How the Stock Market Differs from the Economy

 

After reading the last Revitalization Partners blog, a friend of ours sent us some thoughts regarding the stock market. The point was how the financial market can and does differ from the economic conditions we see every day.

Our thanks to Jonathan V. Bever for the thoughts and Jim Falcone, Managing Director of Fulcrum Wealth Advisors in Bellevue WA for permission to publish in our blog.

Casey Stengel: “Never make predictions, especially about the future.”  We will heed his advice.

 

A NEW ERA …

In the following pages, we are going to argue that we are transitioning to a new era in the investment world; a paradigm shift is taking place. 

We see it highly probable that a period of increasing inflation, moderately rising bond yields, an improving economy, modest commodity prices, and a new bull market.

Not so fast; we can hear your objections!  What about the next presidential election, possibly more social unrest, the recession, bankruptcies, and last but least, the coronavirus?  

We understand. The negative news is abundant; however, shake it off and look around the corner.  Are we not saying volatility is going away?  Not a chance.

 

PROBLEMS REMAIN … SEVERITY DOESN’T

We are optimistic, while the problems we face today will not necessarily go away soon enough, the severity will. The solutions being implemented have long term consequences, and they are awesome.

Yet, we do believe the battle with the coronavirus will be a multiyear experience.  Please walk with us as we go down the yellow brick road; together we will navigate the economy, the stock market, and the effects of the pandemic.  Aside from the potential for volatility, we are extremely bullish.

With all the pessimism, one would think the American Dream is over. The American dream has not gone away; it was merely on vacation being revitalized (its version of social distancing). 

Interest rates will be low for the foreseeable future not only for governments and corporations but, we believe, eventually will be so for the rest of us.

 

AS MILLENNIALS FINISH COLLEGE …

As the Millennial generation finishes college, the economy will continue its slow road to recovery, the coronavirus will be managed effectively, new jobs created for increasing demand, and new families formed will accelerate the demands.  So, new homes, new cars, new TVs, new phones, etc. will be needed.

To accommodate this expansion, low-interest rates, low energy costs, low commodity costs, and plentiful liquidity to lend to institutions and the consumer.  We are going to posit interest rates for the consumer will be much lower.  Any politician that can transfer the low rates of the Fed to corporations will be awesome to the consumer, to GDP, and the economy.  

America does not need to be made great; America is great. We simply need confidence, equality, and economic push, and the citizens will do the rest.  The Fed would like to have about 2 percent inflation rather than deflation, and low consumer borrowing rates would easily accomplish this.

The policy of lower rates and lots of money printing began in 2008 and now is the accepted norm.  Many critics think the unintended consequences will derail the whole scheme. We have considered their logic and find it lacking in one thing: truth.  Mostly, it has taken time for the paradigm shift to be accepted by economic tinkerers and public psychology. In short, “the day of reckoning” will be beaten by the innovation of America!

 

ARGUED FOR 2 YEARS …

We have been arguing for over 2 years that our economy and stock market were heading for a slowdown, if not a full-blown recession. 

Our augment: the fed was removing liquidity and putting the brakes on the economy; this was done by raising the fed target rate and unwinding their balance sheet. 

Volatility arrived first in 2018 conjoined with the beginning of an earnings recession; this earnings recession is still being worked through. The stock market had a nice rebound in 2019 as the market had a P/E multiple expansion.

Ultimately, the P/E expansion was popped by the coronavirus in 2020. We all know what happened when the virus arrived: chaos, economic shutdown, and a severe historic decline in the stock market; not just in the USA but around the world.

It would take a steady hand, sharp focus, and emotional discipline to navigate the treacherous stock market environment.

 

NO PLACE TO HIDE …

There is no place to hide in a crisis, and it exposes those who are qualified and those who are not; it exposes the good and bad in people. Those who survived by smoke and mirrors will come to the end of their road. Meanwhile, we will continue toward the Emerald City and ultimately home.

Regarding the SARS Corona Virus: a lot more is known today than just 6 months ago. We are confident it can ultimately be “beat” by following the guidelines while a vaccine or cure is developed. It will take several years to work through the coronavirus and potentially other SARS viruses; the workaround is not impossible-thankfully in part because of technology and a lot of hardworking people all over the world.

The new Fed policy of lowering rates, printing unlimited QE is a 180 degree from their policy 2 years ago. Therefore, our thesis has turned 180 as well.

 

INFLATION & A BOOMING ECONOMY …

Rather than looking for deflation and a recession, we are looking for inflation and a booming economy. We think this will be a process with the likelihood of some short-term pain.

To point out the obvious: the business affected by the coronavirus to emerge in a couple of years-assuming technology come to our rescue once again to beat the coronavirus.

If we look at history as a clue, we should expect good things. I asked a friend of mine: if you were to print 10 trillion dollars and give it to any country in the world, which country would you give it too? After some thought, he answered the USA: because the USA is the proverbial melting pot of the world.

The innovative risk-takers who are willing to work hard seem to end up here from all countries. Sure, we Americans make mistakes, have colossal failures, but we get up, dust ourselves off, and continue toward the good life as we see it.

In Part 2 of these thoughts which we will publish in two weeks, the folks from Fulcrum will lay out the case for the new bull market and identify the risks and consequences of money printing that began in 2008.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

We’re From the Government ………….

 

The outbreak of the COVID-19 pandemic has made a farce out of that famous saying: “We’re from the government, we’re here to help.”

And lest you believe that this blog is a rant about the President, there are enough of those to go around without our help.

But as a group of individuals that work with companies in either financial or management difficulty, we have learned that most problems can be addressed by two things: Competent Management and realistic Financial Alternatives.

 

THE ROLE OF GOVERNMENT …

The role of the federal government is to manage those things that are difficult to do at the local or state level.  

And this pandemic has certainly demonstrated that the Federal Government has proven to be grossly incompetent at the very things we not only depend on them for, but in doing the things we pay them, through our taxes to do.

Some examples:

Congress decided that the mechanism for distributing money to small business (less than 500 employees) was going to be the Small Business Administration (SBA).

And they set aside billions of dollars for the program.

One of these programs, the Economic Injury Disaster Loan program is supposed to provide small businesses running out of cash due to the pandemic “with working capital loans up to $2 million” according to the SBA website.

 

HOW DOES IT WORK?

How does it work? Let’s hear from one borrower.

“I called the SBA and I actually talked to someone who has been with them for a long time and knew what he was talking about. He explained to me why had all of the hard pulls in my credit. I was one of the original ones who sent everything in with the 2000 (application) number.  As soon as that was received, they pulled.

Then when we had to reapply, they automatically pulled again. I was told on one of many calls in that I should apply yet again which was the 3rd pull on my credit. He was able to look up my application. The one in the 3300 and saw that it was pending in queue and I should hear something by Monday. He also said that there is so many duplicates that they have to go through them to make sure they are duplicates and that is slowing them down.

Also, he told me that they are capping loans at 15,000.00 plus the grant of 10,000.00 for a total. Of $25,000.00, if you meet the requirements of the max 15,000.00 some will be lower. You do get $1000.00 per employee for the grant. He said they had to throw the “up to 2 million” out the window when they received millions of applications. He said they are working 24 hours a day to get these done.”

 

OUR CREDIT RATING …

Since, in our society, credit rating determines many things:

  • Can we buy a house or a car or rent an apartment?
  • And what will the cost of those things be?

Yet, because of sheer incompetence in establishing the program, this person’s credit rating is impacted long after this pandemic is over.  Is that really the best we can do?

Tom Sullivan, the US Chamber of Commerce vice president for small business policy wrote in an internal email:

“I do not understand the SBA’s decision to have a quiet rollout instead of admitting publicly that their disaster loan program is tapped out and Congress needs to grant them more money.”

 

MORE NEEDLESS DELAY  …

But Congress has now delayed returning to work until May4th at the earliest.

This means another multiple week delay for those businesses and employees.

And for those employees that desperately need the unemployment checks from the various state governments, another two weeks to solve the problem of the supplemental unemployment funds.  Much of the country is in long lines for food and Congress extends its vacation.  Why not?  We’re paying for it.

Throughout this pandemic we have heard from the media that states need more protective gear for their front-line personnel and for patients. 

One governor said that “it’s like being on eBay with prices going up with every bid.”  If you’re in a populous state with a large tax base, you probably have the money.  But if you’re in a smaller, rural state, how do you bid against a California or New York?

 

FIXED PRICE FOR ESSENTIAL GOODS …

During the second world war, the Federal Government fixed prices for essential goods.  Anyone could buy what they needed at a fixed price.  How hard would that have been to implement?  In today’s age of incompetent government, maybe impossible. 

Especially when the government maintains an emergency stockpile of this equipment, paid for by taxpayer dollars and a White House staff member announces that this stockpile is “theirs” not the peoples in the states.

There are any number of incompetent actions that we see on the part of both the legislative and executive branches of government. From trying to slide climate change funding into the emergency aid bill or spending $238,000 of taxpayer’s money for a trip to satisfy an ego.

And, as we are reminded, multiple times per day, this is an election year. The suggestion is that we put aside our partisan differences when voting and vote for the most competent management. Not the person with the most money for ad’s, the best sound bites or who believes like you about selected issues, but the people we, collectively we believe are the most competent managers at all levels.

 

COVID-19 DOESN’T CARE …

COVID -19 doesn’t care if you’re a Republican, Democrat or Independent. 

And if you’re one of those people, lying in a hospital bed on a ventilator, you can only hope that the rest of us elected the most competent people we can find.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Lead Your Business Through the Coronavirus Crisis

 

coronavirusThe Coronavirus (Cov-19) has now reached a new, critical phase where public health systems need to act decisively to contain the growth of the disease outside China.   Clearly, the main emphasis is and should be on containing and mitigating the disease itself.

But the economic impacts are also significant, and many companies are feeling their way toward understanding, reacting to and learning lessons from rapidly unfolding events.

Unanticipated twists and turns will be revealed with each news cycle and we will only have a complete picture in retrospect.  Given the very different degrees of preparedness across companies, the potential for further disruption, and the value of being better prepared for future crises, the Harvard Business Review has developed a few lessons for helping companies respond to unfolding events.

 

DO THESE THINGS …

Update Intelligence On a Daily Basis.
Events are unfolding with astounding speed and the picture changes on a daily basis. Only several days ago, it looked like the outbreak was mostly confined to China and was being brought under control.

More recently, a number of fast-growing epicenters of infection have sprung up beyond China, signaling a new phase and potentially necessitating new strategies of mitigation rather than containment.

You need to move to a daily cycle of information within your company.

Beware of Hype Cycles / News Cycles.
News organizations often focus on what’s new rather than the big picture, and they sometimes don’t distinguish between hard facts, soft facts, and speculation. Yesterday’s news is likely to frame how your organization thinks about the crisis today.

When exposed to fast changing information, be it a new technology or an emerging crisis, we have a systematic tendency initially to overlook weak signals, then to overreact to emerging issues before we eventually take a more calibrated view. As you absorb the latest news, think critically about the source of the information before acting on it.

Don’t Assume That Information Creates Informedness.
informedIn our connected world, employees have direct access to many sources of information.

Leaders might reasonably conclude that there is so much information and commentary available externally that they don’t need to do anything additional.

We have found, however, that creating and widely sharing a regularly updated summary of facts and implications is invaluable, so that time is not wasted debating what the facts are – or worse, making different assumptions about facts.

Constantly Re-frame Your Understanding of What’s Happening.
A big-picture synthesis of the situation and a plan to deal with it, once captured on paper, can itself become a source of inertia.

A Chinese proverb reminds us that great generals should issue commands in the morning and change them in the evening. But large organizations are rarely so flexible.

Managers often resist disseminating plans until they are completely sure, and then they are reluctant to change them for fear of looking indecisive or misinformed, or of creating confusion in the organization.

A living document, with a time-stamped “best current view” is essential to learn and adapt in a rapidly changing situation.

 

7 KEY AREAS TO ADDRESS …

Make sure your response is balanced across these seven dimensions:

1. Communications: Employees will likely be exposed to conflicting information and feel anxious or confused about the best course of action.

Be sure to communicate policies promptly, clearly, and in a balanced manner. Furthermore, communicate contextual information and the reasoning behind policies so that employees can deepen their own understanding and also take initiative in unanticipated situations, such as employee holidays in a restricted location or how to handle contractors.

2. Employee Needs: Restrictions on travel and congregation will trigger employee needs for access to education, health care, daily provisions and the like.

You should anticipate and develop solutions to these and create an information hub where employees can find all the information they need.

Many of these needs will be locally specific, requiring a multi-tiered approach to policy making.

3. Travel: Make sure that travel policies are clear in terms of where employees can travel to, for what reasons, what authorizations are required and when the policy will be reviewed.

4.  Remote Work:

Be clear on your policies – where they apply, how they will work, and when they will be reviewed.

Home working is rare in some geographies, like China for example, and the need for additional explanation should be anticipated.

5. Supply-chain Stabilization: Attempt to stabilize supply chains by using safety stocks, alternative sources, and working with suppliers to solve bottlenecks.

Where rapid solutions are not possible, co-develop plans, put in place interim solutions, and communicate plans to all relevant stakeholders.

6. Business Tracking and Forecasting: It’s likely that the crisis will create unpredictable fluctuations.

Put in place rapid-reporting cycles so that you can understand how your business is being affected, where mitigation is required, and how quickly operations are recovering.

A crisis doesn’t imply immunity from performance management, and sooner or later markets will judge which companies managed the challenge most effectively.

 

7. Being Part of the Broader Solution: As a corporate citizen you should support others in your supply chain, industry, community, and local government.

Consider how your business can contribute, be it in health care, communications, food, or some other domain.

Focus on the intersection between acute social needs and your specific capabilities – in other words, live your purpose.

 

This crisis will, over time, pass. Or, we’ll learn how to live with it and adapt.

But we should recognize that this crisis, like others, will change our businesses and society in important ways.

It will fuel areas like online shopping , online education and change how companies reconfigure supply chains and move away from dependence on a few large factories in supply chains.

As this comes to an end, leadership will require understanding lessons learned and how they effect your business.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.