I am trying to figure out how much I care, as a businessman (as opposed to an actual living, breathing human being), about the chaos swirling around us. Every day’s news seems more the stuff of a dramatic conceit of someone’s next thriller than reality. Throw in a car chase and some sex, and we’ve got a movie. (The North Carolina sexting scandal doesn’t really get us there for this purpose.)
I watched the whole Presidential Debate the other week (I passed on watching the warm bucket of spit (bowdlerized version) debate this past week). The debate made me feel like Malcolm McDonald in A Clockwork Orange. You know the scene; eyelids pinned back, forced to watch a re-education video over and over again; it still gives me nightmares. Ugh! Between a truly ugly and chaotic election, war, insurrection, sedition, plague, fire, storms, flooding, locusts (and, ugh, lantern flies), grotesque incivility, and the collapse of norms, where are we going? What next? Human sacrifice and dogs lying down with cats? Terrific.
Talking heads like to talk inflection points because hey, drama sells. The SNL headline from years ago that Generalissimo Francisco Franco Is Still Dead is pretty thin stuff for the 6 o’clock news hour. So, we bloviate and bloviate about the fraught state of the world. This is the stuff that very serious people (we know that they are serious people, because they tell us how very serious they are all the time) pontificate, hand wring and generally tut-tut about every day.
Uncertainty makes this easy. Questions about the state of the world and the state of business abound. Asking questions designed to be without answers, fans the flames of anxiety, which of course garners ratings… which is probably the point.
I will, for the moment, put aside geopolitical adventurism, space aliens and the possibility that the New York Giants might actually win a football game. You know, the truly unlikely, and focus instead on the election and COVID-19.
Every day we hear: Who will win the election? Is it a blue wave? Do we care? Does the business year effectively end on November 4 if we have no clear winners? What happens if we don’t know whose hands are on the levers of power for a considerable period of time? What happens when, no matter who prevails, half the country is convinced that the process was flawed and unfair? Constitutional crisis in the making? Electoral college collapse? What’s the consequence of a new sheriff in town at Justice, at Treasury, at the CFPB, at HUD? What will the Fed do? Is it still really independent? Will we have 104 senators soon? Eleven members of the Supreme Court? Will we really have a green revolution? Is the oil business toast? Is trade policy and in general the country’s geopolitical posture going to change radically (again)? What sort of recession are we really in? Did we come out and we’re going back? Are we actually in one at all? Has the US economy’s capacity to grow been secularly reduced? How about the world’s?
Will political and social norms continue to erode, and does that mean that the political pendulum will swing even more wildly between left and right as Democrats replace Republicans and Republicans replace Democrats? What happens if the customary progression of somewhat left of center and somewhat right of center collapses? Is there a chance the Republican alternative has been so badly scrambled by the past four years that we may see a semi-permanent one-party government for a considerable period of time? What will that mean for us all?
Will this plague ever end? Might there be a next one (let’s face it, there surely will be, but when)? Will COVID-19 get worse? Are we in the middle of a second wave right now? Does the election matter for how we respond? Is a vaccine more likely to show up after a blue wave? Are major cities likely to reopen sooner after a blue wave? Or not? Should we expect sustained social unrest; a never-ending 1968?
Will we ever return to a semblance of the time before?
If you are inclined to worry about these sorts of things, no matter how finely you grind, you will find more to confound. This is an anxiety fractal.
I take some comfort (again, with my businessperson’s hat screwed tightly on) that continuity is more common than discontinuity. Inertia, habit, routine, convention, capitulation, and indeed human nature in general all argue that incremental change is easier and hence more to be expected than rapid or discontinuous change. A rift or abyss from what was to what is, is a rare thing in history.
What will that likely mean for us in 2021? I’m expecting a blue wave. That’s certainly the consensus view, though 2016 should give us a hardy dose of humility in the election predicting business. Yet, my guess is that this election drama will not wildly change how our polity is organized, how our country is governed, or how our economy works. It will not radically change the shape of 2021. Sure the arc of many of these things which make up the American experience, which define how the American capital markets function, may change a bit, but while they may be nudged onto a slightly different orbit, they will not be radically reimagined. Taxes will likely go up, but not become confiscatory. Business interest will continue to be deductible. In general, the US Tax Code as it applies to commercial real estate and capital formation will remain largely as it is right now (with the exception of carried interest, the elimination of which is, of course, a democratic shibboleth). The laws affecting capital formation will be essentially unchanged. Corporate law will not radically change. Stakeholders will not be elevated to shareholders, at least formally in most states (though I’m watching California, Oregon and Washington, the capital of the woke). The partnership code will not change. The rules governing forbearance, foreclosure and enforcement of remedies, will re-stabilize in pre-COVID-19 form. We will still have the opportunity to play with opportunity zones. 1031? Maybe (a lot of big Biden donors own a lot of real estate).
Capital formation will continue apace, lending and borrowing will progress largely as before. The basics fundaments of our largely capital system will not change radically but might become a bit more mixed à la our European friends. After this curious recession is done, GDP will continue to repair (albeit probably more slowly than we would like). The Fed will continue to be accommodative. Many of our friends and colleagues will undoubtedly spend more quality time on Capitol Hill with the various and sundry select committees, but, notwithstanding the continued weaponization of statutes affecting business, I am not predicting that orange jumpsuit will become the new white cuff and collar of Wall Street.
Will animal spirits survive? Probably.
But of course, that all might not all be true.
Are we on the cusp of a chasm where what follows will be radically different than what was? After the current caesura, will we discover that 2021 will be radically different than 2019?
That’s really the question, isn’t it? In some ways, while it matters why we might confront discontinuity (is it a geopolitical event, political upheaval at home, more bad medical news, space aliens, or something else?) the big predicate question for planning purposes is whether any of these Four Horseman of the Apocalypse will ride into town at all.
I have always been fascinated with discontinuities. Think about the years leading up to 1914 and the years that followed the War. The world radically changed and strikingly, once radical change began to occur, it seemed to metastasize. Start with a war with millions dead, boundaries scrambled, empires fallen. Arguably enough change for a lifetime but look what else happened. The voting franchise was expanded, prohibition (Good Lord), rapid acceleration of technology in transportation and electronics, radio and the movies, the explosion of the consumer society, the expiation of the gold standard (well, until the British in a fit of moronic sentimentality about their lost empire, returned to it briefly in 1925), changes in literature, mores and public morals, artistic sensibilities, jazz, nihilism, Wall Street bombings (a tad more challenging than recent sit-ins ), radicalism of all sorts including the rejection of new found democracy in much of the developed world, (think Italy) . And that’s just some of the change. Looking back, the decade following the war was extraordinarily transformational. While there’s not particularly strong causal relationships between war in Europe and much of this, it seems that change is itself an enabler and multiplier of change.
So, as we sit here on what might well be the cusp of something fairly consequential, we should be eyes wide open to the fact that cascading change might be soon our reality.
There’s not really much to do about all that, is there? Unless you’ve a mind to become a prepper, buy a go-bag, dig a hole, sell your FANG stocks for gold bullion and stockpile MREs, we really have to continue to believe that, in large measure, the past is prelude.
As I sit here, my best bet is that none of the more awful or even more disruptive things that could happen in 2021 will happen in 2021. (As making predictions about the future is particularly fraught, I’m comforted by the fact that if massive disruption occurs, no one is likely to have the time or energy to remember this commentary.)
So small-ball change is almost certain and small-ball change is what I’m going to prepare for. I’m looking at a return to a more regulatory-minded government, more institutionalized hostility toward Wall Street and finance writ large, the probability that the prudentially regulated institutions will be more risk adverse (creating a potential dividend for the alternate lending marketplace).
A reinvigorated CFPB and more focus on protecting consumers will make consumer lending more difficult. We’re not done with forbearance, foreclosure bans, rent control and the like, but we will rebalance when it becomes apparent that these threaten to make the delivery of homes to regular people well-nigh impossible. It will be harder to develop both urban and suburban sites. We will all need to recognize and embrace the green agenda. A more redistributive federal policy will obtain. Lots more debt (sometimes I hope that Modern Monetary Theorists are right), and a Fed that will make all that possible will be our reality. Zero bound interest rates for as far as the eye can see. (Let’s not even talk about negative rates because I still don’t understand them.)
So, I am focusing on getting ready for a sustained period of economic slow or negative growth. If there’s economic growth in the United States in the next year or so, it will be uneven. I’m expecting to see significant amount of mortgage debt and corporate and industrial debt default. Retail is not coming back. Hospitality episodically. Assets will need to reprice. Values of fixed assets are generally going down and while that’s a cyclical change, the cycle may be so long as to be effectively secular. The supply of capital to capital markets will be more volatile as politics continues to intersect with finance and banking in new ways. The alternate or non-bank sector is almost surely to grow in importance. We’ll see new winners and new losers. And sadly, we’ll see many of our friends and colleagues whipsawed as political toys by our gloriously elected representatives. As I have said so often, it is so easy to blame the financial sector for maladies whose birthing was far away from our world.
So what to do? We will build workout capacity and develop workout strategies and asset repricing strategies and make that part of our practice more robust. We’ll be prepared to spend a great deal more time with the Bankruptcy Code. We’ve dusted off our liquidating trust and securitization structures and thought about how liquidity could be brought to non-performing and sub-performing assets in a difficult environment. We’re ready to see loan pools start to trade, either NPL or sub-performing pools. Trades will occur because of asset repricing. Many will become highly motivated sellers because of business or regulatory externalities. We’ll be alert to how regulated institutions behave and the flow of investable funds into what may be a disproportionately growing alternate lending space. We’re watching regulatory change with utmost care. Some of the changes affecting the banking world that had been put on the back burner over the past four years may be re-accelerated into reality. Basil in full, which is almost a certainty if we have a globalist-minded administration next spring. We’re trying to think around the corner and see how change will impact markets.
For the moment, stay nimble, my friends. Be mindful that banking and capital formation tend not to be popular during periods of economic stress and as I was saying last week, be ready to protect our industry from real or ginned up assault and calumny. Sticks and stones aren’t the only things that hurts these days.