How Will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 19: July 4th
Updated: Feb 8
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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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.
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.
The researchers found that the original version of the virus (called D614 or the "D variant") predominated in China. But in February, a mutation appeared in Italy (called G614 or the "G variant"). And even though the G variant started small, it grew quickly as the virus spread in Europe, North America and South America. Today it accounts for almost 100% of new infections and is now considered the "dominant variant" by scientists.
The genetic difference between the two variants is tiny. However, this change happened to occur on a crucial part of what makes the coronavirus work: the spike protein. This makes up the thorny-looking exterior of the coronavirus and allows the virus to forcibly enter into a victim's cells.
Another study by the Scripps Institute released on Tuesday found that spike protein on the original D variant was more brittle and less optimized for spreading. So, sometimes it would break when attempting to bind to the ACE-2 receptors in human cells. On the other hand, the G variant is stronger and much less likely to do this. And this makes the G variant much hardier and more contagious.
How much so? The Duke University team conducted a laboratory experiment that suggested that the G variant may be 3-9 times more contagious than the original.
They also used samples from six San Diego residents to see how human antibodies neutralized the two variants and see if one might be stronger than the other. Fortunately, both were neutralized equally. This means that the human body would not need to produce more antibodies to fight the G variant versus the D variant.
The researchers also said that clinical data from a paper in the University of Sheffield found that G virus patients carry more copies of the virus. But fortunately, the study did not find a corresponding increase in severity or death rates. So this suggests that the G virus doesn't cause worse symptoms and is not more deadly. If accurate, this would be good news.
Regardless of how G variant operates, new infections of it are now at record levels. So the potential for additional new variants is higher than ever. And so scientists continue to watch and monitor the situation.
Want More Variety in Your Pandemic Diet? Study Finds That New Swine Flu Could Be Just One Mutation Away From an Unappetizing Addition
Epidemiologists believe that most pandemics are zoonotic. This means that they start off in an animal before they jump to a human. Ebola, HIV, and other coronaviruses like Severe Acute Respiratory Syndrome (SARS) and Middle Eastern Respiratory Syndrome (MERS) are all believed to have originally come from animals (African fruit bats, chimpanzees, bats and camels respectively).
So scientists watch the viruses that are spreading in animals, to see if they might become problematic for humans in the future. And that's exactly what researchers in China (including the head of China's Centers for Disease Control and Prevention) have been doing for the past several years on a newer swine flu. This swine flu has been circulating in pigs since 2016 and is called G4 EA H1N1. And this week, the scientists presented the results of that study.
They sampled 338 swine workers and unfortunately found that this swine flu is indeed zoonotic. Ten percent of the swine workers had antibodies for the virus, which indicated they had been infected.
So, this jump has already occurred.
However, there is one important silver lining. In order to become a pandemic, the virus or germ needs to jump easily from human to human. And thankfully, G4 EA H1N1 does not yet have that ability.
But, since it is spreading rapidly in pigs, the virus has a lot of opportunities to mutate. And if one mutation happens to make it contagious among humans (similar to other flus), then we might have a big problem. Most likely the next pandemic would be unleashed.
What are the odds of this happening? It's difficult to say in advance. Robert Webster is an influenza investigator who recently retired from St. Jude Children’s Research Hospital. He says it's always a “guessing game. We just don't know a pandemic is going to occur until [it] occurs.”
Dr. Anthony Fauci, the nation’s top infectious disease expert, said that so far, G4 EA H1N1 isn't an “immediate threat” but is “something we need to keep our eye on just the way we did with in 2009 with the emergence of the swine flu.” According to the U.S. Centers For Disease Control And Prevention (CDC), the 2009 pandemic for the H1N1 virus caused 274,304 hospitalizations and 12,469 deaths in the U.S. alone. Unusually, about 80% of the deaths were in people younger than 65 years of age.
🎶"It's the End of the World as We Know It, and I Feel Fine!"🎵
On Tuesday, Tuscaloosa Fire Chief Randy Smith told city council members some shocking news. He claimed that some college students in Alabama were throwing parties to compete over who could catch Covid-19 first. According to Smith, the organizers intentionally invited guests infected with the disease. Then others put money into a pot and the first person to test positive for catching the virus would win the money. Although it wasn't specified which schools the students attended, Tuscaloosa is home to the University of Alabama and several other colleges.
City council member Sonya McKistry didn't believe it was true at first. But she followed up and found that doctors' offices as well as the state corroborated it. Officials know about several parties in the city and surrounding areas which have done this. And presumably there are many more that they don't know about.
McKistry said, "It makes me mad as hell... we're constantly trying to do everything we can to slow the spread of the virus while they're just having a damn party trying to spread it...Not only is it irresponsible, but you could contract the virus and take it home to your parents or grandparents."
Shortly after the meeting, city council unanimously voted to adopt an ordinance requiring face coverings be worn while in public. Tuscaloosa's ordinance will go into effect on July 6. (Scroll down to section further below for more information on face coverings).
Did George Floyd Protests Kick Off The Second Wave Of Infections? One Study Gives A Surprising Answer
On May 25, a black man named George Floyd was videotaped while being suffocated to death by a white policeman in Minneapolis. This led to a series of demonstrations, riots and looting. Over time, the protests became larger, predominantly peaceful and more numerous (even spreading overseas to 60 countries).
The size and scope of the movement has been unprecedented in American history with more than 4,700 protests to date (or about 140 per day on average).
And polls show that anywhere from 15 million to 26 million people (or 6 to 10% of the U.S. population) claimed that they participated. This blows away participation in the civil rights protests of the 1960's, which cumulatively involved merely hundreds of thousands of people. And it also easily eclipsed the previous U.S. protest record holder which was the Women's March of 2017, which turned out 3 to 5 million people (although in a single day).
Protests typically involve large numbers of people gathering closely together and talking loudly. And studies have shown that these are all conditions that can lead to increased spread of the virus. So, many health experts have been concerned that these protests might kick off a second wave of increased infections.
At the same time, the protests have all been held outside, and many (although not all) of the protesters have worn masks. And these are factors that have been shown to control the spread. So other health experts have wondered if the risk from protests might not be as large as feared. But up to this point, there's been no way to tell who was right and who wasn't.
This week, the National Bureau of Economic Research (NBER) weighed in on the question. In cooperation with researchers from the University of Colorado, San Diego State University and Bentley University, they looked at all cities in America with at least a hundred thousand people. There were 281 U.S. cities that experienced protests and 34 that didn't. The researchers then connected the cities with citizen mobile phone data (from Geograph) and Covid-19 case data (from the CDC). And what they found surprised many.
One third of cities that experienced protests also experienced large-scale gatherings of 1000 or more people. Typically, these would be the type of events that would be most expected to start an outbreak. But shockingly, the researchers could not find any increase of infections associated with these protests.
How could this be? The mobile phone data provided a potentially fascinating reason. The researchers discovered that large protests caused people in that city to change their behavior and increase their social distancing afterwards.
Unfortunately, the researchers did not have the ability to track individual protesters (due to privacy concerns). But they were able to look at citywide averages. And while they expected this to dilute the extent of any real trend, they still were able to detect a significant change in behavior.
Starting about 3 to 7 days after a protest, the average time spent at home for the entire city increased 11 minutes per day. And this effect lasted more than a week.
It's hard to imagine that everyone in an entire city would change their behavior due to the protests. Perhaps a smaller number of individuals were changing their behavior in much more significant ways than the average shows.
Also, the researchers found that cities without protests saw no changes. So this strongly suggested that the phenomenon they were seeing was indeed caused by the protests.
Why? The researchers weren't able to answer this with the crude tools they had, but did come up with some theories. Maybe a significant number of protesters later experienced "virus remorse" and felt safer limiting their exposure later. Or perhaps some of those who did not protest were more worried for their personal safety afterwards (either because of a fear of increased crime, violence and/or infection). Or maybe the associated road closures, blockages and businesses being closed discouraged movement. It's also possible that more than one of the above factors contributed to the effect.
Once Again A "Big Four" Auditor Blows It By Missing Billions Of Dollars Of Blatant, Massive Fraud
Typically, fraud schemes run well during the go-go years of economic expansion. But once a downturn hits, it can cause enormous financial pressures even on legitimate companies. So, many fraudulent schemes find downturn pressures too much and end up collapsing. More than a few have done this spectacularly.
During the 1990's, Enron was vaunted as a world-changing company and soared to become one of the most valuable companies in the country. Then, the 2001 dot-com crash came, and massive accounting fraud was discovered. Enron collapsed almost overnight. It eventually declared bankruptcy, and shareholders ultimately lost $75 billion in value.
Around the same time, WorldCom had exploded to become the second largest telecommunications company in the U.S. But in June, 2002 (shortly after Enron collapsed), investors discovered $11 billion worth of fraud. Soon after, WorldCom also imploded and was forced to declare bankruptcy.
Later in 2008, the stresses of the Great Recession exposed Bernie Madoff's $65 billion Ponzi scheme. It had previously fooled investors and bamboozled regulators for years.
Why does this keep happening? Warren Buffett, the fourth richest person in the world (with a net worth of $88.9 billion), is considered by many to be one of the most successful investors of the 20th century. He explained the idea in his inimitable folksy way, saying: “You only find out who is swimming naked when the tide goes out.”
This recession has barely even begun, but the water has receded much faster than normal. And already, several companies have been caught unclad.
Last month, media darling and NASDAQ-listed Luckin Coffee revealed it had fabricated revenues of $300 million. Its CEO was forced to resign and lost his freshly acquired billionaire status overnight.
And two weeks ago, global electronics payment behemoth Wirecard made a similar announcement. The company had previously vaulted from being a tiny, obscure firm in a small town to become one of the largest companies in Germany. Claiming to process $140 billion of transactions a year on behalf of a quarter million businesses, it was added to the esteemed German DAX stock market index (equivalent to the Dow Jones index in the U.S.). And at one time, it was valued more than any of the famously solid German banks.
But, on June 18, investors learned that $2 billion of company cash that was supposedly sitting in two Philippine banks didn't actually exist. The amount would be equivalent to the entire profit the firm claimed to have made over a decade. In just eight days, the company disintegrated, losing $14 billion worth of value and declaring the German equivalent of bankruptcy.
All of this occurred under the nose of the supposed investor watchdog: the auditor EY (Ernst & Young). The company had previously signed off on Wirecard books for more than a decade. And for at least three years, it never bothered to follow the standard audit procedure of inquiring with the banks about the claimed mammoth cash horde.
This week, the lawsuits started, with 1500 Wirecard investors seeking up to $1 billion in compensation from EY. Others are expected shortly.
Many investors erroneously believe that an auditor looks for fraud and is supposed to protect them from this kind of scandal. Investors will typically believe they can can trust one of the so-called "Big 4" to be among the most vigilant: EY (Ernst & Young), KPMG, Deloitte and PwC (Price Waterhouse Cooper).
But, as we discussed in a Real Estate Crowdfunding Review article back in 2018, the dirty secret of the accounting industry is that audits are not actually designed to catch most types of fraud. And worse, even with the bar set ridiculously low, the "Big 4" have still missed billions of dollars of fraud that they should have caught. And this has happened time and time again.
The root of the problem is that the current audit system has a built-in financial conflict-of-interest. Auditing firms are not paid by the investors on whose behalf they work. Instead, they're paid by the company that they're supposed to be overseeing. And an auditor that produces a positive audit can expect to keep the job (and the profits) for decades. So the watchdogs have a financial incentive to make sure that their bark has no bite.
Things have gotten to the point where employees of one of the big four accountants (KPMG) were indicted for trying to game the way that regulators double check their (often bad) audits. And unfortunately, the trend has been to loosen regulations on auditors rather than tighten them.
However, some believe that this recession may end up providing the tipping point that turns things around for investors. Ernst & Young had also signed off on Luckin Coffee, and is now currently under investigation by the U.K. accounting watchdog over its auditing of NMC Health (which collapsed after revealing more than $4 billion of previously hidden debt). And U.K. regulators are working with politicians to force the auditing arms of accounting firms to be completely separate businesses. If successful, this could be a watershed event with global repercussions.
One anonymous EY partner went even further and said, to the Financial Times, that even EY's own people are starting to get fed up with the current system. “Wirecard... has stoked many fires across the business and, depending on the nature of regulatory interventions, I wonder if this will accelerate calls for separation from within, not just from the outside. Some partners have already had enough.”
Covid 19 Ventilator Death Rates Still High But Also Look Vastly Improved
Experts say that roughly 20 percent of symptomatic covid-19 patients require hospitalization and about 5% end up in the intensive care unit (ICU). If a patient gets to the ICU and is suffering from dangerously low oxygen levels they are typically put on a ventilator. This is a mechanical device that is extremely invasive but allows them to breathe.
However, a late April study of ventilator patients in New York City found that the risks of dying on the ventilator may have been shockingly high. The study found that a staggering 88% of the 2,600 patients put on ventilators died anyway. And this increased to 97% for those 65 and older. (See part 9)
A caveat at the time was that another 3,066 patients in the study had neither died nor recovered. So the numbers were subject to change.
Still, another small Chinese study of 56 patients seemed to roughly corroborate this figure, when it found that 86% of it's ventilator patients also died.
Back in part nine, we also discussed how those lucky enough to survive a ventilator may not be in for a picnic afterwards. Virtually all lose their abilities to walk, talk and swallow and have to re-learn how to do these things again. Some never recover. Many suffer cognitive impairment. And again for some it becomes a permanent disability.
However, in early May, there was some promising news (see part 10). Chicago Hospital announced that they had seen remarkable results by re-routing patients who normally would have been assigned to a ventilator to an alternative, less intrusive method. They would "prone them," or position them on their stomachs to improve breathing. And they would give them non-invasive nasal prongs (which blow low volumes of humidified oxygen into the nose and lungs). This required specially configured hospital rooms, but was extremely effective. It typically raised oxygen levels from a distressed 40% to a manageable 80 - 90%. And after 10 days, 23 out of 24 patients had recovered and were able to avoid the ventilator entirely.
Since then, more and more hospitals have followed suit.
And, as discussed below, we now have two effective medicines that can treat ventilator patients: the drugs remdesivir and dexamethasone. While neither is a cure, they at least either lessen the duration of symptoms or increase the chance of surviving.
Additionally, most hospitals in the nation are not currently in an overload situation. So they have the time to take the lengthy 30 to 45 minutes required to adjust a ventilator for a single patient.
Many believe that all of these factors have helped numbers improve versus what we saw in New York City, Italy, and China. (Although, as discussed in a previous section, some also worry that parts of the country may be experiencing hospital overload soon).
As a result of the above factors, ventilator survival rates appear to have improved significantly.
Russell G. Buhr is a pulmonary and critical care physician at Ronald Reagan UCLA Medical Center. And he's heading a study that he says currently shows the death rate is about 30 to 50%. While this is still high, it's also much better than 80 to 90%.
Additionally, a study came out on May 26 in the journal, Critical Care Medicine, involving 217 ventilator patients. It found the death rate to be 35.7%, which appears to be right in the same ballpark.
These numbers also happen to match up with the 40% of people who die on ventilators due to more typical causes. Usually, this happens to people suffering acute respiratory distress syndrome from disease (like pneumonia) or from injuries (such as car crashes).
So the convergence of all of these numbers is making many believe that ventilator care for Covid-19 has improved a lot, in a short tim
Former top SEC investigator Jacob S. Frenkel (now in private practice as chair of government investigations and securities enforcement at the law firm Dickinson Wright) said: “All of the activity in the days leading up to the announcement and the offering, and the days following the announcement, are ripe fodder for SEC investigation."
The SEC doesn't typically disclose when it's investigating a company and wouldn't comment if they are investigating Moderna or not.
When asked directly about this on TV interview, Jay Clayton (chairman of the SEC) simply said that companies should be trying to avoid even the appearance of impropriety. “Why would you want to even raise the question that you were doing something that was inappropriate?” he said.
Nell Minow, an expert in corporate governance and vice chair at ValueEdge Advisors, said it's inadvisable for insiders in any company to be selling stock in the middle of major news about its leading product. “By definition, it is very concerning. Whether it is preprogrammed or not, it’s hard to believe that anybody who thought the company was going to be tremendously successful with this vaccine would be selling,”
Were Face Masks Improperly Maligned by U.S. Health Officials and Experts? And Could They Be Key to Saving the U.S. Economy from a Second Wave?
Face-masks part one: an epic CDC flip-flop
Back in late February, the U.S. Center For Disease Control (CDC) and many health advocates strongly warned Americans to not use facemasks to protect themselves against the virus. They claimed there was no proof that masks worked to protect against the spread of respiratory diseases. And that fiddling around with them around the face, ears and nose would actually increase the chance of getting infected. They also claimed that the false sense of security would cause people to take less precautions with other things like washing hands. And finally, they worried that panic buying of masks by the public would lead to shortages for healthcare workers who needed them the most.
This messaging was echoed by people like the U.S. Surgeon General (Dr. Jerome Adams) who tweeted on February 29th:
"Seriously people - STOP BUYING MASKS! They are NOT effective in preventing general public from catching #Coronavirus, but if healthcare providers can’t get them to care for sick patients, it puts them and our communities at risk!"
Then on March 2, Adams said on a news show:
"There is no proof that masks are effective in stopping the spread of the virus...And you can increase your risk of getting it [the disease] by wearing a mask if you are not a health care provider. Folks who don't know how to wear them properly tend to touch their faces a lot and actually can increase the spread of coronavirus".
It turned out that the health authorities were partially correct. As we discussed in part 5, unprepared healthcare systems did indeed suffer chronic shortages of critical Personal Protective Equipment (PPE). So health workers did indeed run out of masks in the early and most critical stages of the epidemic in places like New York and New Jersey. And officials were right to be concerned about that.
At the same time, the claims of a lack of scientific evidence on effectiveness of mask wearing were not based on sound logic. And this later came back to bite them.
Even at the time, some scientists pointed out the logical holes in the reasoning. Back when the CDC first made its pronouncements, it was already widely known that facemasks protected healthcare workers from catching respiratory diseases via the droplets that spread viruses. And while no studies had explicitly been done at the time on Covid-19 in public crowd settings, it would've been very reasonable for authorities to recommend cloth masks. For whatever reason, they instead claimed there was "no scientific evidence" that masks were effective. And this often translated, to the ear of the general public, as "masks don't work".
But then, in early April, the CDC was forced to do an about-face. Suddenly, it started recommending that everyone wear a face-mask in all public places where social distancing is difficult. Their website explained that this was because of "recent studies" which showed that a significant number of infectious cases either "lack symptoms (or asymptomatic)" or "transmit the virus before showing symptoms (presymptomatic).
Again, some scientists pointed out that even back in February, there was already evidence suggesting both presymptomatic and asymptomatic spread of Covid-19. So they questioned why it took so long for this to filter into the public messaging.
Others noted that there seemed to be no consistent explanation to the general public on why authorities now suddenly deemed Americans to be completely competent to operate a mask (after being told just a few months before that they were dangerously inadequate). Also missing was an explanation on why the "false sense of security" mentioned in February had now become a non-issue.
Unsurprisingly, many in the general public were thrown for a loop. The seeds for a resistance to mask wearing were sown, and this continues today.
Face Masks Part 2: The latest and greatest on masks
So what's the latest info on masks today?
Early in the crisis, it was known that the virus spread through respiratory droplets, but it was widely believed that these occurred only from sneezing or coughing. However, an experiment using high-speed video and lasers found that by simply talking, people generate thousands of droplets capable of spreading viruses and these remain in the air many minutes later. And the louder they speak, the more droplets are created and the further and longer they can spread. (See Part 10) But crucially, researchers found that virtually all of the droplets were blocked when the mouth was covered with a simple washcloth.
Then another study went a step further and looked at how specific viruses are emitted by people. They were not able to study Covid-19 directly, but did have access to older coronaviruses like SARS, as well as other viruses like influenza and the common cold. As expected, they found that people spread virus droplets from their mouths. But more importantly, wearing a surgical mask significantly reduced them. So while they did not specifically test for Covid-19, it seemed logical that this strategy would work for this disease as well.
Then on June 15, researchers from Virginia Commonwealth University and University of Toronto Medicine did a study comparing Covid-19 deaths across 198 countries. They separated the countries into two groups: those with cultural norms and/or government policy supporting public mask wearing (like in Asia) versus those that don't (like in the United States). And they found a dramatic difference. The "mask wearers" benefited from a relatively small increasing per capita mortality of 8% per week. But mask-skippers had to endure a painful 54% per week. The study also found that lockdowns in mask wearing countries were more successful and also associated with lower mortality. This was not a double-blind study, since such a study would be impossible to do in today's environment. Still, the study strongly suggested that mask wearing could be very important to the controlling the disease around the world.
On June 16, a peer-reviewed study looking specifically at the United States only was posted in Health Affairs. It studied the Covid-19 spread rate in 15 U.S. states plus the district of Columbia, all of which implemented mandatory mask use. And it examined the spread both before-and-after.
And it found that mask mandates were associated with significantly decreased spread of the disease. As soon as the first five days after the mandate, the daily growth rate of the virus had slowed by almost an entire percentage point (0.9). And over time, this beneficial effect accelerated. For example, at 3 weeks, the improvement had doubled, slowing growth by two percentage points.
Additionally, there have been several very interesting case studies that have strongly suggested that masks can prevent virus transmission in extremely high risk scenarios that would normally be an invitation for a super spreader event.
In May (as we discussed in part 17), we learned that two hairstylists in Springfield Missouri were infected with the disease but hid their symptoms and interacted with 140 customers at close range for 20 to 30 minutes at a time. Again this would normally be expected to be a recipe for disaster and a super spreader event.
However, both they and the customers were wearing masks. And 46 of the clients were later tested and came back negative. The remainder were quarantined for two weeks and showed no symptoms either. (Although, it is possible that some were asymptomatic.)
But in April, there was even stronger proof. We talked about in part 14 about how a single man infected with coronavirus on a 3-hour flight from Hong Kong to Beijing infected 21 other people (and killed 5 of them). Some of the victims were seated up to 18 feet away. So aircraft are one of the well-known ways to get a super spreader event.
However, on April 15, Canadian researchers reported a very interesting incident. A man infected with Covid-19 boarded a much longer 15-hour flight from China to Toronto. He had a dry cough and normally you would expect the story to have a tragic ending. But in this case, he wore a mask on the flight. When he was later discovered to be positive, all 25 people closest to him were then tested. And amazingly, all of them came back negative for Covid-19. (The one exception was his wife who sat next to him and had been exposed to him long before). The researchers went on to theorize that the combination of the conditions along with "the lack of secondary cases after prolonged air travel exposure" supported the idea that "droplet transmission, not airborne" is the "likely route of spread of the COVID-19."
Face Masks Part 3: Could Mask Wearing Save the U.S. Economy?
On Tuesday, the economists at Goldman Sachs weighed in with an economic analysis of mask wearing. They wanted to examine if mask-wearing slows the virus; if people in the U.S. would be likely to wear them; and, if they did, what effect it would have on the U.S. economy. The final results were surprising to many.
First, they compared the U.S. to other countries around the world and compared mask mandates and societal norms. Unsurprisingly, they found that the U.S. is one of the least restrictive economies on the planet when it comes to masks:
Then they examined how the use of masks varies across different U.S. states. They found this ranged widely from a high of 80% saying they always wear masks in Massachusetts, to a low of 40% in Arizona.
In comparison, people in Southern Europe and Eastern Asia self-report that they always wear a mask around 90% of the time.
Could a national mask mandate change these numbers and bring mask wearing up to the levels of those countries? To gauge this, they analyzed survey data in the (now 20) U.S. states (plus the District of Columbia) which implemented mask mandates. They concluded that states without a mask mandate could expect a 25 percentage point rise in "always" mask usage with a national mandate. And even states with an existing state mandate could also expect a five percentage point increase.
The analysts then estimated what effect this would have on the economy. They concluded that this level of compliance with a national mask mandate would add 5% to national GDP, without having to do a lockdown.
If this is accurate, what would this mean? The Federal Reserve recently estimated that the cost of the coronavirus to national GDP in 2020 will be -6.5%. So removing 5 percentage points from that would transform a brutal recession (with knockoff effects that could last years) into a much more mild one. And it would facilitate much quicker, V-shaped recovery versus a more painful, slower U or W-shaped one. Anything that could do this would be huge.
Goldman Sachs noted, however, that in the U.S., mask wearing has shifted from a health policy issue to a political one. So this makes a national mandate extremely uncertain. Despite this, they said that state and local governments could and should implement such mandates. And they concluded that the national economy "could [still] benefit significantly from such moves, especially when compared with the alternative of a return to broader lockdowns."
Update on My Investment Strategy
Every week I take a look at the latest developments and data and reevaluate my personal outlook on the possible economic scenarios and my personal investment strategy. This week everything is essentially the same as last week.
Treatment: I believe chances are good we'll have an effective medicine for Covid-19 (i.e. antibody treatment, vaccine, etc.) by fall or winter of this year. And with some luck we could even have more than one. Unfortunately, it's also unlikely it can be manufactured and distributed in large enough quantities to immediately treat everyone who wants and needs it. If that happens then it will not be enough to super-charge the economy right away. And there may be potentially huge quality-of-life difference between the treatment-haves and treatment have-nots. This will be divisive and exacerbate already strong tensions in our society and between rich and poor countries.
Recession? We've already had one quarter of negative growth in Q1 (-4.8%) and Q2 will be record-breakingly bad. So a technical recession (2 consecutive quarters of negative GDP growth) is inevitable.
Shape of the recovery: In part 14, we talked about how the shape of the recovery (V-shaped, U-shaped, swoosh-shaped, W-shaped, L-shaped, combo-shaped etc.) will have a huge effect on the ultimate outcome of many different investments. So far, pretty much everything that's happened has been much worse than the consensus expected. Pretty much no one saw the lock-downs coming back in February. More people have been killed than originally projected. Many more than expected have lost jobs. The stimulus and unemployment aid was enormous but has too many unexpected holes and isn't getting to millions who need it the most. States are starting to reopen but most individuals are still choosing to stay at home anyway. So unfortunately, I don't think a quick, V-shaped recovery is going to happen. I would love to be wrong. I'm getting more and more concerned about a very damaging "W", which could come from a second wave of the virus and a second lock-down. Unfortunately this is looking more and more likely. The one slim hope is that for now it has not shown up strongly in the death stats. So I'll continue to monitor the data very closely. Currently, I believe we will have a 3 stage combo-shaped recovery that starts off (1) quick as the first "easy" industries and companies come back online (i.e. v-shaped). But (2) this will peter out as the more difficult ones are unable to and a slow swoosh will become apparent. If we get a second lock down then this step (2) will become W-shaped and more painful Then in fall/winter, (3) I believe we will probably see a treatment and/or vaccine. And if we do, then that would be the trigger for the 3rd stage and an accelerated recovery. But this most likely won't be a straight-V up recovery because it will probably take time to ramp up production and delivery to enough Americans to get herd immunity. (And that will depends on which treatment makes it that far...which we don't know at this point). So it will be a slower boost. But we also could get a little lucky (for example, if the successful vaccine treatment is of a newer type that can be scaled up more quickly). If so the 3rd stage boost would be faster. If I'm wrong, and we don't get a treatment or vaccine this year, then the economic damage caused by long-term job loss and wage cuts will most likely be severe and further exacerbate (and slow down) whatever type of recovery we do get. That would probably be ugly for the majority of all investments. So let's hope we don't have to find out how that scenario would play out.
Investments: If the above is roughly correct then it will unfortunately be painful for many individuals and some investors. And some subsectors of alternative investing (like certain real estate classes) will come under heavy stress. Many may fold in the coming months. At the same time, I think there will also be an opportunity to purchase dislocated and distressed assets at very favorable pricing and significant discounts. And I believe that patient, discerning investors may be able to take advantage of once in a decade or once in a generation opportunities.
Strategy: 1) Invest in assets that are corona-virus resistant (and uncorrelated with the business cycle). That includes: - 1a) Music royalties (which can actually do better in lock-downs due to increased streaming). 1b) Life settlements (which actually perform better when people are dying faster and in any event isn't directly tied to the business cycle) 1c) Litigation finance (which performs based on winning or losing cases and also isn't directly tied to the business cycle). 2) Continue to hold cash and be patient for dislocated and distressed opportunities. The worse the economic damage, the more chance there will be for once-in-a-generation or once-in-a-lifetime opportunities.
My opinions and strategy will change if we get some better or worse news on the science side or some of the other X factors. For example, the stimulus bill being debated in Congress is one that could shift things in a more positive direction. And, as I mentioned above, the virus getting out of control again in large areas and forcing large lock-downs a second time, could easily make things worse. Next Article