Small Business 2020 –How do you spell Opportunity in a Recession

This week we paid the last payroll of the first quarter of the Virus. We have endured Shut Down, Financial Panic, Protests and Riots. We have learned to shop with a face mask on, issue staff policy for social distancing, and made a revised marketing plan for the year. What else could go wrong?

There are three things that still darken the horizon; Banks have insufficient reserves, Global Banking system is unstable, and the Virus is returning with force.

2008 Redux for US banks

The banks are in a position to repeat their 2008 melt down. In 2008 the culprit was CDO’s based on mortgage loans, at a time when a critical mass of people defaulted on their mortgages. Currently the risk is in CLO’s, a similar instrument based on Collateralized Business Loans. These instruments are held by Banks, and are dependent on payments by businesses. Those same businesses that are struggling to maintain sales and market share against a public that is socially distanced. The key time period is August 2020. When 2nd quarter earnings reports come in, CARES Act! funding has run out, mortgage relief, renter relief and unemployment relief will all be past their 90 day limits. If individual payments are not made then bank collateral will melt from the bottom up.

Global Banks under pressure

Globally, banks are dependent on their loan customers making payments. In addition, most global banks have substantial investment arms. As we get to August Earnings Season, we will get our first look at how these assets are performing. Areas of concern involve HSBC with substantial assets in China, Hong Kong, and also the largest bank in the UK. Since we no longer know what country Hong Kong is, putting treaty, import and export status on hold, several banks are highly invested in the HK economy. In addition, nearly every bank worldwide has substantial interest that Oil stay above $30 per barrel. As we saw with Cushing Crude in May, the $30 benchmark is not a given.

Virus Wave Returns

We are now seeing several states reporting substantial increases in Virus cases. The US as a whole was holding steady at 20,000 new cases a day for nearly five weeks. That number is rapidly moving higher now. The curve is rising. There is no question today that the virus is again out of control in half the US states, including our own. If the current rate of increases takes hold, we could see 50k cases per day by August, and discussion of a far more drastic shut down of the economy.

How to Plan for What Comes Next?

Is Congress going to play Santa, or Marie Antoinette? Are protests going to fade out, or strengthen? Will the US Treasury continue to spend taxpayer money to prop bonds and stocks (That’s Capitalism Baby!) Small business remains trapped between the disaster and the goodie bag.

Be careful, be grateful, and be patient. Only time will tell which decisions we make today will turn out to look smart in the future.