Two things I have never, ever said or written:
“No giveaways to small businesses” and “Our congress is functional!”
The villain to the political left is large corporations and their greed. The villain to the right is often liberty-stealing government and faceless bureaucracy. However, everyone champions the hero we know as small business.
The CARES Act stimulus package passed last week is enormous; it seems to have something for everyone. There are cash giveaways to individuals, cash infusions to businesses most affected, and regulatory changes. I want to focus on one provision: loans to small businesses.
When we think small businesses we often envision shops, restaurants and small manufacturing plants. But it is so much more: it encompasses lawn care companies, boat repair specialists and other solo acts. They are everywhere and are the lifeblood of any economy.
The CARES Act will reimburse small business owners for their rent, payroll and health insurance costs for 2-½ times their average monthly payroll.
Let’s imagine that you are a chiropractor in Oklahoma. You have two office staff members and yourself, and you take a salary. Your rent, health insurance and salaries are around $300,000 per year. Since the virus hit, half of your patients are cancelling their appointments. You are hurting. With only 50 percent of your previous revenues you can’t pay yourself and you are thinking about letting your team go.
The CARES Act will offer you a 10-year, low interest rate loan. To the extent you can show that you used the proceeds from the loan to cover rent, salaries and health insurance for the eight weeks after receiving the loan, it is forgivable. Put another way, future taxpayers have agreed to cover your salaries, rent and health insurance for the next two months. That means that you, our friendly chiropractor, will receive around $30,000 tax free.
What does this have to do with your investments?
Our economy is powered by small businesses that are, in realty, millions of individual people who compete for our business every day.
It is quite literally their life’s work. And through their work they grow, expand, improve and make our communities better.
John Maynard Keynes coined the term “animal spirits” to describe how people make decisions. It refers to the emotions of confidence, hope, fear, and pessimism that can affect financial decision making, which in turn can fuel or hamper economic growth. If spirits are low, then confidence levels will be low, which will drive down a promising market—even if the market or economy fundamentals are strong. Likewise, if spirits are high, confidence among participants in the economy will be high, and market prices will soar.
The point is that what people believe about their future and the prospects for their business matters.
If people are optimistic they invest in their businesses; they advertise and hire. But if they have a pessimistic view of their futures, they will let their businesses languish or even cease to exist.
What our congress did in passing the CARES Act was radical. It was something never tried before and the amount of money it pushes into the hands of both for-profit and nonprofit organizations will help many survive the current crisis.
Well done Congress, we needed a giveaway for small businesses to help the people who fuel our economy. Investors, take note. There is now reason for high animal spirits.