In an economic sense the world is undergoing a collision of complexity. How government, markets and health systems operate are all under immense stress. People are making lots of decisions. What I have learned in 30 years as a professional trader and innovator is that people aren’t good decision makers during crisis. Logic is swamped by emotion, understandably.
This post is about giving our customers some concepts to think about in the hope it might help improve decision making for your business and your future. Concepts only, take these and seek specific financial or strategic advice from your financial planners and accountants.
Online everything – The trend from retail bricks and mortar to online will accelerate. This event is training millions of senior citizens to buy online. It’s causing people who use a mix of both to do more online. Essentially the adoption curve is shortened for online e-commerce. Even for accountants this will be tougher than they think. The governments digital systems for doing personal and company tax returns, BAS’s and other forms have improved dramatically and spawned a DIY approach to this. I’m not advocating this, just saying that it is happening, it’s a revenue risk for the industry. In tough times you can see people cutting costs everywhere and professional services, retail and travel industries will suffer.
Revenue ‘Gap’ Risk – The best example is WeWork. You can’t take out 10 years leases on buildings and then sublease them as coworking sites for monthly rents and expect to survive shutdowns like this. These businesses will either have to spawn a new insurance industry or mitigate this risk in some way or they will not be able to exist. Investors won’t touch them.
The long tail of economic burden – There’s no avoiding the impact of GDP months lost forever. It’s years of future burden. Less tax dollars and increased government borrowing for spending all point to one highly visible problem. Who will pay? If the government excessively milks the cash cows (small businesses) they might not show up. There will be a serious rethinking of the worthiness of actually being in a small business. It’s sad but it’s a reality we all can’t ignore. The burden if not shared by employees, employers and the government will cause changes in the mix.
Resets – Quite obviously it takes two events to show something isn’t a one off. I think the vast majority of people out there thought the GFC was a one off. We wouldn’t see another one like that for decades. Crashes seem to be that far apart. It took just 13 years and the market is resetting again. Coronavirus was just the pin that pricked the bubble.
Crashes are Cleanouts – What will happen now is that wealth in society is about to be redistributed from the risky into the risk adverse. This means that your target demographics, addressable markets, personas and architypes for your business are changing fast. This crash is cleaning out people who have been taking very high risk for tiny returns. It is cleaning out people with excessive debt and leverage levels that simply cant last in any environment other than prosperity. It is popping what I call ‘millions of household financial bubbles’. I’m observing this in my friends and family network. We all are. They have been waiting to burst for years, it’s terrible. I tried to have lots of conversations about this, some listen, some don’t. However, as a business, know that the high risk takers are a rapidly diminishing target market.
Black swan events become normal. To those technically aware of black swan risk you will see the irony in that statement. Black swan events are statistical outlier events in the realm of things that you don’t know, that you don’t know. Put simply they are blindspots. Not for everyone, but for the vast majority. People and markets adjust for them. This Coronavirus and the Mortgage Backed Security crisis that led to the GFC are two examples of Black Swan events. What will happen now is that businesses will adjust to recognise and price in that these black swan events will occur from time to time. They are not one offs. Higher levels of savings, cash and allowances for future problems will be built into business balance sheets. Practically this could be as simple as having savings set aside in a business for health, wartime or crisis based shutdowns.
Tech bubble – I think the very naive short term view is that online businesses are safe. Consider these two key event driven changes, that might be extinction events for 1000’s of startups and tech businesses. We just haven’t read about it yet while the media is looking at everything from the Helicopter (and so to the government). Firstly, tech businesses are very often about ‘wants’ and not ‘needs’. This is critical now but in the heady days when we were living the lux life it wasn’t. You now don’t need to get an Uber to work but you do need to get food from Woollies. Secondly, the premise of tech valuations and future funding from investors has been all about future returns in good economic times. This is no-longer the world we live in.
Respect for debt – We lost all respect for debt in the last 25 years. People borrow huge amounts of money to buy new cars, houses, investment properties expecting that rates will never rise again. Well this crisis is not just a health one. It is shaping up into a credit crisis that may force rates higher even though the official rates are low. This is because banks that lend to you need to borrow money from the financial markets and the rate of interest they pay is going up, fast.
Respect for risk/return – There was never a time where the compensation you receive for taking huge risks was as low as it was before the #CoronaCrash. We lost respect for the need to return a decent amount of interest or dividends for the risks investors were taking. We priced risk as though the good times would last forever.
Needs verses Wants – it always takes a crisis to remind us about economic 101 learnings. Business owners will think carefully before starting business in “wants” category going forward. They are susceptible in every future health event. Needs businesses are now the safer bet, maybe not as glamorous, but meek and humble ‘needs’ based businesses seem to inherit the earth in these situations.
Repricing of products and services – Some industries will see big pricing changes related to the need to self insure for this situation in the future, it needs to be passed on in price changes. The travel industry is an example. All the costs related to increasing health measures, distancing etc. change the volume of sales possible for assets owned. There is also the allowance for currency risk volatility. Many business allow for this risk but the movements are much bigger now (volatility) so prices need to be set to allow for what might be 1-2% shifts in price in a day. For businesses on tight margins this can translate into very big changes in profits. The tighter your margins the more impact FX rates have if you buy/sell offshore. Repricing risk associated with disease going forward will be the new normal.
Concentration risk – This crisis has been a huge wakeup call and regrettably a fatal situation for some in respect to single supplier risk. I feel strongly that any business with single supplier risk is at risk in this crisis. We ourselves have this in respect to where we source bank feed data for some minor banks. For this reasons we use a well funded organisation for data that is an essential service to its clients and thus has some systemic immunity. Not a guarantee though. For this reasons we explore other sources of data and allow for importing of bank data to work around the key supplier risk.
Contagious behaviours accelerate – In times of low stress this doesn’t come up, but in high stress anxious time people panic and copy strategies of others that they perceive are more switched on because they acted sooner. Financial market traders call this adaptive market behaviour. The recent rush to buy toilet paper is a classic example. People watch the rush on “The Project” or “Current affair” and had an “oh shit” moment and rushed the shops the next day. p.s. Don’t let these TV shows trick you. They were the cause of this. In Ireland they are banned from showing panic footage as part of the IRA related media rules and thus they didn’t have the toilet paper panic like we did in Australia.
Simplification of financial Markets – The GFC let all the banks except one off the hook. So like trained monkeys could have told you they went back to the same products and approaches that led to the last financial crisis. Formation of complex trading systems, structure products and business models are now all under stress from lack of liquidity. So markets will behave in new undiscovered ways. Many have already gone to the wall. Margin called out of existence or just escorted from trading floors. I expect regulation post a systemic collapse to avoid a 3rd repeat of our mistakes of the last few decades.
Companies with God Syndrome – Google is the best example. Maybe they need to stop trying to decide what we read and watch (banning political channels, attempts to rig election traffic etc.), stop trying to play our profile against us and spy on our living rooms and instead focus on core services and software that respect people and their rights. As I speak my children’s school are leaving Google Meets and shifting to Microsoft Teams. The school cited failures in Google security and performance versus Microsoft Teams who scored much better on these things.
Proximity changes for decades to come – Just as Sars and Mers altered social proximity in Asia, we will see this in Australia. The generations experiencing this event will learn what caused it and it will impact layouts in cafes, malls, public transport and the like in significant profound ways. The events and sport industry will reinvent themselves on this I believe. Factory lines will change. I have already seen evidence of this in Hubei. My friend sent me a video of an open production line and it was clear to me there was an increase spacing and thus production rates must fall.
Public transport – you only needed to see how many more people self isolate and drive to work to know this is an issue. It will cause more people to work at home permanently to avoid PT. The industry will need to reinvent itself allowing for less patronage.
Dwellings – the gap between Rural, Urban Homes and Multi-Dwelling residences will widen long term. The risks of being in a multi-dwelling high density environment have increased with an awakening around the concepts of proximity, shared air quality and limited retail resource availability in dense suburbs (yes it was easier to buy toilet paper in less dense suburbs for longer). There will be an Architectural and Building industry level response to these problems (to some degree) but I think people will cherish space, identify that nature and space help in isolation and accept that more working at home means savings on transport, less work attire etc. These saved funds could be funnelled into extra space for their home office. They also don’t need to live as close to the city. Outer suburbs are cheaper.
Commercial Real Estate – Work at home may become sticky. I know our business is moving to this model and others may stay with it also. Owning commercial real estate is challenging at this time. The pressure that the commercial retail sector faces as businesses shutdown becomes a new normal. I’m already seeing landlord pushing for lease renewals with longer free rent period to get tenant businesses over this crisis.
Key person risks – This is rarely taken seriously in small business in my experience. Larger corporations address it well in a documentation sense but I’m not confident they do in a real sense. This is all because we have survival optimism bias. I for one got my staff to review all procedures and increase documentation levels on aspects of Saasu back in February. We actually went through this process a couple years ago in preparation or what we knew would be an eventual end to the financial bubble.
Sovereign risk – The geo politics related to China and the trade war should have been a huge alarm bell for any business importing from China as its single source. I have been warning friends in this situation since the start of the trade war. I never expected Covid19 would accelerate and intensify that risk. In addressing this risk I believe the solution is to cherry pick your biggest supply shock and work on an alternate source or market for that as the first project.
Banks will adjust credit models – Banks will adjust how they see ‘needs’ versus ‘wants’ business models for lending. Retail versus Online will also be reconsidered risks. I think modelling will have to go back to the old school approach of looking at basic interdependence and independence of a business.
Monetary policy – As a way to address economic shock this has had its glory days. With rates near zero its impotence is obvious. Peoples repayments (when observed as a collective loan pool) are much more about principal than interest now (with interest rates so low). So cutting rates has little effect when your loan repayment is mostly made up of principal. Monetary policy has been mismanaged and overused so badly that governments have been encouraging federal reserves (such as our Reserve Bank) all around the world to use Quantitative Easing as an approach. This is what caused the bubble, so it’s not a good idea in my opinion. They are simply avoiding present day economic slowdowns and pushing them into the future as even bigger collapses such as the one we are in now. There is also no avoiding inflation long term if that new approach is exercised at the levels we are being told in the press. Get ready for higher prices.
Innovation in packaging – How we pack things when buying online is pretty lame from environmental and bulkiness perspectives. I rarely get an efficiently packaged delivery. This will change, it will be one of the factors in how people choose where they buy from online. Click and collect should also increase in popularity. It will get focus as a point of difference between competing online sellers. Unboxing matters to people.
You will change – As a consumer and a business person you may lose loved ones or your business. I think this will harden many people, just like the depression did. Frugality, risk aversion, loyalty exchanged for security will have revivals after being treated with disdain during the boom. I think it’s important that people don’t give up, start from scratch if we have to. It is often surprising what is on the other side of crisis, it can be new beginnings, new way of life, a new appreciation of life itself. For me The Story of the Chinese Farmer sums this up best. I will end this post with the best expression of that by Alan Watts
Story image by Nikolas Noonan