At the beginning of 1980, if you declared that Rochester (New York) based Kodak would go on to file for bankruptcy a few years later, people would have laughed you out of the room. The brand ‘Kodak’ was a business synonymous with photographic film, employing 30% of the workforce in Rochester at that time. However, Kodak completely missed the digital film revolution and became irrelevant soon after.

“We are always two years away from irrelevance” has been the trademark closing phrase of our CEO at each year beginning staff meeting.  But this year it changed from ‘two’ to ‘one’.

What a prophetic statement!

With the COVID-19 outbreak, brands like Zoom, a video conferencing application and HelloFresh, an online meal-kit delivery business are booming. While at the same time, iconic brands like Victoria Secrets are struggling, and have decided to close 250 stores across the USA and Canada due to weak sales. Due to COVID-19, traditional brick and mortar businesses are failing, and online businesses are thriving.

What fascinates me to write this blog is Hertz, a 102 years old car rental company, saddled with about USD 17bn in debt and nearly 680,000 vehicles idled filing for bankruptcy protection in May 2020 amidst the COVID outbreak.

The business model of Hertz became irrelevant with the launch of ride-sharing apps like Uber and Lyft. The general understanding is that when a business files for bankruptcy, investors will try to exit at any price since debt holders will get their settlements before investors. However, in the case of Hertz, what happened was the opposite. The share price of Hertz increased by 10x from a low of USD 0.56 to USD 5.53 in June 2020. You may ask what may be driving this seemingly irrational behaviour.

The answer lies in the balance sheet of the Federal Reserve. The Federal Reserve printed tons of money to bail out struggling US businesses from the adverse effects of COVID-19, which is evident through the balance sheet expanding by USD 3tn during the quarter of March-June 2020. Furthermore, a government handout of USD 1,200 was made to the US citizens as well. Long story short, the COVID-19 stimulus created an artificial demand in the financial market.

What is interesting is that, if all the printed money goes directly into financial assets, how long the US economy and the political climate stay relevant given that more than 21mn people are unemployed?

Thuvarakan Senthilmani – CAL Research