Mar 19, 2020

Axios Capital

By Felix Salmon
Felix Salmon

Last week I attributed to Lenin the quote that "There are decades where nothing happens; and there are weeks where decades happen." I apologize; it seems that attribution is apocryphal.

  • The closest real quote seems to come from Marx, who wrote in an 1863 letter to Engels about "days into which 20 years are compressed."
  • It seems we've had many such days in succession; I hope you're staying sane and grounded.

In this week's issue: The war we find ourselves in, and one potential winner. Plus the bailout, the rent problem, the dollar's surge, and my attempt at a coronavirus guide for individual investors. All in 1,830 words, which will take about 7 minutes to read.

1 big thing: After the war

Illustration: Sarah Grillo/Axios

"Nous sommes en guerre."
— French President Emmanuel Macron

Your life has been upended by the novel coronavirus. Your quotidian routines, your relationship with your immediate family, your news consumption, your wealth, quite possibly your income — all of these have changed in ways that were unthinkable just a few weeks ago. At some point, they will change back.

Why it matters: This is not a shooting war, but in important ways it looks and feels like one. Understanding the similarities and differences is a useful way to judge the potential economic consequences of the pandemic.

The big picture: In a war, three big things tend to happen to an economy: Private-sector employment plunges, a large proportion of the labor force is injured or killed, and a substantial part of the country's infrastructure is destroyed.

  • In the fight against COVID-19, the central strategy of the war effort — social distancing — is forcing layoffs in dozens of industries. That's a big similarity.
  • The other side: The labor force is — with tragic exceptions — largely untouched, willing and eager to get back to work as soon as it can. And the economy's asset base — its buildings, production plants, intellectual property, internet backbones, and the like — is not being harmed at all.

This is good news from a medium-term economic perspective, and explains why the likes of Goldman Sachs expect a sharp rebound in economic activity — and also stock prices — once America is allowed to get back to work.

  • The country's infrastructure might be temporarily retooled to support the war effort — GM and Ford, and maybe even Tesla, are considering moves to start making ventilators instead of cars.
  • Either way, the core ingredients of America's pre-crisis economic strength will largely be in place after the pandemic has run its course.

Caveats: There are far too many known unknowns to have any certainty about the medium-term economic prognosis. And since no major economy has experienced all-out war on its own soil since 1945, the utility of the simile is limited.

  • The world is also retreating into national borders, both in terms of travel restrictions and hoarding medical supplies. That doesn't bode well for global supply chains.

The bottom line: Shooting wars are horrible, devastating things, so "better than a shooting war" is in no way reassuring. But wars are not that bad for capital markets, and capitalism has proved extremely resilient many times in the past. It's far too early to count it out this time.

Bonus: China eyes victory

Illustration: Sarah Grillo/Axios

Wars have winners, and China wants to win this one.

  • Its economy is already bouncing back, per FedEx, which reported that more than 90% of large businesses and more than 65% of small businesses are already back at work.
  • There were no new cases of locally transmitted COVID-19 reported in China on Thursday.

China is also seizing the opportunity to portray itself as the new global leader, as the U.S. retreats into nationalism. And it has some built-in advantages.

  • China dominates the manufacture of medical masks, which it is distributing with great fanfare to countries like Italy, Spain, Iran, Pakistan, and the Philippines.
  • Its medical staff has more experience battling the coronavirus than anyone else in the world.

Our thought bubble, from Axios' Bethany Allen-Ebrahimian: China’s leaders need to convince not just the world but also their own citizens that the Chinese Communist Party saved China from the worst horrors of the coronavirus, and that they are now beneficently saving the rest of the world.

Subscribe to Bethany's China newsletter here.

2. The bailout arrives

Illustration: Sarah Grillo/Axios

The White House has pledged to spend "whatever it takes" to win the fight against the novel coronavirus, and to that end has put forward a $1 trillion bailout package.

How it works: Half the sum will be spent directly, in the form of checks being sent to American households. Details are still being worked out, but there will be an element of means testing, with poorer Americans getting more money.

  • That makes sense, because richer households are already getting an involuntary cash injection of their own, in the form of foregone consumption expenditures.
  • A personal datapoint: I looked at my 2019 credit card summary, and fully 40% of my spending went towards travel, entertainment, and restaurants. My enforced frugality on those fronts will be worth well over $1,000 to me by the time I'm out and about spending again.

The other half of the bailout goes to corporations, who already received a trillion-dollar giveaway in the form of the 2017 tax cut.

  • The corporate bailout isn't a cash grant, though. Instead, it takes the form of secured loans. That's a smart way of giving businesses the liquidity they need to keep on operating, without the money going to shareholders or even bondholders.

Small businesses will also be eligible for government-guaranteed loans — but it's not obvious how they're supposed to be able to repay them.

  • One good idea comes from Adam Ozimek and John Lettieri of the Economic Impact Group. They suggest that the loans should amortize over 20 years, with a three-month grace period, and carry an interest rate of 0%. The loans should also be available for much more than just maintaining payroll, which is the focus of the Treasury Department's proposal.
  • Another good idea comes from Toby Scammell, the CEO of Womply, a payments data company. Take every small business merchant account in America, and simply deposit their average daily volume into their bank account every day until the crisis is over. The money then would be repaid over time with an automatic 5% charge on new inflows.

Why it matters: As my credit card gathers dust, businesses around New York and the world are losing income, unable to make payroll. The Danish government has offered to pay as much as 75% of the wages of employees in businesses hit by the coronavirus. That, or something even bigger, would help a lot of U.S. businesses weather the present storm.

3. Whither rent?

Illustration: Aïda Amer/Axios

Small businesses can lay off or furlough employees if they are forced to close for the duration of a lockdown. They can stop buying goods from vendors. They can even stop paying their owners. But they still owe rent.

  • If no money is coming in, then most businesses won't write those rent checks. Some will simply fall behind; others will take advantage of formal rent moratoriums. Either way, the problem just gets kicked down the road, creating a nasty past-due rent liability.

What to watch: France has announced that it will suspend rent and utility bills for small businesses. So far, that doesn't seem to be something the White House is considering.

  • Few if any U.S. landlords will be willing or able to start eviction proceedings in the midst of the crisis. But once businesses start to reopen, nearly all of them will try to collect on back rent.
  • In the case of small businesses paying below-market rents on a long-term lease, the landlord could get quite aggressive.

The bottom line: At some point, the U.S. government will have to step in to adjudicate these disputes. It might even have to pay some of the back rent itself. Or, it could follow hedge fund manager Bill Ackman's advice and just give everybody in the country a 30-day rent holiday.

4. A coronavirus guide for individual investors
Expand chart
Data: FactSet; Chart: Axios Visuals

The longest bull market of all time is over. What now? That's the question facing millions of individual investors in the U.S. and around the world.

The bottom line: How worried you should be depends entirely on your time horizon, and when you might need to start spending the money y0u have saved up in the market.

Investors are experiencing unprecedented volatility — as of yesterday, we've now had eight consecutive days with the S&P 500 moving more than 4%, easily breaking the old 1929 record of six days. The S&P 500 moved more than 9% on three successive days on Thursday, Friday, and Monday.

  • That's a clear sign that Wall Street has no idea how to price assets right now. (Movements in other markets, like oil futures and corporate bonds, are similarly wild.) If the professionals are flailing, it makes sense that individual investors would also be confused and concerned.

For long-term investors, stocks are starting to look attractively priced for the first time in a while.

  • The world is going to recover from the pandemic. When it does, there will be winners and losers in the market. But corporate America as a whole is likely to remain a highly profitable enterprise. The value of the stock market is always a function of future earnings, so even companies that suffered greatly in 2020 might be worth a lot of money in 2025.
  • Long-term investors should expect to see years like this. The stock market has fallen more than 20% a little over once per decade on average, and the average peak-to-trough has been 33%. The current drawdown has happened particularly fast, but its magnitude is not unusual for a bear market — the S&P 500 fell 48% in 1973, 49% in 2001, and 47% in 2008.
  • If you're putting money into your 401(k) every month, then this decline is good news for you: It's like a 30% off sale on all those future profits. Declines like this are where the likes of Warren Buffett make their fortunes.
  • Even companies that go bankrupt aren't total losses. If you have a diversified portfolio including corporate bonds, then in bankruptcy some of those bond holdings might end up converting to shareholdings.

For individuals who will need cash in the next year or two, the current situation is much more worrying.

  • There's no indication that the volatility we're seeing is going away, and the downside is bigger than the upside.
  • If you need money to live on in your retirement, or because you've just been laid off, or because you want to put a downpayment on a house, then holding substantial savings in the stock market can end up vaporizing wealth you really need.
  • Thanks to the stock market decline, you now have a smaller percentage of your net worth in stocks than you have had for a while. But if you're looking at savings you're going to need to spend and that you can't afford to lose, then having any money at all in stocks could well be too risky for you right now.
5. The dollar surges
Data: FactSet; Chart: Andrew Witherspoon/Axios

Panic in financial markets has grown to the point that many now believe the only safe asset is the U.S. dollar, Axios' Dion Rabouin writes. Go deeper.

6. Coming up: Coronavirus' economic impact

Illustration: Aïda Amer/Axios

Axios' Courtenay Brown writes: Brace for a batch of data that will show how hard the global pandemic has already hit the U.S. and European economies.

Why it matters: Surveys due next week will be one of the first looks at how businesses have fared this month, when countries started to shut down to prevent spread of the coronavirus.

  • The PMI index measures the health of a country's manufacturing and services sectors. Anything at 50 or above indicates growth, while anything below that level signals contraction.
  • Data for France, Germany, U.K., U.S., and the broad eurozone is due on Tuesday.
  • Expect readings to be in the low 40s, per Fortune — a significant decline, even for some countries whose sectors were hurting before the full effects of COVID-19 were felt.
7. Building of the week: National Fisheries Development Board, India

Photo: Exotica.im/Universal Images Group via Getty Images

The Central Public Works Department of India built the headquarters of the National Fisheries Development Board in Hyderabad in 2012. A glorious example of mimetic architecture, it's known to Google simply as "Fish Building".

Felix Salmon