No Magic Answers
Bankruptcies happen when there is too much debt leverage accompanied by some sort of economic shock.
For example, Hertz filed for bankruptcy on Friday. Now, the entire rental industry is Scrambling for Answers, but there really aren’t any.
Covid-19 caused air traffic to plunge 90%. But blame debt for the Hertz bankruptcy, not Covid.
Layoff Impact
CNN comments on the Hertz Bankruptcy.
Hertz has notified 12,000 employees in North America that that they were losing their jobs, and another 4,000 are on furloughs. Its US workforce stood at 38,000 employees at the start of the year, with about a quarter of them represented by unions.
Auto Manufacturing Impact
Ford (NYSE:F), GM (NYSE: GM) and Fiat Chrysler (NYSE: FCAU) all face a steep drop in rental fleet purchases.
Last year, Hertz alone bought 1.7 million US automobiles, about 10% of the US auto industry production according to Cox automotive.
CNN commented “Avis Budget said it expects its fleet in the Americas will be reduced by 20% by the end of June, compared to a year earlier.”
Used Car Price Impact
If Avis, Hertz, Budget, etc., have too many cars, then a flood of cars will hit the used car market. It’s already happening.
Hertz had already announced it would not purchase any new cars for the rest of this year, and that it is starting to sell its vehicles as used cars. As of early March, it had sold 41,000 cars out of its US fleet and another 13,000 out of its European fleet.
Regional Impact
On Friday, the FAA granted airlines the right to halt service to regional cities.
As many as 60 cities face flight shutdowns.
For details, please see Airlines to Abandon Dozens of Regional Cities
Corporate Travel Impact
- Companies forced to allow more work-at-home have noticed no loss in productivity.
- The same applies to use teleconferencing instead of air travel.
Both cut down on eating out and driving (think local restaurants and gas stations).
Point number two is an additional hit to car rental companies and hotels.
This means more layoffs or fewer people recalled from furloughs.
Attitude Change
It’s important to factor in the change in consumer attitudes.
Some retail is going away, never to come back. It will take a while for people feeling comfortable having to sit in a full capacity theater, stadium, or airplane.
- Some people forced to cut their own hair will continue doing so.
- Some people who seldom cooked, learned how. They will be slow to return to eating out for many reasons.
- In general, any persons who suffered a huge income reduction will be very slow to resume eating out, traveling, or buying a car.
To entice people to buy cars, the automakers will have to cut prices, and perhaps dramatically given a new model year is coming up.
Existing Home Sales Plunge 17.8% Much Worse is on the Way
Note that Existing Home Sales Plunge 17.8%.
April will not mark the bottom in sales. Here’s why.
- Existing sales are recorded at closing whereas new sales are counted at signing.
- April sales represent transactions that occurred in February and March.
May sales (transactions in March and April) are sure to be worse. Even June sales could be worse.
Real Estate Agent Impact
Price is sure to follow traffic lower, and real estate agents will get hit twice. First on the amount of traffic, and second as prices decline.
April sales price rose, bit that was heavily skewed by the reduction in sales.
Grim Economic Data
- May 8: Over 20 Million Jobs Lost As Unemployment Rises Most In History
- May 15: Retail Sales Plunge Way More Than Expected
- May 15: Industrial Production Declines Most in 101 Years
- May 15: GDPNow Forecasts the Economy Shrank by a Record 42%. It’s 41.9% as of May 19.
Ripple Impacts May Last Years
The economic data has been grim and the ripple impacts may last for years.
Powell Warns Recovery May Stretch to the End of 2021
Fed Chair Jerome Powell Warns Recovery May Stretch to the End of 2021.
Powell is likely to be optimistic.
Fed in Panic Mode
Seldom does the Fed openly ask Congress to spend more money or to engage in fiscal stimulus.
But that happened on May 14 when both Powell and Minneapolis Fed president Neel Kashkari.
For details, please see Fed Promotes More Free Money.
This is a sure sign the Fed is in a state of panic.
Global COVID-19 Risk Ranges Up to $82 Trillion
To understand the total global risk, please see Global COVID-19 Risk Ranges Up to $82 Trillion
Anyone who expects a fast recovery out of this mess is delusional.
Mish
Car companies should be selling direct to consumer. And new makes and models only available every few years. Anything else is just bubbly waste.
New year models are a marketing gimmick, nothing actually changes in those vehicles. Another industry falsely propped up by low interest rates.
I’ve heard dealers talk to new buyers about auto equity… I mean how sleezy has this industry become? Does anybody actually own anything anymore? Or the banks literally own everyone and everything at this point.
You are right of course. We all either need to rebuild savings or help our families who need to repair theirs. Confidence isn’t coming back and we all have to adjust to an impaired life with this virus which is about to get worse. The only US State that beat it is Hawaii but how long can they remain a fortress without going broke?
This guy is pretty good. His writing is easy to follow and seems to be describing me. I’m not sure if i’m in the majority though. For me
How the hell were you spending $75 a month on haircuts?
This column adds some perspective:
the new normal
May 24, 2020
The sooner this economy doesn’t return to “normal” the better. And do not make the mistake that the stock market is somehow correlated to the economy. That idea works about as well as cash on the sideline theory.
This recession was on the horizon for 20 years. If you didn’t see it coming then you need glasses. Like CV19 was obvious in December 2019, the recession was obvious long before that. The cost of W Bush’s war, CV19 and Trump’s mismanagement will just make it worst. We will survive, America will survive if we can hang on to our Democracy and keep it alive, but everything will change weather we like it or not. And that might not be a bad thing in the end.
Reading these comments, I believe a contrarian would be fully invested in stocks.
The only reason anyone with half a brain would be fully-invested in stocks right now is if you were 100% convinced that a hyper-inflationary event is imminent.
And by imminent, I mean less than 6 months away, because many, if not most publicly traded companies will either be bankrupt or have their existing shareholders diluted to near zero beyond that time frame.
“Most publicly traded companies will be bankrupt”?
Not likely, unless I am misinterpreting your comment based on your hyperinflation comment. I don’t think I am, I am reading as two standalone comments.
I must have half a brain, I don’t invest based on the economy at all. Tradeable setups and individual charts. I suggest that readers here don’t apply Mish’s economic platform to their portfolio.
I think many are long again now thinking stocks are past their worse.
people who believe the collapse are people who use logic & fundamental & meritocracy. that world no longer exist. we have to adapt bc it’s different now. they are not even trying to hide the printing and lying. powell gives trillions so he can have security after he leaves his job. he doesnt want to die like volcker with no recognition & meaning whatever he did. if volcker did right thing, no one in new generation even knows him. Central Bank, Fed Gov, & Wall Street are just people. they are not mother theresa. if we keep expecting them to do right thing, we will keep losing. just recognize that they will print & push pain forward until it’s too late – adapt accordingly. fellas, they can print for a while but i will come back here to apologize next year if i’m wrong.
I learned in 2008 that the Fed will print money until stock markets come back – and this Fed is far more aggressive. They know they can’t save the economy but they can hyper-inflate stock and bond prices. Most professional investors still believe its futile to fight the Fed. We shall see. I’m not going to fight them. My $ are still long term and it’s impossible to time the market.
Shhhh! Wall Street better not read this article.
My wife and I usually plan a either a winter vacation in the Caribbean or a summer vacation in Europe to visit family, sightsee and play some golf. We have canceled our plans to travel anywhere this year and will probably not book anything for 2021 unless the outlook improves significantly.
What is your favorite city in Europe?
Mine is Prague but admittedly have not been to that many: Prague Munich, Vienna, Salzburg, Innsbrook. Want to go to Krakow
Mish Please visit Portugal. Go to Porto and take a day trip up the Douro river and taste our favored Port wine.You will fall in love with my country and our food.
Portugal, excellent value, nice weather, history, mountains everything. It’s where I’ve been hiding out during covid. Awesome place, has it all.
Krakow is a very good value destination! I recommend! Also Budapest, Hungary!
A vote for both..
Lisbon, Edinburgh, Paris and London are all wonderful cities.
We need to travel between Amsterdam, NY and LA. We will not buy tickets until an airline makes a very solid and detailed case that it will keep us from getting infected. Regardless of ticket price. Getting infected is at present more dangerous than any ‘dangerous sport’ by orders of magnitude.
Mish, excellent summation of just some of the reasons a V recovery is only something in a make believe world…the stock market. It is much worse than the avg person knows or maybe doesn’t want to know.
The grim reality on the street will be exposed and imho the huge disconnect with valuations in the mkt will get corrected.
I want to be optimistic, I only find reason in the exposure of the insanity the Fed policies helped get us to here.
Like bad dry wall, I don’t think you can paper over this.
Please keep writing the truth!
Mojo
Thanks
Hertz took approximately $800 million in new debt a few months ago, so likely they are planning to conserve their cash hoard, renegotiate their liabilities and re-organize as leaner and meaner?
Market participants view it another way. The fed is going to save us all.
We will need to watch local, county and state government budgets as they have 4 choices and all bad:
a) cut services and they always cut the most needed services first to inflict the most pain = higher unemployment
b) raise taxes = higher unemployment
c) combination of a and b = higher unemployment
d) bankruptcy which isn’t an option (yet) because of the legal hurdles
But hey, a cure is coming and the fed can bail us all out so party on. BTW, it’s great to hear that stimulus checks were spent on investing in stocks, tvs, and apple products instead of paying down debt.
I’ve always voted Republican but I’m going with the Democrats this year. I’ve surmised that they are more likely to support assisted suicide. The only way out for much of the US population.
That is the last thing I would ever do!
No point in voting anymore, each side was bought and paid for a long time ago.
Well, here’s the 18 year old Fed Blueprint for response to deflation. Enjoy:
link to federalreserve.gov
I see lots of people riding bikes in the future. I have a nice road bike – an old Raleigh Technium 12-speed. All Reynolds aluminum frame. This bike was “the bees knees” almost 30- years ago – before they started with the ridiculously expensive carbon fiber frames and forks. Just had it tuned up and it rides great. See you out there on the road!
Not to mention e-bikes especially for those of us with an older orientation. Adjust it to get as much exercise as you want and still get up the hills back home. I got one last year with a 20A, 48v battery and easily do ten mile trips in hilly country, might do 20. Using it more and more.
Yeah the cost efficiency of biking is something along the lines of every km or mile biked saves society .10 cents every mile driven costs .10 cents (health, pollution, infrastructure etc). Biking as an individual is such an efficient way to get a big of exercise and vitamin d dose daily.
Good luck trying to get even 1 percent of the road budget allocated to biking infrastructure.
The biking infrastructure also allows handicapped / elderly scooters to get outside and move around locally better. The upsides of biking infrastructure are enormous!
Hertz was running and 80% debt to asset ratio. And that was at grossly inflated asset values. The “moral hazard” has finally bitten, and now it is Hertz’s lenders who are in big trouble.. to the tune of 19 billion dollars.
“link to bloomberg.com“
From the article: “But the landlords are stuck with their own bills and bank debts to pay. By some measures, they’ve already been more than patient. Normally, they’d send out default notices as soon as 10 days after missed payments, rather than waiting weeks or months.
“The landlords do have the legal contract,” said Vince Tibone, a senior analyst at Green Street Advisors. “However, from a practicality standpoint, a lot of these retailers are on the brink of bankruptcy and simply cannot pay right now.””
As Mish has pointed out, “That which can’t be paid, won’t be paid.” Enter the lawyers stage right.
Well reasoned.
This has been a very strange event. Not part of any business cycle, more like a natural disaster. Hard to say how things will be going forward, though it feels like we are entering the aftermath phase.
There might be some surprising positives as well as negatives, though. As we emerge from this it might prove a sort of collective baptism, in that the body goes down into an alternate world (of water) for a little while, and then returns renewed, a new body in a new world, a fresh world. Maybe some of the world supply chains are going to change greatly after this which might in turn have some very positive effects in many areas – for example the manufacturing and generally ‘making things’ areas. Maybe the health industry will change significantly and the dominance of Big Pharma in legislation be cut back. Maybe the world banking system via centralised credit cartels will be abandoned and a more multi-polar system established. Maybe a new-found appreciation for how vital small business is effects electoral politics and regional governance. Maybe a new-found appreciation for republics and what they are for and against. For sure there is going to be quite a lot of detritus to sort through, and much damage to absorb, some which can be worked through quickly, and much that will take time, or maybe prove unsurmountable.
It’s going to be a challenging, but also interesting, time.
For some reason, I feel that as ghastly as most of it has been thus far, something positive is going to come out of it. Maybe because it feels to me like we have avoided a huge fall, that we came to the brink but did not founder. That did not happen by accident. Forces in play came out in a positive configuration. That’s something.
I’d like to see more appreciation for the trades – people who can make or fix things. If this mess leads to a greater recognition that many college degrees are worthless, especially considering the cost, so much the better.
I wish that I was optimistic, but I fear that we have become irreparably partisan. It seems that the voters are not giving the politicians a good reason to do the right thing. We would rather win the culture war.
Surprised you didn’t single out higher taxes due to all the free spending by governments. Or debt is so out of control that it doesn’t matter in a new parallel universe. We’re on a collision course with a death star.
Hertz isn’t the only one to take on debt / leverage. What about cities using Tax increment financing (TIF)? TIF was meant for areas that needed environmental cleanup, but cities like to use it to increase tax base even if cleanup is minimal.
Sometimes this is to detriment of existing businesses, since people will go to shiny new toy.
If they can’t paper over the hole again, demand for warm bodies and war materials will be our economic salvation.
That sound you hear is our economy imploding.
The knock on effects are huge on all of this stuff.
We will all be victims. Tax, financial repression, increased risk across the board, general stress.
Not to mention the international impact. A potential hammer blow to mercantilism and the major exporters who will need to stimulate their own consumer sectors to bolster demand.
I cut my own hair recently and I’ll probably never pay someone else to again. It wasn’t great but I have paid $16 for as bad a haircut as I gave myself several times in the last 2 years. I’ll save about $160 a year including the tip not to mention my fuel and time.
I cut my hair for the first time ever, and I liked it more than any haircut in recent memory.
I’m really tempted. If not, maybe I’ll just put together a 60/70s band that has nowhere to play.
Put together a 60s and 70s band and I will sing at the first annual MishTogether
I think the time saved is the biggest factor.
I have 3 boys aged 4, 9, 13. I just ordered clippers from Amazon last night and am looking forward to trying to cut their hair. Cost the same as one visit to the barber shop. I have You Tube to help and keep thinking of all the money I’ll save on haircuts.
I started buzzing my hair two and a half years ago – the clippers cost me $42 (I got the professional ones, I’m sure there are perfectly good ones cheaper). So far I reckon I’ve saved $25 x 30 months – $42 = $708. My wife trims around the edges for me, and I end up with the same cut I would have got at a barbers. Go for it.
Yeah, because it is fairly straightforward to make awesome food out of simple unprocessed ingredients, why would you go back?
A quick check shows you nitpick over the silliest of things, not just to me but to those commenting.
Reader request: do a John Hussman type analysis of where the market is heading, if your charter allows for it.
Yeah, replicating reheating or frying a frozen meal from Chili’s, TGIF, Sizzler or any like garbage uhmmm fast casual chain is very tough. You can’t get that poor quality if you try.
As for airplane flights…measles on a plane–why would CV be different? And consider that measles has a pretty high rate of vaccination making the possibility of a flight with a sick person matched to a non-measles-vaccinated person relatively rare.
From 2012….However, recent work has shown that cabin air flow may not be as reliable a barrier to the spread of measles virus as previously believed. Along with these new studies, several reports have described measles developing after travel in passengers seated some distance from the index case. To understand better the potential for measles virus to spread on an airplane, reports of apparent secondary cases occurring in co-travelers of passengers with infectious cases of measles were reviewed….Papers were included in this review if they reported secondary cases of measles occurring in persons traveling on an airplane on which a person or persons with measles also flew, and which included the seating location of both the index case(s) and the secondary case(s) on the plane. Nine reports, including 13 index cases and 23 apparent secondary cases on 10 flights, were identified in which transmission on board the aircraft appeared likely and which included seating information for both the index (primary) and secondary cases. Separation between index and secondary cases ranged from adjacent seats to 17 rows, with a median of 6 rows….Although the pattern of cabin air flow typical of modern commercial aircraft has been considered highly effective in limiting the airborne spread of microorganisms, concerns have been raised about relying on the operation of these systems to determine exposure risk, as turbulence in the cabin air stream is generated when passengers and crew are aboard, allowing the transmission of infectious agents over many rows.
COVID-19 hysteria has turned everyone into a germaphobe.
No link, but I read about a month ago that to the researcher’s surprise, people working on airplanes were coming down with CV less (percentage-wise) than the average population, so perhaps the air-conditioning systems, which include filtration, were involved somehow, or maybe viruses don’t like pressurized spaces. Anyway, their numbers were encouraging. I always thought it would be the opposite – in spades.
Turns out measles has one of the highest R0 of any virus, 12-18 (!!), meaning 18 people will be infected every time a measles carrier coughs, while Covid-19 has an ‘ordinary’ flu-like R0 of between 1.4-5.7. Given airplane air is about as filtered as hospital air, that means it’s unlikely you’ll get Covid-19 while on a plane, unless the person next to you is a carrier and sneezes without a mask and you’re not wearing a mask either.
‘airplane air is about as filtered as hospital air’
I have yet to read any study attesting to that statement!
Even in hospitals there are no 100% sterile areas. More germs/viruses in the the toilet and changing areas!
The HEPA filtration system can make a complete air change approximately 15 to 30 times per hour, or once every two to four minutes. According to IATA, the International Air Transport Association, “HEPA filters are effective at capturing greater than 99 percent of the airborne microbes in the filtered air.
In fact, because of the high-efficiency filters on most commercial airlines and the frequency the air is recirculated and filtered, the air you’re breathing on your flight is likely much cleaner and less contaminated than most office buildings and is on par with the air in most hospitals.
Unfortunately the majority of people form their ideas & opinions from a vast collection of propaganda, lies & deceit, which nicely packaged as “factual/ official information” and disseminated to them via their “trusted” TV news sources & mainstream media outlets (which are all owned & controlled by five multinational corporate media giants, whom are financially influenced ie controlled by Big Pharma, Big Business & Big Brother whom have long been regulating, manipulating, directing & controlling the information to the masses in ways that suite their agendas). The recent measles narrative is merely part of the ongoing conditioning process to promote acceptance into a world run by Big Pharma… many will immediately accept what is repeated to them on TV and across mainstream news outlets without question. In the 1960’s the measles was hardly a virus to be feared, in the 50’s & 60’s you never heard of anyone dying from the measles & it was common for parents of the babyboomer generation to have “measles parties” to actually increase the likelihood of their children & children within their neighborhoods to collectively catch the measles, be a little under the weather for a few days & then be done with it. And yet now that Big Pharma money dictates the dissemination of mainstream content/“info”… measles is now something else entirely, something to be “feared” & vaccinated for… and who benefits from the world that increasingly needs more & more vaccines? B/c there’s a massive amount of research, published studies & articles in medical journals, of which you’ll never hear about from mainstream news that show vaccines are a joke when it comes to building immunity & have a long track record of cause more health complications & deaths then the viruses they’re supposedly protecting against. We now have more autoimmune diseases then ever before & for the first time in a then past century people have stopped the progression of living longer lives & are now move backwards on the life expectancy curve…. Is it no coincidence that over the past decades we have dramatically increasing the number of vaccines & immunizations children & adults receive every year. People across the world are also having more difficulties the ever with fertility issues. And yet you have extremely powerful, wealthy, elitist organizations & individuals such as the Rockefeller Foundation & Bill Gates, who have repeatedly & openly been proclaiming that “the growing global population is the greatest threat to civilization & if left unchecked will soon become unsustainable” ….And then we have the Rockefeller Foundation and the Bill & Melinda Gates Foundation leading the charge with their billions in backing to increasingly vaccinate the world, as if they “actually” want the growing masses of people be healthier, live longer & procreate even more…?!?!? People make a huge mistake trusting that these ultra wealthy individuals in positions of power & control actually care about them, want whats best for their wellbeing, etc… most of these individuals have a superiority complex you can’t even begin to comprehend, many got to their positions of wealth & power either by being ruthless & greedy &/or were born into ultra wealthy powerful families… they are thinning the herd, but doing out in the open and easily manipulating the peasants to actually go along with it & believe its for their own good… all the while they get even wealthier, obtain more power, more control… and we more & more to Big Pharma & healthcare for our increasing diseases & health issues… we never get a cure for anything, but only a steadily growing number of patented toxic pharmaceuticals that only ever treat our symptoms, and come with whole host of adverse side effects which only lead to more health complications, for which we’ll be prescribed more pharmaceuticals for down the road.
Agree 100%. This shutdown has changed the way we approach work and spending. More tasks will be performed from home online. Some retail is going away, never to come back. It will take a while for people feeling comfortable having to sit in a full capacity theater, stadium, or airplane.
Certainly interesting times we live. I don’t think we have ever seen such a jolt worldwide since WWII transformed the world.
“Some retail is going away, never to come back. It will take a while for people feeling comfortable having to sit in a full capacity theater, stadium, or airplane.”
I like that comment – adding to my post
Thanks
Movie theaters have been pretty sparsely attended for a while. I go about twice a year and the theaters have been far from full capacity seating, I would guess about 30% full.That is probably the one thing I would not be hesitant about .
And yet, the US stock market is down, what, about 10%-15% from its peak? Nonsense buy the dips mentality IMO.