Saturday, September 19, 2020

Think Strategically: Crisis Separates Pretenders From Players

By on April 22, 2020

The Shape of Economic Recovery: ‘V,’ ‘U’ or ‘L’

The coronavirus pandemic has resulted in one of the fastest economic contractions in history. We have begun to analyze what may determine the shape of the recovery in the U.S. and Puerto Rico. 

As the economy of the U.S. and Puerto Rico ground to a halt, we knew the economic impact would be fast and severe. However, what we need to figure out is how we come out of this economic contraction.  There are three distinct variables to the economic recovery that follows. In these situations, the recovery represents itself in either “V,” “U” or “L” shape. We predict a U-shaped recovery since it better represents the gradual resumption of activity that the White House Medical Task Force is favoring after the prolonged period of social distancing measures begins to ease. The International Monetary Fund predicts that the U.S. real GDP will contract about 5.9% in 2020, and the outlook for Puerto Rico’s is a 6% contraction. We do not expect to experience optimal economic activity until the latter part of 2021.

Pandemics are a classic example of what economists call an “exogenous shock,”  an event or development coming from outside of the system that has a major effect on an economy. Some other examples include wars, natural disasters, technological change and changes in demographics.  

The shape of economic recoveries:

  • The “V” shape: It is probably the most bullish. The thought process is that the economy was fundamentally strong before the coronavirus lockdown. Thus a V-shaped recovery implies a fast return to the same levels of the economy and the second half of 2020 absorbing the shortfall of the first half, which would result in 2020 contracting by 1.2%. Odds of occurring: 27%.
  • The “U” shape: This recovery occurs gradually. The economy does not return to normal levels quickly and the rest of 2020 does not recover fully. Those who predict the “U” shape recovery base their outlook on the coronavirus not spreading after the lockdown and social distancing have been reduced. What the “U” shape predicts is that human behavior will change and alter how business is conducted. We tend to agree with the “U” shape as we are convinced that human behavior will change for the next three generations. You see, it takes a human being, on average, 66 days for a habit to become automatic. We will reach 66 days of lockdown on May 19, and once that happens, our new reality becomes a habit. In this scenario, GDP contracts by 3.2% in 2020, and even by late-2021, GDP has not returned to 2019 levels. Odds of occurring: 58%.
  • The “L” shape: Of the three, an L-shaped recovery is by far the most pessimistic, as it would maintain economic weakness and coronavirus causing permanent damage to the economic model. The “L” shape would keep unemployment at higher levels, and thousands of businesses filing for bankruptcy as the government safety net would prove inadequate. In the “L” shape, depression takes place lasting beyond 2021.Odds of occurring: 15%.

The permanent effects the coronavirus may have in the U.S. and Puerto Rico economies are difficult to determine and calculate. Our new reality is wearing face masks, using latex gloves, carrying sanitizing alcohol and practicing social distancing. Avoiding large crowds is on route to becoming a long term habit and a daily routine for all of us. 

Trump Administration, Congressional Stimulus Funding to Increase

The first three stimulus bills rolled out at a cost of $2.2 trillion. It will take a while to understand the effectiveness of these funding bills. However, the Payment Protection Program  (PPP) seems to be the most attractive, and the $349 billion in funding ran out, leaving thousands without access to the program.

  • Composition of Stimulus 3.5- The PPP is the driving force of the stimulus 3.5 bill, a $483 billion aid package that the Senate passed Tuesday.  An additional $331 billion would go to the PPP, which has strong bipartisan support. The bill also contains $75 billion for hospitals and $25 billion for ramping up Covid-19 testing.  
  • Key aspects of Stimulus 4 –Critical needs at that time will be prioritized, As such, it may include infrastructure spending and payroll tax forgiveness as well. 

Principal Economic Benchmarks

  • U.S. Business Sales: fell to $1.465 trillion, down from $1.471 trillion last month or 0.48% lower.
  • U.S. Housing Starts: fell to $1.44 trillion, or 22.95% 
  • U.S. Business Inventories: fell to $1.42 trillion, or 0.043%
  • U.S. Industrial Production: fell 5.4%, compared with 0.46% last month
  • U.S. Retail and Food Services Sales: fell 8.73%, down from 0.45% last month.
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Week in markets: Dow, S&P and Nasdaq Rise for second consecutive week

Even as all the economic data reported during the week showed increased weakness in the economy due to the coronavirus shock, the Dow Jones Industrial Average, S&P 500 and Nasdaq rose for the second week in a row. As investors digest the economic data, most internalize that the impact on the economy is temporary and have become hopeful that the pace of the pandemic has subsided. As this is going on, the White House released new guidelines to reopen the economy in different phases, and some European countries have announced tentative steps to ease restrictions.

  • Italy is keeping the lockdown in place; however, on April 14, it allowed stationers and children’s clothes to reopen. 
  • Spain is allowing construction and manufacturing sectors to work; however, the nationwide lockdown continues until May. 
  • Germany allowed stores of up to 8,611 square feet, car dealerships and bike shops to reopen, while schools will reopen May 4.

On to the markets, the Dow closed the week on April 17 at 24,242.49, for a gain of 523.12 points, or 2.21%, and a year-to-date (YTD) return of minus-15.9%. The S&P 500 closed at 2,874.56, for a gain of 84.74, or 3.01%, and a YTD return of minus-11%. The Nasdaq closed at 8,650.14, an increase of 496.56, or 6.09%, but for a YTD return of minus-3.6%. 

The Birling Puerto Rico Stock Index closed at 1,307.7, for a loss of 67.14, or 4.88%, and YTD return of minus-35.83%. Meanwhile, the U.S. Treasury’s 10-year note closed at 0.65%, a change of  minus-10.96%, and YTD return of minus-1.3%. The U.S. Treasury’s two-year note closed at 0.20%, a change of minus-13.04%, and a YTD return of minus-1.9 percent.

The Final Word: Crisis Separates Pretenders from Players

Throughout history, we have seen that during any crisis people will always look for a leader to guide them, the coronavirus pandemic has placed most political and business leaders in positions that are challenging, uncomfortable and for many navigating uncharted waters. On every occasion in my life where I needed guidance, I have reached out to the wisdom of John C. Maxwell, the author and motivational speaker. This past week, during one of our weekly sessions, he said something that I want to share: “On the other side of a storm is the strength that comes from navigating through it; raise your sail and begin. Just because you are struggling, it does not mean you are failing; sometimes people that are struggling think they are failing—not even close. If you are struggling, it tells me you are still in the game. We don’t see these incredible opportunities, first because a problem always surrounds them, we always have to go through the door of problems.

“So the next time you have adversity in your life, don’t allow the crisis to numb you. Be alive, feel, fail, learn. That is what it is all about. There is a hero within you; during this tough time, let the hero out, let people see the best in you, you be the hero they need.”

You see, “Crisis Separates Pretenders from Players.” As we have seen in this period, there is an incredible crisis of leadership in Puerto Rico.

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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