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Tag: Covid-19

Why Does the Fed Cut Interest Rates When Stocks Fall?

As you may have seen that worldwide stocks are falling as the COVID-19 fears have completely taken over the markets. The S&P500 index has fallen nearly 20% from it’s ATH. Asian and European stocks are also following suit.

When markets crash like that, Governments step in and offer certain incentives to businesses like tax-cuts and cheap credit / lower interest rates etc. The governments say that cheap credit will enable businesses to fuel growth with lower borrowing costs. However, there’s an interesting theory on why the Fed really offers cheap credit and what the businesses really do with that credit, read below.

TL;DR: Companies use cheap credit (e.g 0.5% interest rate) to buy back their own stocks which post 5-10% profits per year.

Are Software Companies Safe from Present Economic Conditions & COVID-19?

What’s happening right now due to coronavirus is a supply-chain crisis. Businesses have buyers but are running out of goods to sell. Once the business profitability is affected due to decline in sales, they will let go some of their employees. This could affect purchasing power of some of the people creating a demand-side crisis.

The pandemic could also affect demand as more and more people stay at home to avoid the disease, they would be spending lesser money on certain products. In addition, their purchasing power could also be affected by additional health related bills. If COVID-19 lasts long enough, which at the moment it is showing signs of, there will be both supply-side and demand-side disruptions.

To improve the situation, Fed has cut down the interest rates. The goal is to sustain the economy by offering cheaper credit to businesses. But I’m wondering how can a supply-side disruption be fixed with cheaper credit. Moreover, cheaper credit could help larger businesses but small and medium sized businesses are likely to suffer the most.

While it is obvious that trade and e-commerce are largely affected, are software companies safe? Some of them might be but I do not believe that they will not have a cascading affect on them. After all, many software businesses are intended to solve real-world problems.

In my industry for example, many software businesses are Shopify apps or WordPress plugins. Shopify store owners use those apps to improve their selling experience. But if there are no sales, or no revenue, the store owners will obviously stop using those apps until situation changes.

Softwares that have nothing to do with commerce, may be relying on advertising as a source of revenue, or may be assisting industries that depend on advertising revenue. They aren’t safe either. Once the commerce is disrupted, the advertising is meant to be disturbed too. In my own case, my e-commerce stores are affected due to supply-chain crisis, but I’m also not spending on Facebook and Instagram ads to drive sales which means the advertising industry is taking the hit too.

As a publisher, I also have data to support this argument as CPMs are going down across the board. So any software business which is dependent on advertising or support customers who drive revenue from advertising will see disruption too.

All other kind of softwares may be safe from this cascading affect, but will still be dealing with users with lower purchasing power.

While pure software businesses are much better off than other businesses, I wouldn’t say that they will not be affected. However, it is still a better time to be running a software business than any kind of traditional business.

What To Expect From COVID-19 Coronavirus

Bill Gates wrote, and I quote

In the past week, Covid-19 has started behaving a lot like the once-in-a-century pathogen we’ve been worried about. I hope it’s not that bad, but we should assume it will be until we know otherwise.

I recommend that you read the full article written by Bill Gates to get in depth insight on the epidemic. In the meanwhile, just like Bill Gates, I hope it’s not that bad, but for now there’s no reason for me to believe that it isn’t. So I’ve done some reading on the subject myself, and want to present some facts below.

Please note that I’ve no intention of driving panic, and all intentions of initiating correct preparation for the Covid-19 epidemic by sharing my thoughts below.

1) Stock Market

The American stock market is down 15% in last 1 week. Companies will publish their Q1 2020 earning reports between 15th April and 15th May. I expect the stocks to be in downtrend until April/May timeframe, and if earning reports are quite bad, they may trigger a potential recession. Apple has issued an early warning for investors. Actions to take: Sit tight and wait until April/May for more clarity on investment strategy.

2) Vaccination

According to Bill Gates, June could be the earliest time-frame for large-scale vaccination “trials” meaning we are unlikely to have vaccination available at scale and approved by FDA before Q4.

3) China

There’s a unified opinion that China is under-reporting cases. There’s complete lock-down in China and I wouldn’t expect China to cause such damage to their economy for something that’s not very serious.

Most researchers believe the actual number of cases to be 10x more, and hence 800,000 people could be infected in China.

4) Death rates

Death rates are 2-3% in Wuhan and 10% in Iran. The death rate is 1% in rest of China. This makes me believe death rates are obviously dependent on the conditions of health-care available as well as the capacity of number of patients that can be treated simultaneously. Assuming China has the ability to provide better healthcare than global average quality, the death rate could be more on global level.

5) Death numbers

Researchers believe that up-to 20% of the global population could get affected. Assuming 20% of global population and 1% death rate, there will be 14 million deaths. Assuming 0.5% death rate there will be 7 million deaths. And assuming 3% death rate, there could be 42 million deaths.

6) Virality

The virality rate is 3 which means every individual will at average infect 3 other people. This is much higher than common flu where the virality rate is 1.5.

7) What to do

In addition to all the advice that you’ve heard/read so far about washing hands, not shaking hands, avoiding gathering, etc, I recommend that everyone should stock minimum 1 month of grocery and 2 months of medication if someone uses regular medication at home such as for heart or diabetes etc. 60% of all medicine is manufactured in China which is on complete shutdown right now. There will be delays and shortage in medication.

May God protect us all