Strategic thinking

This Crisis is Different

Warning: This post requires a strong stomach. I hug my friends and family often, but I deal in, and am deeply interested in reality. Proceed with caution.

I grew up during sanctions in South Africa. The world finally took notice of the racist National Party that ran the country and decided to hit SA with a wave of activism thanks to many brave souls who had been working for decades to bring awareness to the issue. The economic impact was significant as foreign companies pulled out of the country, as did foreign investment. There was economic pain, but it brought about healthy change.

I was working at Credit Suisse First Boston in London in 1998 to 2000 when Long Term Capital Management collapsed. A massive hedge fund which many of the banks, including CSFB, were exposed to. That cost many jobs but things bounced back.

I remember when the Russian Ruble collapsed around the same time. IIRC it cost CSFB about $600 million. We saw a few layoffs.

Then I joined during the dot-com boom. I headed out to Santa Monica where I was based for a while. I remember being in my apartment in the early 2000’s in Marina del Rey watching CNBC live and watching the market collapse in real-time. When I returned to London the company went through multiple rounds of layoffs.

I stuck around until pretty close to the lights being permanently switched off in the London office. eToys, worth $6 billion at its peak market cap was delisted from Nasdaq and the assets were sold to KB Kids for $2 million.

And of course we all remember the sub-prime mortgage crisis of 2007/2008. What fun that was.

This time is different, for two reasons. Firstly, all those other stories were due to business, market or economic forces. They were man made. LTCM, Russian Ruble, dot-com bubble, badly rated and badly priced debt during the housing crisis. We did that.

This thing is not man-made. It’s completely exogenous. Something external to the machinations of us puny humans. It is not something we can fix in the short term because it’s not something we broke. We just had a lot of kids and mother nature took an interest in us as a source of food for a new pathogen. Technically cities are infestations of humans – a rich feeding ground for a new kind of monster. And with over 4.3 billion people traveling by air each year, flitting around the globe was easy.

Having survived many economic crises with the usual levers, financial regulators and central banks have run home to mama and are using the usual levers. Only this time they’re pushing them much harder than they’ve ever been pushed before. But we didn’t break this, so we don’t get to buy our way out of it.

The second, and most important difference, is that this is a global event that is almost simultaneous in its impact. The economic impact of this has been compared to a hurricane. Now imagine a hurricane with the impact of Katrina in every major economic center at the same time around the globe. We can’t bail others out because it’s hitting every city in every country within a few months of each other.

I think back to when I worked for CSFB. When LTCM collapsed – hey OK so we took a hit but there’s still other investments, other sectors, other countries that are doing OK. And those other investments buffered the impact.

Same with the Russian economy collapsing in the late 90s. OK so we lost Russia for a minute. But there are a huge number of other investment areas and business sectors that create a buffer.

We’ve seen countries rise and fall, sectors like technology fall and rise back up. We’ve seen major terrorist attacks on individual cities, and those same cities rising from the ashes even stronger. We’ve seen hurricanes or earthquakes taking out major metropolitan areas and they rise back up.

This time it’s different. For the first time in my life, every economy on the planet – every city, every country, every region – will take a major economic hit. Now you might think that doesn’t matter because we’ll just work our way out of it with the help of courageous central bankers, legislators businesses and individuals. Well, here’s the problem…

Remember I mentioned the collapse of the LTCM hedge fund? That was triggered by the collapse of the Russian economy and the 1997 Asian financial crisis.

Remember the sub-prime mortgage crisis? That was triggered by a fall in home prices after the housing bubble collapsed, which lead to mortgage delinquencies which caused a crisis in housing related securities.

Remember Madoff’s hedge fund? His ponzi scheme almost collapsed in 2005, but survived. Then the market downturn, thanks to the sub-prime crisis of 2008, finally revealed the fund to be a ponzi scheme.

You could even argue that the dot-com bust was triggered by two things: Greenspan raising interest rates, which made borrowing more expensive for the dot-coms – and also Japan entering a new recession. The combination of these two events led to a major pull-back in investment in overvalued tech stocks.

The global economy has not yet collapsed. We are at the leading edge of the storm right now. The stock market collapse you saw is anticipating the collapse of the global economy. It is not actually the collapse. Same with the recent $2 trillion bailout.

The collapse is just beginning and it’s off to a smashing start with 6.6 million Americans applying for unemployment benefits last week. That’s the most ever by a massive margin. Expect similar next week. And the week after that.

Taleb’s concept of anti-fragile is applicable here. Systems that are fragile, but have been surviving thanks to favorable weather and calm seas, are about to experience the worst economic storm in modern history. The damage from this storm will become apparent once it has passed. Just like the 2008 crisis, we will see ships that started out fragile, completely destroyed. They will cause collateral damage. There will be many failures because this is a global event. And it has not yet begun.

Strategic thinking

Unvarnished Reality Leads to Opportunity

I’m hereby terminating my blogging hiatus. Thank you Covid19 for compelling me to put fingers to keyboard.

I’ve been deeply concerned about Covid19 since Jan 26th when I discovered the virus is infectious before symptoms appear. That was a pivotal moment in my understanding of where we are headed. It led me to almost immediately cancel the trip I was on in Hawaii – even though my family had travelled for several days from South Africa to join us. We did the math and determined that it wouldn’t spread far enough to harm us if we stayed another week. We got that right, but not by much.

This fundamental fact – that the virus spreads before symptoms show up – is what led me to take the following actions in the market that my company serves:

I’ve been proactive in the community in other ways, and quite opinionated about this. I mention that because I’m not a political creature. The trouble with being a CEO is that if you pick a side in a 50/50 split, you instantly alienate half your customers. Between the two of us, I’m a moderate and I live near the center of things.

In this post, I’m going to try to reveal what will happen from here on out and what threats and opportunities that might present. I’m going to start by discussing how to build a crystal ball – in other words, how to get started in doing this kind of strategic thinking.

To reveal opportunities, I need to provide you with some background on how I think about this – and how I think you should think about this. It may help you become more strategic in general. But I must warn you: Understanding the true nature of reality and taking it on board is a rough business.

I’ve been an aspiring entrepreneur since 1999 when I toured a data center in London with the intent of installing rack mount servers that could be remotely managed from anywhere in the world. My dream was to build a remote team and to be able to work from anywhere in the world.

I made many attempts at building a business. The thing about trying to build a business is that the universe is brutally honest. No longer do you have a parent who loves you and insists that the race official give you a participation prize.

No longer do you have a professor who favors you and throws you good grades for just being awesome. No longer do you have a boss who likes you and cuts you some slack for being a slacker.

When you step into the octagon of entrepreneurship, you get your ass kicked. And this happens repeatedly over a period of years. You get very good at taking it straight on the jaw and bouncing back.

It took me about twelve years to get good at entrepreneurship. My definition of good isn’t the typical west coast USA definition. I wasn’t going to incorporate a company and make venture capitalists my target market, each time trading stock for cash until the addiction turned me from founder into employee. I set out with the specific intent of creating a business that would generate cash.

I’m telling you all this because, in my humble opinion, this is the Mount Everest of entrepreneurship. To come up with an idea, execute on it and have it generate enough cash to create a self sustaining business? Well that’s the big kahuna. The moon shot. The whole enchilada. The most badass of badass challenges. It is what every great entrepreneur wants to achieve, and it is what every VC wants, but only after they’ve gotten as much of your stock as they can for rock bottom prices.

The thing about doing this is that it requires an understanding of the true nature of reality. What things really are like. What the data on the ground looks like. This might sound obvious. It might sound easy. It’s neither.

Good data on the true nature of things is hard to come by. I read the following sources:

  • NYTimes (paid subsription)
  • LA Times (paid)
  • Seattle Times (paid)
  • Financial Times of London (paid – and bloody expensive I might add!)
  • BBC (Used to work for them.)
  • Bloomberg
  • Fox News
  • NPR news
  • Washington Post (paid)
  • Hacker News (
  • Reddit – various subreddits
  • Eyewitness News courtesy of Radio 702 in South Africa
  • Whatever my colleagues, friends and family send me.

Surely I can get global headlines and local stories from two sources? Each publication has their own lens they use to examine and report reality. Each social media outlet their own biases. Papers have their own ideological bent and editorial agenda.

To truly understand the nature of things, you better aggregate what everyone is saying, cross reference it and interpret a rather large amount of data every morning into what is really happening on the ground in local cities you care about, and globally.

If one were to stick to a single source – lets say Fox News or The Washington Post – you’d end up with an interpretation of reality that is skewed right or left, politically. You’d see emphasis on certain stories to achieve and outcome or promote a message. Read both and a few others and you have a fairly decent picture of what is really going on.

This is how I get a reasonable facsimile of the true nature of things. And that long journey towards being a successfull entrepreneur taught me to start with good data on the nature of things and build from there.

Now back to Covid19. There’s a lot of noise out there. You are trying to figure out what is happening right now and what trajectory we are on. So lets chat about reality.

Any virus spreads with two basic parameters: The R0 – or how many people each person infects, and the viral cycle time, or the time it takes one patient to recruit more. I have studied epidemiology, but not in the medical sense. I used to build viral apps including one extremely popular service called Feedjit which “went viral”. We used to think in terms of R0 and viral cycle time. And the math for an actual virus is the same.

The growth in the infected population is the number or current patients multiplied by the R0 and you do that multiplication every X days, where X is the viral cycle time.

So if we have 1 patient and our R0 is 2, and our cycle time is 5 days, then we have a chart that looks like this:

This is very simple arithmetic. 1 X 2 = 2 X 2 = 4 X 2 = 8 and so on. It is an R0 of two which is the lowest R0 that Covid19 appears to have.

You’ll notice that the curve is a classic exponential curve. I only projected it up to 1 million infections. After that the numbers increase so rapidly that things get absurd. This is only 100 days of projection with a viral cycle time of 5 days. We get to 1 million infections with just 22 steps in the transmission cycle.

The thing I’d like to point out is the rather obvious exponential nature of this curve. The curve is continually steepening. In other words, growth is continuously accelerating. It’s like being in a car where you have a driver that is continually going faster. Normally you’d expect them to go faster at a linear rate. They accelerate from 10 miles per hour to 20 to 30 to 30 to 40 to 50 miles per hour, and so on. Ever been in an exponential car? You accellerate from 10 miles per hour to 20, 40, 80, 160 to 320 miles per hour in exactly the same amount of time and number of steps.

The point here is that you have never been in an exponential car, and exponential growth in a real-world scenario is highly counter-intuitive. We don’t expect that and we rarely see it.

When we are confronted with an exponential curve, we should expect to be continually surprised. Expect to be freaked out as that car hits 320 miles per hour in the same amount of time it usually takes to get to 50 miles per hour. And once you’re at 320 miles per hour, that thing just keeps on accelerating. That is tough to deal with. It is also tough to explain to other people. And even with the benefit of hindsight – “Hey, we’re already at 320 miles per hour!” – you are surprised when in two more steps you’re at 1280 miles per hour. And surprised again when you go through a few more cycles.

And that is the main idea I want to share with you in this section. In an exponential scenario, you need to expect to be continually surprised. You need to examine the math dispassionately and, as crazy as the next few months seem, you need to accept this new reality and plan accordingly.

I should also warn you that as you do this, you will be insulted as a jerk, insensitive, passive aggressive, nut job and so on. I’ve been dealing with this for the last month or more. Exponential growth of a crisis is highly counterintuitive for most people, and sharing your assumptions based on your rational projections will get your ass kicked on social media. And then they’ll apologize, but things will be worse, so the one kind of negates the other in terms of your feelings.

Now that we have a model for thinking about Covid19 and we know to expect to be surprised, lets chat about what the next few months might look like.

We know that we’re already a little surprised that global quarantine is kicking in, the markets have collapsed and all major events have been cancelled – including the major sporting league events in the USA, which are sacred to most of the country. Where to from here?

We know that we’re dealing with a virus that has a respectable R0, a short transmission cycle time and of course the big underlying end-game issue which is the mortality rate. We also know that attempts to prevent the virus from crossing borders failed and the WHO has declared it a global pandemic. So we couldn’t control that. We also know that it has spread to all 50 states in the USA as of today, which gives us a nice wide-spread ‘seed’ bed for growth. So they couldn’t prevent that either.

I’d like to throw something else into the mix. As the infected population grow and become more dispersed, it becomes harder to test all the infected. You have exponential growth and you have a limited number of test kits and personel. Which means that testing becomes more difficult at an exponential rate. That means there is a gap between how many people we think are infected and how many actually are infected. Remember that ‘nature of reality’ lecture I started this blog post with? Well this is the good stuff right here. We must assume that the true number of infected are higher than those we know for a fact are infected through testing. Because of the exponential growth of the virus, it’s a safe assumption that the distance between ‘known infected’ and ‘true infected’ will increase.

When you graph this, something interesting happens. While the reality is an exponential curve of infected growth, the measured data is a logistic curve. And that is bad, because logistic curves give you the impression that things have decelerated and are flattening out – when in fact the growth has gotten so steep that it’s now impossible to measure. It looks a little like this – the logistic curve is in red.

This is a big problem because at the worst possible time it leads to incorrect measurement of reality.

Based on recent history, the fact that we have a virus growing at an exponential rate and a gap between what we think we know and reality, I’m going to come up with a few outcomes that I think are plausible.

  • Hospitals will be overwhelmed, and quickly. This will happen globally.
  • The gap between what is measured and reality will be worse in developing countries, and so they will do a worse job of anticipating the results of the virus. This combined with a lack of infrastructure will have catastrophic effects.
  • The attempts at quarantine in various forms will continue to be disruptive to business and life.
  • The median small business in the USA has cash for 27 days according to a 2014 study by JP Morgan. We will see a huge number of small and medium sized businesses fail globally. Travel, event and accommodation businesses first, and then their suppliers, moving on down the chain.
  • The large number of business failing globally will lead to a drop in employment, which will cause a decrease in spending, which will push us into a global recession.
  • We will see a banks fail as they take the hit from defaults on corporate debt.
  • Central banks globally will continue to try to fix the markets and their various economies by using traditional tools like money supply and cutting everyone a check through tax breaks – or it seems by actually cutting everyone a check. This will fail because the underlying cause is exogenous. You don’t fix this until you fix the underlying problem.
  • These events will be a catalyst for political change globally. This will be the defining issue in the USA election year 2020. In unstable regimes, like certain developing countries, this will be a catalyst for great and precipitous change. We may see several revolutions take place, and some of them may not be peaceful.
  • Before Covid19 showed up, there was a rise in nationalism globally. We saw that in the USA, UK, Italy, Netherlands, Germany and other countries. Covid19 actually forces the implementation of many policies that parallel extreme nationalism. Like border closures, xenophobia, trade restrictions, travel restrictions and so on. This is one of the most catastrophic outcomes of Covid19. It has rapidly and forcibly driven the world apart.
  • The blame game post Covid19 will accelerate this nationalism effect. We are already seeing China working to rewrite recent history and claim that they weren’t the origin of Covid19.

I’ve listed some of the effects of this virus. As you think about these effects, try to visualize them unfolding at an exponential rather than linear rate. It is not easy because it’s quite terrifying and counter-intuitive.

To put this in perspective for Americans, consider that Covid19 will have a more profound impact on American society than September 11, if for no other reason than it will kill more people. We are looking at tens of thousands, best case scenario, but I think the reality will be mid six figures.

Because this event will be more impactful than 9/11, expect it to have greater long term consequences. 9/11 left us with two wars, one of them the longest war in American history. It also gave us the beloved Patriot Act which massively increased surveillance in the USA, both foreign and domestic, until Snowden helped reign things in slightly.

So what political changes might we see in the USA post Covid19? Perhaps a few of the following:

Markets will continue to deteriorate, even with a massive amount of stimulus provided by central banks and regulators. Small business failing will exacerbate this as it creates unemployment and sparks a recession, as I mentioned above.

The U shaped recovery that CNBC pundits have been hoping for will not materialize because the failure of businesses will be the catalyst for a longer more drawn out recession. Once the virus crisis is over, those businesses won’t come back overnight. They’ll need to rebuild from scratch in many cases.

In the midst of all this, where do we find opportunity? This goes back to the beginning of this post where I was focused on getting you to try to understand the true nature of reality. As you can see, this is a rough game. You and I have been chatting about armageddon for some time now and, even though it might be 10am where you are, you probably feel like you need a drink.

But what this conversation has done is it has equipped us with the real data. The good stuff. Now we can have a real conversation about what opportunities this might present. Lets do this!

We know that cities will be hell to live in for the next few months. We also know that companies that have historically resisted remote workers have had to embrace the concept very rapidly.

We also know that medical supply chains are going to likely be moving back on-shore in the USA, and soon.

Out of these facts, there are already a few obvious opportunities. I’ll take a stab at a few:

  • Companies that enable remote work will be hot, if you’re looking to invest in stocks or start a new business. This includes Slack and Zoom.
  • Cities are going to suck, so this, combined with the ability to work remotely will probably see a massive rise in interest in rural property – both housing and raw land. We may actually se a precipitous fall in urban property prices and a sharp rise in rural prices as remote living becomes desirable and feasible.
  • Thanks to remote work, Internet use has spiked, so internet infrastructure companies and providers are going to see a rise in business. This presents an investment, employment and entrepreneurial opportunity. Italy has seen a 20% to 40% rise in overall internet traffic since the lockdown.
  • The medical manufacturing sector in the USA will explode as soon as we’re out of lockdown and will probably benefit from government subsidies.

The message I am most interested in getting across as I come to the conclusion of this post, is that understanding the true nature of things is where you want to start when looking for opportunity during crisis. It is also absolutely critical to start with on-the-ground reality when innovating.

It is hard to get good data to gain this understanding, and it can be psychologically challenging to take that data on-board. But you need to do that dirty work before you are well positioned to make good strategic choices.

I hope you’ve enjoyed this post. You can follow me on Twitter.