Saturday, July 18, 2020

The Other Shoe Drops

People have been living in a fantasy world for the last few months, hoping things won't be so bad.  They're bad.

We entered 2020 on a cautious note.  The economy was showing signs of weakness. The bull market had gone on for a record length of time. Stocks were wildly over-valued, particularly tech stocks.  Housing was through the roof in many markets, to the point where no one but investors were buying - and they were hemorrhaging cash on these "investments" hoping some greater chump would come along and buy them.   Sounds a lot like 2008, don't it?

A reader writes asking if I think there will be another tech crash.  I can guarantee it.   There is always a tech crash - the question is, of course, when.   When I figure out that part, I'll be a Billionaire.  Until then, you're stuck with me and my crappy blog.

Like I said, 2020 started off on cautious footing. The big car companies saw declining sales and were offering "employee pricing" to keep the record sales of the last few years going.   Last time we did that was.... 2008.  Funny, that.  Housing starts were faltering, and RV sales were slipping by major proportions.   As goes Elkhart, Indiana, so goes the nation - or so we thought.

Then enter the virus.  Imagine how a car company that is resorting to wholesale-pricing cars to stay afloat (and one just coming off a billion-dollar strike - thanks again UAW! You're there for the company ain't ya?) is going to do when they sell virtually no cars for at least a month.   The only bright side is that they did save some money by closing the plants and worked a lot of older inventory out of the system.

And so on down the line. Imagine struggling restaurant chains, many already closing stores and slated to close more, now forced to close the entire chain for more than a month.   Revenue down to zero, but the landlord still wants the lease paid.  Ditto for clothing stores and aging department stores.   JC Penny has declared bankruptcy - the Corona Virus merely accelerating its death spiral (much as it does in nursing home or apparently, among smokers).

People thought that maybe it won't be so bad - that the economy will "bounce back" in a "V-shaped" recovery.  Maybe this will be the case.  Let's hope so.  People are going nuts - the RV business bounced back, as people are buying small and mid-sized RVs like mad (sales up 50% over last year). Even tents are out-of-stock at the local sporting goods store and even online.   Can't go on a cruise, don't want to go on an airplane.  Kids are out of school, Disney is only open on a limited basis.   What else to do?  Go camping.

It certainly helps that throwing a tent in the trunk of the car and paying $20 a night at a State Park is a pretty cheap vacation.   A lot of people are seeing their hours cut, their jobs on furlough, or just plain laid-off.  A $600-a-week stipend added to unemployment made some people better off than when they were working.   Sadly, this ends in a couple of weeks, and unless there is a second stimulus check, people will start clamoring to go back to work.

But there might not be a job there when they go back.  In every recession, there are layoffs, and in many cases, companies realize they can do with fewer employees when the rehiring starts.   They realize that maybe all that paperwork they were doing before could be replaced by a computer - or nothing at all.

Earnings week is coming up, and companies are starting to report earnings for the biggest part of the virus shutdown.   It will not be pretty.  We can assume the major car companies and restaurant chains, Disney, the cruise lines, the airlines, Boeing, and others all have bad news to report.  Small profits, if any, perhaps huge losses - likely huge losses.   Maybe this is a one-time glitch, maybe part of a trend.

The last time around, after 9-11, it took years for the airlines to rebuild business.  We used to fly to our condo on Spirit for $30 from Washington Reagan to Ft. Lauderdale-Hollywood.  No one wanted to fly, and I suspect the same will be true in coming months.  Fear - not by everyone, but by a substantial portion - will keep a lot of folks off planes, and cruise ships, and out of theme parks.

Will there be winners?  Perhaps.  The RV business is booming - right now - but it remains to be seen if this is pent-up demand, a one-time spike, or a long-term trend. I hope not the latter, as crowded RV parks and State parks would be no fun to visit.

Technology companies may be winners, too, which is why I cannot predict when a tech recession would occur, only that eventually, they get caught up in their own exuberance and hubris every so many years.  As more people work from home, the demand for higher-speed internet, as well as communications devices, computers, printers - even desks and office furniture - will increase.  This may be offset by a lower demand for office space - something that was already overbuilt and where demand was declining back in 2019.   One man's win is another man's loss.  Whether this means a long-term tech boom or not remains to be seen.  An overall slowing of the economy will mean a slowing in tech.   Companies may put off upgrades for a year or so - maybe longer.  If your earnings are in the tank, a new cloud-based system may not be in the cards right away.

My gut reaction is that we haven't seen the worse yet, and a lot of this has to do with psychology. Some really shitty earnings reports will tank some stocks and scare investors. And many of the small, retail investors today are little more than gamblers, who drive up the price of a stock with their small buys based on rumors, the shouting guy, "tips" offered on television to millions of people, and online day-trading sites.

We were treated to another "rags to riches" story online about a guy who supposedly turned $35,000 into a million dollars in "only" 350 "trades".   Of course, the source of the story is Reddit, and that could be a real story, or it could be the fantasy of a 14-year-old in his bedroom, going over past stock price quotes to put together a narrative.  I'm betting on the latter.   Sadly, the media hypes this kind of thing, promoting the idea that you make money from stock trading and not from stock owning.  For every stock trader who makes money, there are ten who lose.  Often these are the same person. You make fantastic sums in one trade, lose your shirt on ten others.  Like any good gambler, however, you remember and tout only the winners and conveniently forget about the losers.

V-shaped recovery, or the dead-cat bounce?

Traders and euphoria are what are driving the market right now.  I think a lot of people thought the market reached its nadir in May and is on its way to a "v-shaped" recovery. Again, maybe the case and let's hope so.  The market will recover, of course, eventually.  If I knew when, again, I'd be a Billionaire and not blogging.

Of course, politics could rear its ugly head here.  When we realize that kids are not going back to school this fall, the cruise lines are not opening back up until after Christmas, and a lot of people are not going back to work and their unemployment has run out, well, the mood of the nation will turn ugly - uglier than today.  Trump may wish he lost the election - Biden may regret winning.  After all, Biden was there to clean up the mess left by Bush, right?  He's familiar with the process.

Sure as shit, though, if Biden wins, the GOP will call it the "Biden Recession" and forget CoVid or Trump's goosing the economy with tax breaks and deficit spending - and starting the whole recession with his stupid trade wars (are we winning yet?  I'm tired of winning!).   Quite frankly, you wonder why anyone in their right mind would want the job. 

Oh, right.  Right mind.

UPDATE:  Well, it looks like for Tesla anyway, that they've dodged a bullet for the time being, posting a modest profit for the quarter.   I guess when you lay everyone off, costs go down considerably.   Then again, maybe a paycheck protection loan is covering a lot of those expenses.  We'll see!