Steven Senne/AP Photo
Unsanitized-061320
An empty food court in a nearly-empty mall in Providence, Rhode Island, on June 1, 2020.
First Response
There’s a concept in finance called “stranded assets.” It refers to something that loses its value unexpectedly. The sudden conversion away from nuclear power after the Fukushima disaster made nuclear plants a stranded asset, particularly in places like Germany and France, which decommissioned them. A technological change like an app that allows people to get rides has turned taxi medallions, once very valuable, into a stranded asset.
Somebody owned those medallions, and invested in that nuclear plant. As a financier, you really don’t want a stranded asset, because you have to precipitously write it down. You won’t recoup your investment, or your portfolio will become unbalanced with worthless elements. As we transition to renewables, there’s a real concern that banks holding too many stranded assets like oil and gas or coal infrastructure, or investments in gas-guzzling car companies, will generate a financial crisis.
In other words, if you orient society around certain everyday activities, and those activities change, those who profit off the activities that get stranded can get wiped out. And if you lock people in place for three months and deprive them of things they once relied upon to get through their day, you’ve built the conditions for that to happen.
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Some of the changes will come about simply because we’re entering a time of extreme financial stress for millions of people, where once-normal activities become unaffordable. We will make coffee at home instead of picking it up on the way to the office. We will mend old clothes instead of buying new ones. Restaurants are a luxury rather than an expectation. We will work on ourselves rather than working so hard to keep up.
In addition, some trends already in motion before the crisis are accelerating, most notably deliveries. Convenience in a hyper-speed world had led people to rely on Amazon, and now every retail outlet down to your local store will find a way for you to get what you need without any human contact. Home theater systems and in-home entertainment, another convenience, are likely to spread.
But while this is mostly anecdotal but increasingly evident, people are finding that they like some elements of the lifestyle they’ve had to adopt on lockdown. Making meals might be better than eating out. Taking Zoom calls might be better than business trips away from family. People are breaking habits ingrained in them through decades of consumer culture. And that, friends, is a serious stranded asset.
Most of these changes involve transitions from one type of consumer good and service into another. And many of them are absolutely positive. But we have enormous investments made in American life circa February 2020 that are rapidly becoming obsolete.
So there’s an expectation that one-third of the nation’s malls will disappear within a year. That accelerates an existing trend; the nation was over-extended on retail storefronts, and people are breaking their retail therapy habits (or confining them to the internet). But that’s millions of retail jobs that will go away. And it’s a large portion of the property tax base for cities.
Similarly, office rental prices are falling, which could signal permanent shifts to working from home. People not out in the world aren’t going to pick up lunch every day like they did at the office. Starbucks sales were down 43 percent in May, and the company is closing 400 stores and shifting to a “pick-up” store format with no seating, to accommodate changing tastes.
Humans are social creatures, and I don’t believe we will never see people congregate in public ever again. But it doesn’t take much of a shift in consumer demand to make the profitable unprofitable, and to strand assets.
There will separately be lots of pursuits that grow rapidly as a result of these changes. Boeing may never sell aircraft at the same level again, but in-home exercise equipment might have to produce at much higher rates. (Of course, what does this mean for gym memberships?) Groceries up, restaurants down. And so on.
You can see the impact of stranded assets in these shifts with the mass dumping of milk in dairies around the country. People’s eating habits didn’t drastically change from February to March, but food destined for groceries comes from a different supply chain as food for the commercial market, and it was impossible to transfer that over in the transition. Now think about that for the entire economy.
If the tax base is permanently eroded, and there are shifts from restaurants (which include sales tax) to groceries (which mostly don’t), how will cities ever regain the revenues to provide services? If malls and offices are significantly curtailed, how does the commercial real estate industry survive? Who holds those assets when they get stranded? What are the implications?
We shouldn’t roll back climate stabilization efforts because banks profit too much from fossil fuels. We should wean them off those assets which we know must become stranded for civilization to survive. Similarly, we shouldn’t—actually we can’t—forestall the societal changes arriving from pandemic habit-breaking. But the economy will take some time to catch up to those changes. And this will likely cause turbulence for years. Our economy is so dependent on a particular type of consumer culture, and that will have to change. One of the reasons we won’t snap back so quickly economically is due to the wrenching steps it will take to get to that change.
Today I Learned
- Amazingly, Hertz got court approval to sell stock that won’t be worth anything in a few weeks. It’s like a license to fleece investors, though I guess that’s better than fleecing customers from a distributional standpoint? (Bloomberg)
- A whopping 90 percent of independent music venues could close, according to a new survey. (NPR)
- A tracker of refunds to oil and gas company royalties—handouts, really–during the pandemic. (Center for Western Priorities)
- Another in the series of academic studies showing indisputably how important mask use is to stopping the spread. (PNAS)
- Mnuchin refusing to disclose the names of PPP recipients even to the Government Accountability Office. I see a lawsuit in the future. (Associated Press)
- The initial post-pandemic Trump really was moved to the day after Juneteenth, but there are viral outbreaks in Tulsa, where he will appear. (Fort Worth Press-Telegram)
- Unusable personal protective equipment sent from FEMA to nursing homes. (Wall Street Journal)
- A reminder that there will be no Unsanitized tomorrow. See you Monday!
