At this point, every single country is trying to print trillions of dollars to solve the economic crisis caused by COVID-19. If we look at the solution from a “fix it now” perspective, it works. If we look at the situation from a long-term impact perspective, it does not. Paying off debt with new debt is exactly what happens when a company is entering bankruptcy/insolvency. If you give a person debt who cannot pay his own bills, this means his future bills just went up. He’s better off shuttering and moving on.
Example – a Restaurant: Since our readers have various backgrounds, a restaurant is a simple example to follow. If we take a middle of the road restaurant, call it “Italian Restaurant”, this location will cost ~$40 per person for a dinner. This is a reasonable price range for middle class people. Unfortunately when you sell to the middle class, margins are usually lower relative to someone operating an ultra high-end restaurant. How low are profit margins for regular restaurants? They run at around 5%. If you don’t believe this feel free to look around online and you’ll get to a range o 0-12% or so with most hitting 5%.
Now that we understand slim profit margins, we have to look at only two variables. Rent & Food/Drink Costs. Why? These businesses are being forced to run at 25% capacity at max. To keep it simple, we will even give them a boost to 30% of normal capacity. Remember, social distancing and other rules cause these numbers to be generically correct. Therefore we have to ask… How much is rent?
Well, rent/lease cost is usually 5-8% of total sales (this is during normal times). Food and drink costs (cost of goods sold line) is around around 28-32%. This gets us to a minimum cost range of 33% with a high-end of 40%.
Put it all together. If a Restaurant made $1M in a year, around $333,333 was spent on lease + supplies and you’re left with 60% “Other” expenses like insurance, employees etc. Even if we assume that there are no other costs, you have to pay out $333,333.
Jump to the conclusion at this point. If the revenue line is stuck at $300,000 because of the pandemic, and you must pay out $333,333 it means you’re losing $33,333. Also. This assumes you have no debt at all (running the business as 100% cash). This is incredibly unlikely as most restaurants are levered up just like a home (you borrow to buy).
How does this end? It ends with the person losing everything. Even if you give the person a free loan for $100,000+ with no interest rate attached to it, he’s still losing money every single month. This means you’re creating a payment for him that just gets bigger and bigger and bigger as he borrows more and more during a time when the business cannot operate. Pretty insane when you think about it. His business was shut down beyond his control and the person paying the price is the business owner? It’s quite a mess to watch. He’s better off closing the business instead of running at 25-30% capacity over the long-run.
Go to the Next Step – The Competition: The above should make intuitive sense to anyone. No need for a specialized degree in Economics or a degree in anything else they told you would help obtain a “good job”. If we look at the other side of the equation, competition is imply ramping up in two ways. You have two other options to eat: 1) you can cook by yourself and 2) you can have food delivered for you by Amazon.
Now you’re probably asking, why won’t people go back and live a normal life once we open up the flood gates? The answer is that a large chunk of the population is unemployed so you cannot simply flip a switch and force companies to hire everyone. In fact, many of these major companies learned that a huge number of their employees were not useful at all. They were simply collecting checks and going home without any productivity. The firms that said “we won’t fire anyone this year due to the pandemic” will be cutting heads by next year. The firms that did not make this offering? They have already started the cuts.
So now you have a “retail apocalypse”. The major retail areas have less foot traffic (even if everything opens up), the competition allows people to save money (cooking for themselves) and the longer term solution (delivery) is run by Amazon who’s interested in making costs go down long-term. It is safe to say that a structural shift has occurred and you’ll have a larger remote work force (continued pressure on foot traffic).
Put this together and the below chart is a good set up for what is to come.
Another Structural Shift: The second step is where degrees in economics and “Phillips Curve” discussions get thrown out the window. We’ve lived in a world where inflation has been part of our lives and we believe that this is going to continue with no rational explanation for why. There is a great book on this topic called “The Price of Tomorrow” by Jeff Booth.
In summary for those who haven’t taken economics, the Phillips Curve is simply the statement that “economic growth comes with inflation so inflation should line up with job growth”. That is great, until you look at the national debt and realize all the “growth” wasn’t economic growth. It was really just debt piling upon debt which was causing the “inflation”.
Take a step back (as the recommended book does) and ask yourself, in what future will we see job growth? Job growth in the physical realm is highly unlikely. All the products we are consuming are competing against robots. Factories are run by robots in many areas (hint think Alibaba and China), the number of jobs being replaced by lines of code is accelerating and on top of that, levered up companies that are facing potential bankruptcy are looking for ways to cut jobs that are unproductive. Job growth will not occur until we’re able to create a new virtual economy discussed in a prior post. Until then… job growth is going to go down.
This creates an extremely difficult set up. If you print a ton of money and cause asset prices to go up, you’re putting the clamps down on 90% of society. If you don’t allow assets to go up, large numbers of people/companies go bankrupt. The solution is to re-do the entire monetary system and that requires far too much coordination (if you obsess over this stuff like we do, you know the IMF is already dropping hints of a new Bretton Woods agreement).
It is quite interesting to watch. The best solution is to issue checks to everyone and tax it back based on their income this year. And. That’s not going to happen as the government had a chance to do this and went with mass printing instead (hence asset prices went way up while people who do not own assets got significantly poorer). Focusing on asset prices prevented any sort of market reduction and now we’re living in a twilight age where big companies believe they will always be bailed out even if they lever up to the gills.
Solution for You: The answer is quite simple, you must produce something (anything) immediately. There is just no way around it. Unless your net worth is increasing by 20-25% a year, you’re going to be falling behind. Why do we think the number is this high? Look at the prices of tech stocks. Since we know that tech is going to drive all the value going forward (or at least the vast majority) it’s the new standard for relativity. Buying something like the Qs (NASDAQ) is a lot more reasonable with a 10-year time frame than a diversified basket of stocks in dying industries (as usual, not to be deemed as legal or financial advice of any kind, just an opinion)
If you don’t have money, we would go ahead and trade your time for money and work those 60-80 hour weeks. There is just no other way to gain ground. If you have $50,000 to your name, producing even $5,000 of extra income is a 10% move for you. This gives you a shot (at least). Go ahead and start fixing iPhones, repairing watches, doing yard work for money etc. Anything and everything is on the table since the value of assets are going up rapidly.
Meanwhile, do not sell any internet producing assets. For those that have followed our recommendations over the years, we’ve historically talked about times to sell and times to avoid selling your company. At the current rate, unless your business is going down and you’re certain, you do not want to sell it. The number of ways to generate *income* from an asset is declining. Tech stocks are great for investing (healthcare as well), but, the majority of them don’t have big dividend payments. So you need that cash flow to invest into the future which is heavily technology centric.
Newer Readers: For those that are unfamiliar with our blog we have three high quality products in order: 1) Efficiency, 2) Triangle Investing and 3) Spending for Maximum Return. In order, you learn how to make a good amount of money (a million liquid within 10 years or so), how to correctly invest it and finally how we’d avoid blowing it all with intelligent spending and PED use to improve quality of life. We hold Q&As 1x a month for purchasers only.