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Coss

Economics

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I am, patently, not much good at economics, but I'm not starving and I have pretty much all I need, to live a reasonably comfortable existence.

I'm asking a question here, of you folks who know economics, following a short preamble:

I've always thought that I should have, and even when I ran my own businesses, I strived to have, reserves. Of food, of money, of resources for capacity for production, etc etc..

Q: Today's and recent decade's, business environment of "Just in Time" and knife edge balance sheets, may have allowed for better percentage profit margins. How do those ideas and policies allow for situations like now, where businesses have no back wall, have no reserves and their only strategy for survival, is to sack everyone?

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I think that until the end of 2019 the big Q&A in modern economics schooling would have been something like:

Q. What happens when a global pandemic strikes, governments around the world essentially shut down their economies and break large parts of the human connectivity chain?

A. Ha ha ha ha ha ha , Firgeddaboutit, never will and never can happen. Totally preposterous suggestion, now any serious questions?

You can imagine for the next few years planners wanting a potential lock-down supplement.

My particular area of interest, the aviation business looks to be a fun watch for the next few years. BA have announced they will need to make redundancies going forward, about 12,000 people will go, that's around 25% of their workforce. Virgin is on the brink of collapse. Quantas is struggling to keep afloat. Boeing has said it will need to cut jobs, much of that is probably the double whammy from the 737MAX and the likely minimal civilian orders going forward. One of the UK LCC's, I think EasyJet but not sure, has said they will cut several thousand jobs, again, a sizeable percentage. I know nothing of the US carriers though I have connections to some employees through friends, flying staff, all think they will likely see big job losses and big scaling back of operations in the next few months. Realistically, bailout money for those who can obtain it, will likely cover only a small fraction of potential losses. Some smaller EU airlines might well disappear. Middle East Airlines are potentially shielded similarly for any other countries where the government holds a large stake. They will likely be more massively unprofitable than they usually are but simple pride will not permit their failure and so they will remain essentially subsidised by their populations.

Contracts on the books now will likely go ahead where funding is in place but anyone looking for a budget to develop aviation projects for the next 2-3 years minimum is likely not going to get it.

Hong Kong airport is building a third runway, project is underway and part done but as some aspects are scheduled for fiscal 21-22 and beyond I would say its questionable they will finish it now. They don't even need two runways for the time being. It is possible that smaller projects might get a boost while the blue sky jobs get sidelined.

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An sane answer, I can see that my view of the world would have never made me rich.

When I had a successful restaurant business, 50 staff, I worked towards and achieved, a back stop that would allow me to pay wages and rent for 6 months, in the advent of a disaster, my idea then, was a volcano, Auckland sitting on a volcano field as it does....

Of course that all went with my first divorce, but then I didn't pay alimony :)

Probably why I'm not a millionaire like so many restaurateurs are, these days.

 

 

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It seems to work on the basis that those you owe will not foreclose, for one reason or another. I think the term is leverage, in two senses of meaning.

I read that a Singaporean oil tycoon has recently gone bust. I don't recall the numbers but his company had something like $3-4bn in debt with about $700mn in resolvable assets. This is a chinese gambler of a tycoon, old school, no hedging. So when the oil price dipped the creditors (banks) were on the phone fast, oops. Clearly the guy made a big mistake, it's okay not to hedge but you better have all the bankers balls in your hands.

But I think the reason so many people can "appear" rich is all down to borrowing. I don't know if it would be realistic to achieve millionaire status from simple re-investment without borrowing. Assuming you are actually in a productive business generating something of real tangible value.

 

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Yes , we used to sneer at the bloke who talked up his restaurant business, had "the best house in the best street" and that latest car, parked outside. But when the telephone repair man went, he reported no furniture inside, no TV ....

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Or as we say in Northern England “All Fur Coat and No Knickers”

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Curiously, I had girlfriend once, who turned up in a fur coat, and as I found out, nothing else, afterwards, I was curious as to whether or not, her mother would notice the stains on her prized Mink coat...

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My personal strategy when I consider businesses or income is a business scheme that is:

1. Location neutral. Meaning I can make money no matter where I am. 

2. I can make money while I'm sleeping. Warren Buffet said, real wealth comes when you are making money while you are sleeping. 

3. No employees and inventory. 

I tend to look at things that are online as example, be it eCommerce as an example. I do forex as well. For either, you only need reliable wifi. It can be done on the beach in Phuket or in a ski lodge in Aspen, Colorado. 

Rental income works as well, if you have a reliable property management company or someone trusted to manage it. Another means is to be a passive investor and get a 'draw' from that business. Someone else is running it. That requires a lot of trust and time and means to examine the books from time to time so you are not a victim of fraud or shorted in some way. 

After the fact, this concept is also Covid 19/pandemic proof to a certain extent. In the states you can still get rent if the person is on public aid. You will have to hope the renter has a reliable job or getting some sort of assistance otherwise. But online, non brick and mortar businesses would seem to be not as effected as a stand alone store. 

There are brick and mortar businesses that are great and if you plan to be in one location primarily, then its not an issue. I plan to do some traveling and would not want to be 'tied down', to one location. 

 

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