As the COVID-19 coronavirus was exploding in Miami Beach, an oblivious college boy on spring break said on national television, “We’re just living for the moment.” That kid’s cavalier comment in the face of serious danger to millions of people is consistent with the mindset of many C-suite executives. In the wake of COVID-19, every bad decision those executives made in the past six to seven years will be exposed.
After the Great Recession ebbed, many executives returned to debt financing, created grossly optimistic forecasts, and adjusted or justified numbers to artificially prop up the company’s performance. It was all about producing a stockholder quarterly financial report to boost bonuses and stock prices for the benefit of the C-suite executives.
Overexpansion, the accumulation of too much debt, and poor business strategies are rampant. They have been fueled by executives, with easy access to a lot of money, who are seeking unrealistic returns. Many mergers and acquisitions, financed by Wall Street money and hedge funds, have focused more on the forecast return instead of the actual business intelligence of the deal. This debt dependence and these bad practices eventually ruin businesses.
Two years ago, it was apparent the Wall Street bubble of excessive debt and exuberance was blowing up unabated. It was bound to be popped by a black swan event. I wrote about this in my column, “The Great Debt Depression” (ProSales, October 2018), stating the next “recession will occur in 2019–2020, as the stock market bubble will burst, exposing the hubris of Wall Street.” In this case, COVID-19 popped the bubble.
There will be many companies, especially independents, that will survive because their businesses were operating successfully. These businesses are based on sound fundamentals that produce real numbers. The basic principles of their success include having a solid business plan, great people, minimal debt, managed growth, and a fervent devotion to financial truth. For those executives who don’t start paying down their debts and putting these sound business fundamentals in place, they are doomed to bankrupt their companies and possibly drive the economy off a cliff.
One part of my column from 2018 was edited for space. It stated, “The Federal Reserve and Treasury, goaded by politicians, will shoot one of their final arrows from their debt-quiver to stop a real ugly recession. Expect the economy to limp along until 2027–2028.” That is when I predict some event will trigger the Great Debt Depression.
I suspect the Fed and Treasury will juice the economy and there will be a sharp rebound in the third and fourth quarters, but this response to COVID-19 doesn’t solve anything; it only makes it worse for the long-term. More debt is not the answer for anyone. We must get back to sound business fundamentals.
No doubt, this episode of COVID-19 has been painful for everyone. The scores of lost jobs and businesses are heartbreaking. Executives at all levels must start focusing on the long-term well-being of their companies instead of short-term quarterly profits. Start building your balance sheet to withstand the unexpected so you can keep everyone working.
Prepare now for the Great Debt Depression. Be frugal, eliminate debt, and remember, cash will be king.
