Oh, Hell

the U.S. could see a 20% unemployment rate if the coronavirus pandemic is not properly dealt with.

reportedly, Treasury Secretary Steven Mnuchin, March 17, 2020

Perhaps it was hyperbole in performing some old-fashioned arm twisting with GOP senators, but it sure was a market mover with the DOW dropping 6.73% the following day. It was down 1,000 points when the double whammy hit:

Hell is coming.

Bill Ackman, CNBC interview March 18, 2020

Bill’s context was in urging companies to conserve cash by pausing buybacks, the warning was apparently heard as the markets promptly dropped further, triggering a circuit breaker. Fast forward two days …

Hell is here.

Robert Herjavec, CNBC interview March 20, 2020

The difference obviously being big companies versus small. Then there are the minis. The mom and pop shops – sole proprietors. The ones that operate on a shoestring budget to begin with.

Assuming Mnuchin is the face of the organization – at least in regards to negotiations with Congress – it would appear to be a tacit acknowledgement that the president has been blowing smoke – albeit perhaps for tactical reasons. Realizing a 20% unemployment rate is not a foregone conclusion, as this is a level not seen since the Great Depression, I doubt many investors have come to grips with the current bear market. Time In The Market recently published a view that is rational and insightful.

Yet, if we are on the verge of Hell, it may be useful to understand some of the conditions present when it last arrived:

  • Unequal distribution of wealth
  • High Tariffs
  • Slowing Economy
  • Market Speculation (notably margin use)

While similarities exist, differences include Federal deficit spending and an external catalyst (rather than implosion).

What is stunning is the general lack of foresight now on display. Granted, some industries (airlines) had any contingency plans blown away with various governments forcing their hands. The line being formed by corporations and trade associations less than a month into the crisis is downright obscene. Some requests on behalf of workers are understandable, but it is becoming increasingly apparent that the Trump corporate tax cuts did little to shore up the vitality (or viability) of many companies. At the very least, retained earnings (in theory) should sustain companies for longer periods. History may reflect that this opportunity squandered was a result of greed.

There are some foundational cracks forming as well. Ronin LLC, a clearing firm was dissolved last week and some banks acted to shore up money market funds after significant outflows.

It will be one thing to pass a relief bill. As always, the devil is in the details – specifically the delivery mechanisms. Various ideas have been floated – using existing SBA, ADP, PAYX or US Treasury infrastructure but each has inherent flaws. Meanwhile of the small businesses I’m familiar with; a pizza parlor is now delivery only, an after market auto custom shop is sidelined pending a restart of production lines, and another is working through order backlogs. One – a caterer – has evolved from banquets and corporate events to Non-contact Delivery Foodservice. Various approaches from hunkering down to minimizing losses to retooling the business model. Whether Hell is coming or here already, at least ingenuity remains in full swing!

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