Quick Look Into JP Morgan’s Worse Case Scenario

The economic damage of the COVID-19 crisis is difficult to measure. One way is to use data from the past and assess the damage, but the most difficult part is to forecast the future impact. 

The big unknown with the current crisis is the length of the pandemic. How long will it take for lives to get back to normal? The CEO of pharmaceutical company Merck has recently said that the public is so desperate to go back to normal, they are pushing pharmaceutical companies to move things faster, but the problem is that if we are to use a vaccine on billions of people, we better be sure that it works and that there are no side effects.

The fact that we do not know the time element, makes capital budgeting a critical yet difficult task to estimate for each company.

JP Morgan’s Preparations for the Period Ahead

An internal note circulated within the company shows how one of the biggest financial behemoths prepares for the Q3 2020 and beyond. It sets a pile of money aside for rainy days, a full $34 billion, effectively telling everyone that there is no way to know how bad the storm will be.

Even under an extreme adverse scenario, the bank relies on a strong capital position, setting up reserves for a possible W shape recovery. The shape of the economic recovery is something of great debate since the start of the pandemic. Many economists and market participants were inclined to expect a V-shape recovery at the start of the Q2 2020.

However, as time passed and the job creation is not strong enough to grant a quick recovery, a W-shape is more likely. Moreover, some voices argue now for an L-shape economic evolution, which basically calls for a restart of economic activity from a lower level and never getting back to pre-pandemic levels.

As always, time will tell how the recession will unfold. But when a big financial conglomerate like JP Morgan prepares for the worse, it sends a sign to market participants that things are far from normal. In a way, JP Morgan does just what the regular households do – putting money aside for rainy days. If we all agree that the rise in the households’ savings rate is normal in times of economic crisis, then it is normal to see companies following that same example.

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