Dividends and Modern economy vulnerable to global recession from virus

In every situation there is the opinion of the half filled glass – is there great opportunity or is there the expectation the glass will be empty. The coronavirus is one of those situations. throughout December and January, China shut it people inside to contain the virus. In the form of government China has, it was possible to do and hopefully the virus is contained.

In looking at half empty situation, Eric Reguly wrote about other concerns in the way our economic system works. The concern is debt, both country and corporate, although one should be worried more about corporate debt. US corporations are sitting on almost $10 trillion of debt or 47% of GDP. Cash is not good, adding to the debt to buy back shares and pay dividends is important.

For corporations, the low interest rate is great, however when the virus jolts business, that is not okay. For example in France gatherings are only permitted of less than 5,000 people; in Switzerland the Geneva Auto Show which typically attracts 600,000 people was cancelled by the government. One can rationally argue those were good things, but they have an effect. The issue with corporate debt is the rating, if the rating is in the As or BBB, most institutions around the world can own the debt; when the debt slips to BB or B, it is in the junk status and many institutions have to sell, for their constitutions prohibit the owning of the bonds. Prices fall and the cycle begins.

Another vulnerability is the just in time delivery system that supplies factories everywhere. There are great reasons to have the just in time system – costs are lower, for the factory does not pay for inventory. The technological systems to manage the inventory are easily administered. The problem comes from if one supplier is late, disruption hits the assembly process. A missing $10 part can hold up a $10,000 product. If the shortage happens, the shares of the companies fall, the bankers have input and everyone loses. If there is a the virus emerges as a pandemic, then the supply system will fall. If there is no product, buying on line does not help.

In every downturn, people turn to the Central Banks for assistance. However interest rates are low, how much lower can they go? Central banks address demand shocks, not supply shocks.

Linking to dividend paying stocks, with all things in life some sort of balance is important, as dividend investors you tend to want to hold onto the stock for a period of time, however that is dependent on the sustainability of the dividends. At the annual meeting, ask management what keeps them up at night? if you can sleep through it, then you can see the glass as greater potential.

There are more questions than answers, till the next time – to raising questions.

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