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.