Liquidity is More Important than Ever
We are into our second month of quarantine across most of the country and the economic cost of reducing personal interaction is slowly coming into focus. As we muddle our way through what now is developing into an economic contraction of indeterminate depth, cash is king.
As the shelter-at-home orders spread nationwide in March it became understood that demand was going to plummet, along with revenues, but the duration was unknown. Would this last for weeks, or even months? Every organization would be affected to a degree, but some were more exposed than others. In particular, theater chains, restaurants, cruise lines, airlines, hotels and department stores expected to see revenues decline as much as 80-90% or more, and were thus at greatest risk of a business interruption and loss of employees, even for a short period. Real estate firms faced questions about how many tenants were capable of paying rent. Energy firms were at risk as demand for oil plummeted following a supply fight between Russia and Saudi Arabia which pushed prices down to levels not seen in nearly 20 years.
Those with capacity drew on their bank credit lines to bolster cash balances, unsure they could access public markets to raise additional capital. At the same time, investors are looking more closely for changes in how companies use their cash, rewarding those cutting expenses and working to strengthen balance sheets. For companies already struggling before March with declining revenues or high debt levels, Coronavirus will likely be the knockout blow; reports of missed bond payments are already showing up in retail and energy.
Investors made their own dash for cash by selling assets, sometimes indiscriminately. With sellers vastly outnumbering buyers, markets became imbalanced and prices declined. During March, bond and equity funds shed $300 billion in assets, and liquid assets like money market mutual funds and savings accounts increased by $1.1 trillion.
In short order, the Federal Reserve stepped in to provide cash and liquidity wherever it was needed. They resurrected every program used in 2008, and introduced several more, broadening their support further than ever. Congress also entered the fray by approving the CARES Act, the largest fiscal expansion in history. The intent was to push $2 trillion in cash directly into the hands of individuals, businesses and state/local governments to help navigate the quarantine with minimal economic damage. The ink was barely dry before they started negotiations for more.
Going forward, entities with sufficient cash balances on their balance sheets will have the highest ability to weather the quarantine and position themselves in the best possible way for whatever comes next. Cash offers the ability to make decisions from a position of strength rather than weakness. Those that made intentional decisions to operate conservatively are now reaping the benefits such flexibility supplies. Cash flow strength has always been at the heart of our investment processes; the impact of cash is now more vital than ever.