MENU

Perspectives

Federal Government is About to Become a Distressed Investor to Slow Unemployment

by Fortem Financial March 20, 2020

Estimates for 2Q GDP growth are ratcheting down and a 10 percent contraction is not far off from the consensus. Initial unemployment claims could reach 1 million next week. If policymakers get this wrong, contagion can easily spread, despite the temporary nature of the coronavirus. In that context, Congress is rushing to get a $1 trillion plus stimulus passed in the coming days. Senate Republicans released their plan last night. There are large differences between the goals of the two parties, but the negotiation process will start today. House Democrats have their own ideas of what to include. We break the Senate Republican plan into four categories: 1) Tax refunds for individuals; 2) Aid to small businesses, which sets up a loan forgiveness plan for small businesses to retain employees and pay their rent/mortgage; 3) Funds to build up the health care infrastructure; and 4) Guaranteed loan facilities to backstop large companies suffering from a collapse in demand. This should help with liquidity in the short term. As part of the corporate backstop, however, the Treasury Secretary is authorized to inject capital into companies and participate in the gains of the company through warrants, stock options, common or preferred stock, or other appropriate equity instruments. President Trump endorsed this idea yesterday. The government is set to become a distressed investor. We anticipate a loud chorus to argue that the stimulus won’t work. But our read of the plan suggests that the underlying goal is to make the initial surge of unemployment temporary, prevent more layoffs, and allow for a quick resumption of hiring as the US economy restarts.

DIRECT AID FOR SMALL BUSINESSES TO COVER PAYROLL EXPENSES AND RENT

Unemployment is about to go higher. Small businesses, suffering from a collapse of revenue, are laying off workers. The Senate Republican plan tries to make this effect temporary, akin to a natural disaster, rather than a permanent increase in unemployment. In fact, the legislation provides for 100 percent guaranteed loans through December 31st to enhance liquidity. But most importantly, the proposal provides for loan forgiveness in the amount equal to payroll costs and debt obligations like rent for the entire second quarter. The amount of loan forgiveness is reduced proportionately by the number of employees laid off (So keep paying your employees). A read-through of this proposal is that federal taxpayers will pay for small businesses to maintain their payrolls through the entire second quarter as the US economy shuts down. Implicitly, if the virus fades in the summer, there will be less need for small businesses to reduce their payrolls and others can hire workers back.

Small Business Provisions:

  • Provides small business interruption loans from March 1 through December 31, 2020 for businesses of 500 employees or less and for nonprofits.
  • Increases the maximum 7(a) loan amount to $10mn through December 31.
  • Expands allowable uses of the loans to include payroll support (including paid sick leave), employee salaries, mortgage payments, and any other debt obligations.
  • Provides delegated authority to all current 7(a) lenders and to lenders that join the program, and requires lenders to determine eligibility based on whether the business was operational on March 1 and had paid employees.
  • Waives both borrower and lender fees for 7(a) loans.
  • Provides 100% government guarantee of the loans through December 31, and allows complete deferment of loan payments for not more than one year.
  • Increases the maximum loan for an SBA Express loan from $350k to $1mn through December 31, after which the maximum will be $500k.
  • Allows borrowers to be eligible for loan forgiveness in an amount equal to the payroll cost and costs related to debt obligations for the period of March 1 through June 30, but the amount eligible will be reduced proportionally by the number of employees laid off during this period. Provides for no prepayment penalties before December 31.

TAX RELIEF FOR INDIVIDUALS COULD PROVIDE A TEMPORARY BOOST DURING THE VIRUS WAITING PERIOD

The mitigation strategies of dealing with the virus are leading to a collapse in consumer demand. As such, Congress is looking to boost incomes of Americans as the waiting period takes hold. We rank order tax cuts based on the economic bang for the buck as: 1) Income tax rate cuts; 2) Payroll tax cuts; and 3) Tax refunds. The Senate plan has chosen the lowest of the three choices, which is more of a function of political expediency than seeking economic efficiency. More specifically, the Senate plan proposes tax rebates of $1,200 per individual and of $500 per child. But there is a catch. Estimates suggest that 65 million people with lower tax liabilities will not receive the full rebate. Additionally, the checks phase out at $75,000 in income for individuals and $150,000 for those filing jointly (based on 2018 tax returns). The payment will be completely phased out for those with income of $99,000 per individual and $198,000 for joint filers. It’s hard to see how this current proposal makes it through the final product. The slicing and dicing of the rebates by income and children will slow the process down of getting the checks out. There will also be a push to make sure taxpayers with lower tax liabilities get a bigger check. The most efficient way to get the money into the economy is to give everyone the same amount. If policymakers are truly concerned about the wealthy not getting a check, a tax can be placed on the refund in next year’s tax filing season. Still, despite the program design issues, the delivery of $500bn of tax refunds in 2Q could help. The chart below shows GDP and consumption in 2008 when the tax refunds hit. The delivery of the checks coincided with the only positive quarter for growth and consumption during 2008. At the very least, the checks will restock household balance sheets to help consumers when the US economy restarts.

INDIVIDUAL TAX PROVISION SUMMARY

Individual Tax Provisions

  • Recovery checks of up to $1,200 per individual and of $500 per child. The checks phase out at $75,000 in income for individuals and $150,000 for those filing jointly (based on 2018 tax returns). The payment will be completely phased out for those with income of $99,000 for an individual and $198,000 for joint filers. Taxpayers with little or no tax liability, but at least $2,500 of qualifying income (earned income, Social Security retirement benefits, certain veteran pension and compensation benefits), will be eligible for a minimum rebate check of $600 per individual.
  • Extends the tax filing deadline from April 15 to July 15. Allows for the postponement of estimated tax payments due from the date of enactment until October 15, 2020.
  • Waives the 10% early withdrawal penalty for distributions up to $100k from qualified retirement accounts for coronavirus-related purposes. Income attributable to those distributions would be subject to tax over 3 years and the taxpayer may recontribute the funds within 3 years without regard to that year’s cap on contributions. Provides flexibility for loans from certain retirement plans for coronavirus-related relief.
  • Allows for the deduction of up to $300 of cash charitable contributions regardless of whether the taxpayer itemizes their deductions. Increases the limitations on deductions for charitable contributions by individuals who itemize and for corporations (suspending the 50% of AGI limitation for individuals for 2020, increasing the limitation for corporations from 10% to 25% of taxable income, and increasing the limitation on deductions for contributions of food inventory from 15% to 25%).

NEW FACILITY TO PROVIDE GUARANTEED LOANS AND CORPORATE TAX CHANGES TO BOOST LIQUIDITY

The next leg of the legislation is to provide liquidity to firms that need it through collateralized loans and loan guarantees. More specifically, the legislation provides $208bn for Treasury’s Exchange Stabilization Fund. The purpose of this facility is to provide collateralized loans and loan guarantees for industries. The legislation sets forth $50bn for passenger air carriers, $8bn for cargo air carriers, and up to $150bn for other companies. The legislation specifically prohibits the funds being used for grants and/or direct aid. There are restrictions on compensation and golden parachutes. Our sense is that the final legislation will likely increase the size of the non-airline facility and impose more restrictions on buybacks and possibly dividends as a condition of receiving the aid. Taxes are also a part of the effort to increase liquidity. Airlines are not getting any direct aid, but the legislation eliminates taxes for commercial aviation. All employers will be able to defer their current payroll taxes. Additionally, the legislation makes several corporate tax changes to help with liquidity for firms with no profits such as expanding net operating losses, accelerating corporate AMT credits for refunds, and increasing the amount of net interest that can be deducted. The legislation also fixes the expensing provision from 2017’s tax reform to include restaurants and hotels. Our sense is that Democrats will oppose most of these corporate tax changes.

THE FEDERAL GOVERNMENT IS ABOUT TO BECOME A DISTRESSED INVESTOR

The Treasury Secretary is authorized to inject capital into companies and participate in the gains of the company through warrants, stock options, common or preferred stock, or other appropriate equity instruments. President Trump endorsed this idea yesterday. The reason this language was included is because the number of industry aid requests being sent to policymakers is staggering. Yet, direct aid is not politically feasible and the federal government is likely to become a distressed investor. Boeing, which we would consider to be at the top of the food chain, is the largest US exporter and has a supply chain employing roughly 2.5 million people. The company is “Too Big To Fail” and failure to act by the federal government would lead to a surge in the number of unemployed Americans. Yet, there is little appetite on Capitol Hill for Boeing to receive direct taxpayer aid. That leaves few options for policymakers other than a direct stake in the company. While Boeing won’t fail, a partnership with the federal government is not likely to benefit shareholders. In a flashback to 2008 with the banks, we would not be surprised if policymakers are looking for a private sector actor with a large balance sheet to do this work for them. But absent private actors stepping in, we anticipate the government will need to be active based on the aid requests from companies.

WE ANTICIPATE THAT STATE & LOCAL AID WILL BE PART OF ANY FINAL STIMULUS PACKAGE

By all reports, the municipal bond market is a mess right now. State tax revenues are about to get crushed. Our sense is that the federal government will plug those gaps as it did in 2003 and 2009. The federal government always backstops states after natural disasters. Additionally, we expect the House legislation to authorize the Fed to purchase municipal bonds. We are not fully convinced that the all members of the Fed want to purchase corporate and municipal bonds, but political pressure is building given the mess in the municipal bond market.

Source: Dan Clifton, Strategas

Please call or email us with any questions

Sincerely,

Fortem Financial
www.fortemfin.com
(760) 206-8500

 

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

Disclosures:
Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client’s experience or of the Firm’s future performance. Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
Fortem Financial 2016. All rights reserved.

Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Forward looking statements are based on current expectations and assumptions, the economy, and future conditions. As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict. Actual results may differ materially from the anticipated outcomes. Carefully consider investment objectives, risk factors and charges and expenses before investing. Fortem Financial is a registered investment adviser with the SEC. Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Fortem Financial

Fortem Financial Author

Recent Posts

PRIVACY NOTICE REGARDING CLIENT PRIVACY

Fortem Financial Group, LLC, has adopted this policy with recognition that protecting the privacy and security of the non-public personal information we obtain about our customers is an important responsibility.

All financial companies choose how they share your non-public personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your non-public personal information. Even when you are no longer our customer, we will only share your non-public personal information as described in this notice. So, please read this notice carefully to understand what we do.

The types of non-public personal information we collect and share depend on the product or service you have with us. This information can include items such as your Social Security number and income, your account balances and transaction history, and your investment experience and account transactions.

We collect your non-public personal information in a variety of ways. For example, we obtain your non-public personal information when you open an account or give us your income information, tell us about your portfolio or deposit money, or enter into an investment advisory contract. We also collect your non-public personal information from other companies. For example, from the custodians who hold your account assets.

All financial companies need to share customer’s non-public personal information to run their everyday business. Below, we describe the reasons we can share your non-public personal information and whether you can limit this sharing.

We share your non-public personal information for our everyday business purposes such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, report to credit bureaus, to protect the confidentiality or security of your records, or as permitted by law. We may also share your non-public personal information for our own firm’s marketing purposes; so that we can offer our products and services to you.

Federal law gives you the right to limit only sharing non-public personal information about your credit worthiness for our affiliates’ everyday business purposes; sharing non-public personal information about you with our affiliates to market to you; and sharing non-public personal information with non-affiliates to market to you.

We don’t share non-public personal information about your creditworthiness with our affiliates for their everyday business purposes. We don’t share your non-public personal information with our affiliates to market to you. We don’t share your non-public personal information with non-affiliates to market to you. We also don’t share your non-public personal information for joint marketing with other financial companies. State laws and individual companies may give you additional rights to limit sharing.

We share non-public personal information with our parent company affiliate, Focus Financial Partners, Inc, for its internal and external auditing purposes. We also share your non-public personal information with a non-affiliate for the purpose of aggregating it and providing summary information based on this data to our parent company, Focus Financial Partners, Inc.

To protect your non-public personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.

Our policy about obtaining and disclosing non-public personal information may change from time to time. We will provide you notice of any material change to this policy before we implement the change.

If you have questions please call us at 760-206-8500 or go to our website at www.fortemfin.com.

IMPORTANT CONSUMER DISCLOSURE

Fortem Financial Group, LLC ("Fortem Financial" or the "Firm") is a federally registered investment adviser with offices in California and Arizona. Fortem Financial and its representatives are in compliance with the current registration and notice filing requirements imposed upon federally registered investment advisers by those states in which Fortem Financial maintains clients. Fortem Financial may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements.

This website is limited to the dissemination of general information regarding the Firm's investment advisory services offered to U.S. residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of Fortem Financial' website on the Internet should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment, tax or legal advice. Furthermore, the information resulting from the use of any tools or other information on this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from Fortem Financial. Any subsequent direct communication from Fortem Financial with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. Fortem Financial does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to this website or incorporated herein, and takes no responsibility therefore. All such information is provided for convenience purposes only and all users thereof should be guided accordingly.

All statements and opinions included on this website are subject to change as economic and market conditions dictate, and do not necessarily represent the views of Fortem Financial or any of their respective affiliates. Past performance may not be indicative of future results and there can be no assurance that any views, outlooks, projections or forward-looking statements will come to pass. Investing involves risk, including the potential loss of principal, and the profitability of any particular investment strategy or product cannot be guaranteed.

Any rating referenced herein may not be representative of any one client's experience. Further, the Firm's receipt of any rating is not indicative of the Firm's future performance. The Charles E. Merrill Circle of Excellence award is granted by Merrill Lynch for outstanding client service and satisfaction. The award is granted based on annual criteria established by Merrill Lynch for its top decile advisors. The Barron's Top 1,200 Financial Advisors rating of the top financial advisors in the United States is based on data provided by participating firms. The following factors are included in the rankings: assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. Investment performance is not an explicit component. The Palm Springs Life's "40 Under 40" Rising Young Professionals to Watch in the Coachella Valley is based upon nominations from the local business community and selected by the staff of Palm Springs Life.

For information pertaining to the registration status of Fortem Financial, please refer to the Investment Adviser Public Disclosure website, operated by the U.S. Securities and Exchange Commission, at www.adviserinfo.sec.gov., which contains the most recent versions of the Firm's Form ADV disclosure documents.

ACCESS TO THIS WEBSITE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND WITHOUT ANY WARRANTIES, EXPRESSED OR IMPLIED, REGARDING THE ACCURACY, COMPLETENESS, TIMELINESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS WEBSITE OR ANY THIRD PARTY WEBSITE REFERENCED HEREIN.