Economic Uncertainty

On February 21, 2020 the Dow Jones Industrial Average was 29,000, on March 23rd, 2020 it reached the 18,600 mark and hovers in the 24,000 range during the month of April, 2020. The underlying driver for this decrease is COVID-19 and the required shelter in place mandate by most state governors. The economic impact is yet to be determined. This is the uncertainty aspect of economics. The term ‘economic uncertainty’ has a historical definition which has been modified due to the pandemic response. This article will cover the historical meaning and then its updated definition. The term is redefined due to the Paycheck Protection Program loan applications. One of the requirements is for the owner of the company to certify that their business meets the definition of economic uncertainty. The historical definition and the current legal definition are different. Thus, it is important for the reader to differentiate between the two meanings.

Economic Uncertainty – Historical Definition

If you think of the economy as a train pulling a load on the track, you would base its near future position on its current and historical trend. It is unlikely its current speed will change; thus, we can predict its future position with some degree of confidence. The short-term position is easier to determine with greater conviction and accuracy than 3 to 6 time periods out. Why does our confidence decrease the further out in time the train travels? Inherently, we know that there are variables that can impact the outcome. What if the train slows down? What if there is engine trouble? Worse yet, what if the track is blocked and the train must stop to wait for repairs?

In economics, these unknown variables are referred to as uncertainty. Uncertainty is typically measured and reported at the macro level. This is due to vast resources available to predict the economic results in the near future with a high level of certainty. Again, the further out in time the prediction is made, the more uncertain the forecast becomes.

Economic uncertainty is rarely reported at the micro level. In effect, each of the industry groups, or even at the corporate level, has to take into consideration all the factors that impact their respective situation. The U.S. Federal Reserve prepares economic uncertainty reports and provides data for a slew of variables such as:

  • Foreign Trade Policy
  • Interest Rates
  • Consumer Debt
  • Unemployment
  • Manufacturing Production

At the micro level, this isn’t prevalent; thus making it difficult to evaluate economic uncertainty, especially for a small business.

The end result is that economic uncertainty is a macro level term defining the ability of the economy to continue on its current path in the near and long-term.

Economic Uncertainty – Modified Definition

The term ‘economic uncertainty’ is used with the application for a loan under the Paycheck Protection Program administered under the Small Business Act. On page 2 of the application, the 2nd certification uses the term ‘economic uncertainty’. In effect, the applicant states that the current economic uncertainty makes the loan request necessary. It is here that the historical definition comes into play. The macro level of uncertainty, i.e. the current COVID-19 pandemic affects the ability of the applicant to continue operations. Therefore, the applicant must take into consideration the macro factors and customize them to their respective operation, i.e. convert economic uncertainty to the micro level.

Interestingly, the text of the Congressional Act (Public Law 116-136) provides guidance for the applicant. Under Section 1103(a)(4) there are either three criteria experienced or a separate fourth condition to qualify. They are:

(D) is easy to understand. Those businesses mandated by state government to close, commonly referred to as ‘non-essential’ meet the requirement and easily qualify to affirm economic uncertainty. Those in the marginal areas will run into problems validating economic uncertainty. A good example would be a company servicing restaurants such as the linen service provider or meat vendor. These businesses will experience a decrease in sales but not a total stop to operations. Will they qualify?

The Act specifically states that all three A, B, & C must be experienced. Thus, those operations that slow down in overall production and sales will most likely not qualify for the Paycheck Protection Program. The applicant must document and provide substantial evidence of all three minimum criteria. This will be difficult as all criteria have its own set of nuances. For example, under (A)(iii), how does the applicant substantially prove technological difficulties? Will the fact that certain customers are closed and therefore they do not respond to phone calls and e-mail qualify?

The real question is how much change must be experienced to qualify for certification related to economic uncertainty. It is the author’s opinion that the change in the aggregate must equate to more than 25%.  At the individual variable level, the change must be a minimum of 5% but that in the aggregate, all three variables must add up to a minimum change (overall production) of no less than 25%. Any change less than 25% can be the result of factors not related to COVID-19 and the associated macro response. The key is to be able to convince a court of law that the applicant experiences economic uncertainty directly related to the current economic situation. The greater the impact, the more likely the courts will agree that at the micro level the applicant is experiencing economic uncertainty. ACT ON KNOWLEDGE.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak
    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount: