We have a growing demand problem as a result of millions of jobs lost to the COVID pandemic (Personal Consumption -13.6% March to April 2020). Many of these jobs are not coming back as companies close permanently, realize they can do more with less and lose market share to competitors.

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Airlines: Airlines have reduced capacity and laid-off executives to mitigate the negative impact of COVID. Once government bailout restrictions are lifted airlines will further reduce employee headcount. Our bet is that American Airlines (tkr: AAL), will not survive nor will aviation supplier General Electric (tkr: GE). A quick and full airline industry rebound is not happening. Offices are not open and therefore business travelers – the airline industry profit engine – are not flying.

Hotels: 60% occupancy is the magic number where many hotels will be able to service debt. National occupancy rates were approximately 35% between May 17th and 23rd per weekly data released by CoStar Group. Perpetual loan forbearance is a myth. The rubber will eventually meet the road.

Retail: There are many more bankruptcies to come. Moody’s expects the speculative grade default rate to increase from 4.7% to 14.4% over the next 12 months. Restaurants, gyms, salons and similar small businesses can’t survive operating at 50% capacity.

A check mark recovery: The impact of jobs lost will be felt broadly across all economic sectors especially as many jobs are permanently lost. The impact of millions of unemployed people, a lingering virus and a paycheck stimulus program that has motivated a number of people to not be productive makes it difficult to imagine a “V” shaped recovery. A check mark-shaped recovery seems more reasonable where the economy modestly rebounds in Q3 and Q4 off of the Q2 lows only to see the sequential rate of recovery slow and occasionally plateau for the reasons described above. The recovery is not likely to be smooth, up and to the right like a Sell-side analyst’s revenue model. Instead, it is likely to be uneven, resembling real life.

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