How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 8: April 18th
Updated: Aug 16
U.S. beaten down, but outlook improving more rapidly than last week; Lockdown exit strategies get fleshed out; But what about the "3 T's"?; Crippling oil price war ended by historic agreement (but still too little too late, as oil plunges anyway); Unemployment body-blow destroys all job creation since the Great Recession; Chinese economy seizes up (and for the first time in decades); Air pollution levels linked to risk of dying from Covid; Wuhan and California antibody tests suggest we shouldn't hold our breath for "Herd Immunity" anytime soon; Can Sweden provide a "loose lockdown" model?; Anti-malaria drug Hydroxychloroquine fails to impress when confronted with large double-blind test; the race for the vaccine; "Mankind's best friend" may also help save us from the virus
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As usual, a ton of things happened this week which affect investors.
By the way, this is one article in a multi-part series that has been published weekly since the pandemic began back in March 2020. The series started with three introductory articles on the virus, effect on the economy and alternative investment classes. And then it moved on to weekly updates on the latest and greatest developments (along with weekly updates on my evolving personal portfolio strategy). You can see the links to every article in the series here.
U.S. Beaten Down but Outlook Improves More Rapidly Than Last Week
Deaths continued to mount in Europe and the U.S., and many health systems continued to battle the virus in crisis mode. However, the long-term situation continued to improve rapidly this week. In Europe, Italy's death doubling rate (the time it takes the number of deaths to double) dropped from once every 3 weeks (21 days) to every 4 (28). Spain, continuing its week-behind pace, dropped from 12 days to 3 weeks (21 days). The U.S. (a week or two behind Spain) dropped from 5 days to 8 days.
New York City showed rapid improvement, dropping from 5 days to a much more bearable 2 weeks (14 days). Some of the newer hot-spots, like Maryland, improved to 5 days and Florida to a more manageable 9 days. Virtually all look so much better than even a week ago:
This week, the University of Washington's state-by-state model was updated extensively with new social distancing categories, mobile phone data to track actual behavior, latest stats included, and more. These latest projections showed rapid and welcome improvement in several states, too. As an example, Florida's peak moved from April 29th to April 18th and is no longer expected to exceed bed or ICU capacity (i.e., hospital overload is no longer projected). Note that the dotted green line representing "ICU beds" needed is covered up by the dotted blue line representing "invasive ventilators needed".
Lockdown Exit Strategies Get Fleshed Out
Most of the above was very welcome news. And signs are increasing that the nation will almost certainly avoid some of the worst possible outcomes that seemed very plausible only 2 weeks ago. Whatever happens, the country appears to be moving closer to the resolution of the first phase of the virus: the initial hospital overload. So now, many people are thinking about what happens next. If the White House models are correct, we've saved millions of lives via lock-downs. But we've also paid an incredibly high economic cost. So once things stabilize, how do we exit? On Thursday, the White House issued its multi-step guidelines on how to handle this. As mentioned in the last article, states do actually have the ultimate authority to decide what will happen. But the national government can influence decisions using the bully pulpit. Here's how the different steps work:
Pre-opening / gating requirements: the state must document a downward trajectory of coronavirus and flulike illnesses for 2 weeks before moving into the 1st phase. Then, each following phase must also document 2 weeks of falling cases. If it can't show improvement, then some or all of the previous restrictions will be reimposed.
Phase 1: vulnerable individuals continue to shelter in place, while others can exit lock-down. In public, physical distance from others should be maximized and gatherings of up to 10 people are allowed. Certain public venues, including restaurants, movie theaters and sports venues, can open if they practice "strict social distancing". Visits to hospitals and senior care facilities are prohibited. Elective surgeries can resume.
Phase 2: schools, day cares, gyms and bars can open. Gatherings of up to 50 people are allowed.
Phase 3: vulnerable individuals can exit lock-down, but need to maintain physical distancing. All people should consider minimizing the time spent in crowded environments. Visiting of senior healthcare facilities and hospitals can resume.
But What About the "3 T's"?
Some scientists and policymakers noted the high-level guidelines don't mention the "3 T's". These are the widely accepted pillars of pandemic control and include testing, tracing and treatment (quarantining of the affected). It's widely agreed that if these are neglected, the lock-down exits will be forced to backtrack. And if this happens, it would be psychologically discouraging, economically expensive and deadly. For example, if testing is inadequate, many cases of Covid will go undetected. So, a state could easily advance through the phases prematurely. And eventually, that misstep would catch up to them and they'd see exponentially spiraling deaths. Even if they slapped restrictions back on immediately, it would be very painful. It would take a couple of weeks for them to kick in. (Since it takes 2 weeks from the time of infection to death). And a lot of economic damage and deaths could take place within that time frame. A panel of experts from the American Enterprise Institute (including former commissioners of the Food and Drug Administration, as well as professors of health security at Johns Hopkins Center) has looked at this issue in depth. Here's what they found:
You can never win a war if you can't see your enemy. And in a war against the virus, testing is the only way to see where our enemy is.
Unfortunately, the US has been behind the curve here from the beginning. During the crucial early stages of the crisis (January through March 3) the CDC bungled things badly. Early tests were erroneous, facilities and regents got contaminated, and there were neither enough kits nor labs to process them. So on March 3rd, we only manged to run an insignificant 459 tests. In comparison, South Korea had run 65,000 and China was doing 1.6 million every week. After getting hit by heavy critcism, the FDA announced it would reverse course and fast-track outside public and private sector labs and shorten the length of critical trials needed for outside test approval. By March 11, we had improved to 2,700 tests a day. And by March 29, it had increased to 95,000 a day.And health experts believe that capacity will continue to grow and improve.
But will it be enough to control the virus outside of lock-down? AEI estimates will need 750,000 tests per week to stay open. And 95,000 tests/day corresponds to about 665,000 tests per week. So we're pretty close. On the other hand, that number has come under criticism by some. AEI derived it from the number of influenza tests needed in the difficult flu season of 2017-2018. But Covid-19 spreads faster and has a larger percent of the population that isn't immune. So arguably it's too low. The Center for American Progress tried another way. They figured that South Korea has been successful controlling the virus outside of lockdown. So why not use them as a model? Based on that they believe we need an additional 2.5 million tests in the next 45 days. And at the current rate, we could actually do 4.2 million. If they're accurate, this would be great. As another data point, Harvard University's Divya Siddarth and E. Glen Weyl feel both of these numbers are way too low. They used an epidemiological model and came up with a likely need of a breathtaking "tens of millions of tests a day". If accurate, we're a long way from that and it would require major new investment to be able to ramp up like that (probably from both government and industry). So far there is no talk of such a partnership or thing happening. On the other hand, epidemiological models can easily backfire if fed incorrect assumptions. And at this point they had to make some guesses the things we don't yet fully understand. For example they assumed that only 25% of people are asymptomatic, which doesn't match with the studies we've looked at previously that found about 50%. Ultimately, the only way to know who's right will be to wait and see. 2 + 3) Tracing and Treatment
In addition to testing, the AEI says that strong contact tracing via cell phones will be required. This is where an infected person shares their location with others so that those who were nearby can also get tested. Those who are sick are then quarantined (which is the 3rd "T", that is to say, "Treatment"). And this breaks the infection cluster. And as mentioned in last week's article, this has been highly effective in South Korea, where it allowed their country's economy to re-open. However, it's controversial in the West, because personal location information is considered to be private and off-limits to others. But new advances in technology and a rare cooperation between Apple and Google are trying to make this as anonymous and un-obtrusive as possible. Hopefully, the state lock-down exits will work. But if they fail and the X-factors don't bail us out, then what happens? I think many of us could have choices to make. Do we want to:
Stay in a cycle of economically and personally devastating lockdowns and releases (for several months more, until a vaccine arrives)?
Or are we okay with giving away our location information if we get sick... in exchange for the right to exit lockdowns, have our health protected, get back to making money (to feed ourselves and our families), and get back a semblance of a "normal" social life?
A growing chorus of medical experts and public policy influencers from both major political parties are endorsing #2 as the only way out of the stalemate of #1.
If this happens, and we go with #2, it'll be important to put safeguards in place. We will want to ensure that when the crisis ends our personal data will be destroyed and the tracking systems shut down. Other, more authoritarian countries, will almost certainly use this as an opportunity to permanently clamp down control over their citizens. Either way, I hope it doesn't come to the point where we have to find out.
Crippling Oil Price War Ended by Historic Agreement (but is still too little too late as oil plunges anyway)
Back in March, Saudi Arabia (and OPEC) waged a price war on Russia which gutted the price of oil (from $70 a barrel to around $30). While good for consumers, this has also jeopardized the future of the U.S. oil industry. Fracking is unprofitable below $40-$55 per barrel and many of the companies are heavily indebted. And if all went out of business, then 1.7 million+ workers would also be unemployed. So the big news this week was about a historic agreement to end the price war. It took a week of difficult, touch-and-go negotiations between nations who normally can't agree on much. But in the end, all the major oil-producing countries promised to cut petroleum output by one 10th. This included OPEC+ (OPEC + Russia) and the Group of 20 nations (the largest economies including the US). But as of Monday, the price of oil had barely moved above $30.82. Why? The problem is that the coronavirus crisis has caused air and ground travel to collapse, which brought down with it the demand for gas, jet fuel and diesel. Goldman Sachs estimates this has caused the world to consume 19 million fewer barrels a day just from April 2 to now alone. And we also estimate that the 10% cut will result in a real-world reduction of only 4.3 million barrels a day. So, while accomplishing this cut may have felt like pulling teeth, it was too little, too late. But unfortunately, this was not the end of the bad news. The world has only so much oil storage space available. When it's filled, oil may be forced to be sold at rock-bottom prices, further depressing the price. Eurasia Group estimated that world storage capacity may be hit "within weeks". And one of the largest midstream companies in the U.S. (Plains All American Pipeline) estimates the U.S. will use up its oil storage in mid-May. And as of last night, the price had actually plummeted even further to a stunning and gut-wrenching $18.27 a barrel.
Yesterday, oil and gas companies announced plans to shed more than 6000 jobs.
Un-employment Body-blow Destroys All Job Creation Since the Great Recession.
At this point, the unemployment news is starting to feel like a broken record. Another week went by and we've gotten another gargantuan jobless claims report. This week, a previously unthinkable 5.25 million were put out of work. The cumulative effect of the economic closure's hammering is shocking. In just 4 short weeks, 22 million jobs have been lost. In comparison, the record-setting 11 year expansion created 21.5 million jobs. So the Covid crisis has effectively wiped out all the job creation since the Great Recession. Bloomberg economists estimate the unemployment rate to be at least 17%. This is almost double the worst unemployment of the Great Recession (10% in 2009). And unfortunately, this is very unlikely to be the last bad report that we get. Some are speculating that if it continues, the numbers could rival the worst of the Great Depression (which saw 24.9% unemployment in 1933). Despite the large number, there's one potential silver lining. Currently, it looks like we've hit the peak and that control measures have been working:
If so, that would mean the worst reports were behind us and we could start to see improvements. We'll see what happens next week and the weeks to follow.
Chinese Economy Contracts Hard (and for the 1st time in decades)
Wuhan, China (the city hit by the virus first and the hardest) is continuing its slow exit from months of oppressive lockdowns. Last Wednesday (April 8), authorities reopened the city to air and train travelers. They've also reopened malls and allowed selected workers to return to work in businesses that are important to public health or to the nation. But life is still not the same as before. Only those who have a much desired "green code" (health clearance on the official contact-tracing app) are allowed to go to work or travel. Those without are still required to stay at home and are closely monitored by an army of neighborhood party officials. Meanwhile, many have been waiting for the China-wide quarterly results to come in to get a sneak preview of what might be in store for us. Unfortunately, the numbers don't look great. China suffered a brutal -6.8% first-quarter contraction. In comparison, the country has not suffered a negative year-on-year quarter since the end of the Mao era in the late 1970's).
On the other hand, China isn't exactly the same as we are. It's both the world's largest exporter ($2.5 trillion versus $1.7 trillion for the US) and as the first to get the virus, is suffering from bad timing. As they start to get their production back online, the rest of the world is just getting hit with the virus and demand is collapsing. Arguably, by the time we get to the same point, we may have the advantage of more of the world having already opened up and become able to accept our exports. But at this early stage, it's difficult to say how this will play out. So we can only wait and see.
Air Pollution Levels Linked to risk of Dying from Covid
A recent study found that quality of the air is linked to Covid 19 deaths. They found that a small increase in long-term exposure to tiny PM2.5 articles, corresponds to a 20 times larger increase in the COVID-19 death rate. Perhaps this partially explains why places with high pollution like Lombardy, Italy and Wuhan, China were hit so hard.
Wuhan and California Antibody Tests Suggest We Shouldn't Hold Our Breath for "Herd Immunity" Anytime Soon
We don't yet know for sure that those who have contracted covid-19 and survived will be immune. But, people who survive other coronaviruses are immune for several months or more. So many scientists believe it's likely. If so, then the next generation tests are designed to detect virus antibodies, and tell us who these immune people are. And at some point, there will be enough immune people that the virus will become unable to spread anymore. This is called "herd immunity". We don't know what that magic number would be for this virus, but experts believe it may be between 50 to 80% of the population. And many people would love to know how close or far we are from that saturation point. Chinese scientists recently implemented mass antibody testing at Zhongnan Hospital in Wuhan to try to answer some of the above questions. They gave antibody tests to everyone who works at the hospital as well as all recent patients and visitors. The result was that 2.4% of its employees had antibodies. This was very similar to the patients and visitors who were also between 2 to 3%.
Another antibody test of 3000 people was conducted recently by Stanford University in Santa Clara California. Their results have also not yet been peer-reviewed but were reported on Friday. And they extrapolated from the results that between 2.5% and 4.2% of people in the county have it. Note that the test used has not yet been approved by the FDA so the false positive rate is not yet known. But, if these are accurate and representative, China and the U.S. are very far away from herd immunity. This would mean we can't realistically expect herd immunity to bail us out of lock-downs anytime soon.
Can Sweden Provide a "Loose Lockdown" Model?
All eyes are on Sweden as they attempt to defeat the virus with a very different tactic than most: a "loose lockdown". On one hand, the country has closed high schools and universities and told those at high risk (70 and over or with health issues) to self isolate. Officials have also encouraged the famously logical and compliant Swedes to work from home and follow social distancing rules in public. On the other hand, gatherings up to 50 people are allowed (which is much higher than many countries. And they've kept the grades schools open since very few young children die from the disease. (Although this arguably does not deal with the issue of them spreading it). Restaurants and businesses have been allowed to stay open as long as they maintain greater space between tables and customers. Swedish officials believe that doing these things will be enough to keep the virus under control while avoiding some of the harsher side effects of a full lockdown. If they're right it would be fantastic for countries like the US. If they succeed it probably means we can more easily exit lockdown without suffering a setback. And we could probably do it without extensive contact tracing (which they don't do). But currently, the results are mixed. About a week ago they appeared to be very successfully bending the curve from once every 3 days to about once every 7. This would be an amazing thing to pull off without a full lockdown. Unfortunately, more recently they've done something else that no other country in full lockdown has done yet either: experienced a major backtracking. A recent spurt of deaths has pushed their doubling rate back up to a disturbing 4 days.
but the data is noisy, so it's difficult to say what will happen next. But, whatever it is, the world will be watching eagerly.
Anti-malaria drug Hydroxychloroquine Fails to Impress When Confronted with Large Double-blind Test
Hydroxychloroquine is an anti-malaria drug that was given to Covid 19 patients in several small but promising early studies. And many of the patients who took the drug recovered quickly, which got many people excited. However, these early tests also had a potentially fatal flaw. While Covid is deadly because it spreads so quickly, the actual percent of people it kills is fairly low. (The most conservative estimates of mortality rate range from .1% - 2% versus about 50% for Ebola). And the people who do recover, tend to do it fairly quickly. So, this means you could give snake-oil to 100 people with Covid-19 and afterwords, see the majority of them recover quickly. That doesn't mean that snake oil cures Covid-19. So what a good test must do is determine if people recover more quickly via the drug than they would by doing nothing. That's the goal of a double-blind study: half the people get a placebo (a fake pill that has no medicine), while the other half gets the real medicine. Then scientists can compare the two groups and tell whether the drug makes a difference or not. Unfortunately, in the middle of a pandemic, it's really difficult to do that. Hospitals are already overloaded and unable to keep up with the patients they have. So they don't have extra time to do experiments that usually require a large number of patients (in order to be statistically significant). Also, it's sometimes challenging to get lots of sick people to volunteer since they know they have only a 50% chance of getting the real medicine. As a result, most studies on Hydroxychloroquine have either not been double-blind, not large enough to be statistically significant or both. But there is a workaround. Most hospitals can provide and handle a very small number of patients for a study. And this can be done across many hospitals and the results accumulated in aggregate into a much larger (and statistically significant) study. A group of 24 researchers across 16 health centers in China recently finished this kind of aggregated study. They studied 150 patients and released the results on Wednesday. The results have not yet been peer-reviewed. But if correct, then it's very disappointing news. On the plus side, Hydroxychloroquine did alleviate some clinical symptoms of Covid 19 faster. But the drug failed to accomplish the main task: patients did not clear the virus any better than without it. The drug also made them more likely (30%) to experience side effects (although most were mild, like diarrhea). The University of Pennsylvania is doing an even larger double-blind clinical trial with 400 people. Although perhaps unlikely, it's still possible it could show a different result. If it did, then it would probably be considered more definitive than this one.
The Race for the Vaccine.
The drug industry is working overtime to try to compress the usual timeframe for creating a vaccine (which is often 10-15 years), to just one year. The World Health Organization (WHO) reported that there are 70 candidate vaccines being worked on. Currently three are in the lead. The furthest along is an experimental vaccine from the Hong Kong-listed CanSino Biologics Inc., in cooperation with the Beijing Institute of Biotechnology. It's currently in phase 2 trials. U.S. drugmakers Moderna and Inovio Pharmaceuticals are next, and being tested in humans. Moderna has never before put out a product, but received regulatory approval to skip the typical required animal trials (which normally takes years). Inovio began human trials this week. Meanwhile, an Oxford team is trying to shave time off the usual process with an unorthodox (and potentially very expensive) strategy. They have just started phase 1 trials, but are already ramping up manufacturing production as if they've passed. There's no guarantee the drug will work. And if it does, it may still hit other roadblocks along the way. So this is a high risk strategy. But if they succeed, then, in the best case scenario, a vaccine could be ready as soon as September.
"Mankind's Best friend" May Also Help Save Us from the Virus
Most diseases actually have very distinctive smells. And while humans usually can't tell the difference, some dogs (like Labradors and Spaniels) are experts at sniffing them out. Today they are routinely trained to detect malaria, Parkinson's disease, and cancer in humans. The London School of Hygiene and Tropical Medicine believes it's very likely that Covid 19 also has a distinct smell. So they are crowdfunding a project to train dogs to detect it. If successful, a dog is capable of screening thousands of people a day. So they could become key tools in a post-lock-down world: sniffing out asymptomatic carriers in hospitals, healthcare homes, airports and train stations. The School believes they will know fairly soon and if successful will be rolling it out in Britain by the summer. Presumably, other countries would follow. Next
Part 9: April 26th: Bruised US Finally Peaks and Experiences "The End of the Beginning";The World Eyes the Lockdown Exit Door; The Herd Is the Word?; Another Week, Another Disastrous Unemployment Report; Oil Wipesout Even Further and Futures Plunge Below $0/Barrel ;Small Business Emergency Loan Program Gets More Cash But Still Probably Not Enough; Covid 19 May Not Really Be A Respiratory Disease; A Stunning 88% of Covid-19 Ventilator Patients Die;60% of Covid-19 Positive Sailors on US Theodore Roosevelt Had No Symptoms. Somehow The Navy Was Still Surprised; Covid-19 Antibody Treatments Might be Viable as Early as Fall; The Promise of Far UVC Light Click here for Part 9: April 26th