On the back of COVID19 consumption habits have drastically changed thereby impacting even the best made business plans globally. Normal everyday activities that we took for granted like going to work, schools and entertainment venues have come to a standstill as these now posed a potential risk to life. Given the new realities, companies have seen consumption going down, individual savings going up and supply of goods and services become uncertain due to global supply chain issues, all of which have led to an increase in insecurity amongst the various stakeholders in the economy. According to Morgan Stanley, Global Recession in 2020 is a base case scenario. A recession is often defined as a period of decline in economic activity like trade, industrial output and consumer spending. As a recession is inevitable, we looked at the economic and financial downturns and recoveries in the past century to look for similarities with today’s COVID19 crisis. What we have done here: 1) Assessed this problem statement - COVID 19 has led us to a situation where we are in both a health as well as an economic crisis. Are there past recessions and crisis that we can look at to learn from? 2) Analyzed the two recessions that occurred in the 21st century by metrics like the economic and financial factors - how the GDP Growth and Unemployment were affected, how the financial markets reacted and how the sectoral recovery looked like? 3) Examined the Spanish Flu pandemic, the Roaring 20’s (a decade of massive expansion in the economy), and the Great Depression by metrics like the economic and financial factors

1. Crisis to Recovery
July 2020

2. Agenda
Recessions that took place in this century
S&P500 and Nasdaq (Peak to Trough)
Sectoral Recoveries using Index ETF’s
Recessions that took place in the past century
(similar to the current pandemic)
Spanish Flu
Roaring 20s
Great Depression
Where do we stand today?
High Debt Levels and a possible bubble?
Role of Government and Feds in this crisis
@lbvc

3. The two recessions of this century…
2001 Recession 2008 Recession
Global Financial Crisis
@lbvc

4. … were
due to structural problems in the economy
Recession Period ’01 Recession ’08 Recession
Duration 8 Months (Mar’01 -Oct’01)
18 Months (Nov’07 –
May’09)
GDP Decline 0.8% 4.3% (US)
Unemployment 6.8% 10%
Cause
Dot.com bubble, accounting
scandals, 9/11 attacks
(Technology Sector)
Housing and a liquidity crisis
(Financial Sector)
Source: Bloomberg Economics
@lbvc

5. 101
62
20
30
40
50
60
70
80
90
100
110
120
Aug-00
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
’01 Crisis
S&P 500 Nasdaq
The S&P 500 took almost 7 years
and Nasdaq took 15 years to recover
to it’s pre recession highs
The S&P 500 took 5.5 years and
Nasdaq took 3.5 years to recover
to it’s pre recession highs
101
113
20
30
40
50
60
70
80
90
100
110
120
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Great Recession
S&P 500 Nasdaq
S&P 500 fell by 48% and Nasdaq by 72% S&P 500 fell by 55% and Nasdaq by 54%Recession Period
Source: Google Finance
@lbvc

6. Technology Sector
Consumer
Discretionary
Consumer Staples Financials Healthcare
Microsoft Amazon, eBay Procter and Gamble Berkshire Hathaway Johnson and Johnson
Apple
McDonald’s,
Starbucks
Costco JP Morgan United Health Services
Visa Nike, Hasbro Walmart Bank of America Merck
Adobe Booking Holdings Coco Cola Blackrock Pfizer
Salesforce
PVH Corp,
Tiffany and Co
Colgate American Express CVS
Nvidia Ford, Carnival Cruises Walgreens Bancorp Humana
Index (SPDR) ETF funds used for this analysis
Source: State Street SPDR
@lbvc

7. 0
20
40
60
80
100
120
140
160
Aug-00
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Consumer
Discretionary, 161
Financials, 133
Consumer Staples, 116
S&P 500, 101
Nasdaq, 62
Technology, 38
Healthcare, 122
Tech sector took the biggest
hit during the ‘01 recession
Financial sector took the biggest
hit during the ’08 recession
Consumer
Discretionary, 144
Financials, 54
Consumer Staples, 140
S&P 500, 101
Nasdaq, 113
Technology, 106
20
40
60
80
100
120
140
160
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Healthcare, 128
Recession Period
The sectors with the structural problems were hit the hardest
Consumer Discretionary and Consumer Staples recovered the fastest
Source: Google Finance @lbvc

8. While the two recessions that have
taken place this century, they’re not really
comparable to today’s pandemic
@lbvc

9. So we looked for similarities
in recessions in the previous century
1914-1918, 1918-1919 1921-1929 1929-1938
Spanish Flu
@lbvc

10. We haven’t seen a
pandemic in a long time
• Spanish Flu is the last known
global pandemic
• According to the CDC, “One-third
of the world’s population was infected
with this flu. The number of deaths
was estimated to be at least 50MM
worldwide”. Compared to an
estimated 40MM casualties in WWI
• Note: Not much data on the impact is
available of the flu is available, as most
of the concentration and efforts were
on the WWI
Source: Collaborative Fund, Investor Amnesia
@lbvc

11. Spanish Flu affected
states and countries
differently
• Milwaukee was much more proactive in
implementing quarantine and closure,
compared to Philadelphia. This led to
lower deaths (See pic on the right)
• In early 1900’s, most states and
countries were self reliant, compared to
today where globalization is at it’s peak
and self reliance is at it’s lowest
• Local quarantine and survivor
immunity were the removal mechanisms
of Spanish flu. No vaccine was ever
discovered.
Source: Investor Amnesia @lbvc

12. Today’s trends are
similar to trends
during the flu
• Service and entertainment industries,
suffered double-digit losses in revenue
• Other businesses that specialized in
health care products (drug stores)
experienced an increase in revenues
• 1918 influenza pandemic was short-
term and society recovered quickly, but
individuals affected by this had
their lives changed forever
Street car conductor
in Seattle not allowing
passengers aboard
without a mask in1918
Some news articles
from a newspaper in
Little Rock, Arkansas
Source: St. Louis Fed
@lbvc

13. Economic impact of WWI and Spanish Flu
USA 1914 1918 1920 1921
GDP/Capita
($2011)
7,334 8,648 8,485 8,134
Unemployment
(%)
8 1.4 2.3 11.9
Inflation (%) 1.0 17.86 (1.5) (11)
WW1 Post Spanish Flu
Source: Our world in data, The balance
@lbvc

14. US enters
the War
The start of
Spanish Flu
1915
Source: Long term trends, Macro Trends
The market’s
reaction
Dow Jones
Index
Going into Spanish
Flu, The S&P 500 was
fairly undervalued
@lbvc

15. During this period,
the US transitioned from
an agri-economy to a
manufacturing economy
Post- flu came the roaring 20’s, led by
an explosion in the manufacturing sector
Source: A wealth of common sense
@lbvc

16. Technology advancements
and growth in disposable
income led to a change
in habits
• The 1920s ushered in the influx of new
consumer products like automobile,
airplane, radio, assembly line, refrigerator,
washing machine, and many more
• Fall in the highest tax rates from 77% in
1919 to 58% in 1922 to 25% in 1925,
created more disposable income
• Unemployment was at 3% during this
period, one of the lowest levels post WW1
% of
families
with
durables
Electric
Lights
Inside
Plumbing
Washing
Machines
Car
1910 15 - <1 1
1920 35 20 8 26
1930 68 51 24 60
Increased purchase and
usage of consumer
products
16Source: CSU – Modern Economy
@lbvc

17. Credit played a vital role
in the economic growth
• 60% of the cars and radios bought from
1925-29 were on credit
• In 1929, the US GDP was worth $105BN
and the private debt was close to
$160BN
• Corporate debt grew from $57BN to
90BN from 1921 to 1929
• Mortgages grew by 8x from 1921-29
Source: St. Louis Fed 17@lbvc

18. The roaring 20’s saw an unprecedented
growth in the economy
1914 1918 1920 1921 1929
GDP/Capita
($2011)
7,334 8,648 8,485 8,134 10,543
Unemployment
(%)
8 1.4 2.3 11.9 3.2
Inflation (%) 1.0 17.86 (1.5) (11) 0
Source: Our world in data, The Balance 18
WW1 Post
Spanish Flu
Roaring 20’s
@lbvc

19. Post roaring 20’s, when
the bubble burst, it was
the start of the Great
Depression
• The economy soon became overheated,
it became a place of higher supply than
demand, which led to deflation
• The country suffered four years of
contraction, which led to 30% fall in
GDP in just four years (see chart)
• The unemployment rate reached
25% by 1933, up from 3%
19Source: The Balance
Changes in the
economy (1929 – 33)
United States
Industrial Production -46%
Wholesale Prices -32%
Foreign Trade -70%
Unemployment +607%@lbvc

20. By 1929, S&P 500 was overvalued
Source: Long term trends 20@lbvc

21. 10 years of gains wiped out in 3 short years
“In the late 1920s, the Fed
was also reluctant to raise
interest rates in response
to soaring share prices,
leaving rampant bank lending
to push prices higher still.
When the Fed did belatedly
act, the bubble burst with a
vengeance”
4000+ banks had to shut down,
which accounted for 50% in
America
Dow Jones
Jan’1928
Fed Rates:
3.5%
Jul’1928
5%
Jul’1929
6%
During the roaring 20’s, we saw
massive credit expansion. At the
end of this period, increase in Fed
rates caused increased burden on
consumers and the bubble burst
leading to the Great Depression
21Source: Macro Trends
@lbvc

22. The impact of the great depression
took the economy back by 20 years
It was a global crisis and not just US centric, much like the
health pandemic today.
1914 1918 1920 1921 1929 1933
GDP/Capita ($)
(Base 2011)
7,334 8,648 8,485 8,134 10,543 7,270
Unemployment
(%)
8 1.4 2.3 11.9 3.2 24.9
WW1 Post
Spanish Flu
Roaring 20’s Period of Great
Depression
Source: Our world in data, The balance 22@lbvc

23. To save the economy,
government stimulus
called the New Deal
was initiated
• Government stimulus was passed in
1933, 42 months after the start of the
recession.
• The Government invested $7BN in
various projects under Public Works
Administration (PWA) to create
employment and increase workers
buying power
• Public Works Administration was a
project where funds were used for
infrastructure and construction projects
like bridges, roads, hospitals and
schools
The total stimulus is estimated to be
~ $42BN over a 7 year period,
which accounted for almost
40% of the GDP back then
Source: Bond Capital, History of New Deal
23
@lbvc

24. Recovery took 25 years to reach 1929 levels
Dow Jones
Source: Macro Trends 24@lbvc

25. TODAY?
Where do we stand TODAY?
@lbvc

26. A decade without recession
50
100
150
200
250
300
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Jun-18
Aug-18
Oct-18
Dec-18
Feb-19
Apr-19
Jun-19
Aug-19
Oct-19
Dec-19
Feb-20
Since Mar-13
Consumer discretionary, 219
Financials, 184
Consumer staples, 149
S&P 500, 193
Nasdaq, 269
Technology, 304
Healthcare, 205
The bull market has been driven by the
technology sector in the past 7 years
S&P 500 Recovered
from the 2008
recession only in
March 2013
Source: Google Finance 26@lbvc

27. 4.8% fall in US GDP in the first
quarter already, with a further
~30% decline expected in Q2
Consumer spending fell by 7.5%
in March, highest since 1959,
the household incomes fell by 2%,
while household savings increased
to 13.1%, highest since 1981
Source: MarketWatch 27
Change in US GDP in Q1 2020 %
Healthcare (2.25)
Food Services and Accommodations (1.61)
Recreation (1.01)
Motor Vehicles (0.95)
Clothing (0.78)
Transportation (0.74)
Food 1.11
Residential Investment 0.74
Other Non Durable Goods 0.70
Software 0.16
Financial Services and Insurance 0.15
@lbvc

28. Today, we have a three fold problem
- an event driven economic freeze,
a valuation bubble and a potential debt crisis
28@lbvc

29. Today’s GDP to Global Debt is at 1 : 3.3, highest it has
ever been
29@lbvc

30. Since 2008, for every $1 increase in GDP,
the public debt grew by $1.50
Source: Fred
Public Debt to
GDP is at 109%
as of 2019,
expected to
increase in the
next few years
@lbvc

31. Debt levels are the highest they have
ever been for consumers and businesses
Household Debt accounts for 70% of GDP Non Financial Corporate Debt accounts for 52% of GDP
@lbvc

32. Ability to pay back this debt has never been lower
@lbvc

33. In 2019, the S&P grew by 31%, but majority of the returns were
driven by from a valuation multiple rather than earnings
Investors fueled by access to liquidity have been irrationally
driving up valuations, in hopes of earnings catching up
@lbvc

34. Quality of debt has never been worse and is deteriorating
Expansion in BBB bonds, which is
one grade above the junk bonds
The downgrades in bonds have been happening
at a faster rate than the 2008 recession
@lbvc

35. Unemployment is expected to reach the Great
Depression levels very soon
• 30MM jobs lost in the last six
weeks. Highest since 1934
• An economist claims that during
recovery, unemployment
decreases at 1-1.5% only. It could
take a decade to come back to
Mar 2020 unemployment levels
• During the Great Financial Crisis,
the unemployment rate had
touched 10%
Source: Forbes
Took 10 years to go
from
10% to 3%
@lbvc

36. S&P 500 PE ratio, we were in a bubble
before we entered the pandemic
Trading at 25x P/E multiple as of Feb 2020
Source: Long Term Trends
@lbvc

37. Inspite of all this, the stock market is showing us a
different story
• The S&P500 is up 2% YTD, after a 34%
fall in stock market in March
• Reasons for such a quick recovery
being two fold:
• Federal reserve and Government
Stimulus generating the confidence in
the markets (See slide 38,39,40)
• Big tech is stronger than ever as
COVID has accelerated the online
penetration in each and every sector
from shopping to working to
socializing, you name it.
Jan 2020 – July 2020@lbvc

38. Historically, the Fed has reduced interest rates by 5%
during recessions to provide economic growth
• Fed for the first time ever started
buying corporate bonds and ETF’s
• In 5 short months, the Fed has
expanded it’s balance sheet by a
whooping $3 Trillion (13%)
• The feds action has brought tons of
confidence and liquidity in the
markets. The increase in liquidity
is one of the reason for the sharp
recovery in the S&P500
5%
5%
Fed Interest Rates
Opportunity to
reduce the rates by
5% is no more an
option
Source: Macro Trends
@lbvc

39. The US government has announced $2 trillion+
worth of stimulus in the economy
Source: Bond Capital 1 month vs 42 months @lbvc

40. While, incomes are expected to drop, the government
stimulus is expected to drive the disposable income
This quick disbursal of stimulus is one of the reasons that is maintaining
the consumption from falling as it did during the Great Depression
@lbvc

41. Summary of the economic factors
Recession
Period
Great
Depression
’01 Recession ’08 Recession COVID-19
Duration
9 Years
(1929-1938)
8 Months
(Mar’01 -Oct’01)
18 Months
(Nov’07 –
May’09)
Jan 2020 – ?
(Hopefully soon)
GDP Decline
30% in the first 4
years, 20% in 9
years
0.8%
4.3% (US);
5.1%(World)
20%+
Projected
Unemployment 25% 6.8% 10%
25%+
Projected
Source: Our world in data, The balance
@lbvc

42. While, today’s healthcare crisis looks similar to the Spanish Flu in 1918, the
current economic realities are similar to those going into the Great Depression in
1929.
If the Great Depression is anything to go by the recovery will take a long time and
a combined global effort.
However, unlike the Great Depression, the federal reserves and governments
across the world have acted quickly with significant economic measures which
has softened the blow to the economy from COVID-19.
While there will be unavoidable damage to our economies, certain sectors like the
technology sector will help with recovering from the crisis faster and emerge
stronger than ever before.
@lbvc

43. India Story
@lbvc

44. India is heavily reliant on the financials sector,
compared to the technology sector in the US
Technology,
23
Financials, 13
Healthcare, 14
Consumer
Staples, 7
Consumer
Discretionary,
10
Energy, 4
Industrials, 9
Materials, 3
Utilities, 3
Telecom, 10
Real Estate, 3
S&P 500 Sector Breakdown in 2019 (%)
Technology,
14
Financials, 45
Healthcare, 1
FMCG, 9
Transport
Equipments, 7
Energy, 15
Others , 12
BSE Sensex Breakdown in Oct’19 (%)
@lbvc

45. Impact on Indian markets during the recessions has
only been in ‘08
101
62
327
0
50
100
150
200
250
300
350
Aug-00
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
2001 Recession
S&P 500 Nasdaq Sensex
101
113
95
20
30
40
50
60
70
80
90
100
110
120
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
2008 Recession
S&P 500 Nasdaq Sensex
193
269
198
50
100
150
200
250
300
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Dec-15
Apr-16
Aug-16
Dec-16
Apr-17
Aug-17
Dec-17
Apr-18
Aug-18
Dec-18
Apr-19
Aug-19
Dec-19
Since Mar-13
S&P 500 Nasdaq Sensex
COVID - 19 is the first
time that a recession
has hit all the countries
at a significant level
Source: Google Finance @lbvc

46. Indian stock market is overvalued as of Mar 2020
Higher than the ’08 recession
Source: Business Today
@lbvc

47. India’s public debt is 70% of GDP, with not enough
room to increase it
Other countries like US,
China, Japan all have
public debt over 100% of
their GDP, as they have
better ability to pay their
bonds
Even though, our debt to
GDP is at 70%, we don’t
have enough room to
provide stimulus to the
economy
Source: Trading Economies
@lbvc

48. Our private debt, driven by household debt, is the
highest that it has ever been
12% of GDP as of 2019,
At an all time high
48% of GDP as of 2018,
Fairly flat in the past decade
28
40
35
47
49
25
50 51 49 4950
4748 48
Source: Business Standard, Motilal Oswal
@lbvc

49. Estimated 120MM jobs lost in India as of May’20
(91)
(18) (17)
5
Source: NSSO, CMIE
@lbvc

50. RBI cut it’s repo rate by 0.75% to 4.40% since March
RBI in the past have cut repo
rate to increase liquidity. During
the 2008 Global Financial Crisis,
the repo rate was decreased by
4.25%
Today, RBI doesn’t have the
tools to decrease it by 4.5% as
they have been low Pre-Covid as
well
Source: Trading Economies
@lbvc

51. India’s GDP is expected to decline by 5% in FY21
As India is a developing nation,
the current recession due to
COVID is India’s fourth recession
since independence
@lbvc

52. India imposed stringent lockdown measures that have resulted in
adverse implications on the economy. Businesses in sectors other than
essentials have experienced zero revenue for the first time in April and
May 2020.
Given the Indian economy’s reliance on traditional sectors as compared
to technology, we expect the recovery to happen at a slower rate than
the developed economies.
This presents an opportunity for technology led businesses to drive
adoption and grow faster. As individuals and businesses have been
under lockdown, they have interacted with technology more than ever
when it comes to consumption of all forms like education, payments,
entertainment, etc.
Crises drive creativity and innovation. Past recessions have seen new
startups emerge driven by technology globally and we fully expect that it
to happen in India as well.
@lbvc

53. @lbvc
THE END