The Shoe Dropping

The pandemic is wreaking havoc, but you would hardly know from looking at the stock market. But long term, structural change is a coming

Not a (directly) product management post today, but musing on the market, and the economy. The Dude is a bit of a news junkie, and while his retirement account(s) are tied up in the stock market (via 401K’s IRA’s and other investment vehicles) he does keep an eye on what is happening there.

And a lot is happening. In spite of the COVID pandemic, and the major drop in March, the market has behaved rather well.

Where we hear about the rising number of layoffs, the shuttering of countless small and medium sized businesses, and utter chaos in the service sector (think restaurants, hotels, and hospitality, as well as travel and leisure.) We ought to be terrified by what is happening on Main Street.

As the experts say, the “Market” is not the “Economy”. So why is the business outlook so bleak, yet the stock market is doing so well?

The Dude has heard a lot of postulates on that, like:

  • The market is looking to the recovery
  • The market is reacting to (questionable) news on vaccine development
  • The market is pricing in the post Pandemic world order

And others. They all soundplausible, but they fail to hit the mark.

The Dude had a call about 6 weeks ago with his Fidelity Financial advisor (where most of his retirement accounts are housed,) and the advisor gushed about how restaurants were coming back. At the time the status in the Bay Area (SF area) was that limited indoor dining was opening up, and his take was that this was the turning of the tide.

The Dude wasn’t buying it, and ripped into his assumptions. The Dude worked his way through University in hot kitchens, dabbling in management, so he knows full well how precarious the restaurant business model is, how sensitive it is to capacity, butts in seats, and the number of turns.

Fact is, no restaurant can operate at 25 or 50% capacity and stay in the black.

And the delivery services (Grubhub, Doordash, UberEats et. al.) do not make up the differences, often digging deeply into the profit margin of the food sale. And that was before the larger ones started their own “ghost kitchens” to cut out the restaurant. In the US, the only segment of the restaurant delivery business that works well is pizza delivery. But guess what, most pizzerias have their own systems, and do not rely on the vultures that the major delivery apps are for this. (n.b. The Dude knows that in dense urban populations, there are other ethnic cuisines that have their long history of delivery, Chinese and Indian being examples, but in the ‘burbs, it is Pizza or GrubHub).

It was in this conversation with his financial advisor that the Dude realized that there was a general blindness in the financial world to what was going on. Blinders, and blind faith if you will.

So, why is the market doing so well?

The Fed Effect

The Fed, or formally The Federal Reserve Bank, has taken extraordinary measures to combat the virus. They have essentially zeroed out the interest rate. This is why the Dude’s passbook savings account is earning a whopping 0.6% APR interest.

But it is what else they have done. The Fed is buying enormous amounts of risky corporate debt, relieving Banks and investors of the risk, and this directly props up the market.

Furthermore, the very low interest rates, and the corresponding low yield of US Government bonds presents investors with a dilemma.

They want a return on their money, and the market looks risky, but it is the only avenue returning cash. So they pile in, driving up prices.

The Tech Whale

Then there is the report from last week that a lot of the recent gains in the market were due to a small number (cough one cough) investor plowing literally billions of dollars into the tech majors (Apple, Facebook, Alphabet, Amazon, Tesla) and then buying calls. This is straight up market manipulation, and Softbank ought to be punished for it. But likely they won’t.

Last week, it appears that the tech majors gave back much of those gains.

Still, the market is looking irrational.

The Day Traders

The Dude remembers the original dot-com ride, and even knew people who had quit their day jobs to become day traders. It is pretty easy to make money when the market rises 1-2% per day, as it was in the late 1990’s and this summer.

The Dude has heard tales that the SIP and working from home of relatively well paid white collar workers using their spare cycles (cough) to do some ol’ fashioned day trading, and driving some of the irrational cycles. It sure does feel like the late 1990’s.

The Coming Storm

In the spring, before Congress lost their shit, they passed a couple of pandemic response bills. One of them provided a metric butt-load of support for the beleaguered airlines, helping them stave off staff layoffs. $25B that seems well spent, and had restrictions on laying off or furloughing employees as part of the conditions. United postured that they didn’t like the conditions, but they ultimately sucked up their pride, and took the money.

The guarantees of making payroll? They expire at the end of September. Already American has announced that they will be laying off 19,000 flight attendants and support staff. Pilot buy outs are being discussed.

And of course, the Republicans in the senate seem to be tone deaf, thinking that the number of new weekly first time applications for employment are still around 900K (that is still higher than ANY week during the GFC of 2008-2010) is a positive development.

Meanwhile, they (predominantly Republicans) are resisting any meaningful relief for workers, industries, and the public sector. It is estimated that 1.3M workers for state and local governments have been furloughed, and that number is set to rise dramatically with the reduced tax receipts that the pandemic is driving. This will get much worse in the coming fiscal year.

Add to that the tidal wave of layoffs and restructuring that will sweep through corporate America, and the outlook seems bleak. Indeed many of these large employers have ridden out the crisis but clearly need to realign their resources. With large fractions of their workforce working from home, and other challenges related to returning to the office, coupled with drastic changes in revenue patterns, expect this quarter’s financial report to reflect plans to reduce headcount by 5 to 10+% across a lot of enterprises.

All this adds up to a bleak earnings season, some hard reckoning, and massive structural changes.

The Election

It would be criminal to not mention the US Presidential election. You have the incumbent (Trump) pounding his chest saying that you can kiss your retirement accounts goodbye if he isn’t re-elected. The challenger (Biden) is clinging to a fairly durable lead in the battleground states, and the market seems to have shrugged.

If the Dude was a betting man, he would say that the market has read the tea leaves, and expects Trump to be defeated, and is already pricing in a change in administration. That means that they do not see the loss by the incumbent as a world shaking event, and that they expect the market to coast on like it has been.


The stock market isn’t the economy, and the economy remains in a poor state. The market is being driven by a lot (nearly $3T) of money pumped in from the Fed, and some other irrational exuberance.

Anyone who deals with main street, and enterprises is bracing for a coming reckoning, that will be exacerbated by some significant bloodletting in the public sector.

Buckle up Baby Jesus, it’s gonna get bumpy.

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