Will More Companies Seek Bankruptcy As Opening Up Continues?

Before the COVID-19 pandemic hit and the U.S. vs China trade war, JIT (Just in Time) or also known as the Lean Manufacturing method was the way to finish up production of a product line that is fast to bring the products to the market. JIT was made popular by Toyota in the 1930’s “The Toyota Way” production method. This method allows any company not to stock up raw materials and be overburdened with materials and parts in the production chain inventory, but instead, any company that uses JIT can just rely on an overseas or local third party to quickly deliver whatever stuff that a company needs to finish up production of a product line. JIT saves time, cost, and improves the efficiency of manufacturing. Unfortunately, the pandemic hit in early 2020 led to the shutdown of most parts of the world, and JIT isn’t viable as before. Shipping became more difficult, and shipping costs were rising tremendously. Furthermore, companies rather cut costs and shored up cash to protect the business during the uncertainty of the pandemic COVID-19. This pushed the JIT supply chain to the brink of collapse since companies weren’t ordered raw materials and whatever parts so freely as before.

The U.S. vs China trade war is still an ongoing thing, and JIT won’t be taken up favorably by the United States. The United States doesn’t want to be overly dependent on China for crucial and mission-critical materials and parts. One perfect example of this is rare earth minerals. China has cornered the rare earth mineral market, and with such influence, China could always use its power to subdue the United States to China’s demand by not selling rare earth minerals to the United States. Rare earth minerals, although the market isn’t big, these minerals are the absolute must for most electronic stuff that every country needs. To produce an electronic vehicle, smart TV, or just about any other electronic thing — rare earth materials must be present for such a thing to be successfully made. JIT is all about relying on a third partner/country to provide the raw materials and parts, but this could become a security nightmare for the United States in the rare earth mineral example. The pandemic has had only increased the divide between the United States and China in regards to how a global supply chain should be reformed onward.

As the United States and China try to promote different supply chain routes and methods for the globe, locally located companies aren’t yet weaning off the crisis of shortage of materials and parts such as microchip shortage — due to shipping difficulty and countries’ shutdowns across the globe — due to the pandemic is still an ongoing thing since many countries have yet to adequately allow the populations to be vaccinated with COVID-19 vaccines. While the shortages of everything are on the menu, companies are trying to alleviate many shortages as possible by hoarding raw materials and parts. Some companies are trying to overproduce the finished products as these companies have seen the demands of goods rising to an unseen level since the pandemic hit. Thus, rising demands produce rising inflationary prices of finished goods. Shortages of raw materials also push the prices of raw materials to be more expensive such as lumbers. As raw materials get expensive, the expense would pass on to the customers in the finished goods. In general, finished goods are more costly as the demands are high and raw materials’ shortage. With high demands come shrewd business sense, and so companies would go overdrive in producing more finished goods, The question is then when the COVID-19 pandemic slowly goes away and the world is opening up again just like how it was in 2019, services will come back to life, and customers would spend less on goods but more on services — how are the demand bubbles of physical goods would fare in such a scenario?

I think as the opening up roaring back, the inflation would collapse into deflation in how physical goods are being priced — while innovation would continue to drive the costs down of stuff such as electronic — and so many companies that overly produce the finished goods will face the glut of inventory. This could be so inefficient that these companies may wish JIT would become fashionable again. Thus, I think the future earnings of such companies will be way less impressive than most investors would have liked to see. The service sector may pick up again, but companies that are in this sector may still have to face bankruptcy since these companies borrowed a lot of debts during the pandemic COVID-19 service shutdown across the globe. Thus, I don’t think we will see the normal as how we had gotten used to before 2020. Companies with heavy debts should be valued less even if these companies fall into the value investing category. This could be an opportunity or a value trap kind of thing. We could not know an overly burdened indebted company is a bargain or a value trap since such a company could file bankruptcy easily.

What Will Happen After COVID-19 Pandemic Goes Away?

Although COVID-19 is still running rampant in the West, especially in the United States, I think when the dust is settling, everything will be amazing again. Why am I so positive like this even though we don’t even yet have a mass vaccination for the COVID-19 pandemic? Just let’s say I believe in the effects of human nature, and certain effects of human nature will never change even if the world is going to end tomorrow!

Right now, people are not going to movie theaters, eating out, shopping at luxurious malls, and whatnot, but believe me I think when COVID-19 is over — you can believe that people will do all of that and even more than they have had ever done in their entire life! I think the feelings of being pampered and served are so amazing that people want to feel something like that again! After all, they are being cooped up indoors for so long during the pandemic — once COVID-19 is gone — isn’t it obvious that there will be a revenge of massive consumerism on the service sector?

Currently, malls and other public physical consumerism/service spaces are not being favored by everyone for obvious reasons — DUH! — not getting infected by COVID-19… So, let me tell you why am I being Mr. Obvious(!) — well, let’s say it’s common sense folks! Let me ask you this, do you want to go out and having a fun dinner with your best friends in various delicious restaurants that you used to go out before COVID-19? I would! So, for me being optimistic about how things would return to normal or things would turn out to be even better than how things were before the whole COVID-19 thing is rather Mr. Obvious(!)…

One small problem though! I think my prediction could be a little off from the bulls-eye because of the negative effects of the COVID-19 aftermath. Although we’re not out of the wood yet and I still could imagine that the people — who are losing jobs due to the massive shutdown of various restaurants and other service businesses — may not be able to get back into the same job career that they had enjoyed before the COVID-19 pandemic. Companies that are being badly affected by COVID-19 may not be able to survive even if COVID-19 is going away. Many retail stores may have to file for bankruptcy! Survivable companies may have to employ more robots and automation to recuperate the costs that they lost during the COVID-19 pandemic, thus these companies may hire fewer human employees.

The negative effects of the COVID-19 aftermath could be so huge that it could push down the market prices for unfavorable real estate areas. For example, several real estate areas could see people walk away from their mortgage payments since they could not afford the mortgage payments any longer for not having to be able to find a new job. When the real estate sector turns negative — depending on how bad it could become — it could also affect the businesses in such neighborhoods. Local businesses could see a huge loss in revenues. It’s like a chain of effects or chain of reactions, and the negativities could multiply throughout the economy.

Nonetheless, I feel that the economy is a strange beast because it could contain both the negatives and the positives all at the same time. I could see a scenario of people will go hungry and yet some people go out and spend money like crazy to make up for the time that they were forced to be indoor for so long during the COVID-19 pandemic. Perhaps, we could see the unbalance of the income quality thus we could have huge inequality in income after the COVID-19 is going away. Some people will be able to do more and enjoy their life more during the COVID-19 aftermath, and other people will have to go hungry and become homeless. I just pray that everyone would be able to do better and feel better after this horrendous COVID-19 pandemic — but we all know praying might not be enough. Let’s hope I could be so wrong, and everything will be super-duper after the COVID-19 goes away.