hands, that's not enough. We have to engage in additional measures like social distancing and so on. So our response to COVID-19 so far, what have we done relative to the financial crisis? Well, we've passed a spending bill. How much is that spending bill? $8.3 billion. That's a good start, but that's not enough. And part of the reason that markets are reacting the way they are is because the response so far has not provided a credible set of measures that will deal with this crisis in a way that will deal with it once and for all. Now, unlike the financial crisis, just throwing money at this problem isn't gonna be enough because dealing with viruses require time, scientific and medical expertise. Once you decide that you want to develop a vaccine, it is often several years before you get one. We need sustained resources to prepare for the outbreaks and right now this area does not have the resources it needs. Now there are organizations like the Coalition for Epidemic Preparedness Initiatives, the World Health Organization Gates that are helping, but we need more. So the takeaways are you have to think about the situation from the short, medium and long-term perspectives. Things will probably get worse before they get better, both from the perspective of this particular outbreak but also financially. The short run is gonna be lots of ups and downs. And a one size fits all solution is just not gonna work. We're gonna have to think in terms of who you are and what horizon you're looking at. In the short run, if you need cash and you need to be able to put money to work, you will need to preserve your capital. But in the medium and longer run, there is gonna be a recovery. So you need to examine your goals, your particular constraints and resources and do not panic, do not freak out, manage your fears, beware of the fact that the madness of mobs is causing these great swings and you'll need to use all of the tools that are at your disposal. If you're not equipped to do that, you may need to seek financial advice from a fiduciary, somebody who's looking out for your interest. So since we're just about out of time, I'm gonna stop there. These slides will be available to all of you afterwards. I would ask you all to please stay safe and to be considerate, think about how to deal with this problem in a way that is gonna be productive. Social distancing seems to be the most effective way now and I wish you all well and happy to take questions now. So one of the questions that I've gotten is that how do you ensure that stimulus goes to good use throughout the economy and not just to do buybacks? It is true that if we end up getting into a situation where we start engaging in fiscal stimulus, that means the government spending money, we wanna make sure that that money is actually creating resilience in the economy. One way to do that is to think about what kinds of investments we make today can turn into jobs tomorrow. So education is a very important component, but right now I would say investing in the infrastructure needed to produce vaccines on a massive scale, investing in ventilators, which is something that we are going to need once the flu gets going in a much more serious way in this country. That's something that we can be investing in. So while the $8.3 billion is a good start, we need many more billions of dollars as we've seen from the financial crisis once you start dealing with the situation in a way that gives investors confidence. Once you are able to restore trust and confidence, at that point you can start turning things around. Thank you very much. Good to be with you.