Wednesday, April 8, 2020

Corona Virus Kills Weak and Dying Companies, Too.

Most of the people dying from the Corona Virus were older, infirm, and had pre-existing conditions.  The same could be true for many companies.

This ain't over yet, although the light is appearing at the end of the tunnel.   What remains to be seen is what happens to ordinary people who survive - many of which have had their finances decimated by this pandemic.  People with money will be just fine.  The young couple just starting out in life, struggling to pay the rent or the mortgage - or their debts - may find themselves behind the 8-ball, if they've lost over a month's income or more.

Similarly, companies that were struggling before this pandemic - companies that had slowing sales, increasing debts, poor management, and high fixed costs - may end up going bust this year.  It is not that they wouldn't have died in any event, only that this epidemic may accelerate things.

Companies like Sears, or JC Penny, which were circling the drain for years, may finally be flushed down, unless they are doing a killer online mail-order business these days - or had the foresight to stock ventilators and toilet paper.  Given how both chains have been managed, I doubt either has taken place.

And that is the problem right there - whether it is personal finances, corporate finances, or government finances - we no longer "save for a rainy day" and by the way, it's fucking pouring out.

Companies used to own the factories they made things in, or the stores they sold stuff from.  They weren't mortgaged and leveraged to the hilt, and had "cash on hand" instead of "lines of credit".  But then "activist shareholders" got into the act, and saw all this "meat on the bone" and insisted that every single penny be paid out to shareholders, either through dividends or stock buy-backs, even if it meant replacing a fat balance sheet with a load of corporate debt.

And unions are partially to blame, too.  "The company has all this money!" they said, "We should get a share of it, too!" - not realizing that companies would need that money down the road, to spend on tooling, R&D, or for eventual downturns in the economy, which occur regularly, with or without pandemics or other natural disasters.  Even without this virus, we'd be shitting our pants right now, as the over-inflated Trump economy starts to collapse.

The problem for Sears - and many other old-line "brick and mortar" retailers - wasn't Amazon, it was the lack of capital to compete with Amazon.   Venture capitalists and activist shareholders stripped these companies clean of any spare cash, so there was no money left to remodel and update stores, or to move to an online platform.  More than one observer has noted the irony of Sears, once the world's leading mail-order catalog outfit, dying in an age of online retailing.  Sears should have owned this shit, not Amazon.   But there was no vision at the top, nor was there any money to implement such a vision, even if there was.

So, expect to see a string of corporate bankruptcies in the future.  The bailout bill sounds like it might be a lifeline for some of these companies, but bear in mind that most of this "bailout" consists of loans not grants.  And loans have to be paid back, usually with interest.  People criticize the "bailout" of GM and Chrysler last time around, but fail to recognize that these were bailout loans not gifts, and that the companies in question paid it all back - ahead of schedule.

While temporary grants to cover payroll might help some of these companies, long-term, they will have to make money to stay in business and have the additional burden of paying back yet more debt than they had before.  It might seem like a life-ring right now, but could turn out to be an anchor.

This is particularly a problem for small businesses and medium-sized businesses, which are not getting the same blanket perks as some larger companies.  Many of these privately held businesses cannot offer equity stakes to the government in return for bailout money, as large, publicly-traded companies can.

A friend of mine owns a sports bar in a small college town.  They were making good money at it, too.  So much so, they decided to borrow yet more money and buy a second bar in a nearby town.  It kind of stretched them out financially and physically.  Running two businesses is even more of a headache than just one.   Then the virus strikes.

They've laid off all the employees and closed the bars.  They have no choice but to sit things out and see what happens.  In the meantime, loan payments come due, mortgage payments come due - even tax payments are due.   For the time being, they are hanging on.  But if another month goes by, maybe two, with little or no income, then what?  College is closed for the year, so even if they reopened next week, they wouldn't get back that business.

What happens in the fall?   Will the students and other customers come back, or will people still be practicing "social distancing" even if the economy is "re-opened"?   With predictions of virus deaths well into September, it is a real concern.

A lot of these smaller businesses may face extinction, too, but not right away.  Like Sears, which has been wallowing in the La Brea tar pits like a wounded dinosaur for more than a decade, they may struggle for years before throwing in the towel.

On a personal level, the same is true.  Them that's got shall get, them that's not shall lose.  The good news is, those who have nothing can declare bankruptcy and start all over with a clean slate - if they are young enough to start over again.   Those who are leveraged to the hilt will cry - as people did the last time around, a decade ago - as their mortgaged toys are taken away from them, one by one.  Owning money, it turns out, is better than owning things.

And many will do foolish things, too, such as cashing in their 401(k) to "hang on" and make payments on loans that eventually, they will have to default on.   It will get really ugly, perhaps worse than it was a decade ago.   Recall that there are still people today who are underwater on mortgages from 2007.

Last time around, I was leveraged pretty heavily.   Today, not at all.   This is not to say I am pleased with the current economic situation, just better prepared this time around.   That was not by accident, either.   I realized that the "record bull market" was bound to retract, eventually, and that as I aged, being leveraged in the markets wasn't a very smart idea when they inevitable retraction occurred.  And after living through several downturns in my life, it wasn't hard to spot the next one coming - virus or no virus.

Like the last time around, the folks with cash will snap up all the bargains when they appear - and before you and I are even aware they are available.  The rich get richer, the poor go to foreclosure.  I know it sounds unfair, but there you have it.   I would be more sympathetic to those who are heavily in debt for an over-mortgaged mini-mansion, a new Harley, the jet ski, the bass boat, and the big monster truck, but those were choices, not mandates.

And yes, I once did that sort of nonsense myself - borrowing $1.10 for every dollar I made, just so I could have "things" rather than owning things.  I was just fortunate not to lose my job during the numerous economic downturns that occurred in my life.  Now that I am unemployed, I can't afford to take that risk.

Maybe - just maybe - this new economic downturn will force people to realize that chronic debt is not a good thing - for people, businesses, or governments. 

Maybe - but I doubt it!

Them that's got shall get
Them that's not shall lose
So the Bible said and it still is news
Mama may have, Papa may have
But God bless the child that's got his own
That's got his own
Yes, the strong gets more
While the weak ones fade
Empty pockets don't ever make the grade
Mama may have, Papa may have
But God bless the child that's got his own
That's got his own
Money, you've got lots of friends
Crowding round the door
When you're gone and spending ends
They don't come no more
Rich relations give
Crust of bread and such
You can help yourself
But don't take too much
Mama may have, Papa may have
But God bless the child that's got his own
That's got his own

Songwriters: Arthur Herzog / Billie Holiday
God Bless The Child lyrics © Round Hill Music Big Loud Songs, Carlin America Inc