When 1928 ended, there were some concerns about margin and trade flows. But mostly people seemed to think that 1929 would be another good year. There had been a string of good years, and today there is some speculation that the Spanish flu pandemic of 1918 left the survivors with a “live for today” attitude that had some responsibility for the “Roaring 20s,” as the decade was called.
By the end of 1929, the stock market had crashed, but nobody was standing around screaming, “It’s the Great Depression!” Then, like now, it wasn’t always clear what you were going to have to dinner that evening, much less what the world would be like in a year or two.
And then, like now, we tended to project the past into the future, and it never turns out exactly that way.
I’m not expecting another Great Depression. The speed and magnitude of the Fed’s response, the social safety net, and the technologies we have to address the virus make this different from the 1930s. But if it turns into the worst recession since World War II, I won’t be surprised. In the Great Recession GDP, at the bottom, was down about 4% and we hit 10% unemployment for a month. The consensus for this quarter’s decline in GDP is almost 9%. I expect the unemployment rate to hit around 20% at the next announcement.
As humans, we like to explain why things happen. I think it brings us comfort- maybe a sense that we have some control- when we can point to a cause. So, we point to covid 19. Obviously, it’s had and is having a huge, unanticipated (though not unanticipatable except as to timing) impact.
But ask yourself, what if the companies that loaded their balance sheets with debt to buy back stock (at what turned out to be high prices) had that cash in the bank (Boeing- $44 billion just to use one example) or had invested it in productive assets that were producing cash flow? They could use that cash now.
What if the Fed hadn’t kept interest rates way too low for way too long, causing incredible misallocation of capital, forcing people seeking some kind of yield to invest in things they had no business being invested in and allowing companies that should have gone out of business to be financed no matter how much money they lost and making you compete with some of them?
What if our politicians (from both parties over decades) hadn’t been willing to give us stuff we wanted that didn’t improve productivity without paying for it? What if they saw being elected as a sacred public service rather than a career (yeah, I know, I expect too much)? What if we’d been willing to elect people who wouldn’t just do and say what they thought would get them and keep them elected? That one’s on us.
The pandemic would still have been bad, but not as bad from an economic point of view. Here we go again trying to resolve a crisis that’s been exacerbated by too much debt with more debt when we know that more and more debt has less and less impact on GDP growth. For about the fourth time, may I recommend, This Time is Different: Eight Centuries of Financial Folly.
Meanwhile, here’s an article with a series of graphs from May 14 that highlight the declines in various retail sectors so far. As I’m sure you already know, you’re not going to like the one on apparel or, well, any of them. At least we’re not airlines.
But it’s always darkest right before the dawn. I’m starting to read and hear about brands and retailers seeing some bounce in sales, though it’s hardly a “problem solved!” moment. For our industry and economy, and for the world’s economy there’s no V shaped recovery in our future.
The biggest strategic unknown for all of us is the extent to which the virus reemerges as we open up. I’m feeling a bit isolated myself. While I don’t completely blame people for wanting to socialize, getting too close to too many people for too long when we have no national policy or ability to test and do contact tracing has the potential to put us right back where we were.
That’s my best medical opinion, worth what you’re paying for it. What’s your plan if the virus surges again?
What behaviors in which groups of your customers will change, and how long do the pandemic and associated economic ills have to go on before those changes become permanent and new ones emerge? My parents grew up in the Great Depression. I’ve written about how it created some permanent behavioral changes in them. The Great Recession did the same to a different generation and I’m thinking some of the changes will be permanent. And now, just a decade later, it’s happening again. Damn- is “hunkering down” a strategy?
Speaking of changing behaviors, I’ve always worked out, belonged to a gym, and participated in any sport that would have me. The last couple of months have not been great for exercise. Or haircuts.
I should point out that neither Diane or I have a job to lose, and we don’t have children at home. So basically, we’re lucky. Our problems seem trivial when we think about what’s going on.
But finally, I haven’t been able to stand it. I’ve ordered some TRX exercise bands. I’ve gotten an exercise ball, some weights, and a large floor mat. Even when the gym opens, I can’t work out with a mask and I’m unclear how an environment with everybody flinging sweat around and panting can be made safe. I’d rather be in the middle seat of a plane. What do you think? Once I get this set up, will I ever go back to a gym? The ROI is actually going to be fabulous with no monthly gym fee.
What changes are you experiencing that you didn’t expect when this started?
I’m rereading a book called The Day the Bubble Burst: A Social History of the Wall Street Crash of 1929, published in 1979. It’s tragically laughable to read about industrialists and bankers orchestrating a campaign to keep the Federal Reserve from raising interest rates, or that, in early 1929, “A recent survey showed that the 60,000 families at the top of the economic scale were worth the same in financial terms as the 25 million at the bottom; and the wealthy were steadily becoming wealthier. Income from dividends, under a series of tax cuts introduced by [Secretary of the Treasury] Mellon, had risen 65 percent in nine years. Higher dividends [like buybacks increasing EPS?] attracted more investors. Up went the market.”
Read it to realize how it’s all come around again, but also to better understand the socioeconomic environment in which you’re running your business.
Those of you with quality customer and inventory information, strong integration of brick and mortar with online and a solid balance sheet who have made the hard choices early will, if you want to try and make this into a positive, be better off than others. I would be particularly focused on long term customers and perhaps the subset of those who have purchased from you while stores were closed. In that subset, I’d be really, really interested in new customers.
This is not my usual article, but I thought some perspective on what might turn into the worse year for this country since 1862 might be useful, and even give you some hope. We’ve been through things like this before. Crises accelerate change. And even though the faster the change happens the more people hate it the change also creates opportunities and gets us from the bad to the good place faster.
You’re stuck with it. Embrace. The next article is half written in my head and will be specific as to some actions you might think about.