Making Hay While the Sun Shines
This first week of May was a good one for the markets as the recent momentum carried forward. Investors appear more focused on developments in reopening the economy than they are with backward looking economic data. While it remains uncertain whether investor optimism is necessarily warranted, we can appreciate the hope for a return to normalcy that it implies.
If you need reminding that these times are anything but “normal”, we’re starting to get a clearer picture of what the U.S. debt will look like for 2020. The Treasury announced it would borrow a record $3 trillion this quarter to subsidize economic rescue efforts due to COVID-19. That is on top of the $477 billion it borrowed in the first quarter and the anticipated $677 billion it will borrow in the third quarter. That puts the national debt near $25 trillion which is far from the $20 trillion we were talking about late last year. The consequences of this ramping up of debt are hotly contested, but rest assured there will eventually be consequences.
In other news, we learned this week that the airlines are burning through $10 billion per month during this unprecedented time. Even after grounding more than 3,000 aircraft, or nearly 50% of its active fleets, U.S. airlines are averaging just 17 passengers per domestic flight and 29 passengers per international flight. The spokesperson for the airlines trade group warned, “if carriers were to refund all tickets, it would result in negative cash balances that would lead to bankruptcies.” Despite the $25 billion bailout the industry received a few weeks ago, it is likely more will be needed in the months ahead.
While we’re on the subject of ailing industries, you might be surprised to hear that hospitals are struggling, and not in the way you may think. U.S. hospitals are losing around $50 billion per month due to the large number of cancelled elective procedures, costs associated with treating COVID-19, and an increase in the number of uninsured patients. “I think it’s fair to say that hospitals are facing perhaps the greatest challenge that they have ever faced in their history,” said the spokesperson for the American Hospital Association. I had to double check that this wasn’t the same spokesperson speaking on behalf of the airline industry. However, you may be equally surprised when I tell you the net impact on U.S. health insurers is quite the opposite and possibly even positive for them. The costs from COVID-19 could be considerably lower than expected and perhaps even outweighed by the deferral of elective procedures. Who could have guessed?
You know the old expression, “to make hay while the sun shines”? Well it appears India is doing just that. India is seeking to lure U.S. business out of China as tensions ramp up over Beijing’s role in the coronavirus pandemic. The government reached out to more than 1,000 companies in April, including Abbott Labs and Medtronic to offer incentives for manufacturers of medical equipment, food processing, textiles, leather, and auto part makers. Japan has also embarked $2.2 billion to shift factories from its neighbor, while EU members also plan to cut dependence on Chinese suppliers. Perhaps a shuffling of the supply chain is coming after all.
In closing, I turn to Iceland. The British have their pubs, the French have their cafes, and the Finns have their saunas. I learned this week that Icelanders have their pools. It seems around 1940, Iceland transitioned its main industry from agriculture to fisheries, however, not many people knew how to swim and there were many deaths by drowning. To prevent drownings, the government made swimming lessons mandatory in school, and municipal pools, heated by geothermal energy, began popping up everywhere. Iceland now has one pool for every 2,700 citizens, one of the highest rates in the world, and swimming has become deeply rooted in Iceland’s lifestyle. While I find it hard to wrap my head around, pools have become a cultural thing in Iceland. People come together in the pools to meet other people, to talk to each other, and just relax after a hard day at work. While I personally prefer a café, socializing in a heated pool year-round could be nice in its own unique way. Now you know.
Bruce J. Mason, MBA