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Despite Media Coverage, Recovery Still Expected

July 17, 2020

The news cycle portends doom and gloom - so why does ITR still expect an economic recovery? Catch our newest TrendsTalk episode with ITR President and Speaker Alan Beaulieu to learn more about our expectations for the rest of the year.



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Transcript by Rev

Hello, everyone. I am Alan Beaulieu, president of ITR Economics, which is the important part of all of that. And I want to talk to you today about something that we heard on the media, one of the main financial news sources, and if you Google the term, you can find out who but that's not really the important part. The piece was about a professor, Edward Altman, who I don't know at all, for all I know he's the greatest guy on earth, who in 1968, published something called the Z-score Formula. And it's for predicting insolvencies. Now, the Z-score is used in lots of different things, but he's adapted it for predicting business insolvencies generally for businesses that are going to be going bankrupt in two years. I read about it and it's very interesting, and I can appreciate the work.

And bankruptcies certainly are not fun. Bankruptcies can be very unsettling for people. For instance, Hertz. You take a name like Hertz, and it's like, "Oh my gosh, if Hertz is that screwed up what's going to happen next?" Well, understand that Hertz had actual assets of $25 billion, actually $25.8 billion in actual liabilities of $24.4 rounded billion. So one of the biggest names, and yet they piled on the debt. And that's pretty much the thesis, is that all these companies that are piling on debt are going to be facing some bankruptcies. And I have a list in front of me, which I'm not going to read to you of the 20 largest bankruptcies so far this year. Six are in oil and gas, not a surprise. Four in retail, also not a surprise. We all remember Neiman Marcus and others along those lines. One in automotive, two in aviation, two in telecom, one in mining, one in apparel, one in restaurants. And these are just large, largest bankruptcies. There are certainly more in restaurants. One publishing, one healthcare. Pretty evenly distributed.

And the thing is, the way these things are posited in the news, and we'll call it news, is that this says the recession is going to continue and this idea of a recovery is madness because we have these businesses, and Professor Altman suggests that we're going to go from 30 companies with liabilities for more than 1 billion, that have already filed for chapter 11, I just took the largest 20 to print off, he expects that number is probably going to top 60 by the end of the year. And again, the underlying thesis is this is going to be crushing. And there goes the hope for the recovery. It's all in how you posit it, I suppose. And if you want to look at it that way.

Well, here's another way to look at it. Okay? And I don't think it's optimistic because history works with us. It's Schumpeter's approach, it's creative destruction. So let's take Hertz. All right. Huge company, well-known international brand, piled on the debt, filed for bankruptcy. Let's assume that they are not going to be able to reorg. They're actually going to go on the way out of business. Somebody's going to come along and buy those assets. Somebody is going to come along and buy that name, perhaps, I would think so, but there are locations, they're known and manage them differently. So what happens is new capital comes along to replace the old capital. And I was talking to somebody the other day, they talked about the destruction of capital. I went well, "Yes, it happens all the time, but there's always new capital." And when you look out there into the world, there's lots of capital and that capital can be used to come in and re vitalize, replace Hertz.

It may be Hertz sub two it may be that Alamo becomes a new leader. I don't know, but it's not the end of the world. And it's the same for telecom. It's the same for aviation and retail sales. Any of these, including oil and gas, can be replaced. And if they're not replaced, that means their customer base will become the customers of somebody else industry. So we may find, instead of one company bringing in a billion dollars, we have five companies bringing in $200 million, which means more employees. So those that were no longer working for company A and now working for ABC and D and E we find that it's just a creative destruction process. Not the end of the world, not the end of the economy. Will it be scary? Yes. Will it make headlines?

Yes. Will it disturb a lot of people? Absolutely. Will it mean that we can have an economic recovery? No, it doesn't mean that at all. Science is good. Just yesterday, industrial production number came out and it was an incredible unprecedented increase from May. Now May was a terrible month. So an unprecedented increase has to be taken in context, but it was still very encouraging and by the way, the results for the second quarter for industrial production, right on target with our forecast. Retail sales number came out today as I'm recording this for you. And that posted a 112 rate of change that was above the year ago, a positive 112, I believe it was 2.3%. That's fantastic news. Now it doesn't mean we're going to be out of this thing and that we're going to see retail sales skyrocket. Doesn't mean that at all, we're holding with our forecasts.

GDP is going to stabilize here in the third quarter. Fourth quarter, it's going to go up. But the numbers, they just quoted in the theory that we were talking about earlier mean, we're going to be okay, we're going to get through this. And we think you should plan for certainly some rocky roads and waves as we go along here, but hopefully are planning for improvement in activity later in '21, late this year and in '21. I know a lot of you had a good June. It could be some pent up demand as things were shut down, things come back on. We'll see what happens in July. Jury's out on July, but overall you want to stick with the forecast please. And you want to get ready to be a busier company as you go into the future. Thank you. I hope you have a great day. Be well.


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