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[In]Securities Guest Blog: Marconi Plays the Mamba by Aegis Frumento Esq
May 7, 2020
[In]Securities
a Guest Blog by
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell
Marconi Plays the Mamba
We humans suffer a delusion. We think we can predict the future. That's not new. Our ancestors saw the future in chicken entrails. We see them in spreadsheets. The only difference is that our ancestors' chicken tasted better than our crow.
Now that the economy is starting to "open up," it seems a good time to put down some prediction markers. We've already gotten past the canard that post-Covid we will return to "normal," right? Good.
The coronavirus has so far taken 65,000 lives in the US, and "experts" predict that the total loss of life will exceed 100,000. Well, bollocks to that! If we are at a peak, or even a plateau, then by mathematical certainty we will lose as many lives on the way down the slope as we lost on the way up, so the total death count will be at least 130,000. But we are not at any plateau. Maybe New York has peaked -- for now -- but the rest of the country is just getting started, recording new cases at the rate of 2-4% per day. https://www.nytimes.com/aponline/2020/05/05/business/ap-virus-outbreak.html. And every medical professional and epidemiologist I've spoken to (also known as three of my college roommates) thinks there will be at least one more wave later this year or next before it's over, and no vaccine for another 18 months. So, no -- we are still closer to the beginning of this nightmare than the end of it.
As of last week, over 30 million people were unemployed. We expect that when Friday's unemployment numbers come out, the unemployment rate will hit 20%. The unemployment rate in 1936 at the height of the Depression was 24%, but it got there over 6 years, not 6 weeks. Everything's at warp speed these days.
Yet the stock markets don't really care. Sure, the S&P500 is down 16% from its high of three months ago, but it is about flat compared to this time last year and the year before, and still 18% higher than it was this time three years ago. The NASDAQ is even stronger, still up 45% over three years ago. All that's happened so far is that the market has passed some of the gaseous bloat of the past three years, like I said it would. http://www.brokeandbroker.com/5100/aegis-frumento-insecurities-covid/.
So, should we believe the markets or the unemployment numbers?
My first prediction: Believe the Markets.
Today's unemployment is concentrated in so-called vulnerable industries. A recent study by the Brookings Institution concluded that over 37 million Americans work in industries that would be immediately impacted by a pandemic, 23% of the total working population. That tracks very closely to the actual unemployment figures. https://www.brookings.edu/research/who-are-the-workers-already-impacted-by-the-covid-19-recession/.
Those industries include the usual suspects -- bars, restaurants, hotels and amusement venues -- and others that would be shut during a lockdown, like brick and mortar stores, laundromats and day-care centers. All those have this in common: their employees are generally at the lower end of the income scale, and they don't make things that people really need (except day-care).
The unemployment of the 1930s was different than this. Then, most of the unemployed were in manufacturing. They were factory workers, steel makers, textile workers and miners. They all made real things, and earned decent working-class wages from which they could afford to buy things like what they made. When they could no longer afford to buy manufactured goods, unemployment bred more unemployment, spiraling out of control. Soon, only the very rich could afford to buy anything at all. Not for nothing did all those 30's screwball comedies and musicals star guys like Fred Astaire in white-tie-and-tails. We only really got out of the Depression when World War II forced us to build things again, things that we conveniently sent overseas to be blown up so we'd have to build more of them. https://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/industry-effects-great-depression.
This pandemic, by contrast, is not putting very many factory workers out of work; there just aren't that many of them left. Unlike the more fortunate knowledge workers who are now saving the money they used to spend in bars, restaurants and hotels, the unemployed waiters and housekeeping staff didn't have as much to spend on non-essentials to begin with. Most significantly, so much of the stuff they aren't buying is made in China that if any factory workers are out of a job they are likely to be Chinese.
However, the Grand Re-opening will not go smooth. Every thinking person acknowledges that more open economic activity will lead to more infections and more dead, as Texas Governor Abbott so candidly admitted earlier this week. https://www.click2houston.com/health/2020/05/06/texas-gov-greg-abbott-reportedly-says-in-recorded-phone-call-that-reopening-state-will-increase-coronavirus-spread/. This is a trade-off between life and livelihood. The problem is that those two goods are not tradable by any common currency. We want both, but when push comes to shove I will be quicker to sacrifice your life to my livelihood, and you will be quicker to sacrifice mine for yours, and there's no compromising between us. The only way to resolve those kinds of intractable disputes is by empathy -- by imagining what it'd be like to be the person you'd put on the sacrificial alter. If you believe the economy must remain closed to protect your life, then you must be able to imagine what it is like to be stone broke with no financial lifeline. And if you want to reopen so you can make money, you should imagine what it's like to die alone in a quarantined ICU. Only then can we support government officials to strike a democratic balance, one that will shift from time to time, between the needs, which we all have, for both life and livelihood.
So, the next prediction: This will change the way we conduct ourselves.
There will be surges of infection, second waves, and more pandemics, in the same way monster storms that used to occur every hundred years now seem too common. We will need to learn to live with them. That means periodic lockdowns and economic downturns. The Depression led to the New Deal. This pandemic is testing many old chestnuts about limited governments dismantling social safety nets. Suddenly, both Andrew Yang's minimum income scheme and Bernie's universal healthcare are getting test drives. That's how revolutions start.
And already, architects are reimagining the office and workplace of the future, where some degree of distance and protection will be necessary all the time. See https://www.architecturaldigest.com/story/covid-19-design. Gone will be the cubicle farms and open-plan offices, whose real purpose was to squeeze as many bodies as possible into a rentable square foot of real estate. More separation will require more space. Or, if more people are forced to work from home, then more homes will need to be redesigned to accommodate home offices. In any case, real estate and those who finance it should find themselves busy in the coming years.
And, another prediction, cities will be better for it.
There is something magical about cities. A true city is a place where different people can mix comfortably with each other in respect and tolerance, where no one has time for petty parochial prejudices. But cities can become too crowded, and New York has become noticeably more congested in the past twenty years, with old neighborhoods plowed under for the sake of greater density and more affluence. In the past, plagues routinely hollowed out cities, making room for new blood from the countryside. I don't expect anything like that to happen today, but the habits of social distancing once formed will stick. As a physical result, the City should become less crowded. I hope we build that City.
Which brings to mind We Built that City by Starship, voted by the rock-n-roll intelligentsia the worst song of the 80s. But this video, with that disco beat, the sight of mid-80s Spring Breakers on Daytona Beach, and Grace Slick (of course) is irresistible. I wonder, these bleak days, if we'll see their like again. My last prediction, then: We will. Someday.
ABOUT THE AUTHOR
Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.
Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.
He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.
NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.