The cost of saving jobs is losing jobs

All jobs are equal, but some are more equal than others

It’s difficult to know whether Scott Morrison and his national cabinet are focused primarily on saving lives or saving businesses. Or whether they are simply blind to the what has happened in China, the country which has seen the full wave of COVID-19, or even Italy, whose lockdown has finally curtailed daily growth in cases.

Morrison is clearly enjoying his stint as a wartime prime minister. He boasted last week that he was saving jobs through his half-baked actions, while bizarrely saying that the restrictions would last at least six months (which creates incredible uncertainty for business). 

He may be right in one sense: he may be saving some jobs, but he’s costing many others — so the net effect of confusing stage two or three restrictions is massively negative.

Based on movement data, our economy is around 80% shut down. Of the 20% that’s open, probably half are genuinely essential services. So Morrison (and to be fair, state premiers) are sacrificing 80% of the economy to keep the remaining nonessential 10% — hair dressers, shopping centres, building sites — open. 

UK-based IHG (one of the world’s largest hotel chains) last week announced that it had re-opened almost 70% of its 180 hotels in China. Booking interest is back to around 40% of normal levels. That is merely two months after much of the country had been shut down. Morrison’s half-shutdown and warnings of six month are killing jobs.

Every day that passes, more businesses shut their doors and the inevitable recession deepens.     

Leading from the rear

Speaking of wartime leaders, while “Scotty from Marketing” would no doubt be revelling in his new found (relative) popularity, he shouldn’t get too comfortable. 

George W Bush saw his approval rating hit 90% in the aftermath of September 11. As the population finally understood the folly of Bush’s later actions, his approval rating collapsed to 25% by 2008.

Similarly, Bill Clinton’s approval rating jumped to 64% during the Yugoslav conflict, and George H W Bush saw his approval keep to 89% following victory in the first Gulf War, only to fall back to 29% before he lost the 1992 election. 

Morrison’s near daily prime time briefings are clearly intended in a similar manner to a leader on war footing — as he single-handedly leads Australia’s War on the Virus. True to form, the former marketing executive ordered the defence force to have “boots on the ground” to enforce the quarantining of returning Australians.

No doubt Morrison’s moves are encouraged by poll results from a fortnight ago, which showed his approval ratings jump to 41%, edging ahead of Anthony Albanese as preferred prime minister. If history is any guide, we can expect ratings to be a lot lower in a few months’ time.    

Guns 1, vaccines 0

My favourite professor — NYU’s Scott Galloway — made a fascinating observation: throughout history, far more people have died from disease and pandemic than from war (think bubonic plague, Spanish Flu).

However, the US spends US$727 billion on its military and only US$6.5 billion on fighting diseases. AIDS alone has killed more than double as many people as World War I. Lots more votes in guns than vaccines it seems.    

Voyage of the damned

The best (or least-bad) businesses to own at the moment are those with low operating and financial leverage (or those which sell essential needs). They can flex their costs down quickly and don’t have significant debt.

One of the least desirable businesses to be in at the moment is cruise lines. Similar to airlines, they have a massive fixed cost base, and tend to carry a lot of debt. 

Carnival Cruise Line, the world’s biggest cruise company, reported cash of US$518 million and other current assets of US$1.5 billion in its latest annual report. It has current liabilities (including almost US$5 billion in pre-paid customer fares) of US$9 billion. It has another US$9 billion of longer date liabilities. 

Normally, this would be a relatively healthy balance sheet for a business that makes US$3 billion in net profit annually. The problem is, Carnival has minimal prospects of short-term cash inflow, but significant liabilities — this is what is meant by weak financial leverage. While the business will reduce its operating expenses significantly (most of its costs relate to staff, marketing, and servicing customers), it certainly can’t reduce it to zero.

While Carnival’s share price has fallen from US$52 to US$14 in just over a month, the market is still betting the business can survive. Royal Caribbean, the second largest cruise business, has dropped from US$135 to US$35. 

After the crisis passes, how willing will the public be to get back on board cruise ships — particularly in the wake of the Diamond Princess?

My take — people who take cruises love them and they will (for the most part) come back. That people were still cruising in recent weeks is proof of that. 

So the big ships will survive. The question is, will equity holders — and potentially debt holders — be wiped out? Or will the big cruise lines be able to convince bankers to give them more time on the basis of mutually assured destruction? 

How to resolve the COVID-19 crisis for (political) dummies

A week after most of the western world locked itself down, Australia stubbornly refuses, for reasons known only to Scott Morrison and his chief medical officer Brendan Murphy.

While Sunday night’s move toward greater restrictions were an improvement, we’re still far from a full lockdown. It seems hard to imagine that a complete, three-to-four week lockdown (China-style, not the Italy variety) wouldn’t work. 

Why? The incubation time for the virus is five to 14 days. So let’s say everyone is locked down for 14 days (other than absolutely essential workers). After 14 days, everyone who could have caught the virus already has.

But then there’s the problem of asymptomatic cases (around 30% of infections). You can’t just let everyone loose after 14 days as we’d have asymptomatic patients causing a second wave. So that means you need to either add on another 14 days, or somehow test everyone (which is not possible currently).

You could potentially ease up in two to three weeks, but you add an element of risk and may need to start again. By adding 14 days to catch asymptomatic carriers, it means that within 28 days, everyone who could catch the virus has done so and we can largely re-open domestic society (much like Shanghai and Beijing were able to do). 

That’s it, Scott and Brendan. Maximum 28 days. Not months, not six months, not years.

Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed