“The time to take counsel of your fears is before you make important battle decisions. That’s the time to listen to every fear you can imagine. When you have collected all the facts and made your decisions, turn off your fears and move ahead.” – General George Patton
I have made some pretty bold predictions in earlier columns which were based on indications and signs within our economy and political environment that made me very nervous. In spite of the claims of the strongest economy in years, I couldn’t help but feel that this seemingly strong castle was built on a mountain of sand. I didn’t have a crystal ball but the indicators were right there in front of our faces.
As a business owner, I wanted to warn others of the potential danger while preaching caution and cash retention. Experience through numerous downturns taught me the bottom would fall out of the economy because I believed the claims of a solid economy were being hyped up. Well, the financial storm came, and the sand started to wash away. In less than 60 days the economy was crushed.
My mantra is – Pay attention, even if it is very uncomfortable to do so.
In an eerie coincidence, a brilliant novel written by award winning author Lawrence Wright entitled The End of October tells the story of a highly contagious pandemic which kills thousands, forces citizens to self-isolate and completely tanks the economy. Sound familiar? The strange part is that he finished writing the book last year and started it 10 years ago. After reporting on earlier epidemics like Legionnaires and swine flu he talked to many public health experts who were certain a real global pandemic was coming and Wright wrote the scenario as the plot of his novel. Holy crap! He denies having any prophetic powers, but as an investigative journalist he learned to pay attention and knows how to collect data and evidence. He knew how important it was to ask the right questions and that question is – What could happen?
How long will this last? Will the virus recede as the summer comes on? Will it return in the fall? Will we have a vaccine or new therapeutic drugs before it does? Will I be able to keep my business alive until that happens? The crushing problem is – no one knows for sure.
Most small businesses are in flat out survival mode. The best we can all do is collect as much information as possible and consider all options as we move ahead in these dangerous and uncharted waters. Unfortunately, you’d have to be totally delusional to believe a “V” shaped rebound in the economy as predicted by the White House is likely. There are too many negative indicators working against that happening. If you want to survive, you need to be realistic and face the brutal truth. This will either be a long and slow recession or, depending if there is a re-emergence of infections – an outright depression that will take a few years to fully recover from. Why do I say this?
Before the pandemic, America had the highest levels of corporate, governmental and personal debt in history. The US National Debt was $24 T before COVID – it will approach $30T by year’s end. With the Trump tax cuts to larger corporations and the wealthy – we added over $2 Trillion to the deficit and there can be no reasonable expectation of servicing that much debt in a down economy. On top of that hot mess we just added TRILLIONS of dollars of national, state, local debt, which accrued as a cost of the pandemic. The Feds are printing trillions of dollars, states have multibillion-dollar holes blown in their budgets – tax income has reduced because of the tax cut, record unemployment, business closures and everyone is looking for governments to bail them out. Where do we go when the well runs dry? Because of this enormous amount of Federal, State and local debt from costs and lack of tax revenues, the inevitable result will be tax increases and the stimulus will probably result in inflation. Double whammy.
Small and midsized businesses are the lifeblood of the economy, yet relief funds went mostly to larger businesses. Many of the smaller businesses waiting for Payroll Protection loans are throwing themselves deeper in debt floating their businesses until the federal money hits their accounts. Then if they have not continued to employ 75% of their employees, they will be required to repay the loan… yep, more debt.
To this we have to add business and personal rent or mortgage arrearages, late payments on utilities, suppliers, insurance, auto loans / leases. Most landlords have been forced to allow forbearance on payments, but they will be looking to be made whole once your doors are open. Some will be more aggressive than others, but most will look to come whole in reasonably short order. Malls are in deeper trouble now that big retailers are filing for Bankruptcy and larger restaurant chains like Cheesecake Factory are considering closing a number of stores due to COVID and their projections for the post-pandemic recovery. How can restaurants and other businesses make up the short fall when they are limited to 50% occupancy and have a customer base that may not be eager to venture out and return?
With all the claims and stress on insurance carriers we should expect a meaningful increase in premiums on our business lines and health insurance for sure. At press time there have been approximately 1.75 Million known cases with about 100,000 deaths. All of those people have medical bills that insurance carriers and their customers will need to shoulder. Medical bills were already the #1 reason for personal bankruptcy in the U.S. – what do you think this will do to the economy now? The Kaiser Health Foundation also announced that approximately 27 million Americans lost their health coverage because of unemployment. Let’s let the implications of that sink in for a minute.
Unemployment claims have been filed by approximately 40 million workers. The reality is that a major chunk of those jobs may not come back. That leaves a huge hole in the tax base as well as a continuing drain on state and federal unemployment funds and ancillary social services such as Medicaid. The unintended Catch 22 in the additional $600 per week unemployment grant has added to the problem in many ways and is costing government a fortune. This too will dry up and with 40% unemployment among workers earning $40,000 and under. This only amplifies income and wealth inequality while putting more strain on the safety nets and eroding the tax base. It’s a sh#t storm!
To counter my position, I have had friends try to point out that the stock markets are at record highs in support of the delusion that the US economy is strong. Even the Fed chairman agreed with me that the only reason stocks stayed high is that the Fed flooded the market with a “tsunami of cash”. The Wall Street Journal, in an opinion piece said the Fed has established a floor for stocks and bond prices and is floating them.
At the Berkshire Hathaway annual meeting, Warren Buffet declared that he had been pulling out of the stock market and accumulating cash as he saw no values for them to buy – unlike the recession of 2008-2009 when they went on a buying spree. Other realistic investors like David Tice who is a specialist in Bear (down) markets, says that the current stock market is far too dangerous to invest in and he believes that we are in the earliest stages of a full-blown depression. This is not an exchange or marketplace right now – it’s a freakin’ casino.
For business growth and recovery to happen, liquidity is required. After the stimulus packages stop flying around, access to working capital will slow for smaller businesses. Banks will return to earlier risk underwriting and fewer alternative lenders will survive. Those that do are adopting higher credit policies for lower risk businesses. They will be saying no more frequently.
So, in looking over the horizon to see what’s coming, I see no “V” shaped bounce back, or even a “W” as some have described. I really think that the damage is too large, the wounds too deep, the response too small and too misdirected to permit of a rapid recovery. The trailing domino effect will continue for years and I am fearful the recovery will be too slow for many businesses to survive and frankly they can’t afford to wait. When asked about the next round of stimulus, the President said… “we’re in no hurry” – but I guess since his livelihood isn’t in jeopardy, nor is any member of his family hungry or broke – he doesn’t need to rush. Sorry, but I don’t see it that way.
The big catch phrase I see thrown around is “We are all in this together”. The reality is you are very much on your own to make decisions that will help yourself and your family. Everyone needs to evaluate their own situation and business to determine the best course of action. I still recommend holding onto as much cash as possible and not waiting too long to make difficult decisions like closing for good or declaring bankruptcy. If you feel you are in a stronger position and you can sustain the business, you will emerge much stronger than you would imagine if you have a solid plan. Collect all the facts, address your fears and as General Patton said – move ahead. I do believe in the resilience of America and we will recover but it will take a long time. Good luck and keep a clear head as the challenges are enormous.