Welcome to a coronavirus briefing with MIT. I'm Randall Wright, program director with MIT's Office of Corporate Relations. I'll act as your host on behalf of MIT's Industrial Liaison Program. The coronavirus outbreak is first and foremost a human tragedy affecting hundreds of thousands of people. It's also having a growing impact on the global economy. This briefing is intended to provide business leaders with a perspective on the evolving situation, implications for their companies, and steps they should be taking now to mitigate the impact of the COVID-19 pandemic. We have with us today three of MIT's most prominent faculty members, Professors Joseph Sheffey, Alex Pentland, and Andrew Lowe, to give us perspectives on supply chain, organization structure, and financial markets, and insight in what firms should be doing now. Let me begin by introducing Dr. Joseph Sheffey, Professor of Engineering at MIT, and Director of the MIT Center for Transportation and Logistics. Today, he will focus on the here and now. And we'll explore with us the COVID-19 disruption in context of past disruptions and explain what companies should be doing now as the epidemic is spreading. Professor Sheffey. Hello, everybody. I'm Joseph Sheffey. I'm the director of the MIT Center for Transportation Logistics. In the next hour, we'll talk about business and supply chain impacts of the COVID-19. Of course, the first thing that people tell you is not to panic. And I'm not panicking because my computer is not working. So just a minute, there's a technical difficulty here. Yeah, just click on the slides once with your mouse. OK, we got it back. So the first thing everybody tell you is not to panic, which, of course, is the reason for all the panic. But let's look at the whole disruption that business are facing here in the context of business disruptions in general. So we have random phenomena like hurricanes and floods and natural phenomena. We have accidents. We have government and politics, Brexit, and lots of other trade disputes and others. There are issues of non-compliance. And nobody don't comply with regulations. And it brings a disruption of business. Or a supplier does not comply with regulation. We have sometimes competition coming from left field without us realizing it. Of course, the economy. We're now going towards a recession. But we've had recessions before. 2008 comes to mind. It was a big disruption for all businesses. There's issues of social discontent when people are angry about using, for example, animals for testing about the environmental issue. There are, of course, intentional disruptions, be it strikes, be it terrorist attack. And finally, we're going to talk about pandemics. That's the subject of today. So in order to put it in context, let's look at some history of some pandemics. So the AIDS pandemic, which is still slowly going on, had 75 million cases at a death rate of over 40%. The US flew just in the US in the last year at 35 million people infected with about 0.1% fatality rate. The H1N1 was a very big disruption. Had about a billion people worldwide. About 200,000 died. The Ebola is one of the more frightening one because of 2-thirds of the people infected died. Finally, we're talking about the Spanish flu, which several people mentioned in 1918. About 1.2 billion people were infected. 60 million people saying 50 million, 70 million. Nobody really know for sure. About 5% fatality rate. But the numbers were enormous. And this was what hospitals look like. And this is where mass graves were digs. So let's now talk about how pandemics work. And they don't attack the whole world at once. There's a first cluster going on, what we saw in China. It then dies down. Then we have another cluster starting and dies down. And another cluster starting. That's what it looks like today. And if we look at one of the dashboards, you see the clusters happening every day. Also, if you look at the lower right-hand side of the screen, you see the top line, the orange line, is infection in China. The yellow line that goes like a hockey stick are infection in the rest of the world. Italy and, of course, around Europe in general. And right now in the United States. Just to understand, there's a lot of misinformation about the fatality ratio. So let's me just mention it that the problem is there are two ways to calculate the fatality ratio. The first one is for countries who are caught flat-footed. They didn't test in time, many undiagnosed infections, and the results are overwhelmed medical facilities. So this is what happened in Wuhan in China. This is what is happening right now in Italy. This is what is happening right now in France. In China, just to understand, during the Edehubei province, there were about 4.5% people died. However, in the rest of China, it was less than 1%. Because by then, they were implementing all these measures to stall the pandemic. Around the world, you can see the difference between countries. In Italy, it's now over 7%. The number of dead people in Italy is staggering. South Korea is less than 1% because they started very quickly testing people, following those that came in touch with those that became positive. And then they have a very low mortality rate. Iran, almost 5%, has a problem. But if you look at Switzerland or Denmark, they have very low percentage. Because they took a lot of the measures early. The idea is to take it early. And just by comparison, there are several countries that took very aggressive measures early and experienced no death. Whether it's Malaysia, Qatar, Singapore, Israel, Finland, Bahrain, none of this country. There are hundreds of infections in this country. None of them experienced any death yet. Let's now move to the subject of this talk, supply chain impact. So first of all, comparisons between this disruption and others like the Fukushima meltdown, the Thailand floods, the SARS, MERS, Katrina and the United States are all inaccurate and underestimating the impact. The problem with the COVID-19, COVID-19 are that it impacts both supply and demand. We saw first a supply impact. And I'll talk about it a little more. But the main impact is going to be a demand impact. Part of course, as you read in the paper, China today is much larger element of the world GDP. So both supply and demand affecting China, thereby affecting the rest of the world. But the main impact will be the demand reduction due to fear and social distancing. And of course, the media, the online hype. We are probably facing a recession. I let the two other speakers talk about it a lot more. But this is the so-called Black Swan, the thing that hit us from left field without any preparation. Let me suggest that even though this is different, there's something that I call the Anakarenina principle. What is this? Tolestoy wrote in his book, Anakarenina, happy families are all alike. Every unhappy family is unhappy in its own way. So every disruption comes with its own litany of misery, causes and cascade of effect. Every disruption, not two disruptions are the same. However, management of every risk and every disruption involve prevention, detection, and response. There are generic preparation steps that should be taken in every disruption. These are applicable to supply chain issues and we will talk about it right now. So first of all, the first thing that I want to explain is the so-called bullwhip effect. It tells us who will be the most vulnerable among businesses affected by the supply chain. What happens with the bullwhip effect is as follows. Assume that a retailer sees consumer demand go down by, call it 10%. The retailers do think now, it thinks that the demand will be down by 10%. I'm just using an example number. We'll go by 10% for a long while. It also has inventory, assuming that it will be 100%. So it has to reduce for the future, its order, and it has to get its inventory down. So instead of just ordering from the distributor, 10% less, it order maybe 15 or 20% less. The distributors see 15 or 20%, it has the same issue. It looks at its forecast, it looks at its inventory, and it order from the producer maybe 25% less. The producers order from supplier even less and it goes up and up. The bullwhip goes up and down. At this point, we're going down. It also, you know, also laid heavily. But the point is that the small suppliers, the second and third tier of the supply chain are usually small and cannot withstand the initial downdraft in orders. So the result is damage to the upstream suppliers. Just to give you some data, during the height of the 2008 crisis, which was also a demand disruption. US retail sales were down 12%, manufacturing inventory down 15%, and manufacturing sales were down 30%. A colleague of ours, Jan Fransow in Holland, did a study with using Dutch data during 2008. Tier one or two is the suppliers immediately supplying to the brand owners. Relative to the end consumer, they went down about 25%. However, people deeper in the supply chain, what we say, what we call upstream relative to the end customers were down 40%. And in fact, the Chinese immediately understood that it's as the China Morning Post that this could be a death blow for Chinese small manufacturers. So the Chinese government told state bank to start loaning money at zero to very low rates, sometimes zero to small businesses, and reduce aggressively the taxes on all small manufacturing. Now, during 2008, Ellen Mulally, the CEO of Ford, understood it very well. When he gave his testimony to Congress, he did something that in some sense is amazing. He implored Congress to save its competitors because he said if a GM or Chrysler will fail, their supplier will fail, their supplier supplier will fail, and their suppliers will fail. These suppliers are making, for example, Johnson Control makes seats, makes seats for all the auto manufacturers. If it fails, nobody will have seats, including Ford. So it asked Congress to help and make sure that these companies will be held. Ford was not in a bad position, it had enough money. But to summarize, he said a collapse of one of our competitors would have a ripple effect across all automakers, suppliers, and dealers. A loss of nearly three million jobs in the first year. So he was trying, he understood this problem very well and trying to explain to Congress that it's not only the, what do you call it, the OEM, the original equipment manufacturer, the people who hold the brand. In this case, it's the other company, but it's older supplier and it'll affect an entire industry. We'll talk a little more about this later. First of all, let me give you some forecasts, which is always dangerous, because in two to three weeks, you may find out that I was wrong, but be it as it may. So we started in, let's talk about supplies from China. First of all, I understand that supplies are coming by and large, the big quantities on ships. They are not flying on air in any case. There's no, almost no flying, but this is not flying on air. It is coming on ships. So what happened is the following, in the Chinese New Year, there's all businesses in China almost grinds to a halt. It goes from the second week of January until the end of January, beginning of February. So this is what happened in 2020. Everybody went home. Factories, the world over who gets part and material from China knew not to expect shipment during the Chinese factories closure. So, however, they expected shipment to restart right afterwards. So what we did, what these world factories did all over the world, they had enough inventory of parts and material in order to build their product to cover the down period, but not much more. So see what happened now. Let's focus on China and its vicinity. What happened is a week after the end of the Chinese New Year, ships from China loaded with part and material did not make it to North Korea, to South Korea. They probably also didn't make it to North Korea, but it was another problem. It did not make it to South Korea. What happened in Hyundai announced a week after the end of the Chinese New Year that is closing factories in South Korea. 10 days after the end of the Chinese New Year, ships laden with parts and material were not making it to Japan. Nissan announced closure of factories in Japan because it did not have parts. Let's now look at the United States. It takes about six, eight weeks to get from a factory of China to a factory in the United States. What does this mean? This means that if we take about the beginning of February, sometimes the end of March, the first part of April, we're gonna start having factory closures in the United States. Whether it's automobile parts, whether it's cleaning supplies, whether it's aircraft parts, whatever. Many, many others. We're gonna start having closures and inability to make product in the United States for a while until the Chinese will start moving again. But remember, it will be not possible to fly many of these parts because we lost a lot of the air cargo capacity. Just for those who not realize it, most of the air cargo capacity is belly freight. What's called belly cargo that flies in the belly of passenger aircraft. Most passenger aircraft are not flying to China. In addition, FedEx, UPS, DIGL all reduce their China services. So we don't even have capacity to do it even if we wanted it. It would be outrageously expensive anyway. So it will be a while until these factories will start gearing up. So what should be the corporate actions that the companies should take right now? We'll talk about setting emergency management centers. We'll talk about how to set up communication decision-making protocol. We'll talk about who has the decision-making authority, reviewing the review of suppliers and review of products and customers. And finally, well, one bullet point before last, we'll talk about one issue about finance that is tied to supply chain. Note that Andrew Law, my colleagues, will have a whole hour talking about financial issues in the context of the coronavirus. And the last one, we should plan for the recovery. We should plan for being able to get up and go at the end of this and we'll just mention what should be done then. So first, let's talk about emergency operation center. So the idea is when you have a crisis, you want central information and decision-making function. You want the decision-makers, have all the information come to one place when people can talk to each other and make decisions. Now, the pictures that you see here are, or the illustration that you see here are probably not relevant for coronavirus because a lot of this, in case of the coronavirus, will be done virtually. But we need a central information decision-making and one can have people in a room like this but spread them around, of course. In this type of emergency operation center, you have to worry about two things. You have to worry about employees. How do you take care of employees? And how do you take care of the business ecosystem? And in many ways, this should be two separate teams because the mistake that many companies are doing is one team looks at both and you have to worry about both of them. Both of them are as important at the same time. When you talk about employees, you have to think about families, you have to think about children at home, you have to think about how to connect employees, continuity of pay, a lot of these issues have to be dealt by the HR team. Basically tied to the emergency operation center. Of course, taking care of the business ecosystem is what we'll talk about later. How do you take care of customers? How do you take care of employees? How do you take care of suppliers and so forth? And lastly, taking care of communities. Corporations operate in certain communities and have to make sure that they offer their services to the community. So for example, Google made its online tools for collaboration free for businesses for the next three months or so. Many businesses are taking similar actions, giving their staff free to people so they can use during the, so they can keep business, family, relationship, collaboration going during this crisis. Just to give you an example, this is the Walmart emergency operation center during a hurricane. You see people sitting next to each other. That's not gonna happen now. They're gonna sit far away from each other, but this is tied to all their system. On the screen, you can see what happens in every one of Walmart distribution center and stores and parking lot. And the information comes to this place. This is American airline operation center, something similar. Let's now talk about the crisis communication. Excuse me. How do you communicate what has to be done in case of a crisis? So first of all, you must have ready communication for all stakeholders, which mean know who they are, have all the emails, have everybody get on similar collaboration tools at this point and so on. As I mentioned before, you have to worry about employees, you have to worry about customers, you have to worry suppliers, the media, shareholders, analysts and the community. You have to communicate with them continuously. For example, MIT every morning sends to all its employee a message about what's going on and how life are changing, what is happening, what is not happening. This is something and it's sent. Now of course, MIT and everybody at MIT has an email address and tags and so forth and it comes on all channels. Important to speak with one voice. Just one person speaks about the crisis and what we are doing about the crisis. Of course we have to decide who is in charge. We all remember after President Reagan was shot that Alexander Haig came on TV and saying I'm in charge. Turns out according to the constitution, he is not. But so one had to decide a priori what happens if the CEO falls ill, what happens if other people in the organization are not able to function. Give accurate information. This is something that we all lament now in the United States but giving accurate information tell exactly what's going on. The one voice has to tell everybody exactly what's going on, not try to spin it, not trying to blame other people, just tell the truth. Example of how not to communicate is the case with Malaysia airline, the Boeing 777 that went into the Indian Ocean. On March 8, 2014, Malaysian airline 370 flight disappeared. Immediately the Malaysian went into a tizzy. They started conflicting announcements and spoke with multiple voices. See the Malaysian prime minister was saying one thing, the minister of transport another, the inspector general of the Malaysian police, the Malaysian Air Force police, the maritime enforcement energy department of civil aviation, airline representative, air traffic control releases, all gave very confusing information. And nobody had the trust of the people and of course the grieving relatives but also the whole aviation work tried to understand all aviation world tried to understand what was going on. What is, what happened to a sophisticated state of the art airplane that fell off the sky? We still don't know. And of course we have a problem when we talk about how not to communicate in the US with the president. And I'm wondering what the people around him are thinking. I think that this guy doesn't really rely, doesn't really believe what the president is saying and this guy gets really angry. So I don't really know what they're thinking. That's in my mind what they're thinking. Now decision-making, let me give you an example that I described in my latest book about risk management and resilience. In 2011, that was the height of the Japan disaster. Remember the tsunami, the earthquake, the tsunami and the nuclear disaster. So many of the GM suppliers in Japan were not able to supply parts. So for example, at one point GM had no seat heating module. That's the solenoid that goes under the seat to warm it up in a cold weather. So they had no seating, couldn't get the part that hits the seat. So they had an emergency management center, of course, but they were arguing what to do. A vice president came in and made a decision, build vehicle without heated seats. Well, turns out a disaster. The problem was that heated seats go with leather. So you build more cloth seats. So but the cloth and leather mix affect the basic versus luxury model. So what happened is cancelling the leather seat meant all sub-assembly and component that went into the seats became stranded in the supply chain somewhere. And anybody who works in supply chain know that the worst thing is to have too much stuff going to a distribution center or a warehouse. And you had all the leather seat clogging the supply chain. They had it with a few other parts.  They don't care about GM problems and they're just not gonna buy. So the idea is, now, of course, if you are an engineer or a supply chain professional, you know these things and you will never make a decision like this. So the mantra, one of the main conclusions from this crisis GM that then they implemented everywhere is called swim your lane, which means, in other words, that's what Bill Belichick, our beloved coach, calls do your job. Don't do other people's job. Don't swim in other people's lane. Just do your job. If you are an engineer who deals with seats, you know what can and cannot be done. If you are supply chain manager who understand where stuff is coming from and where it's going, you make the decision. One of the most important issues in this case is actually to keep the C suite, the CEO and others away from making decisions. They should talk to the media. They should talk to analysts and they should be fully informed all the time about the latest information, but they should not make the detailed decision because in talk about sophisticated product like automobile with tens of thousands of parts and tens of thousands to hundreds of thousands of suppliers all over the world, you have to know exactly what you're doing when you make decisions. So let's now talk about the next point which is look at suppliers. You want to make sure that you still have supplies, that you have a steady flow of parts and material into your factory so you can build your product. So the first thing you have to do is supplier mapping. What do I mean by supplier mapping? You have to know where your stuff is coming from. Surprisingly, most companies don't. What they know is who the supplier is and they know where the headquarters of the supplier is because in the SAP system or other enterprise research planning, what you have is the address of where to send the check where the suppliers send you stuff. That's not what you need. You need to know where the supplier clients are. Are they in Wuhan? Are they in South Korea? Are they in Northern Italy? Where are the plans of the supplier? Not the fact that its headquarters is in Luxembourg or Switzerland. This does not help you. You want to know where the plants are so you know if they'll be affected. Next thing you have to know about each one of these plants of the suppliers, what do they make? What parts do they make that goes into your product and how critical these parts are? What I mean how critical there's a lot of things that go into this but can you build your product without this part? Can you, do you have two other suppliers of this part in other parts of the world who can make it? Also very important is which product do these parts go into and which customers need this product? So now you have to think about the next point which customers are served. That's very important. You want to decide, let's say you don't have enough, you have to decide which customers should be served. And before we talk about inventory level, we'll talk later about what to do when you don't have enough supply and how to decide about which customer to serve. But you have to check inventory level, not only in your warehouse of plants but at your suppliers and their suppliers who has inventory, who can keep building parts and sending them to you. Capacity, are they working at full capacity? Are they working at 80% of the capacity or 50% of capacity? This will give you an idea of how many parts and how much material you can expect to come into your manufacturing facilities. And you want to have what we call visibility. This is something, this is not something new. Most companies are trying desperately to get visibility into their upstream supply chain. What's coming into them? I mean, you know what you're sending out to your customers. What is much harder is to know what's coming into you. Surprisingly enough, even though every consumer when it gets a FedEx, UPS, U.S.P.S. package can follow the package and track it, most businesses cannot. Most businesses cannot follow something from a factory in China all the way on the truck, on the rail, on the ship, goes to U.S. port, go to customs, goes on the rail, goes on a truck and get to their plant. It's very hard to follow this. As it turns out, we can talk about why it's, a lot of people are investing in this, a lot of money, it's getting better. The problem is, what happened to the secondary supplier? What happened to the staff that has to come into your supply? Can they know what's going on? Can you know what's going on, even though it's not coming to you? That's what we talk about when we mention visibility, and with, there are some, there's a lot of work on this with intent of things, with new sensors and new capabilities. What to watch for? Okay, lots of things to watch for in case of a disruption. Supplier may degrade quality. They may be under pressure. They want to serve you, they need the money, and the stuff that they build does not have the same quality, they use material that's not approved. Have to watch for it. Late delivery. They promise to send on a certain date, they just can't. So deliveries will be late. That's why you want all this visibility. A huge problem is fakes. When there's not enough supplies, when supplies dry up, companies start looking everywhere for alternative suppliers, for alternate suppliers. Lots of new suppliers suddenly come online and on the internet, and they offer fakes stuff. They may offer used chips, for example, that may be repainted and sold as new chips, but they'll fail as soon after you install them. Lots of issues with this, and we saw this big time. We saw this doing the horse meat scandal in Europe. We saw it doing the, we saw that the US Air Force, the Lockheed and the people who built some of the most advanced jets in the United States found out that they have fake chips in some of the systems. There are many, many cases like this, but what's important is to watch for it during disruption because this is when they spike. Financial health, you have to watch for the financial health of your suppliers. If you depend on them, they better be in business. So watch for, and this not enough to wait for the end of the quarter. You want, the best thing is actually to watch the news in their city, in their area, to find out if there's too much talk about redundancy and bankruptcy and going out of business, things like this. Of course, call them all the time, be in touch with them. Finally, get ready to support critical supplier. In 2008, we had many companies, automotive companies, Intel, many others supporting weak critical suppliers by other investing in them, extending their own terms to this, their own credit terms to these suppliers and many other ways. But the important thing is make sure that critical suppliers don't go out of business because then you go out of business. You cannot build stuff. Think about it. Now, there are several problems with the supply chain structure. This is what the supply chain structure look like. On the top you see OEM, Original Equipment No Factory. Let's assume that this is Ford Chrysler and GM. So the first problem is opaqueness. Companies actually don't know who is the bottom tier of the top tier of the supply chain. So if you look at the OEM, imagine General Motors. It's no who it's tier one supplier here. Let's assume that one of them is, we say Johnson Control makes seats. The seats will go into GM plant that assembles the cars. But into Johnson Control, there are companies who make all kinds of parts for the seats. So this will be the heating modules that we talked about before. And upstream in the supply chain, there are lots of lots of suppliers who make screws, and this by the way, when you go into automotive just special screws that are actually regulated and heat treated, but they sell to all the auto companies. And the OEM doesn't know who is selling to them, where their stuff is coming from. You know, if the OEM know who is tier, it's tier one suppliers are. Some of them would know tier two, but many tier one in many industry would not reveal who the tier two are. And it gets to be very opaque when you go upstream in the supply chain. So the first problem is it's very hard to know even what to watch for. The second problem is that there's could be vulnerability of an entire industry. For example, it could be that unbeknown to all these three tops original equipment manufacturer, they all depend on for some parts on one supplier, at tier three, they don't even know who they are. We call it a diamond structure in the supply chain. Examples like this was in 2012, a factory Evonic Chemicals, it's a factory in Germany blew up. It supply over 50% of the automotive needs of the world need for automotive what's called plastic 12. It's a certain type of plastic that is very resistant to corrosion, to fluids, to a lot of other stuff. It is 40 to 50 pounds of this is used in every car around the world. It was a disaster that almost brought the entire automobile industry to its knees. Turns out the industry to its credit got together all the competitors got together under the guise of the automotive industry group and in Detroit brought together a lot of other chemical manufacturers, DuPont and many others who started making these tops of the auto industry did not come to a halt. I mentioned before what do we do if there's not enough supply? So if you have limited supply, you can do several things. You can allocate the goods, you can auction them, you can dilute them and you can shape the demand. Let's talk about every one of those. Let's talk about allocation. Excuse me, let me, first of all, when we talk about allocation is product triage. In many cases, the same parts may go to many different products that you make. So again, which product gets the part? How do you do it? Based on financial contribution, which means the product with the highest margin based on product for which you have a lot of products already in the field, based on products that go to the most important customers, based on fairness to everybody, based on which customer really totally depend on you and go out of business without you. There are many, many considerations about which product gets the part and you have to decide this now before, so you don't have to make decision on the crisis. Of course, it works best if this consideration, like margin, vary across product and customer. If they're all the same or on all products, so you just do it by fairness. You give everybody the same percentage of the product, but it's never the case. Usually it's very different between customers and product. So you give you an example, again with General Motors with 2011 during the Japan crisis. So there was a shortage of engine controllers, airflow sensors and brake control modules for all trucks. These parts are the same for all trucks that GM makes. GM made a decision. It made a decision to close the Shreveport truck plane that makes the Colorado truck. This is the truck shown here. Why did they make it? Because this is a small truck. GM makes a lot of money on big truck and very little loses some money on the small trucks. So in addition to this, it had lots of field inventory because it was not selling well. It has a lot of field inventory, so it would not have affected customers. So GM decided to close the Shreveport plane for one week. Of course, the Wall Street Journal and New York Times, so the sky's falling GM is closing plan. It was totally and utterly planned and orderly closing. As it turns out, once they decided to close it and start the process, they found out enough extra parts and did not need to close.  But it's an example of product reaction. An example of auction is in Thailand, France in 2011 was a huge floods in Thailand. You see all the factories being flooded. Thailand is the number one producer, like 70, 75% of the world's disk drive are produced in this part of Thailand. So companies, the company that had the part decided to get it to the customer who wanted most. Now, economists will tell you that this is the right way to make a decision. Western digital was hit hard and Seagate had demand stripping supply. So Seagate conducted auction among customers. He who pays me the most will get it. Economist thing is the right way to do it because it gives the product to the customer who needs it most. Unfortunately, the response of the customer was that this is profiteering and once they had to go to Seagate, but when the crisis abated, they all went back to Western digital. So it worked for a short term, but not for a long term. Delusion, that's an example, there are many other examples, but the maker mark had high demand for his bourbon. So he decided to add what they said, a touch more water to the bourbon instead of 90 proof, it became 84% proof. The CEO explained that to maintain the test, they had to dilute it a little bit. The result was a customer revolt. One customer, my bourbon is being diluted, so beam can fatten the wallets a little more. I'll have lowered their demand by not buying anymore. Customers stop buying it. The CEO, a week later the CEO said, we've been tremendously humble over the last week or so. By the way, many other company diluted many products. For example, Intel diluted some of the material that goes to the chip, but of course it was well tested and to work, it was not a problem. There's another, the last thing is substitution during the Taiwan earthquake, both Apple and Dell introduced no model. Apple, in order to estimate demand, took orders for 160,000 specific computers, the specific component. Dell had no pre-orders. So Apple could not sell what they promised. Dell used its so-called postponement strategy. It would not build a computer until it had an order in hand. So it just raised the price of those computers that had the component in short supply, lowered the price on those computers for which it had all the parts and continued selling with no problem. Let me just say a word about finance and a lot more of it will be said by Andrew. First of all, during recessions, as we seem to be going into cash is king. So in terms of supply chain, you have to think about paying later to suppliers who keep cash. You have to try to get earlier payment from customer once you send them the product. You have to reduce inventory. There's a lot of cash tied in inventory. You have to delay any capital investments. And of course, when you increase the time you pay suppliers, watch for the health of supplier. You can do it with some suppliers, not with the weak one. Of course, make sure you secure credit line and start thinking right now about the recovery. I'm not talking more about it because Andrew Lowe will talk more about finance. But let's talk about planning for recovery. So the idea is to keep expertise in house. So continue to pay, taking care of family, allow for part-time work. Germany, Holland changed the label for example. They wanna make sure that workers with expertise are not gonna leave the market or go and work elsewhere. So they allow for part-time work, but the big change was that unemployment would be paid for part-time work on a part-time basis. And then let's not forget. And a crisis is a terrible thing to waste. And it's opportunity during a crisis for tough business decision. It's an opportunity for reorganization that you always wanted to do, but there was a lot of resistance within the organization. There's an opportunity to cut not performing products and customers under these circumstances. Finally, a note about the long-term because I get a lot of questions about it. Will more companies move manufacturing procurement onshore out of China, out of elsewhere? Short answer is yes, but not much. The reason is that Chinese manufacturing become so sophisticated that it's not easy to replace. And Southeast Asia still has cost advantage being Vietnam, Bangladesh, Indonesia, Malaysia. So it's not easy to move onshore. So, but on the margin, companies will not move totally but will balance their supply base and include supplies in different parts of the world. And maybe in the United States as well or in North America. But note, companies who source in the United States will do the same thing. They will be afraid that something happens in the United States. By the way, like it's happening right now and have some foreign dual sources, has other sources elsewhere. So company will pay to have more than one source. Some of them will be in North America. Some of them will be elsewhere. So finally, let me stop here and I'll try to take some questions if I get some. And just to just further reading, I wrote two books on supply chain disruption. After 9-11, I wrote the resilient enterprise that came out in 2005. It's called the, I don't know my glasses. But it's overcoming vulnerability for competitive advantage. And in 2015, 10 years later, many of the companies that I talked to came to me and said, look, there are a lot more risks but they were also much better at it. We know what we're doing. So we should write another book. So I did. And in 2015, I wrote The Power of Resilience, how the best companies manage the unexpected. None of this talk is about coronavirus, but a lot of analysis of past pandemics. Finally, what you see down there, HTTPSchefie.mit.edu is my website. And if you go there and look on the LinkedIn influencer post and many others, you'll see on the front page a lot of posts, TV appearances, lots of journal articles and others, stuff that I wrote about the coronavirus in the last few months. So with this, let me see if we can take some questions. Okay, there's a question from Solomon. He said, we've been pushing decentralization and pushing decision making to the lowest possible for quite some time. Are we scraping all this with the move to centralization in a crisis? Good question. Many companies have been decentralized and moving decision making down. And by the way, it's absolutely the right thing to do, especially in a crisis. But let's take a look at some questions. But let's separate between two things. Let's separate between the information flow. We have to focus the information and focus high level decision making. But the idea, if something happened at the low level, this particularly important, not for this type of disruption. In this case, it's worldwide. So knowing what's happening in other part of the world, learning from what's happening in other part of the world, concentrating this information in one place is a good thing. But then moving this information down to the decision making maker at the lower level of the organization. So in general, absolutely yes. Moving decision making to lower level organization is the right thing to do. But in this case, since it's affecting the entire world at once, not a particular location was to act fast. We have to learn from everything, understand what's going on around the world, move the information down. And unless it's a decision that affect the entire corporation, which has to be done centrally, decision can be made locally. So with this, let me move to the other question. Philippe asks, given the information overkill at present, my God, I hope I'm not part of it. What are the trustworthy source of information on seaborn and airborne logistics from China to the rest of the world? Okay. Right now we have, the idea is call your favorite supplier. Call your favorite shipping company, airline that you ship it, mostly forwarders, who are forwarders for those who are not familiar with the intermediaries that you arrange for you for either sea or air international shipping. They will have much better information because they talk to the actual airlines and shipping line all the time. So to me, the best source of information are these intermediary, the third party here in between the customer, retailer, manufacturer, distributor, who owns the goods and the customer where you want to send the goods to in the middle there's these forwarders, these third parties who can have the information all around. So my guess is that this will be the source of this information. Okay. Unfortunately, I'm going to sign off now. I'm going to get off this now because I want to finish five minutes before the hour because we have to clean up the surfaces and I'm sitting in a very small clothes, audio booth and we want to clean it up and we want to air it out before the next presenter come. So let me stop here and invite Sandy to come in and follow me. So thank you very much. Go to my site. If you have a question, you can send it to my email, chefie at MIT.edu. My site has more information, chefie.mit.edu. Thank you very much for listening. Goodbye. So we are going to now take a short break of about five minutes and then we'll be back with Professor Pentman to talk to us about organizationally what can we do about the spread of the coronavirus. Well, welcome back to a coronavirus briefing with MIT. Just a few items to mention before we continue with Professor Pentland, we'd like you to use the Q&A feature that is part of the webinar so that we can take your questions. And a recording of this briefing will be available on the webpage that is the Industrial Liaison Program Office of Corporate Relations webpage for this coronavirus briefing that you can access. Individuals with high centrality are most at risk for contracting coronavirus. That means executives, especially ones in corporate headquarters. What should executives be doing now to organize their executives and associates to minimize the spread with its attending work disruption of COVID-19? How can you predict what parts of your organization will be impacted next? Drawing from his groundbreaking work, Social Physics, Professor Pentland will outline what executives need to be doing now to protect their organizations from COVID-19 pandemic. Professor Pentland directs MIT Connection Science an MIT-wide initiative and previously helped create and direct the MIT Media Lab and the Media Lab Asian India. He's one of the most cited computational scientists in the world and Forbes recently declared him one of the seven most powerful data scientists in the world. Professor Pentland. Working, little presentation up and going here. See if we can do all this. Is that working? Yes, no? Okay. Maybe someone wants to come in here and give me a little help because it doesn't seem to be doing. Oh, I see. Too many questions. That's what it is. Okay. Good. Okay, good. So with that on the way, see there's difficulty in doing this stuff online. We're all just learning. So I'm Alex Pentland. I run a group at MIT called the Trust Data Alliance. It spans the Media Lab and Institute for Data Systems and Society and the Sloan Initiative for the Digital Economy and has many industrial and national sponsors. And it focuses on analytics for your organization, blockchain-based data control, AI on distributed data and more. So let's just get into it here. So the medical problem is reducing the virus spread. And so this shows a social network, all the connections and the spread of the virus depends on how tightly connected, how frequently connected you are with people. Of course, this is physical connection and the probability of the infection. And one of the things to notice is that most organizations are very hierarchical. They're centralized. So the people in the center are the senior leadership and they have the greatest risk because all roads lead to them. They also have the greatest risk because they tend to be older and have more medical comorbidities. So you've got the perfect recipe of mixing the virus with people at risk. So what do you do about this? Well, the standard thing you do is reduce travel. So you break some of those links in the social network. No meetings, you don't have those clusters so everybody gets infected. No physical contact. So it's the physical contact, not the virtual, of course. Clean surfaces, schedule people at different times and move to video. Personal hygiene is of course, wash your hands, wash your hands, wash your hands. Gloves, I have these nice little gloves. They're nylon. They're actually sort of evening gloves for a cool night but you can spray them with isopropyl alcohol and that way you can have gloves that come in and on off easily without having them be disposable and yet they get to be sanitized. In more extreme cases, you need masks and gowns and we know that those tend to be in short supply. Maintaining distance, stay at least six foot away. Actually six foot is only a sort of median. It can be quite a bit further. That means though that you need to have very few people in very generous spaces, which is expensive and you can't have queues. So you can't have people lined up to get in. Like for instance, at the airports last night, airport itself was not very crowded but people were all on queues to get their passports checked and their health checked. And then finally, a much more ubiquitous surveillance state than we are used to and that's what they call it in medicine is surveillance. You wanna know who did you come in contact with? You need to follow that. You need to put different data together and then treatment protocols that are very rigid. So for instance, in Taiwan and other places that have had real success at holding this, people get sensed every time they go through a door. If you have anything wrong, then you go to a separate room, typically a tent where you get a flu test. If it comes back negative, then you get the coronavirus test and there's no choice about this. This is like you're in the military now. Okay, we've seen that work in some places. It'll be a question of how it works in democratic societies and particularly in the United States. The real problem from this, from a business and organization point of view is that information spread and virus spread are very, very similar mathematically and how they happen. Everything flows to the central people and normally that's good because that means the central people have a greater view of what's happening and can help make the organization move as a whole. But of course, if this is through physical contact, that also brings the virus along. So the obvious answer that comes to everyone is, oh, well, let's go virtual. But this is not as simple as it looks. And I'm gonna tell you why it's not as simple as it looks. So probably almost all of you are doing some work at home, some virtual meetings, you're on a virtual meeting now, you're changing schedules and that simple sort of medical way of thinking about it is really insufficient if you're going to continue to have a functional business. So what are some of the problems? Well, the problem in most businesses, perhaps the biggest one is that informal communication are about half of decision quality. So this shows information flow in a German bank, five departments. The blue stuff is all the formal communication, in this case, email, paper, things like that. And the red is conversations in the halls. And what we did is we put little badges on people to measure these informal conversations. And it turns out that success in coming up with new initiatives, productivity is far more dependent on the informal stuff than it is on the formal stuff. So when you go virtual, you get rid of all this meeting in the hall, meeting around the coffee pot, et cetera. And as a consequence, if you continue in the normal way, your decision quality is going to be hit very seriously. Another one, which people are not so aware of because we tend to have the wrong attitude about it, is that mental health depends on this sort of social communication and it's much more affected by face-to-face stuff than virtual. Face-to-face is far more powerful because it has all these informal parts to it that tell you what the person's really thinking. And a general rule is that mental health depends on two-way useful social interaction, just as your body health depends on repeated physical exercise. So what that means is that not only do you have to have the ability to reach out to people and talk to them about what's going on, but you also have to feel like they're reaching out to you.  It's in fact the biggest predictor of mental health and the thing which probably has the biggest impact in terms of innovation. Loneliness really does result in mental disease. So when we all work at home, we talk about, oh, the loneliness, the isolation, but this is not just heuristic. It's not just something that is common sense. There's actually a medical process going on here too that you have to respect. Another problem which probably the people on this webinar aren't very sensitive to is the problem of solidarity. Are we all in this together? Well, people under 30 essentially have very little risk of dying from this. It's very similar to the flu for them in terms of mortality risks. And a lot of them say, oh, why should we self-isolate? Why should we hurt our careers? Why should we do these things? And so you're beginning to see these sorts of problems and you can meet this either with force. So you measure these things, the cops come in, you fire them, whatever, which has lots of negative effects, of course. Or you can show them that mortality is not the only thing that's going on here. So even though if you're young, you're unlikely to die from it, you may have to be on a ventilator for two weeks and it will disrupt your life for months. So for instance in Italy where the outbreak is really bad, the advertising for self-isolation, social distancing shows young people who are in the hospital on ventilators and interviews them about the horrible experience it is. So they didn't die, but they certainly suffered. So it brings the value home to them. And of course, there are other sorts of messages you can have to bring home the fact that we need to be together in this, we need solidarity. I mentioned it a little bit earlier, but part of the problem with solidarity, some of the problem with mental health comes down to a problem of trust. You have to have trusted relationships in your organization. It is not a function of transparency or predictable sort of procedures. It's really a very personal thing, which is that I know that if I do a good for you, you're gonna do a good for me. So it has to do with the frequency of having those sorts of interactions that produce this attitude of trust where you're willing to go a little bit extra. That little bit extra results in solidarity, it results in better decisions, it results in almost everything you want. So you need to somehow have these interactions between pairs of people, not the group, pairs of people that are valuable to both of them. And so encouraging that is tremendous. Also, if you're going to change behavior, which you need to do rather drastically in this case, by far the best way to do that is through these personal trusted relationships as opposed to monetary incentives or rules or speaking to a group. So social incentives where, for instance, a group of people, their friends are rewarded for all helping each other is a far better strategy than just making a rule or having penalties. A final problem that we forget all too often is that facts don't change behavior. Daniel Kahneman, the fast and slow thinking, the nudge thinking makes the point that about 5% of our thinking is rational and the rest of it is automatic and habitual. And that automatic and habitual is most of what we do, it's the problem here. And strangely, our rational mind really doesn't communicate with our habitual mind. So think about how hard it is to stop smoking. Think about how hard it is to do many sort of habitual things. That's why social pressure, social context is so important because that's essentially where this intuition, system one stuff comes from. People tend to do what the people around them are doing. They want to fit in. And so making it the social norm is a far more powerful way to change behavior than giving them the facts. So in summary, normal procedures have really serious problems. No contact hurts decisions, mental health, trust, solidarity. Personal hygiene is really hard because facts don't get into our habits very easily. Also, many workplaces have inadequate facilities for this. There are no wash basins every 10 feet. So you have to get in a crowded space, a bathroom, to be able to wash your hands. Well, that's sort of self-defeating. Maintaining distance, it's expensive, it's real estate, it's rent. It's often impractical because you're servicing machines or helping fix things or something that's physical that requires that humans be close to each other. You can work on that, you can schedule things differently, but it's not as easy as it sounds. And the ubiquitous surveillance and rigid protocols is very much anti, not just the sort of democratic sense of things, but the sense of young people in particular where they're worried about Google and Facebook and data being everywhere. And so this really is a sort of nightmare where you have the robot overlords watching people and people will react poorly to that, shall we say. So you really want to involve people in the decisions, be transparent, let them know, and yet you have to be able to accomplish these things. So the bottom line is this is one of, they call a wicked problem. It's one that doesn't have a solution. You somehow have a flow of ideas necessary for organization and that is fighting the flow of virus, which is necessary for health. And both of those are fighting mental health and trust and solidarity. What are you gonna do? But the key thing is what you often do in business is you have to maximize one, minimize the other and maintain a certain level of interaction for mental health and trust. So it's not just do this like the medical recommendation, you have to balance these things. And to balance them, you have to measure them and you have to measure them continuously. So for instance, for the idea of information flow in your organization, you have to keep track of how the conversation, the information, the decisions are flowing versus the information, infection flow, how the physical contact and exposure is happening and then try to balance them. You can also try to lower the cost of decision-making. Like for instance, secret voting is an example of that that we use in our government. Voting on something reduces secretly, reduces the cost of stating an opinion. So in a meeting you might have a secret voting point rather than asking, does everybody agree? If people can express themselves without the social cost, you get a very different dynamic where people feel like, well, their voice matters and it's not just the loud guy that carries the day. This particularly matters online because it is much more the case that online the guy with a loud voice carries the day. So people begin to feel alienated, their opinions aren't heard, you only have infrequent interactions, there's no informal ways. So it's a step in that way. Another is idea markets, the idea that you can post ideas and you can win brownie points or money or other sorts of things for having good ideas and people can upvote them and downvote them. It's not a super great way to actually make decisions but it's a pretty good way to get things out there, to discover stuff that's happening, to hear concerns, particularly if it's done well where people feel that they're actually being listened to. There are some online tools to help these. So for instance, you can look at all of the Zoom and telephone and email paths in your organization. All these flows of ideas that you currently have and not look necessarily at the content but are people talking to each other? So this is a graph of an organization that shows that some of the employees are not engaged, some of them are really, groups are very cohesive which is fine unless it's physically cohesive. Some things, the communication depends on a single person who may not have an official role. They're the connective tissue and usually organizations aren't even aware when they have these sort of bottlenecks. And then some groups are just not talking to each other which is going to result in bad things. So my lab does spin-offs in this area so this is one that generates these sorts of data to help you manage silos, bottlenecks, isolates. And whoops, go back. And there are competitors to this of course but you might wanna take a look at it to get an idea of how you can keep a track of the idea flow as well as the physical flow. Another thing that we've been able to do is have little apps on people's phones and be able to map in real time where there's crowding and where there's risk for infection. So this is the MIT campus. You can see that there are certain places that stand out as being dangerous because they're highly crowded and this just happens. You get queues, you get jams, everybody decides to do it at the same time. But if you can make people aware of this then they can take personal action to minimize their risk. So you can think of this like the driving app Waze. People contribute data, it's anonymous but it lets other people and them know where there's going to be problems. Another sort of topic in this is managing trade-offs between the infection and trust, mental health and solidarity. So this are the things that managers typically have a hard time with. We're not taught about this but it's usually done as sort of a skill that's implicit or it's considered very soft. But as I've tried to tell you, there's some real scientific evidence behind this and it's very, you can make hard numbers about it. You can make hard trade-off decisions and you can actually manage this if you measure it. So the sort of principles are fairly clear. So everyone should be heard and engaged and you want peer-to-peer networks not necessarily top-down networks. In fact, largely peer-to-peer because the peer-to-peer, people talking to specific other people is where you get the source of trust, of mental health and of solidarity. So you need to be able to keep track of the conversations not just that they occurred but that there are two way that people seem to think that they're good, that they're useful between peers and take strategies to encourage that. So an example that I like is some companies have peer rewards. So people in your work group once a week give votes to other people in the work group and the person for doing a good job, for being healthy, helpful, that sort of thing. And the people who get the most votes get a bonus in their paycheck. Well, what that is saying is is that the people you work with value you and it has a sort of demonstrated power to improve trust and solidarity in the work group. Another idea is flu buddies. We use buddies in camps for kids, but we need buddies here. People you can turn to talk about things that aren't part of business like what do you do with the kids? How do you keep yourself clean? How do you, what's going on? You need people to really sort of share with and having specific people assigned to be helpful. So people choose their own buddies, of course, but then giving them time to sort of touch base and encourage them to do that and encourage them to post ideas that they have and be rewarded for that can go a long way to maintain social support. Motivate changes by making personal risk clear. A lot of the messaging is stuff that misses the younger people entirely. It's like, well, this for me looks a lot like flu, right? And that's not that bad. So this business of making clear that being on a ventilator for two weeks is not good. You may not die if you're 25 years old, but you're really going to be in bad shape. Making those sorts of things clear. Making it clear that if we can't do this together, then we're all going to be laid off and being very transparent about how that happens so that people can see that it's a rational thing, not just the boss, right? It is key. And you might consider things like local workspaces. That sounds a little problematic, but that's a good way to build these flu buddies, people that can help each other. It's a good way to get cross organizational ties. Obviously they have to have social distance and things, but you can have broader spaces. You can have people come in only once in a while and things like we work in the suburbs, particularly, is a lot cheaper per square foot than having the similar sort of distancing within a central city. So other things you can do, this is another spin-off.  They offer full stack mental services. The key thing is, is you take your phone, you push it, and within 60 seconds you're talking to a human. That's amazing. And it has huge effects on depression, social support, things like that. And companies like I believe Boeing has given it to all of their employees, et cetera. There are competitors, of course. This one happens to be our spin-off. Another one is RIF, which is a recent spin-off. And what it does is it does that little bit of display in the middle, which reminds people not to dominate the conversation. And it looks at who interrupts who so that you can discourage people who are sort of forcing the conversation, dominating the conversation from doing that, and encourage people who are tending to be alienated and be wallflowers to be part of it. So it's part of making everybody heard. So it's AI for video conferences. And then another spin-off, Cojudo, which listens to the way people talk to each other, not the words, and tries to remind people that they're supposed to go, uh-huh, and not talk too much, and so forth. And call centers use this, and it has huge effects, not only on the customers, but more importantly, perhaps these days, in the employee's stress. And again, there's competitors, but that's the spin-offs that we have. You look at those and sort of see more about how our group thinks about it, how I think about it. And if you're interested in greater depth, here's a couple of books that talk about how people work and how social relationships work using real, quantitative data. It's not a soft science. It's actually something where you can put it in the numbers and you can crank it. So with that, I'll end there. Thank you. Let's see. I guess I'm supposed to do the Q and A. I'll see the Q and A. Randall, you want to help me so I can see the Q and A because it's not coming up. Oh, there we are. Okay. So any questions, please? Any of these? These are the two. Oh, okay. Coming so far and we'll have more. Okay, great. So now we're working here. So question, are we saying one-on-one slack communications are not as effective as water coolers? Absolutely. Not even close. So water cooler things tend to be things that are a little more private. So you can open things up. You get to see how the person feels about it. You can see their facial expression, their body language whereas that all goes away on slack. And so slack is good for frequency. It's good for sort of ease in small groups, particularly, but you lose a lot and that loss has to be made up with other things. So you can't just have slack. You have to have slack plus these other sort of reward mechanisms. You have to manage the social graph so that everybody gets included. You should have social rewards for behavior change, for building camaraderie among people and so forth. Another question is what are the ideas for creating informal socialization experience? I think there's a lot of different ideas out there. For instance, watching movies together like Mystery Science 3000 where you do it on Zoom. Movies on Zoom, everybody can talk to each other. So you can make snarky comments. That's a sort of interesting thing to do. And so you can recreate a lot of that and as a business, you should reward people for doing that. You should give them tools to do that, encourage them. Like I said, you can also do things that are sort of limited social things. Like you can actually have local places that are very small meetings. Say in the hometown of a couple of people and you can have a lunch meeting where you arrange that the distances are large. And that's probably okay, right? So I don't see any more questions here. Oh, there's another one. What about small organizations? So very small organizations often have a lot easier time because you can really know each other and you talk to each other some frequently, right? But you still need to do the social things. You need to have one-on-one buddies to make sure that people feel good about it. Video is a lot better than text just because you can sort of see how the person's feeling and their body language and so forth. And I think that's the main thing. Small organizations tend to not have a lot of bandwidth to actually institute these new procedures. But it's important to actually pay attention to the mental health, to the social stuff. So for instance, in my group, I actually email all the people to ask how they're doing because they're all moving around the country going back home and so forth. We have a Slack channel, of course, but we also do Zoom meets. Like we're gonna have tea today. Oh, what is tea? Well, it's teas on Zoom where we all drink tea and talk about things and it's sort of open chat. Let's see, another question. See, what can we do as executives to keep peer-to-peer rewards not becoming just another popularity contest? Most popular plays aren't necessarily the most productive. That hasn't been a super problem in the places that I've heard it being used, but you can, for instance, a lot say that the peer-to-peer rewards have to rotate. They can't give it to the same person twice in a month, something like that. That makes them look a little further. I agree with you, that's a super problem. But I think there are ways to sort of manage that. How does a company culture evolve in a virtual environment? There are some companies that have been able to do a pretty good job. It's not entirely virtual, which is why I keep bringing back the sort of having little local clusters where people actually do get together a little bit so they know the other person's human and so forth. They could get out of their house a little. Even though that's a little more dangerous than the virtual, if you manage that correctly, it'll be very valuable to people. The companies I know about that are able to do this have these mechanisms like they have group activities, they have peer-to-peer rewards. They pay real attention to inclusiveness, getting everybody to be heard, and they use a lot of tools to be able to do that in their plugins to Slack and things like that, but I'm assuming to do that. Let's see. Is there a way to analyze conversation dynamics? Who and so forth? And the answer is yes. So the last company I showed, Cojito does exactly that. This is typically used for call center people who get in fights with the customers all the time. And what it does is it analyzes the conversation dynamics to remind the call center representative to listen more, to not interrupt, to lower their tone of voice in some cases. And it's really quite effective to see. What would you recommend for executive communications or management communications? Should be they daily? Well, I think that you have to be attention to cognitive overload. You need to put in a new way of operating. That's gonna be a little bit experimental. You might wanna focus on one thing at a time as soon as you can get to that level of new structure so that people don't have, oh, I've got these six things and my job to do, which is what all of us are experiencing right now. If you get one thing that's a management thing that says, we'll pay for having local space, right? Please suggest here, that'll get people to sort of think about it. But you can't have three of those in a row. So you have to be a little bit paced in how you do it. You have to also be somebody who is seen as trying to listen and help. And as hard as it is at this point, you probably also have to put out a little money to make some of these things happen. So people have the right equipment at home so that they can give little rewards to each other and things like that. Question, how would you address the culture that the employee isn't working unless the employee is at work? Seems remote work is discounted. Well, that again has to do with the, the engagement of people and people feeling like they're being heard. You know, you could have check-ins like for instance, in agile software development, everybody has a check-in at the beginning of the day. They say what they're gonna do and then they go off and they do it. And then the following day, they say it worked, it didn't work. So everybody spends a little bit of time describing what are the problems, how are they gonna do it, getting suggestions from others. That way you build some of the cross links too. I think that that's, things like that have to happen. Another way to do it of course is if you can quantify things that often helps because you can have little thermometers about how well people are doing. You have to be careful that you don't shun people or embarrass people using things like that so it really wants to be positive. Other questions? Says, will COVID case change people's future social communications to rely more on IT or will it not change people preference? I think it's going to change people's preferences for sure. One can certainly see that big conferences are likely to change. That the idea of going into the central city will become less frequent. You have more distributed organizations, the software tools, things like blockchain, things like AI, support having very distributed structures now you don't all have to be there. But there's a long way to go before it feels comfortable and it really, really works. So you could look at this as an opportunity too because we've been talking about going virtual for 30 years. It hasn't really happened. It's amazing that the bandwidth and the tools for doing this exist. But the protocols, the habits, the software really isn't up to snuff yet. And I think you're going to see a tremendous amount of experimentation in this area. So question, is there evidence that video conferencing is better or worse than phone conferencing? Does the video help communications? And the answer is absolutely much better. A disembodied voice, particularly if there's more than one person on the phone. You all know what you do. You go and do your email or write notes or something like that because they can't see you. If you're actually on a video chat, they can see your expression. They can see your body language. So if you say something and everyone goes, you know, that doesn't come across on a phone. It does come across on video. So it's not as good as face to face. And face to face, you get to see these little sort of interactions with people. Oh, sit down here. Would you like some tea, bubba? Those sort of things are a way we use to judge each other and really read what sort of person is this. And you can do a limited amount of that on video. So face to face is better. The video is getting very good for one-on-one things. Some of the best things I've seen have little video windows on their screen. So you can see what everybody is doing, but virtual, little fingernail things, right? And so you can just poke on somebody and say, hey, Joe, where was that thing? And Joe says something and says, okay. And then they go back and they're not bothered again. It's like sitting in a big circle where you can see each other and yell to each other, but it's all virtual. How do you deal with people with different cognitive and communication channels? Yes, this is a major problem. There are so many different channels.  I think that none of them are, there's a richness gradient, face to face, video, some of the text-based things, the sort of Slack type things, maybe email's a little worse, but it has other properties, et cetera, et cetera. Those are better or worse depending on the community and the community norms. So Slack is great for a small group of people who are like doing it and wanna share everything.  Video is really good for making people feel engaged if you manage it correctly. But a lot of this depends on the norms of behavior. Everybody has to have the right sort of habits of interaction to make the tool work. The tool is only as good as the group norms will let it be. Let's see, what about giving people, going through hiring process and onboarding fully remote? A lot of that happens already. I don't see any good reason why it can't continue to be going remote, going virtual. So you have groups of people talk to folks, you have a trial period where you work remotely, see how that all plays out. You know, that's gonna be different, there's gonna be different norms, but if your work is virtual, then the onboarding is virtual too, I guess. Will leaders need to reset culture once isolation is over? So I'm sure that what will happen is that the norms of behavior will change. So things won't reset to the way they were a couple of weeks ago. They'll reset somewhere between where they're going to be in a week and the way they were a couple of weeks ago. You're gonna see a lot more virtual than you ever thought you would. Part of that has to do with real estate prices and cost of travel. But you know, the COVID thing, it's not clear how it's going away. We may need to manage it continuously. And if it's not that, it's gonna be another one. So in terms of caution, we need to be able to think about how we build structures that are not only resistant and resilient to fiscal economic shock and political shock, but also this sort of shock. And we've been very lucky in the last long period of time that we haven't had these sorts of shocks, but historically they're fairly frequent. They're huge because we didn't understand the processes. So the black death and the 1918 so-called Spanish flu and so forth, or they've been quiet. Like for instance, HIV AIDS where it didn't disrupt businesses because it was sexually transmitted and because it propagated fairly slowly, although completely. So, you know, we've been lucky. We need to be resilient to this in the future. So we're not gonna go back completely the way it was. Let's see, there's a fellow who has an interesting question. I run the Vessel Traffic Service for LA and LB, which is an organization that can't be done remotely. It's akin to a 911 call. Three people are on watch all time and rotate desks. Any ideas? Well, gloves, masks, disposable gowns. That's what doctors do, works pretty well. Wipe down things, that's what doctors do, works pretty well.  And you're intentionally exposing yourself to it. But having the sort of hazmat cure, think of about it. Like for instance, if you were in a fab plant, chip fab plant, you would wear a really high-end fab gear for gloves and respirators and things like that. I don't think you need anything like that. Nor do you probably need the sort of thing that doctors do. But you need to have a protocol where people put on gloves, like these gloves, where people perhaps wear lightweight masks you don't need the 2.5 sort of supergrade things. And where people have a disposable coat or reusable coat that they put on and wipe the surfaces down, you may have to redesign some of the surfaces to be wiped down correctly. Things don't have to be disposable the way the medical guys do it. That's sort of crazy. But you have to, at the end of your shift, have a way of to take them off and soak them in alcohol, dry them, and they'll there for the next shift. So it's sort of like people who are painters or work with hazardous material. Great, okay, so I guess we're good on time here. Thank you all, hope this was useful. And let's do it. Keep that social support up, stop the virus, and make good decisions. All at the same time. Thank you very much. So we are going to take a short break now and then we will return with Professor Andrew Lowe. And again, just a reminder to use the Q&A option or function on the webinars that we can answer your questions. So we'll see you soon. Well, welcome back. Can the actions of central banks limit the economic impact of the coronavirus? Are financial markets predicting a global recession? Professor Lowe 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 as the coronavirus crisis plays out. Andrew Lowe 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 is also an external faculty member of the Santa Fe Institute and a research associate of the National Bureau of Economic Research. Professor Andrew Lowe. 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 in 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 now in front of 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 earn that contains 100 balls. Now you can't see inside the earn, 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.   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 ask them is a little bit more challenging.  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.  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 earn B.  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.  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 a 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 lockstep 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 the 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%.  That's number five on this top 10 list. So yeah, things are scary. Markets are moving a lot. And 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.  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. Oh, 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 newspapers 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. But 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. And 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.  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 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. 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 US 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 US economy. There's 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 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 and 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.  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 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.