As we close the books on the third quarter of 2020 and begin to look at the end of what has been the most challenging year of my 35-year career, there are a number of issues and questions that remain unanswered. Aside from when will the COVID-19 vaccine be available and scaled, the largest question is what is next. Multiple dominoes are sitting out there and anyone could set off a series of events with unintended consequences. These dominoes are both Political and Economic. It is a precarious time and an uncertain time. This newsletter is not to say there is a raging fire but to say don’t be fooled by the stock market. The disconnect between Main Street and Wall Street has never been greater in my experience. There are many issues and uncertainties that are now coming to the surface and caution is warranted.
We have a presidential election that presents a challenge to say the least. The choices presented seem to be almost polar opposites in both economic and social politics. It is truly an election that presents no clear choice for many individuals. Particularly for those that sit in the moderate middle zone.
On the Republican side of things, if they maintain the Senate and Presidency, there will surely be lower taxes and pro-business agendas put forth. On the Democratic side of things, they will surely put forth a more progressive social and economic agenda. Without regard to party, geopolitically and socially there will be enormous challenges from China, the Middle East, and Russia. Domestically, the response to the civil unrest and destruction of cities and infrastructure by “protestors” along with the homeless issues will differ dramatically based on who wins the White House and Senate. These issues will no doubt drive much of the initial days of the next President. Therefore, the election is the first domino that will clearly fall and set the path to how the others play out.
This election has now been complicated by the selection of a Supreme Court nominee who once confirmed (and there is little doubt that she will be) will sit on the court for 30-40 years and seems to be the polar opposite of Ruth Bader Ginsburg who she has replaced. In fact, the nominee may be a Scalia clone whom she clerked for earlier in her career. Multiple issues from health care, women’s rights, and civil rights will be at stake and may turn upside down. With a court so out of balance (6-3 vs 5-4) it will have tremendous implications for generations to come as the courts seem to be more frequently used as ground to advance political agenda as much as they as they protect the rights of citizens. The court decisions immediately following the election will impact healthcare and women’s rights, both of which have enormous economic implications.
Civil unrest and certain “protestors” exercising what has become a questionable expression of first amendment rights is another domino. How long will major and not so major (Louisville for example) cities allow themselves to be turned into a hostage city where the underlying fabric of the city is systematically destroyed. In Louisville, one only has to look at the condition of a blighted downtown coupled with the dramatic increase in carjacking, homicides, homelessness, and unemployment and wonder how do we restore confidence in these cities as economic and social centers. Los Angeles and San Francisco with its tent cities and diseases are the poster children of what cities can become at some point if these factors aren’t contained, addressed, and corrected. These types of situations represent a great opportunity to improve people’s lives, create economic vibrancy and restore cities to their former greatness and economic vitality by recapturing the human resources that are at the core of the issue. This can be done by empowering the potential economic engines while solving systemic long term social problems.
Economically we face an avalanche of questions and issues. The Paycheck Protection Program (“PPP”) is gone and it seems that no additional program will be in sight until after the election. Many small businesses have used up the PPP money that was provided and now face uneven demand and aging accounts payable balances. The workers that have been retained seem to be hesitant to return to the work place and productivity is proving difficult to measure. Ultimately, there will be a price to pay for the virtual work force in lower degrees of collaboration and innovation. Onboarding of new employees and reinforcement of corporate cultures will be difficult and tricky. Many small Main Street businesses are already beginning to seek bankruptcy and the decimation in the restaurant and hospitality industries will have a huge trickle down impact on the supply chains. Technology will either be the great enabler or the great divider.
Airlines faced a furlough date on October 1 that has resulted in 35,000+ furloughs to date being announced. This industry is already a challenged industry due to the huge fixed infrastructure and capital expenditures required to operate. Balanced efficiencies are important but difficult to obtain in an oligarchy and the airlines have not been the best stewards of their customers or franchises historically. They are bloated with debt and operate with little true completion as the route system leaves an overwhelming dominant single player in most cases (ever fly into Charlotte or Dallas and look for someone other than American?).
There will certainly be a reduction in flights and availability. This will lead to a reduction in secondary and support work as the multiplier effect of the air traveler dollar extends to rental cars, hotels, restaurants, tourism, apparel, and a number of other areas. The impact of reduced air travel also extends to maintenance, cleaning, fuel, and a number of other categories that feed the airline industry. This will have a ripple impact on the overall economy, not to mention the incredible amount of debt that is already on the balance sheets and will be in jeopardy. A bankruptcy by any of the majors will have a tremendous downhill impact as it will shake up the banking system and send another set of dominos tumbling. Although there is talk of a relief package, one has to question whether or not businesses have discovered that Zoom is the new American and the number of business travelers (where the airlines make the bulk of their profits) will be reduced for years to come. This is however an opportunity for businesses to save thousands of dollars and increase profits or reinvest into the business. All positive economic drivers.
Speaking of bankruptcy there is a great question of just what has been reserved by the banks. As anyone who works in an office building knows, there is a lot of vacancy at the moment in commercial real estate. I am not sure I would want to be an owner of commercial real estate in an urban center or in any capacity for that matter. The real estate domino could be one of the big ones. Low interest rates are creating great demand in the lower end of the housing market and supply issues abound. Rent abatements and moratoriums will run out in the near future and you can expect to hear all kinds of stories about evictions and other issues. The critical timing will be whether or not these protections end in November or run into December, which will probably then extend for another few months to get through the winter months. This again ties directly to the election and who wins as to what the outcome will be and what happens. The downstream impact is tremendous on multiple fronts, including the pressure on public funds in cities and states due to lower tax receipts. The flip side is that companies will again live with lower expense ratios and have choices on how to spend the savings. The key issue is like with all else the adjustment will be painful.
The most uncertain domino is the individual consumer. With the fear of COVID-19 driving consumer behavior, coupled with the extra unemployment money being suspended, large numbers of people unemployed, and children sitting at home in distant learning, the consumer is a question mark. Although savings rates are at their highest levels in decades, so is the balance of outstanding consumer credit. The consumer drives this economy and fear drives the consumer. The consumer will be the ultimate determinate of how quickly we get out of this. If a second wave hits that forces a return to closures and diminished business activity (New York City) the impact could be devastating to the consumer psyche. This is the ultimate domino that could drive everything. At the same time, the lower interest rates and high savings rates present an opportunity with the right policies to drive a strong recovery in 2021.
While the above sounds like potential doom and gloom, it is not all bad. Interest rates are at historic lows, inflation is negligible for the moment (yes someone will have to pay for all the new debt), the economy in pockets is doing well, technologically we have advanced a number of years, and Federal income taxes are low at the moment. The stock market is approaching historic highs and those with money to invest should do well. Despite the news on the spiking of the virus worldwide, there is opportunity out in the world and things should return to some sense of normal in the next 12 months or so. We will get through the politics and ultimately we will have to get to solving problems rather than just complaining about them. The point of this article was to highlight areas of concern and raise awareness. Capitalism is built on creative destruction and we are in one of those phases now – this is a major inflection point for the U.S. and the world. The technological revolution will be as impacting for the next 100 years just as the industrial revolution was for the past 100 years. Those that plan for where things are going rather than where they are will thrive. Stay safe and stay distant.