Dear Valued Clients,
The two of us have spent virtually every waking hour (and unfortunately plenty of our sleep time) for well over a month focused on and thinking about the Coronavirus and its implications for all of our families and friends, our clients and Jefferies. In what feels like the blink of an eye, the world has transitioned from a reasonable version of peace and prosperity, including record highs in all asset classes, lows in interest rates and unemployment, and strong consumer spending and business confidence, to a reality of broad-based fear and anxiety, and a panic borne of feeling we could be looking into the abyss we have never before entered. Before we depress anyone too much, let us be clear that we believe the good news is that, just as humankind has overcome every obstacle we have ever been presented — we put a person on the moon, consistently extended life expectancies and, for the most part, have driven a never-ending increase in the quality of peoples’ lives — we will survive this virus. We will learn how to treat it, discover a vaccine and effective methods to broadly administer it, and ultimately eradicate this virus from the earth. We are highly confident the world will keep turning and humanity somehow will be better for having endured this incredibly serious virus. That said, this is our new reality, and, in light of what we are seeing, hearing, feeling, thinking and doing, here are our priorities, strategies and emotions as Jefferies moves forward toward the challenges and opportunities that may lie ahead:
Safety of Our People First: The number one priority must be the health, safety and emotional well-being of our people. We owe each other no less. People must work where and how they feel comfortable and safe, and in a manner that allows them to care for, protect and be with their families and loved ones. At Jefferies, most of our team is currently working from home, some from backup facilities and some from our hub facilities. We are mindful of the stresses, and have done and continue to do everything we can to assure that our technology and communications systems facilitate the best experience and capabilities possible. At the same time, our leaders are focused on maintaining the community and culture to comfort individuals, and have been charged with regular communication with all our people in an effort to provide every support possible. We have every confidence that our people are committed, motivated, sincere, dedicated and keen to protect each other and Jefferies, and serve you and your needs.
And Now We Return to Clients First, Always: With our people physically and mentally as fit as one can possibly be during this turmoil, only then can we successfully be there for you, our clients. Tough times show and build character. Everyone is with you when times are good, but it is in times like these where relationships are truly cemented, trust is unconditional and the next 10+ years are defined. No entity is large enough or deep-pocketed enough to solve every client’s problems with capital. However, with tenacious hard effort, focused and diligent competence and creativity, the ability to harness the capabilities of a broadly-resourced firm, and more than ample capital to facilitate getting the job done, we at Jefferies have rolled up our sleeves and are here for every one of you that we have the privilege of calling a client. For us, this is personal. We have been through many battles and wars ourselves, and our commitment is to do everything in our power to first help you identify and navigate your needs and problems, and then assist you in seizing and executing your opportunities. We may be more geographically dispersed than any time in our history, but we have never been more united in delivering Jefferies for your benefit.
This Likely Will Be a Marathon, Not a Sprint: The Coronavirus is not an event, but rather a condition. Events can be met head on and resolved in short order, while conditions must be endured, and hence we are preparing for a long race. While the 2008 financial crisis felt like it went on for an eternity, the big banks and the financial system were at the epicenter of the situation and governments were ultimately able to accurately hit the target where they knew it would have the greatest impact. Then the long recovery began. The Coronavirus threatens the personal health of the entire global population. In a word, fear has overtaken the population and trust in our universal safety has been perhaps forever altered. This will absolutely cause economic activity to grind to a fairly slow pace, perhaps for a very long time. Rather than being an event or a problem to be solved, the Coronavirus is a condition which we need to endure and overcome, and as such we are preparing ourselves and our team for a marathon. If you can successfully adapt to this mindset and have the right expectations, the stamina and psyche will be properly aligned and we will be able to meet the challenge. We won’t count on a quick resolution, but we will all enjoy being pleasantly surprised should one emerge.
Accept the World Has Changed: As we said, we will all get through this and there will be another, better moment ahead. That said, the Coronavirus is a very big deal, perhaps the biggest event of our lifetimes. Every metric by which we judged success only a few weeks ago is likely out the window today. It feels like yesterday that companies prioritized objectives like total addressable markets, growth rates, margin improvement, ROE growth and valuation multiples. We believe that the companies and investors that immediately pivot to prioritize liquidity, reasonable debt profiles, adequate capital bases and essentially everything that assures a sufficient operating runway until a period of normalcy slowly begins to emerge, will be the ultimate winners. Companies or investors who believe this is just another short-term blip and proceed full speed ahead will be putting at risk themselves and the constituencies that depend upon them. As an investor, unless your mandate is for exceptionally high risk and return, prudence and protection of capital must be of primary concern. Once you have re-underwritten your existing portfolio for the new world, only then does it make sense to open your mind to all of the new opportunities that may become abundant. Yes, one must be swiftly and aggressively opportunistic in seizing these new opportunities, but this does not feel to us like a window that is going to open and close quickly. We would be thrilled to be wrong.
Winners Will Emerge: Capital with reasonable duration will once again be a big winner during this massive dislocation. There is an enormous amount of dry powder in private equity funds, historically patient distressed funds, pensions, endowments and other large pockets of permanent capital. This capital will slowly be deployed and will be part of the solution for the path to our new future. There are a large number of extremely healthy companies that will be in a position to also take strategic advantage of this extreme dislocation. Not every company is in this enviable position and one never wants to delude themselves that you are “bulletproof” when you are not. If in doubt, you are not.
The Economy Is All Connected: Right now, it is easy to see how the consumer and hospitality-led companies are the first lines of defense in the viral tidal wave of carnage. It doesn’t take a savant to realize airlines, cruise ships, hotels, oil companies and the like will be the first to feel the fear engulfing the consumer. Just because you are not in one of these industries doesn’t mean you are immune from the eventual pain. It is not hard to connect the dots to just about every industry on the planet and follow supply chains, demand curves and changes in customer behavior to realize the world has changed for every one of us. Whether you are running a company or managing money, this analysis of cause, effect and connectivity is critical in anticipating how things will play out.
Get Used to Volatility: The one thing we can assure each of you is that we will not soon be returning to the period of low volatility, calm correlations and an overriding sense of security and calmness. In a way, this is good because top quality strategy, decisions and execution will matter more than ever going forward, as it was hard to truly differentiate oneself in operating a company or managing money when the sea of calmness lifted all boats.
No Time For Politics: One of the very best parts of a crisis is that fear is a magical motivator for politicians to forget partisan agendas and focus on quickly doing what is best for all of their constituents. It is far from ideal that this is what is required to actually get the job done, but it is equally amazing to watch them in action as the red tape gets cut, the details get flushed out, and the right laws and actions are swiftly implemented. Our world needs this now more than ever before, and we believe our leaders will rise to the occasion.
Some Things Will Never Be The Same: There is no doubt that many things will eventually go back to the way they were. Fans of sports teams will again be cheering and crying for their local teams more than ever. People will enjoy going out again for a great meal with friends or be thrilled to see the opening of the newest blockbuster film. But not everything will go back to the way it was and there may be more than nuances of permanent change as a result of living through a pandemic. If every firm can function well enough with people working from home, what implications does that have for office buildings and real estate going forward? If business can be effectively conducted by video, will there be less business travel and short hotel stays? Health care and personal hygiene and all of the industries that touch these areas will have lasting and permanent adaptations. Many things will go back to the way they were and some of the changes may be much harder to anticipate than one may surmise. We are just suggesting that the most savvy investors and operators will assess and anticipate the changes that are temporary and those that might be more permanent in nature and act accordingly.
This Is Big and Will Require A Big Response: It is our opinion that governments around the world will be required to intervene in a more substantial way than ever before in history. We are not sure what this means exactly, but because of the global nature of this and the intense shock to confidence and consumer demand, many businesses and industries are at risk. Large ones, medium ones and small ones all are at risk. Firms that did absolutely nothing wrong are at risk. When companies are at risk, that means people are at risk. Lots of people. Lots of innocent, honest, hard-working good people. The good news is that interest rates are incredibly low and for whatever reason we all now believe that deficits don’t matter. We are not going to debate this latter point about deficits, but the real issue is that the time will fast approach where governments, led most likely again by the U.S., will need not a bazooka, but rather an arsenal of every state of the art weapon available. We have the weapons and we will need to have the courage and conviction to use them on a real time basis. We believe that all governments in time will be fully aware of this reality and the goal must be for every company in danger to do everything they can to defend themselves before the blanket of assistance eventually comes. The blanket will come with extreme and unknowable costs, as there is no free lunch, but the destruction of multiple innocent industries and people and the contagion that follows is not an acceptable reality for any of us.
Fast forward one year and the economy will still be here. The globe will be forever changed by this pandemic, but the goodness and virtues of life will once again be readily apparent. In fact it is in times like these that humanity rises to the challenge and we work endlessly to put things right again. We have the best scientists on the planet who are working so hard (makes the two of us feel like slackers) to help restore the balance of health. We have equally tireless healthcare workers, paramedics, police, fire and military who will do all they can to help us through this period of enormous stress. The private sector is remarkable and the entrepreneurial spirit, work ethic, creativity and passion is unparalleled. The private sector partnering constructively with government has incredible power. Our capital markets are resilient and have always healed and provided the fuel needed for growth and prosperity. Our political leaders actually know when it is time to put down the partisanship and put the people first by doing what they were elected to do—help people. We at Jefferies are just one small part of the machine, but we are proud to be able to do our part in helping you, our clients, navigate the complexities that you are facing on a daily basis. Thank you for listening and please know that our entire firm, including both of us, stand ready to assist each of you in every way possible going forward.
In the fight with all of you, but optimistic about the future,
Rich and Brian