The Capital Note

The Capital Note: Lockdowns & Lumber

People wait for health assessment check-in before entering Jackson Memorial Hospital, as Miami-Dade County eases some of the lockdown measures in Miami, Fla., June 18, 2020. (Marco Bello/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: the pandemic’s effect on small business, the duration of work from home, and how a lumber shortage is increasing the size of one university’s endowment.

Main Street Lives
One of the principal determinants of the severity of the coronavirus recession is whether the short-term damage from lockdowns imposes long-term costs. Businesses and households unable to meet their short-term liabilities — mortgages, rent, credit-card bills, etc. — face potential bankruptcy.

The early data on U.S. small businesses suggest that the policy response to the pandemic has mitigated a great deal of the potential damage. According to the latest employment report from the Bureau of Labor Statistics, 6 percent of small businesses remained closed in July — a significant decline from the 25 percent that were closed in April. While the relatively low rate of closures does not capture all of the economic harms of the pandemic (businesses that remain open have no doubt seen a decline in revenue), it is a heartening sign that Main Street can withstand the recession.

In contrast, larger businesses have seen a meaningful spike in bankruptcies, but the lion’s share of insolvent firms was struggling before the pandemic, according to Goldman Sachs Research. Goldman analysts add that :

Although the Bloomberg Bankruptcy Dashboard (which records new bankruptcy cases for companies with liabilities of at least $100mn) indicates a sharp rise in filings, other indicators are more positive. For instance, the American Bankruptcy Institute’s more exhaustive measure of all commercial bankruptcy filings—including Chapter 7 filings which reflect liquidation as opposed to restructuring—remains below its pre-virus level, likely reflecting support from the Paycheck Protection Program.

These results highlight the challenge facing lawmakers as they cobble together the next economic-relief package. According to an academic paper, 70 percent of small businesses filed requests for PPP funding. Should lockdowns persist, a halt in government assistance could push many of those businesses into bankruptcy.

The End of the Office?
The degree to which the pandemic will change behavior over the long term is the topic of endless debate. Insofar as society has adapted to infectious, frequently incurable, disease, there is good reason to believe that less will change than seems to be the case in our moment of masks and lockdowns.

That is not the same as denying that the pandemic might trigger major political change or, at least, major political turbulence. COVID-19 — and the measures to combat it — have clearly already done that, and it is far too early to say what the consequences will be. But the basics — we gravitate towards cities, say, or we like to eat out — are unlikely to change. What will happen, however, is that the pace of certain changes that are already underway will accelerate. The automation wave is gathering even more speed: “Soft machines” are so much less reliable than their metal, plastic or cloud-based equivalents. And the outlook for brick-and-mortar retail looks even worse now than it did before the coronavirus.

But the office, as we have known it for a long time now, will, I suspect, for the most part, survive, despite data like those included in a Wall Street Journal report from late July:

Fewer than one-tenth of Manhattan office workers have returned to the workplace a month after New York gave businesses the green light to return to the buildings they vacated in March, according to the city’s leading landlords, brokerage firms and employers…

As of last week, only 8% of the employees who work in downtown office buildings managed by CBRE Group Inc. had returned from sheltering in place from the pandemic. The figure, based on unique card-swipes at security turnstiles, was 9% in midtown. CBRE, the world’s largest commercial real estate services firm by revenue, manages 20 million square feet of space in Manhattan.

Working remotely can be a good-enough fix to keep a business ticking over, but it is hard to see it as the basis for building or sustaining most enterprises over the long term.

From another late-July piece in the Journal:

 “There’s sort of an emerging sense behind the scenes of executives saying, ‘This is not going to be sustainable,’” said Laszlo Bock, chief executive of human-resources startup Humu and the former HR chief at Google….

The nature of what some companies do makes it tough, if not impossible, to function remotely. In San Francisco, startup Chef Robotics recently missed a key product deadline by a month, hampered by the challenges of integrating and testing software and hardware with its engineers scattered across the Bay Area. Pre-pandemic, they all collaborated in one space.

Problems that took an hour to solve in the office stretched out for a day when workers were remote, said Chief Executive Rajat Bhageria. “That’s just a logistical nightmare,” he said.

And so, from today’s Journal:

Amazon, which was early in sending employees home when the pandemic hit, is allowing staff who can work from home to do so until Jan. 8. The company, however, expects much of its staff to one day return to its offices, Vice President of Workforce Development Ardine Williams said.

“The ability to connect with people, the ability for teams to work together in an ad hoc fashion—you can do it virtually, but it isn’t as spontaneous,” Ms. Williams said in an interview. “We are looking forward to returning to the office.”

Amazon is adding more than 900,000 square feet across the six locations where it is expanding. The New York space alone totals 630,000 square feet.

A week or two before, Facebook secured the main office lease on the James A. Farley Building, located one block south of Penn Station in western Midtown Manhattan. The company’s lease was for 730,000 square feet.

But if the case for returning to the office is clear to many companies, it may (paradoxically, in a way) present advantages for workers, too — beyond efficiency and, yes, socialization.

Writing in the Financial Times, Andrew Hill relates a story that manages to be wildly entertaining — a tribute to human ingenuity and, as he highlights, more than a little disturbing in its implications:

I have been thinking a lot about “Bob”. He was a US software developer who worked from home for a large company. In 2013, it emerged Bob had been outsourcing his own job to China. He sent a chunk of his own salary to a Chinese consulting firm to do his work so he could surf Reddit, trade on eBay, update Facebook, and watch cat videos, according to a blog post by Andrew Valentine of Verizon, who investigated the case.


Bob’s cunning solution to the work-life balance conundrum is on my mind because of the troubling suggestion that if you work remotely, your employer could eventually realize you are eminently replaceable by someone else doing your task more cheaply on the other side of the world. Out of sight, out of mind, out of work…

Nicholas Bloom of Stanford University, who has examined the productivity of remote workers (and reminded me about the Curious Case of the Man Who Outsourced Himself) also foresees a future of hybrid work. Companies will use outsourcing as one of a mix of strategies to cushion themselves against volatility. White-collar employees higher in the traditional office hierarchy may come under threat, he suggests.

Those are also the workers who are already under threat as AI and automation make their way up the food chain, but that’s a story for another time….

— A.S.

Around the Web
While, as we noted yesterday, one Californian legislator (at least) favors maintaining a wealth tax on rich Californians who have the effrontery to leave the “Golden” state, the Dutch may be going full exit tax:

A Dutch law that would hit multinationals leaving the Netherlands with billions in exit taxes is gaining political support after Unilever warned it would have to reverse its decision to relocate from Rotterdam to the UK if the initiative passed.

Unilever warned last week that “if the bill were enacted in its present form” and applied to the company’s planned restructure, it would not proceed with its plan to establish a single legal entity in the UK. The maker of Dove soap and Magnum ice-creams has estimated it would face a €11bn retroactive penalty if the bill was approved.

Put forward by Green MP Bart Snels, the bill is designed to penalize companies with revenues of more than €750m who depart from the Netherlands for low-tax jurisdictions. In the case of Unilever, Mr. Snels said the exit fees would apply because the UK does not have a withholding tax on dividends.

Competition is a terrible thing.

A Cloud with a Gold Lining

Malaysia has long been a place where vast fortunes have been amassed over time. The Kuoks, Tehs and Queks are custodians of palm oil, property and banking empires that stretch back decades.

That was until Covid-19, when the country’s low-key rubber industry — or more precisely, glove making — became one of the hottest on the planet.

Wong Teek Son, who co-founded Riverstone Holdings Ltd. in the 1980s after working as a research chemist, last month became the fifth billionaire in the country from manufacturing gloves. He’s now worth $1.2 billion as shares of his company rallied almost sixfold from a low in March, thanks to growing demand for protective products during the coronavirus pandemic.

And another…

Robinhood announced its third major cash injection in just four months as its core business handles record customer trades during the pandemic. The $200 million funding round lifts its valuation to $11.2 billion from $8.6 billion. The flurry of venture capital cash comes in a historic year for the U.S. stock market and a high-growth period for Robinhood and its publicly traded peers.

Yale’s Forest
The price of lumber has hit an all-time high, thanks to a combination of mill shutdowns and homeowners’ choosing to undertake home-improvement projects as they work from home. Since January, the price of front-month lumber futures has nearly doubled.

Good news for some…

For at least two decades, Yale and its celebrated endowment manager, David Swensen, have led a land rush by the richest colleges. Funds snapped up forests as a way to hedge against inflation and the risks of stocks and bonds, and to take advantage of endowments’ unusual ability to make investments that might not be easy to sell quickly.

Bad news for others…

Other colleges have run into trouble with forestry investments, and some are pulling back. Harvard’s $35.7 billion endowment sold its Romanian timberland in 2014 after paying inflated prices through an agent it hired who was then convicted of taking bribes from sellers and laundering money. It has been exploring the sale of some natural resources assets and has sold at least one timber plantation this year. A portion of its portfolio has been subject to complaints from environmentalists, who criticized some forestry practices on a plantation in Argentina in 2014. Harvard has said the practices were certified by a forestry council; it declined to comment further.

More proof that Yale is the superior university.

— D.T.

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