Restaurants, bars, and gyms are closing. Counties are shutting off their borders. Cruise ships and Airlines start halting business. The stock market is down 20% from all time highs. The people are scared. Everyone is staying in.
What is all of this going to do to the economy?
That’s the trillion dollar question.
It’s quite a time to be alive and to be experiencing this. If you’re a boomer, you’ve likely experienced this with the 2008 recession. If you’re a millennial, chances are, this is the first time you’re experiencing an economic downturn. The previous bull market lasted around ~13 years. This means, any investments you’ve made in the past few years have led to an overall gain & return. This likely boosted your ego a bit as you thought you were an “astute” investor. Now, things are in the red. The rate at in which they’re going red are more than ever before. Trading on Wall Street has been chaotic such that they’re triggering the circuit breakers as a measures to prevent further economic loss. This has happened numerous times in the past month. Boy, 2020 has been crazy. What’s to happen next?
From what we’ve been reading around, a lot of these businesses – restaurants, airlines, hotels, casinos, run heavily levered.
What does this mean? It means that normally, in a low level way of explaining things, companies take debt and operate on debt for their business operations. Companies then get a return from normal business operations (customers, consumers, etc.) and they in turn are profitable. Leverage. As beautiful a concept like leverage is for companies, this can backfire on them. And this will backfire on them. When will we see all of this? Our estimate is that we will see the beginning of this all in a few months.
If we take a company, Marriott for example, if they have lets say with earnings of 21B in revenue,
And their operating income yields 1.8B…
You can see how thin the margins are on a company like this. Now, this is just one company. Imagine that businesses operate on the same way, and if you do your homework, you’ll find that this is true for companies like Airlines (Delta, United), or manufacturers (Boeing).
If a company runs on thin margins as it is, and suddenly operations are forced to shut and revenues go down to 0? They’re going down in the red. That leverage that companies will use, will then backfire on them. They will not make whatever loan payments they need to make (again, this is a low level look at things).
What are companies going to have to do to make ends meet? If they’re lucky, they’ll get a bailout! If not, they’re going to have to cut expenses. What comes to mind when a company wants to cut expenses? You got it – downsizing. At this point, we’ve already started seeing and hearing about companies laying off and furloughing thousands of workers. Some offering a voluntary buyout package like Boeing is.
That’s not even all. You ever go on vacation and see so many of these “superhosts” on AirBNB? They’re leveraged too. Think of all of the high quality properties in upper end areas, with the high HOA fees – even if they’re not leveraged, that’s a huge sum to pay up regarding their monthly mortgage. Imagine what happens when their revenues go to zero? They still gotta pay those operating expenses – the mortgage, HOA fees, utilities and whatever is associated with it.
Do we even need to explain with airlines? Airline companies even take on debt in order to buy back more of their own shares – why do so? This benefits the shareholders – the less of their outstanding stock that is out there, the higher the value. But, taking on debt, to buy back shares, only for revenues to go flat (People no longer flying due to the COVID-19 outbreak, countries shutting their borders, banning and restricting entry to and from certain countries, etc.).
So what should we do?
We definitely don’t want to start investing in the market anytime soon, as we believe there’s the potential for the market to get much worse. When have we hit the bottom? We don’t know, but our opinion is that we haven’t hit it yet. The long term effect of what we talked about didn’t even show yet! Right now, we’re all so fixated on the now and present, but the overall effect of all of these business closures, leading to mortgage and loan defaults, are going to leave a lot of money lost and a lot of people out with jobs. Pair that with rising crime.
What we’re doing?
We’re looking to gold & crypto as somewhat of a safe haven, and take what we can out of our income and keep that in cash. We’ve did a lot of investing from 2016-2019. Investing in 2019 is a regret, but our strategies align in investing for the long term, so we’re emotionally prepared for it. Plus, we’ve got 6 months of living expenses covered.
More to come on what’s going to happen to the economy!