While the August numbers for unemployment look encouraging, there are signs on the horizon of a fresh wave of corporate layoffs that will deal another blow to the global fragile economy. Some of the layoffs are merely announced and have not taken place yet, so they won’t appear in the official statistics until September, October, and in some cases after the US election.
Some businesses in the resorts and hospitality industry have now started to make temporary job cuts permanent. MGM Resorts sent layoff notices to 18,000 people a little over a week ago. The airline industry is poised to cut hundreds of thousands of jobs starting on October 1. The US Federal government’s cash injection for the airlines runs out on September 30 and there is no new money on the horizon that would seek to prevent a massive shrinking of the airline industry. United Airlines is letting 16,000 people go. American is letting 19,000 people go on October 1. Boeing is cutting 10% of its workforce. That’s going to have a trickle down effect to the hundreds of companies that supply parts to Boeing.
But it’s not just airlines and hotels. Ford Motor company is letting 1,400 people go through early retirement, a reduction of 5% of their workforce. Daimler, which owns Mercedes Benz may cut up to 30% of its global workforce. Coca-Cola is offering buyout packages to 4,000 people. We don’t know yet how many will take up the offer and how many will be forced to leave in the end.
Salesforce.com is letting 1,000 people go. LinkedIn has cut 6% of its global workforce. Warner Media is letting 600 people go starting in August. NBC Universal is expected to cut about 10% of its workforce.
The big issue for most of these businesses is the massive amount of debt that is being carried on the balance sheet. When revenues are a fraction of the pre-pandemic levels, these businesses are insolvent. They had the ability to withstand a few months of bleeding, but we’re now 7 months into the pandemic with no clear end in sight.
Frequent listeners to the show will know that I went on record early this Spring and predicted an 18 month economic winter. If my prediction is correct, then we will start to come out of this mess sometime in mid 2021.
We are in the middle of an election campaign in the US. Despite this, there are signs that the government will not be able to prop up the economy through the length and breadth of this pandemic induced downturn. They can prevent distressed properties from coming on the market by artificially freezing evictions and foreclosures. But they can’t do that indefinitely. Otherwise they create an environment where there is no consequence to defaulting on debt. The Fed simply won’t buy all the toxic debt in the world. This means that there will be a downturn in real estate. We’re seeing the beginnings of it in the hotel industry, in retail and in office asset classes. Eventually the job losses will cascade the pain into the residential housing market. That’s unavoidable, even if the short term metrics show a hot market. These job losses will ripple through the economy and real estate prices will not be immune. Your job is to start amassing cash to rescue the right projects when the time comes. That will be an exercise in patience and waiting for the opportunities to arrive.