COVID Lockdowns & Small Company Debt Crunch -- The Capital Note

A deli closed due to the coronavirus outbreak in Brooklyn, N.Y., March 26, 2020. (Stephen Yang/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the (abbreviated — Daniel Tenreiro is away) menu today: Lockdowns, a small-company debt crunch, a motel revival, nukes, and short sellers.

Lockdowns and the Need for a Continuous Reassessment of Risk and Reward
When looking at the ruin — beyond the terrible loss of life — caused by COVID-19, it is important to draw a distinction between the damage caused directly by the disease and the natural human instinct to avoid infection (thus restaurant bookings were down sharply before the lockdowns began) on the one hand and the damage caused by the efforts to combat the coronavirus on the other. Sweden, as we all know by now, pretty much went its own way, and, while it won’t be possible for quite a long time yet to conclude if that country (which, like other places, badly mishandled the situation in its care homes) came closer to finding a properly balanced response to the coronavirus than most, there are some indications that it might well have done.

What works (perhaps) in Sweden might not have worked well elsewhere. It was, I reckon, perfectly reasonable for brief lockdowns to be put in place in certain states or countries when (belatedly) the seriousness of the Novel Coronavirus began to be appreciated. Above all, it was essential to ensure that health systems not be overwhelmed. But after two or three weeks, the risk/reward balance had clearly begun to shift away from favoring lockdowns (at least in their most stringent form). The long-term damage to the economy, and to lives (not least from other diseases that were going untreated or undiagnosed) as well as to livelihoods, was becoming increasingly apparent, and yet those running the lockdowns — many of whom seemed a little too comfortable with command-and-control — were unwilling to face the reality that risk/reward in a case such as this shifts over time.

Instead, they remained, intellectually, stuck, pursuing the objective of “crushing” the virus, seemingly regardless of the cost, and with no reassuring answer to those who asked what will happen if crushing the virus is in fact merely postponing its recurrence, to coincide, perhaps with flu season. (It’s more important than ever to get a flu shot this fall.) Comparisons with some of the more boneheaded commanders of the First World War do not seem inappropriate. The idea that we must find a sustainable way to live with this disease — as humanity has done with disease throughout history — seems to be beyond the capacity of rather too many policymakers.

In the meantime, the economy withers, and jobs disappear, not to return. In a recent note, Goldman Sachs recently forecast that nearly a quarter of April’s “temporary” lay-offs will be permanent.

In yesterday’s Wall Street Journal, Greg Ip took a lengthy and considered look at the debate over lockdowns. It is well worth reading in full.

Five months later, the evidence suggests lockdowns were an overly blunt and economically costly tool. They are politically difficult to keep in place for long enough to stamp out the virus. The evidence also points to alternative strategies that could slow the spread of the epidemic at much less cost. As cases flare up throughout the U.S., some experts are urging policy makers to pursue these more targeted restrictions and interventions rather than another crippling round of lockdowns.

“We’re on the cusp of an economic catastrophe,” said James Stock, a Harvard University economist who, with Harvard epidemiologist Michael Mina and others, is modeling how to avoid a surge in deaths without a deeply damaging lockdown. “We can avoid the worst of that catastrophe by being disciplined,” Mr. Stock said.

I would add that the catastrophe — should it occur (should it not have already happened) — will be far more than just “economic.”

COVID-19 is not “flu,” and it is true that most preparations for pandemics were prepared with a flu in mind. Nevertheless, this is striking:

During the 1918-1919 flu pandemic, some American cities closed schools, churches and theaters, banned large gatherings and funerals and restricted store hours. But none imposed stay-at-home orders or closed all nonessential businesses. No such measures were imposed during the 1957 flu pandemic, the next-deadliest one; even schools stayed open.

Lockdowns weren’t part of the contemporary playbook, either. Canada’s pandemic guidelines concluded that restrictions on movement were “impractical, if not impossible.” The U.S. Centers for Disease Control and Prevention, in its 2017 community mitigation guidelines for pandemic flu, didn’t recommend stay-at-home orders or closing nonessential businesses even for a flu as severe as the one a century ago.

Meanwhile, via ABC:

Newly-minted Democratic presidential and vice-presidential nominees Joe Biden and Kamala Harris in their first joint interview promise a national strategy on the pandemic on day one and they discuss what will happen if a second wave occurs with ABC News ‘World Tonight’ anchor David Muir and ‘Good Morning America’ co-host Robin Roberts. Biden said that as president, he would shut the country down to stop the spread of COVID-19 if the move was recommended to him by scientists.

“I would shut it down; I would listen to the scientists,” Biden said. “I will be prepared to do whatever it takes to save lives because we cannot get the country moving, until we control the virus.”

Of course Biden should listen to the scientists on the science. But deciding what to do ought to involve rather more than that. Any decision ought to involve economics, politics, and some extremely uncomfortable trade-offs. Sheltering behind “the science” is not enough.

Around the Web
Easy money, you say?

From Bloomberg, a couple of weeks ago:

Unprecedented government stimulus has allowed more companies to borrow at lower rates than ever before. Yet amid the credit boom, smaller firms that power America’s economic engine are often being shut out, hamstringing the recovery just as it begins.

The Federal Reserve’s pledge to use its near limitless balance sheet to buy corporate bonds has aided stricken airlines, oil drillers and hotels. It’s also helped companies from Alphabet Inc. and Inc. to Visa Inc. and Chevron Corp. access some of the cheapest financing ever seen. All told, firms have sold about $1.9 trillion of investment-grade debt, junk bonds and leveraged loans this year, according to data compiled by Bloomberg

But for companies not large enough to tap fixed-income markets, the outlook is much more dire. Banks are tightening conditions on loans to smaller firms at a pace not seen since the financial crisis, while many direct lenders that have traditionally focused on the middle market are pulling back or turning to bigger deals instead. What’s more, the Fed’s emergency lending programs for mid-sized businesses and municipalities have been criticized as slow, complex, and largely inaccessible.

A lack of credit for small and medium-sized firms could tip many into bankruptcy, adding to the thousands of local businesses that have already quietly disappeared amid the pandemic’s mounting devastation. Given the sector employs roughly 68 million Americans — Fed Chairman Jerome Powell calls it America’s “jobs machine” — and is critical to regional economies across the U.S., a prolonged inability to access financing runs the risk of stalling the nascent rebound.

Perhaps something good has come out California’s energy fiasco.


It took five decades, but the Democratic Party has finally changed its stance on nuclear energy. In its recently released party platform, the Democrats say they favor a “technology-neutral” approach that includes “all zero-carbon technologies, including hydroelectric power, geothermal, existing and advanced nuclear, and carbon capture and storage.”

That statement marks the first time since 1972 that the Democratic Party has said anything positive in its platform about nuclear energy.

Whether, given the nature of Democratic activists, a Biden administration would be able to do anything about it is an entirely different question.

And . . .

While the pro-nuclear stance is a welcome change to the Democratic Party’s view on energy, the new platform also says that “Within five years, we will install 500 million solar panels, including eight million solar roofs and community solar energy systems, and 60,000 wind turbines.”

To call that a stretch goal would be charitable. The Democrats say that there is an “urgent need to decarbonize the power sector.” But attempting to do so with such massive quantities of solar and wind simply isn’t feasible, particularly in just five years. To put those numbers in perspective, the Solar Star project is one of the largest solar facilities in the country. It has about 1.7 million solar panels and at full capacity, can generate 579 megawatts of power. Thus, deploying 500 million solar panels (which would have a capacity of roughly 173,700 megawatts) would require building nearly 300 projects the size of Solar Star.

The wind numbers are equally daunting. The United States currently has about 60,000 wind turbines with a capacity of about 104,000 megawatts. Where are the Democrats planning to put those forests of turbines? In New York, a state dominated by Democrats, the backlash against the siting of large renewable projects has been so widespread that earlier this year, Gov. Andrew Cuomo pushed through a measure that allows the state to override the regulations implemented by local governments when siting energy projects. In California, where Democrats have controlled the state government for decades, wind capacity has been essentially unchanged since 2013. Meanwhile, only 73 megawatts of new wind capacity is being built in New England. No new wind capacity is under construction in New Jersey, Pennsylvania, and Wisconsin.

And then there is the little matter of cost.

Grand MotelsThe Washington Post:

Motels, those oft-neglected one-story destinations typically spurned by affluent travelers, are having an upswing.

They can thank covid-19. Road trippers and travelers seeking to avoid elevators, crowds and everything else that comes along with fancy hotels are now turning to motels, which haven’t been this popular in decades.

And the Washington Post wouldn’t be the Washington Post without a helpful explainer for its readers:

Motels are typically one- to two-story properties with exterior corridors and parking lots in proximity to the 12 to 35 guest room doors, said Jan Freitag, senior vice president of Lodging Insights for the data and analytics firm STR.

Well yes, but actually this matters:

These properties allow guests to avoid contact with others: They typically don’t feature elevators, nor do they have large common spaces, so guests have a sense of control over their environment, she said.

Random WalkBeing a successful short seller is rarely a way to make friends or win the approval of either the New York Times or, for that matter, Main Street.

And so, from yesterday’s Times:

There is something discomfiting about the idea of getting fantastically rich off someone else’s misfortune, which is what happens when a “short” trade — or bet against a stock or industry — succeeds. The contrast is even more startling given that the pandemic, which has devastated the economy and hurt the livelihoods of millions, has turbocharged the bets that [Carl] Icahn… and others placed on the downfall of malls . . .

The trade Mr. Icahn and Ms. McKee met to discuss, known as the “mall short” in financial circles, is the latest in a longstanding Wall Street tradition that some criticize as bottom-feeding because it preys on failure and can push a business over the edge while contributing little to the economy. Most investors buy stocks and bonds with the expectation that they will rise in value. A short is the opposite, and their defenders say they can help expose corporate fraud or deflate a dangerously overvalued asset, which can aid the smooth functioning of markets.

Indeed, they can. The case of Wirecard is a recent example, which (among other matters) I wrote a bit about here.

“We periodically do shorts, and this is one of the best that I’ve ever seen,” Mr. Icahn said in an interview last week.

In this case, the rationale was the predicament in which malls find themselves, a predicament that has been made even worse by the pandemic.

Brick-and-mortar retail has been in distress for years. Trapped between the growth of online shopping and the popularity of discount chains, many retailers have struggled to find a foothold in the changing firmament. The nation’s roughly 1,000 shopping malls (excluding strip and outlet malls) have borne the brunt of the problems, with hundreds of them fighting low occupancy and the loss of major stores, known as anchors.

The coronavirus pandemic, which prompted stay-at-home orders, increased the financial strain on malls by choking off much-needed foot traffic and cash flow. . .

“The malls were way overbuilt to begin with,” Mr. Icahn said, “but additionally, the real problem was that malls and physical retail were constantly losing ground to online shopping.” He has kept his trade, believing that certain shopping malls could be in far worse trouble.

The legendary stock trader Jesse Livermore (“the boy plunger, the great bear of Wall Street,” etc.) would have understood:

“Go long when stocks reach a new high. Sell short when they reach a new low.”

Livermore was — how to put this — an interesting character, and while his entry on Wikipedia cannot match that of Lieutenant General Sir Adrian Paul Ghislain Carton de Wiart VC, KBE, CB, CMG, DSO (particularly its first paragraph), it has its moments:

His second divorce in 1932, the non-fatal shooting of his son by his wife in 1935, and a lawsuit from his Russian mistress led to a decline in his mental health, while the creation of the U.S. Securities and Exchange Commission in 1934 imposed new rules that affected his trading. Although it is unknown exactly how it happened, he eventually lost his fortune and filed bankruptcy for the third time in 1934.

Sadly, Livermore shot himself a few years later.

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