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Is America About to Face a Bankruptcy Epidemic?

Dollar Reserve Currency

As most of us are aware, analysts and economists have been saying that it’ll take years to get the US economy to where it was prior to the COVID-19 crisis. Not months, but years. Still, there’s a problem with this pessimistic view: the reality is far more dismal than most Americans think.

The notion that it’ll take years for the economy to recover from COVID-19 is predicated on the current state of American business. The current state, minus the emerging developments. In other words, the projections are based on things staying the same. But nothing, particularly in this economy, ever “stays the same.”

Small businesses are going bankrupt at an accelerating pace. That’s the “emerging” reality that rubs against most economists’ models.

And as the economy braces for a wave of bankruptcies yet to be filed, what might happen if millions of businesses go broke at the same time?

Facing the sobering prospects of our economic situation, who can afford to forecast the coming months with the same lens of optimism through which investors have been seeing the markets? We can’t. There’s clearly a schism between fundamental data and investor sentiment. The former indicates a storm while the latter sees only sunshine.

We could be seeing the largest surge in bankruptcy filings  in the history of the US court system. The court system itself may not have the workforce to manage the incoming flood.

Despite government aid to help prevent businesses from failing, many small businesses either haven’t received the money, or, the money they did receive has been far from sufficient. Even for companies that can survive, they may not be able to expand, further reducing the need for workers overall, and in turn, raising the likelihood of an even greater wave of personal bankruptcies. The next few months will tell the story as to how much this pandemic has affected businesses and individual workers. The outcome might not be pretty.

Insolvencies Rip Across the Entire Fabric of the American Workforce

We hear about the big companies. Take two of the country’s largest retailers, J.C. Penney and Neiman Marcus. Unable to pay interest on their debt, both companies are virtually insolvent and expected to file for bankruptcy in the coming months.

What we don’t hear about are the smaller businesses, from unknown mid-size companies to your ma and pa stores. Collectively, these companies employ millions of everyday American workers--the fabric of our country’s workforce, from our most populated cities to the small towns that connect one side of the coast to the other.

Many of these smaller businesses may not recover from the COVID-19 lockdown. Whether they face bankruptcy themselves or whether they’re just unable to retain their current workforce, many households will be affected. And as most American households don’t even have sufficient emergency savings to pay for even a few month’s worth of basic necessities, many of them may be facing personal bankruptcies as well.

We’re about to see insolvencies rip across the entire fabric of the American economy. We’re talking thousands of small businesses failing, a sizable number of larger public firms, and, collectively, entire industries getting ravaged from the bottom up.

Everyone is aware of how much unemployment has peaked over the last few months. It’s been in the news every Thursday, weekly jobless claims piling in on a weekly basis, one after the other. But what we don’t hear about are US bankruptcy filings. Chances are, those too are about to surge.

When such a massive flood of bankruptcies hit, the US court system will get overwhelmed. It’s like the exit door in a crowded movie theater--it works as long as people aren’t rushing the exits. For instance, during the last financial crisis, a single bankruptcy judge would work up to 50 hours a week just to keep up with the filings. It’s likely that the current state of bankruptcy filings will far exceed anything we’ve seen in 2008-2010, simply because the current state of unemployment has already exceeded that of the Great Recession.

But the longer-term concern for most citizens is the overwhelming effect these bankruptcies may have on the economy. Many small businesses and households are under the burden of heavy debt. They will likely fall first. And as with every bankruptcy and debt default, large or small, there’s a significant ripple effect.

Hedge Now or Face the Consequences

There’s a reason why “risk management” is not a science. Science deals with evidence, or rather “things that are known.” Risk management, on the other hand, deals with the “unknown.” You don’t know if you’ll end up in a car crash, so you wear a seatbelt. You don’t know if your neighbor will infect you, or vice versa, so you wear a mask and avoid large crowds. You don’t know if the economy will fall into recession or whether you’ll lose your job, so you avoid taking on huge debt, and you build your reserves. Sadly, that last point is something most Americans didn’t do.

If you have large exposure to the broader economy--say, the stock market, bond market, real estate, or the banking system (as a depositor)--now is the time to hedge the coming downturn. Most people don’t see it, and most are foolish enough to believe that the economy has made a quick V-shaped recovery.

The sobering odds: over 30 million jobs lost and a potential tsunami of bankruptcies doesn’t substantiate the rosy picture of a months’ long V-shaped economic recovery. Who in their rational mind would stake everything on this optimistic yet highly uncertain outcome? As football coach VInce Lombardi once said, “hope is not a strategy.”

As the dollar loses its purchasing power to yet more monetary easing, as bonds slowly become unfavorable due to rates near zero (possibly negative?), and as the market’s optimism slowly comes to grips with its fundamental limitations, all will fall, and there will be only two safe havens left: gold and silver.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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