Marc Cuniberti: The changing business landscape
Things will never be the same after COVID-19.
So many things have transpired economically in the last two months, it’s a full time job and then some covering it all.
The Federal Reserve for the first time ever is backstopping the corporate bond market by buying 750 billion dollars of Exchange Traded Bond Funds (ETF), both investment grade and what is called “junk” bonds (bonds paying a higher interest rate due to the lower financial rating of the borrowing company).
Stimulus checks totaling thousands were given to all eligible U.S. adults or are in the process of going out, and a new round of checks is being hotly debated in Washington.
Other stimulus programs like the Paycheck Protection Program (PPP), the CARES act enhanced unemployment benefits, postponement of student loan payments and their interest accrual, extended sick leave benefits, relaxed restrictions on access to retirement plans and more are funneling or will be funneling more trillions into the economy and the American pocketbook.
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With more programs being discussed as we speak, the amount of money being “created” or borrowed to pay for it all has reached epic proportions and will only go higher and likely much higher.
This analyst has made a host of predictions as to expected unemployment (50 million), small business failures within 12 months (25% of all small businesses), corporate bankruptcies (a continuing wave for 12 months or more with some very large ones) and the government annual deficit this year to reach six trillion and a total deficit of 30 trillion by 2022.
The damage already done to world economies is massive and still ongoing. It’s difficult to say what the world will look like in a year or two, but it’s safe to say things are going to be a whole lot different from here on because of the coronavirus.
Not only has the business landscape been drastically altered, it will likely be a different operating environment for many businesses as we emerge out of our isolation.
It goes without saying extreme hardships have been experienced, but lessons are being learned on how employees can work at home rather than at central locations.
Internet giant Twitter told employees that many of them can continue to work at home after the coronavirus event is over. No doubt many other businesses will follow suit.
That fact, coupled with the permanent exodus of many small businesses due to bankruptcy following the shutdown will mean bad things may be in store for the commercial real estate sector. Businesses that remain in commercial spaces may eagerly rush to renegotiate leases in response to falling demand and a rising glut of available alternatives. Add to that the widespread default on rent payments in general due to COVID-19 and the outlook could indeed spell big trouble for landlords far and wide.
The creative destruction side of capitalism will no doubt have a field day as bankrupt businesses will be replaced by new upstarts with better ideas, more streamlined business plans and stronger balance sheets. Those specializing in the new “stay at home” economy and telecommuting will likely benefit, with many explosive growth stories bound to be written.
Although some positives arise from almost every situation, the obvious negatives at least for now obfuscate whatever good might arise when we come out of the other end this pandemic.
With all the incentive programs to buffer consumer wallets, some are concerned the massive stimulus checks and payment programs will remove the incentive for some to return to work.
Indeed, in speaking with many business owners over the last few weeks, with unemployment bonuses making $2,404 a month the minimum check ($600 weekly bonuses on top of wage compensations), there is some concern that some will not return to jobs that pay less than that and even lean into not returning at all as long as those bonus amounts are attached.
Although slated to discontinue in July, the latest stimulus program in the house calls for the extension of the $600 weekly bonus to be extended through January 31, 2021.
In fact the proposal that extends the bonus has a plethora of additional benefits too lengthy to list them all here.
With all the benefit programs enacted and more being proposed there are some that argue skyrocketing deficits will cause severe financial woes to government balance sheets. Others believe inflation will be a growing concern as the money supply expands from the trillions in giveaways. Still others fear an ever-growing dependency on the government in general and hence more control over the lives of Americans will result.
What comes to my mind is the quote from the famous economist Milton Freidman: “Nothing is more permanent than a temporary government program.”
Yes, things have indeed changed.
Marc Cuniberti is an investment advisor representative through Cambridge Investor Advisors Inc. a registered investment advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St, Suite 1, Auburn, 530-559-1214. SMC and Cambridge are not affiliated. His website: moneymanagementradio.com.
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