Coronavirus and the new American economy (part 1)

April 23, 2020

By Solomon Ali
CEO of NDR Energy Group and Revolutionary Concepts

Solomon Ali

The face of the American economy is forever changed by this coronavirus pandemic. In three weeks time we’ve witnessed financially viable companies go into rapid freefall by the millions, starting with employees and trickling rapidly. Small to mid-sized businesses are laying off in record numbers, and there is no clear end in sight. With the spread of coronavirus, people are being asked to choose between their livelihoods and their very lives. Businesses are pairing down to “skeleton crews,” keeping just enough workers on board to get by and doubling remaining employees’ duties. Never before have we realized just how interconnected we all are in our quest for survival.

Although so many are in the same boat, businesses that prided themselves on having a good credit standing will now find it more difficult to negotiate lines of credit or to have contracts and lines of credit re-instated once things begin to normalize, save for some debt forgiveness programs and financial incentives being granted through the federal government’s CARE Act.

The late Jack Welch, who held the position of Chairman and CEO of General Electric, worked hard to eliminate bureaucracy and increase growth for General Electric. He was known for firing unproductive managers and eliminating whole divisions within his company, and then acquiring other companies and driving them to better management and increased profits – a true master of corporate structuring. Warren Buffett, as Chairman and CEO of Berkshire Hathaway, has built his fortune, not investing in companies, but investing in management teams.

The late Jack Welch was once quoted as saying, “This whole game of business revolves around one thing. You build the best team, you win.”

This quote may sound overly simplistic during such uncertain times, but I can break down how it applies to all of us, the future of our financial health and our economy. The America we once knew is forever changed. I believe hundreds of thousands of businesses will be lost throughout the United States. I further believe and estimate that certain industries will become obsolete, however new ones will be created.

There are certain industries that thrive in tough times, perhaps due to some of the foils of human nature. Let’s first take note of these. Companies that will thrive during this pandemic will most likely be within real estate (investors and would-be investors love a buyer’s market), liquor and tobacco sales, firearms sales, streaming entertainment, sectors of law that deal in financial hardship (think bankruptcies and foreclosures), virtual meeting software, healthcare and banking.

The last one may shock you. You might be wondering, “If people can’t make their payments, how can banks thrive?” As someone who has built a career on obtaining capital for businesses and bringing businesses public, overseeing mergers and acquisitions, and investing as a private equity investor in many companies, I can tell you that, much like casinos, “the house always wins.” Banks come out on top because they are brilliant at transmuting and consolidating, and when all else fails either calling in loans or bundling and selling them to Wall Street. In the coming six months to a year, you will see banks call the loans that appear to be weaker bets and extending new loans to much stronger companies. Therefore, companies with weaker margins will find it harder to survive in the climate that is to come, but companies with solid margins and strong infrastructure will grow in strength at the end of the coronavirus bell curve.

Conversely, industries like travel, hospitality, brick and mortar retail, brick and mortar consumer services, locally driven services that require face-to-face social interaction and manufacturing will suffer the most during this time. Apart from necessities like food, medication and certain sundries, consumers are now buying less goods and services as their financial insecurity and anxiety grows along with massive loss of income.

As of April 2, 2020 a record 6.6 million Americans filed for unemployment, an unprecedented figure. This a fertile ground for private equity investors, hedge funds and venture capitalists to reap the benefits of undervalued assets. This can create a huge opportunity for private equity investors, venture capitalist firms and hedge funds. They can boost the economy by investing their monies into struggling and failing businesses and gaining a substantial stake in new and emerging industries.

Many businesses that rely on self-financing or “self-funding” will begin to falter as personal financing dries up. In addition, many Americans will be scaling down the brands they have always used. Chain stores and large franchise stores will have a better chance of making it through this storm. We are going to be looking at a new world and a new economy in a way that our country has not experienced since the 1930s.

The good news is, we will witness the birth and growth of emerging industries, as this decade and century progresses, much like the horse and buggy gave way to an automotive industry. Companies will be able to work more efficiently due to A.I. and robot technology. There will be a significant streamlining of support staff, while mathematical, scientific and maintenance staff will be needed to services artificial intelligence and robotics-based devices.

China’s economy has also impacted our world in ways that the average American is not directly aware of. We owe China what seems like an insurmountable debt, a byproduct of the Great Recession of the late 2000s. During this time, China bought up a great deal of American debt. I do think, because of the coronavirus outbreak, our federal government stands to re-negotiate its debt with China. Our leverage point is that the United States economy cannot collapse, because we are the largest economy in the world and every other economy is dependent upon it.

Part 2 : Continued next week

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