Fellow investment strategists, macro economists, and global human friends, let’s discuss what Americans could really use to weather the economic impact from COVID-19. The recent approval of the $2 trillion stimulus package will have lasting impact on our country, but what about this alternative solution?
Parts of the Coronavirus Stimulus Package are beneficial including the availability of extremely low cost loans for small businesses, unemployment support, and yes we do have to bail out the airline industry. While the individual checks sent to families making less than $200,000 will be helpful, I feel it will be very short-lived.
My solution for families and small business owners are focused on the two major components of individual and small business budgets:
1: Housing
2: Automobile
Mortgages (+ property tax) and/or rent (individual or small business rents) make up the majority of 95%+ of American’s monthly spending.
Automobile payments make the second largest percent of American’s budgets (especially for lower and middle income earners.)
My thoughts:
Instead of giving a flat $1,200 per person/$500 per child to each American under a certain income bracket, what if the government allowed a forbearance (meaning halted all payments) for 60–90 days on all individuals and businesses making monthly mortgage and rent payments and also provided a forbearance on all auto loans for the same time frame?
Think about it… the biggest stress on American’s minds right now is how are they going to pay the mortgage/rent and car payment this coming Wednesday, April 1st while still feeding and keeping their families healthy while many are out of work? If Americans instead were able to just not pay rent/mortgage/car payment for 2–3 months, it would provide them with the fresh of breath air needed to endure the current economic conditions from a cash flow perspective.
Yes, from a financial planning perspective, you should always keep 6 months of living expenses readily available in cash for these types of recessions/bear market scenarios, but with the rising cost of living in the US, America’s consumer mentality, and slow wage growth over the past decade, I would argue that the majority of Americans (actually 75%+) do not have cash reserves to hold them over for 6 months.
Ok, so who would hurt if we allowed every family and small business in the US to just stop paying mortgages, rents, and auto payments? The answer is:
1: The banks who own the loans
2: Landlords aka property owners who rely on residential and commercial rental income to either make their mortgage payments or to maintain their own personal or business income
3: anyone else?
The Federal Reserve already cut the Fed Funds Rate to almost 0% on 3/15/20. This is the rate at which banks can borrow money. Since our financial institutions have access to essentially free capital, why not put the 60–90 day stress on their shoulders rather than on individual American’s. It would be significantly easier to control the banking system at a federal level than to peer into every household’s balance sheet and income statement.
With regard to the landlords/property owners that would be financially impacted, if they are renting a property that has a mortgage they too would be exempt from the mortgage debt payments and their stress would be lessened. However, if their properties are paid off and they rely on the cash from their real estate to meet their own liabilities perhaps they could look at low cost home/commercial equity loans or have access to SBA (small business loans) quickly and at a very low interest rate as well. Large private equity firms such as Blackstone or KKR (and their institutional investors) could also be hurt if they own these properties, but it would be interesting to see if they have these long positions hedged at the corporate level.
In this “potential solution” of mine, each of these payments wouldn’t just be lost. Instead, if you have a 15 year mortgage it would basically just become a 15 year + 60–90 day mortgage. Same with cars, if you have a 36 month car note it becomes a 38–39 month car note. Or if you rent, your lease would be federally extended by 60–90 days as well.
These are just quick thoughts that I think could help consumers and small businesses in this current economic environment and I am sure there would be a long list of unintended consequences from this “Neil Kay 2020 COVID-19 Stimulus Program.” However, I think this proposal would relieve a lot more of the financial stress being felt by small business owners and 99% of the population in America.
What are your thoughts?
Many of my clients at Old Vine Capital are asking my firm to help develop cash flow and liquidity strategies during these challenging times.
