A Mass Extinction Event

So here's a way to think of what's happening with the economy right now.  Before I write it I'm going to say upfront that this may sound a bit heartless.  That is not my intent and certainly I do not want to appear oblivious to the pain many are feeling.  I know many people and some clients who are significantly impacted by the pandemic.  I personally have a couple of adult children that are in harm's way from this more than I would like to see happening.   But the nature of my job is to peer into the future in order to develop a probabilistic investment analysis.  Given that mandate I often try to look at things in different ways that perhaps gives me different insights on current events.  Hopefully I can then find investment themes that will be profitable for my clients.  So here's my perspective of looking at the pandemic in a different way.  Let's take a look at this instead through an evolutionary lens. I don't have a scientific background and I'm not an economist so folks who study these things more than me may take issue with some of my thoughts on this but this is my brief take on it.

If one thinks of the economy like the state of nature then one can compare businesses with species.  Like species, business exists to find a niche, exploit it and hopefully thrive in that environment.  Like species businesses are subject and adapt to the constraints of their environment.  There's also a predator/prey aspect to business as the strong can devour the weak.  

What I think the pandemic can be compared to for the economy is a mass extinction event.  Here I'm not talking about the human cost in terms of loss of life or people becoming sick, although that is substantial and not to be minimized.  Instead I'm talking about a situation where organisms have adapted to a habitat and then that habitat is utterly destroyed.  The obvious comparison is what happened to the dinosaurs when the Chicxulub asteroid wiped them out 65 million years ago.   However, I think a better way to view this is the impact on a habitat after an event like a massive forest fire occurs where everything is devastated.  The animals that needed that environment are gone, either dead or forced to move on.  With them goes the more mobile predators.  But slowly species that can adapt to this new environment begin to colonize it and change the landscape.  Life returns, although perhaps in a different form or by different species than were there before, and the cycle renews itself.  An example where this has happened to humans is likely the Chernobyl nuclear disaster that made a wide area around the site uninhabitable for humans but wildlife, absent the presence of people, has thrived.

The businesses that have likely struggled the most since the onset of the virus are those that rely on discretionary spending as well as the businesses that support those firms.  Use as an example a well known theme park.  Once a it closes down it not only impacts the company and the employees that work for the park, but also all the businesses that generate revenue from being near that park or supply things that the park needs.  

Same with the restaurant business.  Many restaurants are going to permanently close because unless there's a vaccine soon they won't be able to survive long on the reduced revenues this environment is bringing about.   Restaurants here in Chicago are making a go of it this summer by feeding guests outside.  The shelf life for most of that in our area has two dates, the end of September and mid-November.  We have up here at best two months left where people can comfortably eat outside.  By the end of September the light is fading and it's cooler at night.  You can compensate for that by using heat lamps and people wearing sweaters etc.  If we're very lucky up here you can get good weather through the mid point of November.  We've had Thanksgivings in these parts where it's been in the 60's.   But what also arrives here in October is rain and I can't think of any way you can put people in tents, even with heat lamps that will likely suffice from a health standpoint unless the virus is contained.  Also even with lamps that damp cold just doesn't go away.  Also we may not get so lucky on temperature.  Last year we had snow here on Halloween.

Now if you've been reading me this year then you know that I've consistently said that absent a vaccine the businesses that will do ok or perhaps even thrive are those that can convince people with money that it's safe to go out and spend it and that businesses will adapt over time to a changed environment.    Humans, like species in a ruined habitat can do this.  Perhaps, people will be willing to endure the cold outside more than I think.  Or perhaps people will be willing by then to ignore the danger. Many are already ignoring health warnings about public places so perhaps folks will be willing to eat indoors by then as if nothing has changed.   Perhaps people will change their habits and opt for an early dinner outside or a late lunch with friends.  If I was a restaurant I'd maybe incentivize people in the fall to do that.  But even with all of that by mid-November at the latest in Chicago you're going to have to be willing to eat indoors and I think that's going to be a killer for many, many places.  I desperately hope I'm wrong but I'm afraid that's coming.

However, like Chernobyl, nature abhors a vacuum and if there's multiple empty restaurants sitting in a prime location then somebody without the legacy costs of the former business may by then have figured out a way to make a go at it.  Or maybe a current restaurant that people love closes shop and reconstitutes itself in a different space in a way that it can keep its patrons safe and make money.  That restaurant then starts hiring back the servers, cooks, bartenders busboys etc.  Those employees don't care where they work in the business as long as they're getting paid.  The point is restaurants will adapt.  Those that can't will die but something new will likely take their place.  There will still be profits in feeding people and somebody's going to find the formula to do so.

We are in the adaptive phase of this pandemic right now.  We're groping about for how to do things but we're trying to find a way.  When we do and hopefully with a vaccine on top of that is when we'll see things start to level off and the economy start to grow again.   At least that's how I see it.

How I also see things is that Saturday begins the month of August.  I'm going to try to recharge the batteries a bit so I'm taking postings down here to once a week.  Maybe less if I'm having a really relaxed time.  I'll break in if needed but expect less put up here until the leaves start to fade some.  It's hard to believe we're in the last third of summer now!  Even with all that's occurred I'm still amazed how quick it's passing.  

God bless to you all.  Please stay safe and healthy.

Cash

Personal savings rates jumped in the spring to numbers that have never been seen before!  I don't think we've seen June's numbers yet but I'll bet they're right up there and comparable to what we've seen this spring.  Looks like folks took those stimulus checks and banked them rather than spending the money.    

Several ways to look at this.  First that's an awful lot of dry powder out there to be spent once this pandemic is either vaccinated away or finally burns itself out.  The second is to say if the Government's purpose in handing out all that cash was to grease the skids of the economy then so far it doesn't appear all that successful.

I'll just stick to my assumption that the economy won't really get humming again until you convince enough people with money that it's safe to go out and spend it.

Link:  US Personal Savings Rate.

I know my posting has been rather infrequent and I want to warn you that may be the case for the next few weeks.  

How We're Adapting

One of my major thesis during this crisis is that we would begin adapting our behavior as we learned more about Covid and that would be a major driver on turning the economy around.  I know the headlines and new case counts are horrendous but lost underneath all of this are some very solid adaptive policies that are starting to occur.  Here's a few.

Hand sanitizer:  At the beginning of the crisis the public didn't know anything about face masks while hand sanitizer and wipes were sold out.  Bleach wipes are still not so easy to find but you can buy hand sanitizer by the gallon now.  There's not a single business or public building that doesn't have copious amounts of the stuff on hand.  We've been to outdoors events where the hosts have it on the tables as a matter of courtesy.  If you can't find ways to sterilize your hands when you go out then you need to have your eyes checked.

Masks:  Forget the political and scientific debate about masks.  Businesses are already ahead of the curve.  Walmart, Target, Costco, Starbucks and many more all mandate the use of masks in their stores.  They do this for the simple reason that they want you to feel safe so you'll come to their buildings and spend money.  Small businesses at least around here are following suit.  Office buildings, same.  

Social distancing:  Everybody is trying to reposition space to enable social distancing.  Grocery stores mandate one way aisles.  You have to stand six feet apart while waiting to pay.  Plexiglass on counters is everywhere now.  Stores originally did this for public health mandates.  Now, again, they're doing it because they want you to feel safe.  It's good business for them and performs a public services.  Public spaces are being repositioned so that restaurants can have outside dining.  In the north this is a stop gap measure as the shelf life for outside eating in Chicago may be at a maximum early November {with the help of heating lamps} but at least for now it's getting the wheels of commerce moving in the right direction.  Also the public is figuring out how to use the outdoors for social events.  Churches now perform services outside.  Sometimes under tents with fans.

Schools:  Schools are trying to figure out how to reopen.  Cameras are being installed that follow teachers around in a classroom so life can go on even if schools are forced to close down again for some period of time this year.

Some of these changes may be temporary but a lot will be incorporated into life as we know it going forward.  It's hard for me to imagine the plexiglass ever going away in stores even if it will eventually look better.  But it is getting the economy moving again.  That progression may be in fits and starts but it's an improvement over what we had a few months ago.  It's also probably one of the reasons the stock market has been sniffing out a recovery these past few months.

*Walmart, Target, Costco and Starbucks are components of ETFs we own in client and personal accounts.

A Thought That Has Nothing To Do About Investing

A thought came to me as I was walking through our neighborhood over the past few days and watched a group of kids absolutely breeze by me on bikes.  The group was both boys and girls, I'm guessing ages 9-13.  The boys weren't wearing shirts, the girls all had on shorts covering swimsuits.  That's because I think everybody was swimming in a blow up pool in somebody's backyard.   Everybody was yelling and screaming in glee as they raced around the corner as fast as their legs could take them.

I think the first summer for kids in the age of Covid is going to look like summers when I was growing up.  There's not going to be a lot of organized activities for them and maybe not much vacation time either.  From what I can tell in good weather their parents are kicking them out of the houses around us and forcing them to make fun and games up on their own.  There aren't around us vacant spaces for kids to play sandlot baseball but that doesn't seem to be stopping them so far from finding ways to play games.  A few streets over on a cut-de-sac somebody's set up a portable basketball hoop and kids are constantly there shooting around.

It won't surprise me if in 20-30 years when today's children look back on this summer that they don't say something like this, "You know looking back on that summer when we were all locked down because of Covid was pretty good to be a kid.  We went out and played, got into a bit of mischief and generally caroused around the block.  We were in and out of people's homes {despite what our parents tried to stop us from doing} and for the most part looked after ourselves.  It was a summer about nothing.  It was great!"

Now it's too soon for that history to be written and hopefully the virus doesn't mutate into something worse.  While for most of the world Covid is a big strain, but I'm not sure in many places it's so bad to be a kid in a summer where adults can't tell you what to do all the time.

I'll be back with hopefully something a bit more constructive later in the week.

Happy 4th of July!

Happy 4th of July America!  Here's a large Huzzah for all the men and women who've served over the years in the service of our country who have continued to make this day possible.  God Bless to you all!