All, I hope you’re well and staying safe at this time. An economic outlook is intriguing to write at this time, and I think cannot be properly considered without looking at the social change our country is currently going through. I believe we are perfectly positioned as liberal arts students – at an extremely diverse institution – to weigh the various factors and come up with a vision for the future. I will look at two different categories and how they will alter the business environment of the future. First, I will examine the push for ends to systemic racism and injustice. Second, I will look out for when we do rebound from COVID, which is not an exact time period, but more so the year after the country/world opens up again. So, without further ado, my fellow Americans, Jack Sercu’s economic outlook/two cents.
It would be ignorant to speak of the future without looking at how the changing political sentiment in our country will affect business. The resource gap for minorities is completely tied to income – no law in it of itself states that blacks should receive worse education, healthcare or other support. However, due to America’s gut-wrenching history where our systems did prevent certain races from most resources/privileges, these gaps have held pretty steady. Picture doing a 100m race where white people start 50m ahead. Anyways, the wave we have witnessed on social media from a combination of friends and celebrity endorsements is to support minority owned local businesses. I believe reallocating your resources as such is a fantastic way to empower minorities. This will not breakup big business and topple capitalism, but I do believe it will lead to more balance between small and large. Attention to small businesses has increased because of COVID, as many have witnessed their favorite local spots struggling or going out of business and are more aware of their power as consumers. The guilt or discomfort that many feel can also be satisfied through spending, and I think this is an underrated factor that will help change. Simply put, people being able to tell themselves “I buy food from the local black-owned deli, I buy cannabis (legally) from the local black-owned dispensary (which I have seen many Seatteites encourage their friends to do), etc” will actually make a difference. That isn’t the best method to change our mentalities, but I do think it is a good supplementary action – put your money where your mouth is! Well done > well said. These are easier changes that allow people to maintain their personal savings rates, an important factor to keep in mind when many have had recent changes in employment/income.
Consumers can aid in the empowerment of minority-owned businesses, but I believe more formal investment vehicles are a faster method for change. SoftBank stepped up and created a $100m fund called the Opportunity fund, which will only invest in minority-owned companies. It is amazing that they put this together so quickly, and it will make a difference, but $100m seems like a drop in the bucket of systemic racism. The minimum investment from their (largely laughable) Vision fund was $100m, and the size of that fund is $100bn. Funding is a barrier that is often difficult for minority founders to access, and this fund will hopefully have amazing ripple effects across the industry.
Another important industry to look at is personal security/defense. These have already been extenuated by COVID, but civil unrest and talks of defunding police will heighten the importance of security more than ever. Firearm and ammunition sales have increased since the start of the outbreak, with gun sales increasing by 85% YOY in March and 71% YOY in April. Home security system sales also have increased significantly. Both of these markets should continue to gain steam as sentiment and legislation moves forward about defunding the police. An interesting distinction between the guns/ammo market and the security system market is the finite nature of guns/ammo. Once a few weapons are owned in one household, the majority of people do not need to purchase more. These people are buying for defense reasons, and do not need a large amount or variety to feel secure. Those who are connoisseurs of weapons for sport will not be affected by COVID or worries of civil unrest, and will consume as usual (barring slightly different behavior from income changes). Ammunition is a small recurring expense, but most who own firearms for defense reasons are not at the range burning through boxes of ammo on a weekly basis.
Security systems, on the other hand, operate more as SaaS companies. Many have little to no installation costs and offer subscription pricing models, which provides recurring revenue. To remain protected, people must remain subscribed, especially after a system is installed. The hardware involved makes switching costs high, so it is unlikely that consumers will switch security companies. Hence, the battle for new consumers will be crucial to revenue growth. It is a real pain to have old systems removed and new systems installed to save cents on the dollar, especially when you are a boomer who has to figure out how to work these systems. This is much different than switching between Zoom/MSFT Teams/WebEx for cost reasons, showing how unique the security market is within the broader SaaS scene. I also hope that the investing scene can fuel developments in public security, especially the use of AI and pattern recognition to remove racism and police discretion from the streets. The low cost of borrowing and large amounts of dry powder that investment vehicles have saved up can be put to good use.
The third important category — when we rebound fully — whenever that may be. Nobody knows. Stocks will go up. There is talk that the market is overvalued at the moment, as evidenced by the increase of recreational trading and various valuation metrics. Stocks are somewhat close to pre-COVID levels, so I do not understand where they will go once earrings rebound to pre-COVID levels. If share prices were to grow proportionally to their increases in earnings/revenue during the rebound, we will essentially have increased the Y-Intercept by 7-9%. I think a bubble has to burst somewhere, as so many people bought into the equity markets based on the principle that stocks will continue to go up. I do not see how expected downfalls can be priced into the market. But we will see. If I was to boil my rebound results into one sentence: There will be a bubble somewhere, but stocks will still go up before/after the market gets a quick reset to their actual performance, in the long run.
Sincerely,
Litquidity Capital