The diverging positions of RH traders and bankruptcy financiers, in the end, is a difference in outlook: the distinction between, say, the letters V and L. The former signifies a sharp and expeditious economic bounce after an artificial short-lived stoppage that did nothing to the business fundamentals; the latter is a slower drift, where the asset value remains permanently damaged.
It is conceivable that if the broader funding market were to see the future the same way the RH traders seem to, at least implicitly, the bankruptcy scenario – its valuation exercise, its ranks and splits, perhaps even its timing – would be different. In this scenario, perhaps, the scope of the proceeding would be more mechanical in nature than financial; in other words, a short bridge to protect the company for some missed near-term payments. Until the rapid rebound that’s in this scenario expected.
In essence, the described position is similar to federal stimulus initiatives enacted at the outset of the economic lockdown. The PPP loan structure, for instance, intended to preserve small business payrolls with a short-term bridge to the V-recovery’s other side, the unemployment benefit boost set to expire a few months after implementation, the 90-day tax extension to mid-July, are all predicated on a quick economic bounce and return to “normalcy”.
In this sense, the RH traders and the Treasury department are more or less the same, although the latter holds more weight (because sophistication). In truth there is no way to really know, at least not yet, whether the V or L, or other shapes and letters that are kicked around, will be upcoming reality. But where the RH traders might reverse their bets at any time with ease and at a relatively small potential loss, all things considered, the federal institutions may not be as nimble or inconsequential.
So far at least, both seem well set and almost stubborn in their opening positions. Let’s hope that they are right, for our collective sakes and theirs.