How Will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 19: July 4th

U.S. remains stuck on uncomfortably high plateau for 4th week; "Surfs up" on second virus wave and water's starting to get choppy; Georgia's economic reopening appears to stall out; Another brutal jobless report shows continuing damage and comatose recovery; Gargantuan $600 billion stimulus lending program, touted as bazooka, looks more like dud; Newer Covid-19 mutation appears be 3x - 9x more contagious than original; Want more variety in your pandemic diet? Study finds that new swine flu could be just one mutation away from an unappetizing addition; "It's the end of the world as we know it, and I feel fine!"; Did George Floyd protests kick off second wave of infections? One study gives surprising answer; Once again, "big four" auditor blows it by missing billions of dollars of blatant, massive fraud; Covid-19 ventilator death rates still high, but also look vastly improved; Covid-19 treatment, Remdesivir, to cost thousands of dollars per patient, despite study arguably showing only marginal personal benefits; Pfizer announces that radical mRNA vaccine has passed combined phase 1+2 human trials; Are Moderna execs sending silent vote of no-confidence on the company's much-hyped covid-19 vaccine?; Were face masks improperly maligned by U.S. health officials and experts? Could they be key to saving U.S. economy from second wave?; Update on my investment strategy.

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Quick Summary

Once again, a lot happened this week that affects investors. This week, the pace of the news accelerated past the last three, as a second virus wave gained strength across the South and West. This ended up being one of the longest updates throughout the pandemic.

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. Remains Stuck On Uncomfortably High Plateau for Fourth Week

For the 16th week in a row, the U.S. continued to battle the novel coronavirus that causes the Covid-19 disease. And by Saturday morning, the death toll had climbed to 132,112 (versus 127,649 last Saturday night).

For the fifth week in a row, the country remained on a plateau and made no progress reducing the death doubling rate of the disease (how long it takes for deaths to double). This remained at two months:

This plateau continued to be significantly worse than many European and Asian countries, with U.K. and Japan at 3 months, Germany at 5, Italy at 8, France at 11 and South Korea at 11+ months.

Many economists say this puts the U.S. in a very uncomfortable position if a second death wave hits (see later section). A serious second wave could cause significant re-lockdowns, wiping out some or all the economic progress we've made so far, and might be crippling to recovery.

Are there any signs of this second wave showing up in the daily death rate? Here's what it looks like:

At first glance, it appears to show a troubling spike. But, as mentioned last week, the CDC measurement metric changed on June 26 to include probable Covid-19 deaths. While health experts agree this is almost certainly more accurate, this also caused the numbers to be a bit higher beginning on that day. And since that was less than two weeks ago, it makes week to week comparison impossible. So we can't actually tell much this week, and will have to wait until next week to do a new trend comparison.

Meanwhile, how did other countries around the world do?

As we discussed in part six, South Korea uses an aggressive mixture of the Three T's of epidemic control (testing, tracing and treatment).

And this week, South Korea continued to lead most of the world again, for both minimizing deaths (one of the lowest per million) and also minimizing economic damage (growth is projected to barely shrink there this year, versus -5.9% for the U.S.):

Meanwhile, Sweden has opted for a lockdown-lite strategy (see part 8). The hope has been that if this works well, it might provide another workable model for other countries looking to deal with the virus.

However, Sweden has been plagued with exceptionally uneven performance and multiple periods of backtracking and waves of infection. But for the last three weeks, they have been unusually volatile and difficult to analyze. This week was more of the same:

Perhaps they've plateaued, or perhaps things are improving. The wild spikes make it very difficult to tell. So we'll watch them again next week.

Unfortunately, Sweden's death rate continues to be three to seven times higher than their Scandinavian neighbors (see part 12). And lockdown-lite continues to appear to have failed its main economic objective. The country is still expected to plunge into a severe recession (their GDP is projected to be -5.6% in 2020, versus -5.9% for the U.S.). This is a bit better than the average -8.1% projected for the Euro Zone, but is not the large benefit many hoped to see.

"Surfs Up" On Second Virus Wave, and Water's Starting to Get Choppy

Last week, we talked about a second wave of virus infections that appeared to be happening across the South and West in the U.S. This week, infections rapidly accelerated in many of those states at alarming rates.

Previous hopes that these wouldn't translate into hospitalizations collapsed further this week, as Covid-19 patients rapidly filled hospitals across both regions. On Thursday, Mississippi, Tennessee, Texas, Nevada and Arizona all set hospitalization records. And the weekly hospitalization rates in 7 states were at least 25% higher than what their seven-day average had been only one week ago: Texas, Arizona, Nevada, South Carolina, Montana, Georgia and California.

As we discussed in part 18, some have hoped that increasing hospitalizations might not translate into actual increased deaths. The thought was that, compared to previous months, the predominantly younger population infected currently, the better medical treatment and the warmer summer weather would prevent this from happening. And prior to this week, death rates seemed to have plateaued in most states, which supported the possibility of this idea. However, Covid-19 deaths lag infections anywhere from 2 to 8 weeks. So it can take quite a bit of time to get an accurate picture of what has happened recently. And this week, several states ominously broke out of their deaths' plateaus simultaneously and showed signs of increasing further.

If this continues, and begins to accelerate along with the infections and hospitalizations, it could be very bad news for the economic recovery. So we will continue to monitor this very closely next week.

Meanwhile, in an unwelcome echo of the early pandemic, many locations this week appeared completely unprepared to meet the demand for testing.

In Houston, Texas, two high schools' football stadiums have regularly hit full testing capacity by midmorning and have been forced to turn people away. Local police in St. Petersburg, Florida, said a site at Tropicana Field ran out of tests after only about an hour due to "overwhelming turnout."

In some other cities, those who suspect they're infected report giving up on getting a test, after confronting unbearable "lines out the door" at urgent health care centers and hours-long car lines at sports stadiums. A person hell-bent on getting tested in Miami had to endure a wait time of up to four hours this week and someone in Orlando had to endure up to five hours. Anecdotally, a Tampa applicant for testing waited ten hours.

The lack of adequate testing throughout the pandemic has caused many experts to believe that current infection counts are significantly understating the extent of the damage.

Meanwhile, how are individual states doing? Let's take a fresh look at the three we looked at last week: Texas, Arizona and Florida.

Here's Texas:

New infections in Texas look ugly and appear to be accelerating rapidly. If so, this would be a classic pattern of exponential growth from a spreading epidemic. And even more disturbingly, deaths have jumped out of their former trough and plateau, and appear to have started to increase. As mentioned above, deaths lag infections anywhere from 2 to 8 weeks. So it will take time before we can see the true effect here.

In the meantime, Texas had to move quickly to keep up with the rapid increase in hospitalizations. This Tuesday, the Texas Medical Center in Houston reported that ICU's hit 100% capacity and they were forced to tap into surge capacity beds.

This outcome lined up with Texas's prediction from last week (see part 18). More ominously, they also predicted that unless something changes, surge capacity will also be exhausted within the month, in July.

Let's hope that doesn't happen, because if it does, we could expect to see a repeat of the health care rationing required in Italy in the early pandemic. Due to lack of capacity, older and less healthy patients had to be left to die (often by slow suffocation) in favor of younger, more healthy patients. And this caused death rates to skyrocket and literally overflowed the morgues (see part 4).

As a result of the escalating crisis, Texas Gov. Greg Abbott (R) reversed his course on Thursday. After previously blocking cities and municipalities from making face-masks mandatory, he put in place a statewide order that they now must be worn in public. Abbott now says: “Wearing a face covering in public is proven to be one of the most effective ways we have to slow the spread of COVID-19.” The order applies in all Texas counties with 20 or more positive coronavirus cases. Within hours, a consortium made up of a Texas political activist, a former Texas state representative, a former Texas chair of a major political party, and two Texas business owners filed a lawsuit to block the order, arguing that the law is unconstitutional

How about Arizona?

Arizona essentially looks like a mirror image of Texas, except worse. Infections appear to be accelerating exponentially. And their deaths have jumped out a little bit further than Texas's from their former plateau and are increasing. Again, this is a potentially ominous sign, and we will watch for the death rate's movement next week.

This week, Arizona's hospitals rushed to expand capacity and adopted practices similar to those employed at the height of the outbreaks in New York City and Italy. These included doubling of hospital beds and rooms, pausing elective surgeries and bringing in healthcare workers from other states. And at the urging of doctors and advisers, state officials also activated "crisis standard of care" protocols, which determine how ventilators and other portions of healthcare will be rationed if the system becomes overwhelmed. If that happens, patients will be given a score based on life expectancy and underlying conditions. Those who score poorly could expect to be denied care and unfortunately left to die.

Will Humble was director of Arizona’s Department of Health Services for six years. He said:

“You look at what happened in Lombardy, Italy. What happened in New York. That’s what is about to happen here. People are going to die because our system is overwhelmed. It’s important for other states to learn from us. This wasn’t bad luck. It was avoidable. Don’t let this happen to you. You look back at the past few months and we’re an example of what not to do.”

Many experts agree that Arizona's response has been marred with mistakes. Health officials abruptly cut off data access to a university modeling team when its projections showed that cases would be rising instead of falling. The state moved very aggressively to reopen businesses, putting few restrictions in place and enforcing almost none. And until recently, cities and counties were forbidden from passing local ordinances requiring masks (similar to what was previously the case in Texas).

Humble explained, “You think back to Memorial Day, when bars and nightclubs were filled at capacity with zero mitigation. Clearly, the voluntary honor system approach to mitigation was not working. It was clear to anyone with any observational skills that this was coming."

Arizona Gov. Doug Ducey had insisted for weeks that the hospitals had adequate capacity. For the first time this week, he admitted that hospitals could reach surge capacity "very soon." And state leaders are now preparing to re-purpose a closed Phoenix hospital (St. Luke’s Medical Center) as a field hospital.

Gov. Ducey also announced on Monday that the state would pause operation of bars, gyms and movie theaters as well as tubing and water parks.

So how is Florida looking this week?

Unfortunately, it's the same story as with Arizona and Texas. Infections are accelerating and growing exponentially. As an example, Thursday marked the 25th consecutive day the state's seven day rolling case average set a record high.

And while deaths have not jumped up as much as in Arizona, they have still appear to be up from the trough, away from the previous plateau and look to be slowly increasing. So we will continue to watch this closely.

Last week, Florida Gov. Ron DeSantis had instructed bars to stop selling alcohol on premises. But unlike the governors of Arizona and Texas, DeSantis said the state won't delay its reopening plans. On Friday he said, “I don’t think that that’s really what’s driving it, people going to a business is not what’s driving it. I think when you see the younger folks, I think a lot of it is more just social interactions.”

Another Brutal Jobless Report Shows Continuing Damage and a Comatose Recovery

For the 14th week in a row, the weekly jobless report showed that more than a million new people again lost jobs. Until this crisis hits, that was unthinkable. This week it was 1.4 million and it again disappointed the optimists by barely budging from the 1.48 million last week (and the 1.54 million the 2 weeks before that).

As we've talked about in the past, at this stage of the crisis, the "continuing claims" is an even more useful statistic to look at in this report. That's because jobless claims give us only half of the picture: how many jobs have been lost. The continuing claims number removes the people who have been rehired from this. And so that tells us how many are unemployed right now.

Unfortunately, for the fourth week in a row, the picture wasn't great. Continuing claims declined very slightly to 19.3 million, which was an almost imperceptible decrease from the 19.5 million last week (and 20.5 million and 20.9 million from the two previous weeks).

Meanwhile, the monthly payroll report for June came in on Thursday. And it showed another month of higher improvement (4.8 million new payrolls) versus last month's improvement (2.7 million).

This caused the headline unemployment rate to fall to 11.1% (from 13.3% last month in part 15), which was welcome news. On the other hand, the economy had previously dug itself into an extraordinarily deep hole after falling off of a cliff in April. So this rebound was relatively small in comparison and still left significant numbers of people unemployed.

There were some other flies in the ointment. For the third month in a row, the Department of Labor misclassified some employees as employed (and "absent") when they were actually unemployed. They clarified that after adjusting for this error, the headline unemployment rate would actually be 12.3%. Why they would not simply fix the data is still unclear to me. At least, the amount of error has been improving, and is better than the three percentage point difference they disclosed in May (and five percentage points in April). So maybe next month, it'll be completely fixed.

But even that number doesn't take into account the fact that the headline rate doesn't include all of the unemployed. It omits people who have given up looking for work, which which makes sense in normal times. But it doesn't right now, because many people who want work can't even begin to look, because jobs aren't available yet. So, to get the full picture, we need to look at the U-6 rate, which was 18.0%. On the positive side, this was three percentage points improved from the 21.2% last month. On the other hand, it is still distressingly high and indicates that almost one in five Americans is out of work.

Also, even though this is called the June report, it actually ended in mid-June. So it does not include what happened recently with the second virus wave. And so far, signs all indicate that this wave will have a significant negative effect on at least some parts of the economy. For example, Open Table is a company that tracks restaurant activity. And in states that are currently experiencing second wave infections, restaurants have already stopped improving. Previously budding recoveries have in fact backed up into reverse:

Still, after the payroll report came out, some analysts focused completely on the V-shape of the bounce back. And they also predicted that a quick V-shaped recovery is in store for the entire economy.

Others pointed out that a true V-shaped recovery would require wide participation by all industries that have been affected so far. But to date, only the least covid-19-sensitive industries have participated in the economic revival:

Very few expect the Covid-19-sensitive industries (that have a more difficult time in a prevaccine world) to be able to see such a rapid turnaround. And so far, this continues to be the case.

Meanwhile, a survey of U.S. CEO's also came out this week. The Business Roundtable Survey found that bosses' confidence in the economy has slumped to an 11-year low with levels not seen since the Great Recession. The reading was 34.3, and readings less than 50 indicate a recession.

CEO's tend to know their own business and industry very intimately and can sometimes make better estimates than economists (who typically have a more shallow but wide breadth of knowledge, rather than deep specificity). And ominously, more than a quarter of them (27%) believe that business conditions for their own business won't fully recover until after the end of 2021 (i.e. 2022 which is a year and a half from now). If they're right, then a V-shaped recovery would be very unlikely to be in the cards.

Gargantuan $600 Billion Stimulus Lending Program Touted As A Bazooka Looks More Like A Dud

As discussed previously, Congress and the president passed a series of stimulus packages totaling about $3 trillion. The idea behind this was to support people and businesses who were hurt by the virus downturn until they could get back on their feet. And this would stimulate a quick, V-shaped recovery.

However, as we've also talked about, millions of people and businesses, for whom the aid was intended, have been significantly delayed or completely denied by unintended consequences, out of date systems, bureaucratic red tape and snafus.

This week, more news came out about this. Numerous bankers said that the much vaunted $600 billion Main Street Lending Program is shaping up to be a dud. This program was intended to fill the large gap between the Paycheck Protection Program (PPP) loans for small businesses and the Fed debt purchasing program for large corporations like Apple and Verizon.

But bankers are saying that most firms in need are disqualified by the rules. And stronger firms can find better terms elsewhere. As a result, finding a business willing to take a loan can be as rare as sighting a mythical creature.

Lauren Anderson is the senior vice president of the Bank Policy Institute, whose 42 members include the largest U.S. banks. She said, "It’s a little bit of a Catch-22. We’re all kind of struggling, to be honest, to figure out who this sort of unicorn borrower might be.”

Additionally, some banks are balking at how certain features put them (and/or their customers) in a difficult position. Since principal payments are deferred for two years, 70% of the loan is due in a lump sum payment at maturity. That could be a hefty burden for some companies to repay. And if the borrower can't do it, the bank would either need to assume all of the credit risk themselves by refinancing the loan (which could be risky). Or it would have to force the borrower into default (which customers wouldn't like).

Tom Iadanza, chief banking officer at Passaic, N.J.-based Valley National Bank claims: "There will be an issue after term [for banks to go ahead with these loans]." He says his $39 billion bank received inquiries from 20 to 30 companies about the program. But all lost interest after hearing the terms. In contrast, the bank also approved about 12,000 forgivable loans under the Paycheck Protection Program.

Newer Covid-19 Mutation Appears 3x - 9x More Contagious Than the Original

Experts say that viruses mutate virtually every time they replicate. But the overwhelming majority of these mutations have no noticeable effect on the virus. Those that do often have a negative effect on the virus itself (such as making it less stable or less viable). So when this happens, the mutated virus naturally dies out on its own.

However, in a pandemic, there is an extraordinary amount of replication that happens. And this increases the chances that by chance, a mutation can occur that would help the virus spread more effectively or make it more deadly. And even more ominously, such a mutation could make a vaccine or treatment less effective or even nullify it. So researchers have been concerned about this possibility and have been trying to monitor for signs of it.

On Thursday, a study about this was released in the scientific journal Cell by scientists at Duke University, Los Alamos National Laboratory and La Jolla Institute.