Sunday, November 29, 2020

THINK STRATEGICALLY: Celebrating Initiatives Rather than Results

By on June 22, 2020

This past Thursday, June 18, the governor of Puerto Rico, Wanda Vázquez, gave her “State of Puerto Rico Address.” Although the only legal requirement is to send a written message with the budget to the legislature, since the ’50s Puerto Rico’s governors have copied the U.S. president’s “State of the Union” address to communicate their accomplishments and plans. 

The message delivered by Gov. Vázquez, who lacks eloquence and passion in her spoken word and is unable to create an emotional attachment with the public, was quite bland and full of promises. 

You see, Puerto Rico is the only place where politicians celebrate their initiatives rather than their results. During the past 10 months, the governor has been unable to present a well-constructed, edifying or moving speech, and I do not think anyone was expecting it. Gov. Vázquez presented a $10.21 billion budget for the central government and a consolidated budget for the Government of Puerto Rico of $28.23 billion, without offering much detail about the numbers.

During the speech, the governor promised a gift bag of pay raises for teachers, police officers, firefighters and school directors. This is nothing new, every address in the last 30 years has offered the same kind of pay raises. Some of the more populists promises were:

  • Christmas Bonus for all government employees, even though 70% or more have not been working for the past 100 days. 
  • $1,000 bonus for all high school graduates who have been accepted to secondary education institutions.
  • Government healthcare coverage for an additional 200,000 citizens, utilizing $200 million in non-recurrent funding from the Coronavirus Aid, Relief and Economic Security (Cares) Act.

The speech highlighted how correct I have been to point out we live on two separate islands. The Island of the Public Sector and the Island of the Private Sector. 

The Island of the Public Sector:

  • It is represented by 201,900 government employees who have been quarantined at home; only essential agencies are working.
  • All are receiving their pay on the 15th and 30th of every month.
  • 70% have not worked a single hour since May 26, and very little has changed as the government agencies and the unions are reluctant to reopen. 

So I can’t stress how difficult it is to stomach a statement by the governor regarding government employees. The governor said: “It has been enough. It is not reasonable to continue unloading all fiscal cuts against public employees. The remuneration measure is necessary and urgent. I call on this legislature to join this demand for labor justice.”

The governor alleges she is seeking labor justice—higher pay, bonus, benefits and other luxuries—at the expense of the well-being of every private sector employee.

The Island of the Private Sector: 

  • For one, it has been denied all the luxuries provided to the public sector.
  • It is facing insolvency, bankruptcies, losses, high unemployment and a potential loss of life if our hospitals begin to close. 
  • Some economic studies claim that 10,000 to 15,000 businesses will never recover.
  • Causing job losses north of 100,000.
  • We must warn that we have only begun to experience the worst wave of small-business bankruptcies and closures Puerto Rico has ever seen. It will surpass those in the aftermath of Hurricane Maria, the Great Depression, and the global financial crisis. 
  • For most small businesses, it is impossible to survive without income for an extended period, and then, when allowed to reopen, they do so at 50% or less of their capacity.  

The governor, with her public sector-employee promises, forgets that many of the 359,000 unemployed people in the private sector have been unable to receive unemployment benefits due to the incompetence of the Labor Department. While the governor was giving her speech, many of the 200,000 who have filed for unemployment were sleeping in their cars, waiting in line around the Convention Center to seek a slot to request their benefits. The governor did not mention this fact. Not once. 

We are indeed living in two separate islands. In the Island of the Public Sector, all is easy, no unemployment claims needed, salaries are paid, most without requiring work, and remain as if the crisis had nothing to do with their lives. Yet the governor is implementing policies as if the public sector was the one suffering. 

The government is not capable of recognizing the critical importance of the private sector. With the small and midsize entrepreneurs in Puerto Rico providing north of 47% of the total employment and a substantial portion of the taxes and other government fees, Gov. Vázquez is making a big mistake in not providing enough assistance and importance to the private sector as well as a significant safety net for all businesses.

As the government continues to celebrate initiatives rather than results, in due time, the final result will be the significant harm caused to the thousands of private sector businesses and employees, ruining their lives, well-being and spreading poverty instead of wealth.

Week in Markets: Economy healing slowly, COVID-19 resurgence drives markets 

U.S. and global markets regained some of their footing last week as signs that the economy was slowly recovering allowed investors to become cautiously optimistic. However, only the Nasdaq was able to make the losses from the prior week, and all the other indices are trailing and with year-to-date negative returns.

On the economic front, a critical financial benchmark, U.S. Retail, and Food Services Sales, rose much more than the 8% forecast, to a record 17.69% gain in May, compared with a record 14.75% drop in April. Also, the U.S. Labor Department announced that there were more than 1.5 million, and despite that number being 3.7% fewer claims, it is worse than the 1.3 million claims that had been expected. Finally, U.S. Housing Starts increased by 4.28%, with some 974,000 new homes built in May, which compares favorably with the 26.4% drop reported for April. 

During the week, the Federal Reserve announced it was expanding its credit market activities by purchasing corporate bonds. Finally, there is consistent chatter that the White House and the Senate may be working on an infrastructure plan that may be as large as $1 trillion. We believe that the combination of job gains in May and the rebound in retail sales can give investors some confidence that an economic rebound is underway. The combination of these actions was able to reverse the market losses.

However, investors must watch the rising coronavirus cases in Arizona, Florida, Georgia, North Carolina and South Carolina. To that effect, Apple announced that it was closing 11 stores in these states.

On to the markets, the Dow Jones Industrial Average closed the week June 19 at 25,871.46, a gain of 265.92 points, or 1.04%, and a year-to-date (YTD) return of minus-9.3%. The S&P 500 closed at 3,098.02, for a gain of 56.71 points, or 1.86%, and a YTD return of minus-4.1%. The Nasdaq closed at 9,946.12, for an increase of 357.71 points, or 3.73%, and YTD return of 10.8%. The Birling Puerto Rico Stock Index closed at 1,453.96 points, dropping 10.6, or 0.72%, and a YTD return of  minus-28.65%. Meanwhile, the U.S. Treasury’s 10-year note closed at 0.70%, a change of minus-1.41%, and YTD return of minus-1.2%. The U.S. Treasury’s 2-year note closed flat at 0.19%, and a YTD return of minus-1.3 percent.

The Final Word: Economic Recovery Versus New COVID-19 Wave

As a parting thought, we must comment that we were quite positively surprised that last week’s U.S. Retail and Food Services Sales rose much more than the 8% forecast, to a record 17.69% gain in May. Consumer spending represents 70% of Gross Domestic Product, the increase in retail sales signals that the worst was in March and April. Moreover, this behavior gives the impression that as lockdown orders are eliminated, consumers are ready to step in and spend their money.

Nonrecurrent income such as stimulus checks, the Payment Protection Plan and temporarily increased unemployment benefits have provided increased liquidity. While we are quite impressed with the rise in the retail sales, we are also concerned with a potential “new wave” of Covid-19 spread. The rise in cases has been reported in several key states. If this wave continues, hospitalizations and deaths occur, the implications for the still young economic recovery will be quite severe.

We continue to adhere to our view that should a longer wave of COVID-19 infections occur, it could do so as the Spanish Flu did in 1918: come back more severe. The Spanish Flu infected 500 million people and killed 20 million to 50 million over two years. 

Thus the reactivation of the economy will not be simple and easy with significant roadblocks along the way. New waves of COVID-19 may cause business closures, lockdowns orders, repeating all the precautions, and potentially rolling back all the progress.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

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