Feature Article


The Economy Goes Out on Sick-Leave: the COVID-19 Challenge


by Dr. Ken Mayland The Public Health / Medical Problem T


his is a public health/medical, business, financial, economic, and fiscal crisis. COVID-19 is a pandemic: a highly contagious and dangerous disease, with a long incubation period -- three critical points. The ONLY effective short-term solution is self-quarantine; second-best: “social distancing”. Most people cannot, or will not, shelter-in-place; every human interaction poses a risk (i.e., playing Russian roulette). Consequently, a significant portion of the population WILL contract the corona virus. The good news: perhaps one-half


of those infected remain asymptomatic; another one-third suffer manageable cold/flu-like symptoms. Subsequently, they develop antibodies which prevent or mitigate reinfection risks. The bad news: the remainder of those infected – the exact percentage of which will be determined by behavioral patterns and government edicts – could overwhelm the capacity of the health care industry. The current strategy is to “flatten the


curve” – to spread out the infection of the population to better enable hospital capacity to handle the load is: • Restricting travel, closing borders • Closing schools, restaurants, malls • Eliminating events (e.g., NBA, PGA, MLB)


• Restricting gatherings/ meetings/conferences


• Quarantines


The long-term solutions are viral treatments for those infected and vaccines to prevent infections; but these will take time.


More good news: this is a transient problem; one way or another, like other natural disasters, the impacts are “temporary,” and life WILL get back to normal.


10 ❘ April 2020 ®


The Business Problem The business problem is the catastrophic falloff of demands, from the public’s responses, which are the revenues of companies. Very few firms can cut expenses as fast as the drop-off of revenues. Most organizations do not have enough cash on hand to cover the losses, i.e., pay the bills. Hence, they need to shed expenses AND they need an equity infusion, or credit (loans or forbearance on accounts payable) to remain viable.


Ultimately,


the business problem is one of survival – getting to “the other side.” DRASTIC actions may need to be undertaken. For non-critical businesses, consider


two paths: • Mass layoffs, to stem the bleeding of cash (since salaries are frequently the single biggest company expense); laid off employees can claim unemployment compensation to get by.


until the epidemic subsides.


made by banks, to keep employees on payrolls, at least for a couple months


The Financial Problem Banks make loans all the time, but they can’t physically handle the simultaneous credit needs of millions of businesses. There are additional concerns about credit risks, i.e., the likelihood of being repaid (which would endanger other businesses). Due to volume and credit concerns, the “plumbing” of the financial system clogs up.


Symptom: credit spreads widen


(i.e., the rates paid above the “risk free” Treasury rates increase.) The complex, interconnected web of business and credit relationships is imperiled; there is a threat of a cascading set of business failures (with an attendant loss of jobs).


This is temporary, only A


metaphor: employees at the auto companies, Boeing, and Caterpillar (among others) have gone on strikes for weeks and months; the production lines stopped, and later when agreements are reached, are restarted. Then, life goes on.


• Total company-wide shutdowns. This obviously sounds extreme, but think of it this way: many companies shut down every week! Work ends on Friday and restarts Monday (or even


Tuesday, on holiday


weekends!). Hence, think of this as an “extended weekend shutdown” – a shutdown that lasts one or two months. (A skeleton staff may be necessary just to keep an eye on things).


• Each of these strategies may be modified by the federal government’s $349B Paycheck Protection Program (“PPP”) – a forgivable SBA loan,


Regarding the stock market: this is the polar opposite of the “tulip mania!” The “risk of the unknown” is resulting in a general pricing of equities assuming a one-third loss of ALL future profits (discounted)! … All for a transient problem that may last 6 + or – months!!!


The Economic Problem A “recession” is defined as a broad- based decline of the economy (i.e., loss of output and jobs) lasting more than a few months. One of the biggest, fastest stock market “bear” markets – the 1987 Crash – did NOT result in a recession! There have been other times when the economy saw a one-quarter decline, but did NOT fulfill the requirements of a recession, but this time the conditions will be met. Even the


loss of one full day’s


production, or sales, is significant (1 day of a 91 day quarter is about 1%). GDP figures are quoted on a quarter- to-quarter percentage change, at an annualized rate (AR).


Hence, a full


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