Friday, May 15, 2020
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The pandemic response is a race against time
On Wednesday, Federal Reserve Chair Jerome Powell offered perhaps the most succinct and clear outline of why the current crisis is so urgent.
“The passage of time can turn liquidity problems into solvency problems,” Powell said.
With this line, Powell is trying to prod lawmakers to continue supporting households and businesses during the current forced economic slowdown.
Government policy has so far been able to make up for some of the near-term liquidity problems caused by these closures.
But if additional assistance isn’t made available as states and cities slowly re-open, these short-term challenges may eventually force a broad wave of closures and bankruptcies.
Some businesses like restaurants have already made the decision to permanently close, but many companies have received PPP loans, kept workers on staff, and will try to re-start operations when restrictions lift. Powell’s message to his colleagues in Congress is clear — do not make time an enemy to businesses and households trying to keep it together.
And with these comments, Powell hits at a theme Corporate America listed among its most urgent concerns during the most recent earnings period: cash preservation.
In its latest quarterly roundup of executive commentary from earnings calls, analysts at Goldman Sachs found that cash management was one of the most-discussed areas during the most recent quarter.
“Management teams prioritized liquidity and balance sheet strength,” Goldman said in a report to clients published earlier this week. “Heightened uncertainty prompted companies to reduce capital expenditures, buybacks, and dividends.”
The target of Powell’s commentary was small businesses, individuals, and the elected leaders who represent these interest in Congress. Companies in the S&P 500 holding conference calls tracked by Goldman Sachs analysts have many sources of liquidity beyond the federal government.
But the concern from these management teams isn’t all that different than what we’re seeing on Main Street and in our homes right now. The goal right now is to survive.
Some companies and households can, perhaps, be better positioned to weather future storms. But first you’ve got to get there. And investors have so far rewarded companies taking these steps.
“Our Strong Balance Sheet basket has outperformed our Weak Balance Sheet basket by 24 [percentage points] YTD (2% vs. -22%), but trades at a forward P/E of 32x, representing a 3 standard deviation premium vs. history,” Goldman said in its note.
And so investors are paying a significant premium to own a slice of businesses that are perhaps most likely to avoid Powell’s death march from liquidity problems to solvency problems.
The signal investors are sending out with this behavior is that they are quite worried about how many companies can survive this period and remain healthy.
The message from Powell is similar, but with a more concrete message to Congress and the public. And the message is that we must not believe we’ve done enough to survive this crisis.
Not quite yet.
“At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way,” Powell said.
“Recall that the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis. But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
What to watch today
8:30 a.m. ET: Retail Sales Advance month-on-month, April (-11.9% expected, -8.4% in March); Retail Sales excluding Autos & Gas, April (-7.6% expected, -2.8% in March); Retail Sales excluding Autos month-on-month, April (-8.5% expected, -4.2% in March)
8:30 a.m. ET: Empire Manufacturing, May (-60.0 expected, -78.2 in April)
9:15 a.m. ET: Industrial Production month-on-month, April (-12% expected, -5.4% in March)
9:15 a.m. ET: Capacity Utilization, April (63.8% expected, 72.7% in March)
10 a.m. ET: University of Michigan Sentiment, May preliminary (67.5 expected, 71.8 in April)
4 p.m. ET: Net Long-term TIC Flows, March ($49.4 billion in February)
4 p.m. ET: Total Net TIC Flows, March (-$13.4 billion in February)
5 a.m. ET: JD.com (JD) is expected to report earnings of 11 cents per share on $19.17 billion in revenue
6:55 a.m. ET: VF Corp (VFC) is expected to report earnings of 11 cents per share on $2.36 billion in revenue
NYSE will reopen the trading floor on May 26, president say [Yahoo Finance]
[Yahoo Finance UK]