1) Let's talk about the stock market and it's two-day rally this week, the largest point gain over two days in all of history. Why would that happen? Why now? And what's going to happen next? I won't offer predictions, rather analysis of possibilities.
2) Oh, and why should you care? Let's start there. It doesn't matter if you're a stocks buyer or not, or a Democrat or Republican. The stock market is very much like a thermometer. It gives you a number as data by which to judge health.
3) We have to take in the current condition. You hear about it constantly on the news, if you're listening, watching, or reading. You hear it in just about every conversation you engage with any person. Fear and panic have overtaken our nation and the world.
4) None of us knew that there was a kill switch on the economy. None of us knew that a virus attacking our health had the ability to turn our economy off like turning off the light when you leave the kitchen. It's doubly hard to understand since we have viruses already.
5) The funny thing is, that's part of why we rallied over the past two days. I propose that where we all knew about the flu, before, and we didn't know about Coronavirus, we now do know about it. As a nation, as an economy, we've come down with Coronavirus. We have it.
6) Think about yourself when you catch the flu. You always worry it might be something else. If it gets really bad, and if it doesn't go away, you find yourself getting over your aversion to going to the doctor, and you end up going. He confirms it's the flu and that matters.
7) Then, if your doctor's got a medical prescription for it, and gives you an idea how long it will take before you're better again, something shifts in your mind and heart. You go from denial to acceptance. We'll review that process more deeply in a moment.
8) The transition from denial to acceptance, and the procurement of a prescription is precisely what I deem the market did over the past two days. It accepted the reality of Coronavirus, and it accepted the good doctor's prescription. Trump is moving on his prescription.
9) And now a word to all my libertarian friends who find this Coronavirus bill (read that the doctor's prescription) to be anathema. Once upon a time, I would have been right there with you. I converted. I was a diehard libertarian until 2016, when Dr. Trump converted me.
10) It has been stated over and over that Trump is NOT ideological. He is a pragmatist. It was that pragmatism, accepting the way the world works right now, and attempting to work within it, that converted me from my idealistic libertarianism.
11) I find it interesting, infinitely interesting, that Trump's pragmatism is precisely the philosophy that those buying stocks, as a whole, embrace. I about fell out my chair laughing when I heard Trump compare his stimulus to FDR, saying his is bigger.
12) So my reading is that the stimulus, in all its chaos and filthy politics, is precisely the prescription that the Coronavirus-ridden stock market requires. I say that Trump is at his best in just such messiness. He takes the chaos, embracing it, and finds the practical answer.
13) Will it work, though? Don't know. Neither does Trump, I assure you. He's just doing his damndest and when that man does his damndest, something has happened. That's his way. Betting on Trump's leadership, however, has become a low risk transaction.
14) And here's what we should all know about all those businesses shuttering in the economic kill switch moment we're in. It's time to be harshly realistic. This will be a bit of business speak, here. Business has three primary documents, statements. We need to understand them.
15) They are Cash Flow, Profit & Loss, and Balance Sheet. The Cash Flow statement simply tracks income and outgo. The great error of business is to live off its P & L, which tracks your profit or loss margin. The most important of the three is your Balance Sheet.
16) Balance, what balance? That between what you own and what you owe. They're called assets and liabilities, but don't let that confuse you. A positive net worth means you own more than you owe. It really is that simple.
17) To understand all these businesses shuttering, it means that as soon as cash revenue stops, and expenses continue, the profit margin plummets and is soon a loss margin, not a profit margin anymore, for the moment. Covering this eats up assets, or explodes debt.
18) The thing is, many of these businesses have been continuously profitable for years, even decades. What happened to all the profit they generated? In the vast majority of cases, it was removed from the business, and is no longer there on the Balance Sheet.
19) The truth is we know the following simple maxim. A business' Balance Sheet should cover a minimum of 1 year's loss of revenue. The things the business owns should be convertible into liquid cash - money you can use to pay bills - to cover all expenses for 1 year.
20) If a measly month or two of revenue loss is enough to shutter your business, then your Balance Sheet was too weak. You were - and this is a KEY term - UNDER CAPITALIZED. What's capital? It's all the positive stuff on your Balance Sheet you own.
21) In business, the term under capitalized is wrongly thought of almost exclusively about getting a new business started. This is completely wrong. A business' capitalization is constant requirement. It has an opposing condition that you may have heard of. Leverage.
21) Leverage is nothing other than the use of your assets, what you own, in order to get more cash, debt, which is what your liabilities are. Leverage is how much you own, as opposed to how much you own. If Coronavirus has already shuttered your business, then there's a problem.
22) You're either under capitalized or over leveraged. And, do not be shy to look at the personal as opposed to the business balance sheets of those owners closing up. How many of them have vast wealth pulled out of the business, but now must close the business?
23) Trump has been discussing this, but not obviously. He's been talking about stock buybacks and how the stimulus must NOT be used for that purpose. He knows that owners take wealth out of the business, and then claim the business is suffering lack of revenue.
24) Stock buyback takes the government's stimulus money, buy stock back - but the company's owners are the ones who benefit from the stimulus money, since, owning the company, they then own the value of the shares repurchased.
25) Enough on all that. The simple thing is this. Any business closing after two months loss of revenue was not being managed properly, and most especially if the owners have extracted wealth from the business, still hold it, and won't suffer a moment's reduction in profit.
26) And that, I believe, is what the buyers of stocks instinctively know. The balance sheet of America is vast. And the Presidential Doctor's prescription speaks to that vast wealth. It covers the loss in revenue so that owners are covered through their period of loss.
27) It does more. An economy is not merely business owners, it is employees. Those employees get paid, and then, they spend cash. When that spigot is shut off, the economy is sick. Trump is attempting to turn the spigot back on. He wants to save jobs.
28) For how long? Only as long as it takes for the American economy to get used to its severe case of Coronavirus. Once we get used to this, know how to manage it, our normal robust health will kick back in. That's his faith, and for what it's worth, I agree.
29) And so, at least for the past two days, those who buy stocks on the whole - the market - also agree. By buying, they're stating that this virus will end, or at least normalize into our economy the same way colds, flus, and even pneumonia are normal things.
30) Before we finish, we have to talk about the panic and fear again, which are the primary maladies of our economic virus. Popularly, we may call it the Zombie Apocalypse. A bit more technically, it would be the collapse of our supply chains. It's a fear that must be faced.
31) By whatever means, we all get cash. We live off of cash. It takes cash to pay rent or mortgage, electric bills and such, clothing, health care, and most of all, food. The true basis of our economy, and of our current species-wide survival, is the conversion of cash for food.
32) The most important supply chain to watch is, therefore, grocery stores. If we don't have the cash to buy food from them, we will starve. If their supply of food dries up, we will starve. We do not grow or hunt and gather for our food. We shop for it. Stop-n-shop.
33) Now let's go dire. I might die if the grocery stores fail. And, if I do, I'll be far from alone. It could be billions of us who die due to the collapse of the supply chain, if it does so. But, and this is very important, not all of us will. I'll go even bigger.
34) Turn to thermonuclear war. I do NOT buy for one moment that atomic bombs can destroy the world. Maybe they could destroy what is called the biosphere, so life on the world might die, but the world will be just fine. That matters.
35) But I do not believe that atom bombs have the ability to destroy life on earth, either. It may be that they could destroy humankind - maybe - but there would still be life here after we were gone, no matter the atomic winter or such.
36) But I don't believe mankind would be destroyed, either. That's one of the reasons I have always loved Mad Max. He is a survivor AFTER the atomic wars destroy civilization, which is to say...our supply chains. But get this! I don't believe it would destroy our supply chains!
37) What's a supply chain, again, now? A hunter kills a stag. He cuts out enough meat to feed himself and his family, there's a bit left over. He offers it to someone for something other than food, or even for a different kind of food. Supply and demand...VOILA!!!
38) Capitalism flows from those who produce to those who desire, and can pay for what they want. It's a beautiful thing. It is the actual basis of our specie's survival fitness, above and beyond all other species on earth. It is our greatest adaptation and fitness.
39) How did we get here, over the past two days rally? The market is stating that it believes in our fundamental capability as an economy, and most especially under our good doctor's orders. It's saying - for those two days - we have this. We're gonna get well.
40) I agree. The package will go through. It will be atrociously non-idealistic and break all kinds of right values. It will. But pragmatically it will work. And pragmatically, our economy will heal. Messy? But of course. Righteous in spite of all else? Again, absolutely.
