Economics

Danger beyond the 2nd wave

There are some big economic stories hidden by the current headlines about the second wave. Very significant, but despite this, they are muffled and lost behind the daily infection stats and political power plays.

The future economic reckoning is the backstory but it has much bigger implications for physical and mental health long term. So it’s worth thinking about their implications for small business and startup strategy.

We have a drastically shrinking tax base.

The implications of weaker company earnings, lower employment, reduced retail spending and paused stamp duties, payroll tax (for some) and other sources of government income, is dire to say the least (for the budget).

There’s many more but these are just the headline grabbers. It’s beyond a perfect storm.  I think it implies unprecedented reductions in our state and federal tax base.

The implications for the budget and for government debt issuance are huge. This cannot be understated. While this might be reasonably well known and reported, the lessor know aspect of this is what it implies for the sustained size of government which in effect has been morbidly obese. The government is about to go on a starvation diet.

Government was already too big relative to the size of our economy and this recent crisis just pushed this to a tipping point. The plethora of activities government has involved themselves in extends way beyond the original intent of government. We are more like a totalitarian government now than a romantic concept of a democracy we preach but are nothing like.

Import and export mix

We have never seen such a seismic shift in what might be our ability to rely on our biggest trading partner, China, for both importing and exporting. As business people we know how hard it is to shift to a new market, particularly one that’s more difficult to sell into logistically and from an exchange rate sense. Switching to other countries will be extremely difficult. Taking a more internal economy approach might actually be the best strategy. However, this has always been unpalatable with politicians who err on the side of globalism at the expense of our national interest.

This may now be changing. The selectiveness of capital makes it care about risk and reward. So this system is forcing change. Our whole approach to markets will need to change as the government and many businesses are faced with a severe refresher in supplier and customer concentration risk.

Contracts can’t be relied upon.

This crisis has highlighted how fickle the concept of a contract now is. It cannot be relied on for its traditional economic certainty. This is implied by the law upholding its nature of being bi-lateral agreement we must keep. We have all just been schooled in how the government can change the rules, without an election, and at a level that can instantly cause the financial demise of individuals or businesses.

Government is fearless now in doing this to a point where any contract undertaken now has a heavy risk factor of a 3rd party (the government) dropping in a change that completely alters the contracts risk profile. It changes the game for a very long time because trust in contract law is now gone. These generalist style veto powers are much like a dinosaur tail taking out all the little creatures as it strolls through the jungle.

Investors in many areas including investment property and small business have had their game changed more in the last 6 months than in the last 50 years. The implications for capitalism and investment are huge. This is the biggest disruption to the capitalism rule book in 100 years.

The bad news pipeline grows.

What happens in an economy in times of an economic slowdown is that bad news feeds out over many months which has the effect of adjusting sharemarkets and interest rates at volatile but manageable levels. These cycles in history tend to take many months to even years. Go and research for yourself. Our memory doesn’t serve us well on market data. Many of us recall these events as taking just a few days.

However this time it’s different. What is happening is that the government has turned that news flow off by allowing the delay of bad debt reporting, mortgage defaults, true unemployment rates, normal company reportings, directors reportings and leniency on rental streams. The list goes on.

The implication of this is that the financial system is in increased uncertainty around financial performance of banks, companies and individuals. It’s like a pipeline of bad news. It’s building up and at some point it will burst out and do more damage than if it had been left alone.

We are now in a snakes and ladders economy. We are mostly seeing the ladders like building grants, cashflow bonuses, jobkeeper, jobseeker, etc. Soon the snakes appear in the game as banks, industrials, retail and property giants start to disclose the depth of damage. Mortgage default rates, unemployment rates and lots of other indicators will start to show up in an undressed naked form.

What the government and the banks are doing is temporarily sweeping a problem under the rug, multiple times, and that eventually builds up and must be dealt with. You can’t hide from markets forever. There is always a reckoning in the end.

As small business owners it’s important to see that the game has changed and to adjust our understanding of the game (and its risks) accordingly. Understand also that markets tend to bring a reckoning in time as they have always done in history. Markets outlive politicians, companies and countries. It can take years or even decades but the addictions to risk, the debt, the systemic problems nearly always present themselves in the end.

So I think it’s critical not to relax, keep building resilience into your business, adjust your market as it has likely changed and watch your cashflow and costs. It’s not lack of profits that removes you from the game but lack of cashflow.

Lastly, don’t expect the government to always be there to save you. Their capacity is limited. Expect that banks will start checking in on their bad debts. Expect that the governments just cant keep printing money or raising debt to make a systemic problem like this go away. They are bragging at how well they are currently raising money but they have only raised a spec of what they will actually end up needing.

These are seismic shifts in our culture, in addressable markets, in our countries balance sheet, in the game of capitalism, in the legal and contracts arena. Even the battle between globalists and nationalists has escalated.

Change has winners and losers. Change is volatility. Researched, thoughtful, risk reflective decision making is your friend. Most importantly, making a decision and taking action is more important than ever. Stagnation and procrastination are death in volatile times.

Image by Payton Bissell

Categories: Economics

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