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Friday Thoughts

Life is beginning to look a little closer to normal in the Zimpleman house this week. Clara started back to school in person. Sam Henry starts back next week. We’re so proud of how their school has worked to try to make "in person" school work while keeping distance and sanitation a priority. I hope that it will work and we’ll be able to make it through the year without unplanned virtual school.

I’ve had a few questions after my Friday Thoughts a few weeks ago about when I think we’ll get through the economic issues caused by the shutdowns in reaction to the virus. Unfortunately, there’s no way to know when we “get back to normal”. I think its more likely that we never get back to where we were, but will have deal with some large scale changes to how we live, work, and socialize going forward. I’d like to share my thoughts on some of the issues we’re likely to face, economically, in the near term. I’ll try to share some of my thoughts of what things could look like in the long term next week.

It’s encouraging to see things slowly opening back up around the country. But, as I wrote about a few weeks ago, while there are many businesses and industries getting back to normal, there are many who aren’t.  We’ve seen bankruptcies increasing and a large number of businesses that aren’t reopening. According to a Yelp survey of closed businesses; 55% of all businesses closed in March have decided to make their closures permanent - 60% for restaurants, 48% for shopping and retail, 36% for beauty and spas, 45% for bars and nightlife, and 39% for fitness.

Yet, even with these sad statistics, stock markets indexes, like the S&P 500, are at all time highs. My previous Friday Thoughts addressed part of the reason for this. I found a column published several weeks ago by Mohamed A. El-Erian, Chief Economic Advisor to Allianz, that I found very interesting. One part from that column:

So far, despite signs of rising stress on corporate and public balance sheets, non-payments have been largely contained to certain badly affected segments.

But the sense that the worst did not come to pass has fed complacency among investors of all stripes. A new generation of retail investors has emerged, helping stocks on their relentless march higher.

Contrast investors’ optimism with companies’ circumspection. While many central governments are focused in reopening economies that were locked down to contain the virus’s spread, most businesses have remained cautious. Many are still looking to further reduce their spending.

Not only are businesses remaining cautious about their expenses, individuals are saving more than they have in generations. These are wise things to do, as we still have many unanswered questions with the virus as we attempt to go back to school and work in offices. But, if people and businesses are saving, they aren’t spending. And lower spending will lead to deteriorating economic circumstances.

We’re already seeing a record breaking pace of bankruptcies, unemployment staying elevated as furloughs are becoming permanent layoffs, and an increase in payments falling behind in rent, mortgage, and credit cards. And this is while government unemployment assistance was higher and stimulus money was flowing out of Washington.

I think that the stimulative efforts by governments and central bankers around the globe are another reason for investors optimism. With so much money being put into the system, it has to have a positive economic impact, right? It does seem to keep stock valuations higher, but I’m not sure it will have the impact that these officials hope it will. If people are scared of whether their job will be there next month, they're more likely to save that money than spend it. At this point in time, it’s kind of like trying to push a string.

I also worry about the amount of debt being carried by corporations right now. With interest rates so low, companies have issued debt at record levels over the last few years. But with demand falling off, will they be able to cover the costs of all of this debt? I think that this is part of what is driving the increased rate of bankruptcy filings, above the obvious issues of closures.  If your business has a strong balance sheet and minimal debt, you can handle disruptions better than a competitor who is burdened with debt payments.

If we see a further increase in bankruptcies and, by association, loan and bond defaults, I fear that we could see a rise in concern in the bond market. If that leads to a freeze up in the bond market like we saw in 2008, after Lehman Brothers failed, it could lead to further economic issues as the capital markets try to work through it.

The point of this isn’t to scare you or make you nervous about the economy, the stock markets, or your investments. It’s to share a real assessment of what I’m watching out for over the next several months. I think that the financial media is so focused on what a few large companies and the broader indexes are doing, they're missing the real story. The old adage “missing the forest for the trees” comes to mind.

We will get through this, as we always do. The virus will eventually fade away, as does the annual flu and cold season. Companies will fail and go out of business. But many will be created or emerge as leaders in fields we can’t even imagine. This isn't a new phenomena - it's happened for all of modern times. 

I want to encourage everyone that will take a minute to listen to me to focus on what you can control, enjoy your time you have with your friends and family, and turn off the news for a while. The picture with this post was taken as the sun set over the marsh at Hunting Island State Park, outside of Beaufort, a few weekends ago. We've managed to make it to eight SC State Parks this summer, all on weekend trips. We hope to visit many more over the next year. There are 47, so we have a ways to go!

One last comment - please say a prayer for our neighbors in Louisiana and East Texas. I have an old roommate who lives outside of Houston and I just heard from him that they made it through Laura unscathed. But, he said that just a few miles east of him isn’t looking too good. I’m afraid of what we’re about to see emerge over the next few days from that part of the country.