Yesterday, I wrote about how the fact that “Money Is Available.”
This article tells the story about how much money is available in the US economic system and where all this money is showing up.
Today, I write about the other side to the story…about how in many areas of the country, money is not available and about what impact this is having on the economy.
Closing Retail Stores
Eighteen retail store organizations filed for chapter 11 protection in the first half of 2020. From July through mid-August, 11 more retailers filed.
Those filing for bankruptcy protection included stores like Neiman Marcus Group, Ltd., J. C. Penney Co., Pier 1 Imports, and Tailored Brands, Inc. the parent of Joseph A. Bank.
Most of the companies were concentrated in apparel and footwear, home furnishings, and grocery and department stores.
And, most of them were companies that had already experienced difficulties, had been losing sales to customers buying online, and had accumulated lots of debt.
These were not really surprises.
The recent record for bankruptcies in this space came in 2010 when 48 retailers filed for bankruptcy in the wake of the 2007-09 recession.
Last year there were only 22 bankruptcies filed.
Note that the recent record was achieved in 2010, the year after the Great Recession ended.
One difference this year is that so many bankruptcies came almost immediately following the beginning of the recession, which began in February.
The conclusion one can draw from this is that the stores that filed for bankruptcy already had “one foot in the grave” at the time the recession began.
The particular “social” conditions created by the spread of the coronavirus pandemic and the depth of the recession just added to a condition that already on the edge.
But, it doesn’t appear that the acceleration of bankruptcies is over.
More To Come
Aisha Al-Muslim writes in the Wall Street Journal that, although this is the worst year that the United States has experienced in retail trade in recent history, there is more to come.
Ms. Al-Muslim quotes David Berliner, a partner in the business restructuring and turnaround services practice of BDO, an international network of public accounting, tax, consulting, and business advisory firm,
The trend is still for a lot of liquidations and assets sales while some companies are still trying to reorganize and emerge.”
Andy Graiser, co-president of commercial real estate advisory firm A&G Real Estate Partners is also quoted as saying,
I don’t think it’s going to stop anytime soon.”
Besides the bankruptcies there are also the store closing. For example, for all of this year though mid-August, retailers had announced that they would close more than 10,000 stores in the U. S., and this includes solvent companies. The retail bankruptcies totaled nearly 6,000 of these.
Last year’s number was 9,500 closings. Global market research firm Coresight Research has projected closings, as many as 25,000 for 2020.
But, this brings up the fact that since many of these stores are in malls, the solvency of malls has to be considered in the picture. There are forecasts that more than half of all mall-based department stores will close by the end of 2021. So, the misery could easily be spread farther and farther.
And, this then can lead to repercussions in the commercial mortgage area. We have already examined the fact that delinquencies are already rising in commercial mortgage backed securities so these difficulties can spread even further into the financial markets.
Ms. Al-Muslim closes by saying that many other, shaky companies, are going to try and make it through the Christmas season to see if have any chance of survival. Her article closes with the quote,
That’s a huge bubble that could burst.”
But, The Problem Is Bigger Than This
Retail trade, however, is not the only sector of the U. S. economy that is suffering these kinds of problems. Consequently, there are many other areas of the economy that need to be watched.
The bottom line is that bankruptcies are going to increase in several more areas of the economy and these will these face their own accumulation of troubles. Although debt loads are a problem in many sectors, these problems were not as severe as was the case in the retail trades. The demise of many of these companies will only come later in the cycle.
Remember, that during the Great Recession, the retail stores experienced their previous record number of bankruptcies one year following the end of the recession. This tends to be closer to the historical experience.
So, it looks as if the economy might have to spend a substantial period of time restructuring due to the coming buildup of bankruptcies throughout the economy. And, a “solvency” crisis like this would be beyond the Fed’s ability to overcome. More and more liquidity will not stop this ship.
A Very Difficult Future
This presents us with a very difficult picture. On the one hand the economy is facing a severe financial restructuring of many different sectors of the economy. On the other hand, as many of my previous articles have shown, there is lots of money available channeling around the economy to support new the growth of technology, healthcare, and other areas that are busy raising lots and lots of new money.
How the government is going to respond to this bifurcation is unknown. Right now, I don’t believe that either political candidate is expecting to have to handle anything like I have just described.
Investors are going to have to be very careful and try to understand how the government will act to resolve this dilemma.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.