Key takeaways

  • Forecasts can be helpful to consider, but with so many uncertainties, they can also become noisy and distracting.
  • The current coronavirus crisis is made up of three component crises – the current health crisis, the on-going liquidity crisis, and a coming solvency crisis. Despite the unknown duration of each of these component crises, the interaction between each component is more certain and is important to understand now.

As the current coronavirus situation unfolds, consumers, business owners, and property owners are trying to wrap their heads around what this means going forward. At this point in time, we all know – this is a big event. However, many are stuck wondering, What’s next? When will this end? Will there be a new “normal”?

Uncertain times

The situation is still developing and there are so many unknowns that any speculation about the future is just that: guesswork. While some of this is helpful, because expectations of the future help to inform current decisions, all of these forecasts and estimates can be noisy.

When it’s easy to get distracted by all that we don’t know, it is a time to take stock of what we do know. Even though there is no historical global pandemic similar in scale to compare the current environment to, if we take a step back and look at the crisis as a whole, we can see that while this crisis is unique in terms of cause and scale, it still has familiar elements of past crises. These shared elements include:

  • Seemingly contagious broad market uncertainty
  • Souring future expectations
  • A repricing of risk
  • Tightening of underwriting standards
  • Shift from deal making and origination volumes to risk mitigation and hands on asset management

So while this current period of uncertainty racks nerves, some should find solace in the fact that we have been through crises before and come out on the other side.

Three cycles: health, liquidity, solvency

To get a better sense of what’s happening now and setting expectations for going forward, I like to think of the current situation as being really three parts: a health crisis, a liquidity crisis, and a solvency crisis.

Health crisis

This component crisis stems from the virus itself, it is a capacity strain on the healthcare system and has put pressure on governments and people to drastically change their business practices and social behaviors through travel bans, social distancing, and large scale economic shut downs.

The duration of this component crisis is unknown, but we are starting to see some easing of the lockdowns as economies start to open, but these will likely be only partial until we find a vaccine or cure that can be produced at scale and distributed to the majority of the population; or until we achieve herd immunity.

Liquidity crisis

Given the massive disruptions in supply chains and not-so-temporary changes in consumer behaviors, many businesses have faced significant challenges when trying to meet their near-term financial commitments. This situation has resulted in the need for significant budget and headcount / hours reductions (layoffs and furloughs).

This component crisis was triggered by the health crisis (pandemic) disruptions and mitigation efforts such as social distancing and economic shutdowns. Despite the very large efforts put forth by both the Federal Reserve and the federal and local governments, the duration of this component crisis remains unknown and will remain unknown until the economy fully opens again, business resumes or businesses close permanently.

It is critical to note that the government stimulus efforts have been largely targeted at providing liquidity to troubled firms and market functions. While these measures have been more significant than any stimulus efforts in the past, the amounts allocated to firms are finite and will run out. For example the Payment Protection Program (PPP), which provided small and medium sized businesses with emergency funds to keep their employees and keep the lights on, covered eight weeks.


As the crisis continues and cash reserves dwindle, many companies and individuals begin to see challenges with meeting long-term financial commitments and their solvency comes into question.
While the sequence of this component is known, as it follows both the health crisis and liquidity crisis, the timing remains uncertain but is likely not far away.

Many companies and individuals who have already burned through rainy day / rainy week funds and are currently working through the federal and state emergency financial support now. As courts across the country open, expect to see a gradually building wave of bankruptcies and foreclosures that have been backlogged (bar any additional large scale government support or intervention). Based on prior large scale bankruptcies, this will likely play out for 12-24 months, once it begins.

The fear of insolvency and the permanent removal of so many businesses and jobs is what will build political and social pressure for state and federal governments to open economies; however, as many scientists and doctors have made clear, if done too soon this could trigger a second wave of a health crisis – and we would be back to the first component crisis for the virus crisis wheel to start again.