How Will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 27: August 30
Updated: Feb 8, 2021
U.S. makes more slow progress battling second death wave, but road-bump may loom ahead; World round up: trouble in Spain; After Sunbelt states finally get control of second wave of infections, Midwest appears to stumble along same path toward its own second wave; Georgia's Covid-19-sensitive businesses remain mostly comatose. And ominously, once impervious grocery stores take a hit; Economy hammered yet again by massive unemployment, as a flood of companies announces future layoffs; Financial cliff update: more fiddling while Rome burns; Where are the loans? Much vaunted U.S. stimulus is a $1.8 trillion dud; U.S. commercial real estate transaction plummets: is the worst yet to come?; Caught covid-19 and think you're 100% immune? Think again: multiple scientists around the world document that it's possible to catch Covid-19 twice; Update on my portfolio.
(Usual disclaimer: I'm just an investor expressing my personal opinion and not a registered financial advisor, attorney or accountant. Consult your own financial professionals before making any financial decisions. Code of Ethics: I / we do not accept any money from any sponsor or platform for anything, including postings, reviews, referring investors, affiliate leads or advertising. Nor do we negotiate special terms for ourselves in the club above what we negotiate for the benefit of members.).
Quick Summary
This week there was a lot of important health and economic data, but not much was announced regarding new discoveries about the virus itself. The one possible exception was that multiple scientifically documented cases of covid-19 reinfections were reported for the first time.
This article is part of a multi-article series that's been published weekly since the pandemic began back in March 2020. It started with three introductory articles on the virus, it's effect on the economy and on 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. Makes More Slow Progress Battling Second Death Wave, But Road Bump May Loom Ahead
For the 24th week in a row, the United States battled the coronavirus called SARS-CoV-2, which causes the Covid-19 disease. By Saturday morning, the death toll had climbed to 185,986 (versus 179,805 last Saturday morning).
Two weeks ago, the country finally turned the corner in battling a second wave of deaths. How did that go this week?
(Note: what looks like a temporary surge between days 104 and 110 is actually just a statistical aberration. It happened because the CDC changed its accounting methodology and then worked through the backlog caused by that change. So we are ignoring that).
This week, the death rate dropped a little bit faster than the previous week. So the continued progress was encouraging to see. On the other hand, the progress has been slow. And, so far, it's significantly slower than what the country experienced at the same time back in the first wave. This is what some health experts had predicted, since lockdown measures now are currently much looser than they were back in the first wave. Additionally, deaths still remain significantly higher than they were at the trough of the first wave.
If we are unable to make clear progress and deaths remain high, then the overwhelming consensus of economists is that this would sabotage hopes of a quick, V-shaped recovery. Instead, the recovery would assume a different shape (W-shaped, U-shaped, etc.). This would be slower, involve more damage to health and economy, and potentially cause problems for some or many consumers, businesses and investments. (See part 14 for more information on the possible "recovery shapes" and their ramifications).
Since this is potentially so important, let's take a look at one of the leading indicators of coming deaths: virus infections. Virus infections tend to lead deaths by anywhere from 2 to 8 weeks (depending on how long it takes someone to die and how long it takes their particular location to report the information). These case numbers are not completely reliable due to testing labs' difficulties in many parts of the country with getting results back on time. But they can still provide a clue of what might be happening later with deaths.
What does it look like this week?
The CDC site's label is visually in the way of viewing all the data. So let's shift that label to make the data more easily visible:
This is a potentially troubling graph, because it appears to show that progress is slowing down significantly. Perhaps this is related to the surge of infections that's currently happening in the Midwest (see next section). And if you look back at the first graph, you can see that the daily infection rate is still significantly higher than the trough of the first wave. So it appears that progress is petering out prematurely. But, things can change and we will continue to watch and monitor.
World round up
How did other countries do this week?
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 through most of the epidemic, it has been one of the world leaders in both minimizing deaths (one of the lowest per million) and also minimizing economic damage (their economy is now mostly open and growth is projected to barely shrink this year. In comparison, the U.S. still has significant closures and is projected to take a -5.9% hit to GDP).
This week, South Korea looked like this:
After quelling a second wave, the country is clearly in the third wave. This may have been the inevitable result of the surge of 400 infections that were traced back to a church in Seoul.
Still the very small size of this wave of deaths would be considered an "A+" result almost anywhere else. For example, here's how South Korea currently looks, versus the U.S., on deaths per million (which is a more fair comparison than raw deaths, because it puts all countries at the same level on the playing field, regardless of size):
South Korea's death rate is so much lower, it essentially doesn't even show up on the graph.
As a result, for yet another week, the South Korean economy continued to remain predominantly open for business.
Meanwhile, Sweden has opted for a lockdown-lite strategy (see part 8). While they've enacted some lockdown measures (they've shut down grade schools, prohibited gatherings larger than 50, instructed elderly people to stay home and young people to work remotely, enacted social distancing rules at restaurants, etc.), they never went into the full-on lockdown seen in many other countries.
The hope has been that if this worked well, it might provide another workable model for other countries looking to deal with the virus. Here's how they look this week:
Last week, they had hit the bottom, but appeared to be bouncing up in a second wave. This week, things are looking much better and we can see that it was just a noisy path down to a lower number of deaths. So that was great to see.
Sweden's road to reach this point has been bumpy. The country enjoys a number of unique advantages in fighting the virus that most countries don't have, including an extremely large number of people who live alone, are young and have no children. Despite this, their death rate has been many times worse than other Scandinavian countries (with similar demographics) as well as worse than other countries in general (who lack these advantages). However, they have hoped that if they continued to push down their death curve, they eventually might be able to make up this deficit.
How did Sweden's cumulative deaths look this week? To see, we need to look at deaths per million. Again: unlike raw deaths, this puts countries of different sizes on an equal playing field. Here's how they did:
Unfortunately, their numbers are still stratospherically bad at 576.38 deaths per million. Compared to its next-door neighbors with similar demographic advantages, it's doing almost 6 times worse than Denmark, almost 10 times worse than Finland and 12 times worse than Norway. And compared to the best-of-show countries, it's almost 100 times worse than South Korea and almost 2000 times worse than Taiwan.
Many health experts believe we will likely get an effective vaccine/treatment later this year, and perhaps a rollout to wider populations sometime in mid-2021. If so, then there may not be enough time for Sweden to ever catch up. On the other hand, the Swedish model could still prove itself if other things happen. It's possible we may not get an effective medicine; and/or the pandemic could mutate, leading it to run wilder than expected in 2021; and/or other countries may stumble while Sweden doesn't. We'll continue to watch.
The other big issue for Sweden to overcome is that lockdown lite has thus far been a failure in its main goal: protecting its economy. 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.
But again, if they can sustain their progress on the virus, then their economic outlook could improve as well. For now, it still appears that they've suffered the worst of both worlds (receiving more damage to the economy and to its public health than have others). We'll continue to watch and see.
Meanwhile, in Europe, some health experts had previously warned that the dropping of travel restrictions would cause an additional wave of virus infections and deaths. And this week, some specifically raised an alarm about one of the more popular destinations: Spain. How does it look?
Spain initially was pummeled worse than many countries very early in the crisis, and locked down hard. This brought infections way down. Then they loosened restrictions and deaths increased, but appeared to then get under control and hit a plateau. However, in the last couple weeks, they appear to be getting another surge.
As we talked about earlier, infections can be a leading indicator of deaths. How were they looking for Spain?
This is not a good graph, and in fact, it's potentially an ominous sign not only for Spain, but for Europe. We'll continue to watch this.
After Sunbelt States Finally Get Control Of Second Wave Of Infections, Midwest Appears To Stumble Along Same Path Toward Its Own Second Wave
Over the last eight weeks, we closely watched the second wave of virus infections at the state level. First, it started in the Sun Belt and spread to other parts of the country. In response, many states put in place virus control measures, including re-instatements of key portions of lockdowns and rules mandating the wearing of masks (in more than 50% of states). And in the last two weeks, we saw dramatic improvements in Sun Belt states, including former laggards like Florida, Texas and Arizona.
This week, health experts warned that other parts of the country are looking a little wobbly. So let's take a look at those states, starting with Kansas:
They are showing increasing infections in their second wave, which is worrisome. Deaths are noisy but, so far, have plateaued. However, as we saw in the Sun Belt a month and half ago, this can be the calm before the death storm hits. Let's hope that will not be the case for them, and we'll continue to watch.
Now, let's take a look at a new state: Iowa:
Just two days ago, Iowa added antigen tests to their statistics and this will increase the number of infections shown going forward. However, even the day before that they had still hit a record high. So they are clearly in a second infection wave that is going in the wrong direction. Unlike Kansas, their deaths are climbing as well, which is a doubly ominous sign.
How about North Dakota?
They look very similar to Kansas. Infections are increasing rapidly in a second wave.
How about South Dakota?
South Dakota's numbers are almost a mirror image of North Dakota. They too have a second wave of rapidly increasing infections. And at least so far, deaths are plateaued. At least two dozen new cases in South Dakota this week were tied to a motorcycle rally that drew hundreds of thousands of people earlier this month.
We will continue to watch and see how these progress.
Georgia's Covid-19 Sensitive Businesses Remain Mostly Comatose. And Ominously, Once Impervious Grocery-Stores Take A Hit.
One of the most important questions for investments (as well as for the health of the country) is "what will the shape and speed of the recovery be?" If it's V-shaped and quick, then many investments will be just fine. On the other hand, if it's one of the other shapes (U-shaped, swoosh, etc.), then some or many investments could run into problems. (See part 14 for more information on the possible "recovery shapes" and their ramifications).
To monitor the evolving situation, we've been watching Georgia very closely. It was one of the first states to reopen. So we expected this to make it a useful early indicator of what could be in store for some other states.
Back on April 24, Georgia Governor Brian Kemp reopened nail salons, hairdressers, bowling alleys and gyms (as long as they followed state protocols). Then, three days later, restaurants and theaters were allowed to reopen. So they've effectively been open for about four months.
How are they doing? Since there's no official government or state data on this, we've previously looked at Placer.ai. This is a service which tracks mobile phone usage to different types of businesses to measure foot traffic. Again we'll look at how Georgia's Covid-19-sensitive industries did in four areas: restaurants, hotels, retail and fitness.
Let's start with McDonald's. The company does a lot of drive-through business so they would be expected to be fairly Covid-19-resistant and doing much better than others. What do they look like this week?
Unfortunately, they've been moving in the wrong direction for the last three weeks, with numbers getting worse. And currently they're at a very unpleasant-looking -24% (versus the same week last year). This looks highly unlikely to be profitable for them.
Let's look at hotels next. Here's Holiday Inn Express, which is a budget brand and would be expected to be doing better than luxury brands in a recession.
On one hand, they've been making very slight progress over the last two weeks. On the other hand, they've been essentially stuck in a plateau over the last five weeks and are currently at a painful and unsustainable-looking -22%.
How about retail? This week, we'll take a look at Banana Republic:
This was a nice surprise. Four weeks ago, Banana Republic was looking equally as bad as the others we've seen this week. Somehow, two weeks ago, they jumped up to a small improvement in year-on-year numbers. Last week, they declined down to a level that was about even with their position a year ago, which in the current environment is amazing. And this week, they continue to slide further, and are now at -9.5%. So while that still isn't great, it's still a lot better than many others are doing. At the same time, they do seem to be moving in the wrong direction. It's hard to make out exactly what's driving this strange-looking chart, so we'll continue to watch them.
How about the fitness industry? Let's take a look at YouFit. They are a lower cost gym so would be expected to do better than a more expensive gym in a recession:
That is a heartbreaking graph. They are at what looks like an unbearably bad -63% (versus the same week last year). And things have been getting progressively worse over the last five weeks.
Overall, this was not a good week for Covid-19-sensitive businesses with the majority appearing to be in bad shape. The one exception was Banana Republic, which is only moderately bad, but is also trending in the wrong direction.
But before we move on, I want to look at one more item. One of the concerns about the economy is that the unemployed are currently hanging off of (or falling from) a financial cliff (see later section). And some early data has suggested that even spending on staples like groceries may be tapering off as people have to cut corners to make ends meet. And if this happens, it could be an early warning sign of worse to come.
Are there any signs of this in Georgia? Let's look at BJ Wholesalers. Stores like this have been doing pretty well so far during this recession:
Ominously, there was a significant drop this week, after 12 strong weeks of business. If this is indeed a sign of an important change, it would be very disturbing.
How about how Aldi, which is a discount grocer? They would be expected to do better than luxury grocers in a recession:
They also took a hit this week. And unlike BJ's, they went negative at -5.5% year on year. Still, they have been more volatile in the last several months and also experienced other drops. So with such a volatile graph, this could have been just temporary noisy data. We will see what they do next week.
How about Food Lion? This is a discount grocer, as well:
They have actually been declining for the last two weeks, which is worrying to see.
So overall, it looks like many grocers probably did experience an actual slowdown this week. Still, one week doesn't make a trend, so let's hope this was just an aberration. On the other hand, if we see this continue in the coming weeks, then that would mean this week was an important (and unwelcome) inflection point. We will continue to monitor and watch.
Economy Hammered Yet Again by Massive Unemployment, as a Flood of Companies Announces Future Layoffs
Over the last 21 weeks, the economy has been hammered over and over again by massive levels of new unemployment. This week was no different, with 1.01 million people who lost jobs (versus 1.1 million and 963,000 in the weeks prior).
Meanwhile, 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 within 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.
This week, continuing claims dropped slightly to 14.5 million (from 14.8 million and 15.5 million in the weeks before). So, while it was good to see progress, it continues to be painfully slow. And there are, still, more Americans unemployed than at the height of the Great Recession. Many economists feel it is unlikely we will see a quick, V-shaped recovery without much faster progress.
Unfortunately, there were numerous announcements this week indicating that there's more bad news to come. Typically, we've seen anywhere from one to four companies announcing layoffs and buyouts, but this week, there were seven. The roster was also exceptionally diverse, and included travel and tourism, consumer goods, retail, industrials, technology and finance.
MGM resorts, which is the largest operator of casinos in Las Vegas, announced on Friday it will be firing about 18,000 employees (which is more than one quarter of its workforce).
Coca-Cola, the giant beverage company, said it offered buyouts to enable it to downsize 4,000 workers in North America.
American Airlines said it will cut 19,000 workers after federal payroll aid expires. This will be a 30% workforce reduction.
United Airlines said it will furlough as many as 2,850 pilots this year.
Boeing said it plans to deepen its job cuts beyond its initial 10% of layoffs, with new buyouts.
Salesforce.com said it plans to cut 1,000 jobs. Back in March, CEO Marc Benioff pledged that there would be no significant layoffs for 90 days and scoffed at other CEOs who couldn't make the same promise. This week, he said, "There is no lifetime employment at Salesforce. Everything is performance-based. We are going to make job changes and shift and evolve as our markets shift and as our customers shift.”
Bed Bath & Beyond said it will eliminate 2,800 jobs.
Estee Lauder, a cosmetics giant, said it will be reducing its workforce by 1500 to 2000 jobs. It had previously implemented furloughs during the shutdowns.
Also, there was some unwelcome news on the job creation front. Indeed.com is a site that specializes in job postings. And they reported that after an initial resurgence, new job postings have ominiously declined over the last two weeks.
Initially, there had been a steep drop in April and then a modest but sustained rebound in July. Currently, things have stalled out at a -21% gap between now and where things were a year ago.
Financial Cliff Update: More Fiddling While Rome burns.
As we discussed in past weeks, millions of people are either falling off or teetering on the edge of a huge financial cliff. And if it isn't resolved, there could be significant pain coming up for them, as well as for businesses and investors in virtually every alternative investment asset class (especially real estate and private equity).
Why does the cliff exist? Well, so far, the economy has taken unprecedented amounts of damage through record-setting unemployment. But, this has been mitigated by the $3 trillion Covid-19 stimulus package passed by Congress at the beginning of the pandemic. Unemployed workers got an extra $600 per week. Many citizens got free stimulus checks ($1200 per adult and $500 per child). And governments at the federal, state, and local levels passed moratoriums on evictions and foreclosures that let unemployed people stay in their homes.
None of these programs was perfect, and we talked in past weeks about how snafus caused millions to be unable to get deserved and needed aid. But still, these programs have contained untold amounts of damage. Zach Parolin, a researcher at Columbia University, estimates that this stopped 17 million people from dropping below the poverty line.
Now, however, the problem is that the $600 unemployment payments expired 3 weeks ago, the stimulus payments were a one-time event, and many of the moratoriums have ended as well. And unfortunately, the two political parties and the president were unable to come to agreement on a new law. So an executive order was passed that aimed to mitigate a small part of the damage and pays the unemployed an extra $300-$400 (depending on the state). But it was done through what's most likely an unconstitutional hack. And either way, it's expected to run out next month.
This week, there was no progress passing anything new. And many political analysts expect nothing to happen until the new unemployment funds are completely used up (and provide an impetus for further talks).
Meanwhile, the plight of the unemployed continues to escalate.
This week, the Census Bureau reported that an astounding 29 million US adults said they "sometimes or often" didn't have enough food to eat during the week ending July 21. And the Center on Budget and Policy Priorities found that nearly 15 million renters reported being behind on the rent during that same week.
Meanwhile, the Code of Vets is a nonprofit that assists veterans who can't meet their basic needs: groceries, medications and utility bills. They say that in January, they had 86 cases. Later in the year, it had risen to 1300 and is continuing to grow. The founder, Gretchen Smith, said that one desperate mother recently admitted to her that she had resorted to stealing food to make sure her five-year-old son could be fed.
Unfortunately, most analysts expect that in the absence of political consensus, the numbers on this will continue to get worse.
Where Are The Loans? Much Vaunted U.S. Stimulus Is A $1.8 Trillion Dud
Back in March and April, Congress passed multiple Covid-19 stimulus laws. Among other things, they authorized the U.S. Treasury and Federal Reserve to lend up to $1.95 trillion to businesses in need. The idea was to give a huge helping hand, boost the economy and facilitate a quick V-shaped recovery.
However, five months have now passed and so far only a minuscule $16.4 billion has actually been deployed. In another words, only 0.8% of the intended aid has actually been deployed to recipients in need.
How has this happened? For example:
Main Street lending program: this was given $75 billion by Congress to enable up to $600 billion in loans to be made to medium- and small-sized businesses. To date, it has deployed only a tiny $472 million out of the above sum.
State and local government loan program: this was allocated $500 billion by Congress. But currently, it has deployed only a scant $1.65 billion.
As we discussed in past articles, businesses have criticized the U.S. Treasury department for its implementation rules on numerous parts of the stimulus package. For example, some businesses found the terms of the PPP loans so onerous, that they chose to go out of business instead. In that case, a bipartisan group of congressmen criticized the Treasury Department for changing the intent of the law.
This time however, Bharat Ramamurti (who is one of four members of the bipartisan congressional panel that oversees the Treasury and Fed’s use of the funds) said Congress is also partially to blame.
“Congress didn’t say clearly in the Cares Act...we expect you to invest this money aggressively, and we’re fine with you taking losses...This is on Congress a little bit”
Additionally, the Federal Reserve says that many states have balanced budget requirements, which have prevented them from even considering the loans.
All this has prompted some analysts to suggest that Congress needs to rethink most of the program and completely reimplement them. However, as of this date, there is no political consensus for doing this.
U.S. Commercial Real Estate Transaction Plummets. Is The Worst Yet To Come?
Meanwhile, Real Capital Analytics (a real estate analyst firm) released a report showing that real estate transaction volume plummeted $14 billion across all sectors. This was a 69% drop from the previous July.
As we discussed in a previous week, many sellers have been unwilling to drop their asking prices, and many buyers are unwilling to purchase without a substantial pandemic discount. This has resulted in an impasse, which will eventually have to give in one direction or the other. Either the economy will improve and buyers will have to come up in bids. Or conditions will continue or get worse and sellers will have to capitulate.
According to Real Capital Senior Vice President, Jim Costello:
“The worst is yet to come. We’re not seeing the fallout yet of owners selling properties and taking a loss. I wouldn’t be surprised if we start to see some of it start to break in September or October,”
Prices also dropped for offices (0.9%), retail (2.8%) and hotels (4.4%). In contrast, apartment buildings rose 6.9% and industrial properties (which benefit from stay at home orders) rose 8.3%.
However, all apartments may not stay immune forever. This week, the Center on Budget and Policy Priorities reported that nearly 15 million renters were behind on rent by the middle of August.
As we discussed last week, those hit hardest tend to be lower income renters who are typically in Class-C or workforce housing. (See "The Cleaving of America's Two Worlds: A Tale of Two Recessions" in part 26.)
Costello says that the recovery this time also won't be like before. “The last downturn, suburbs were the laggard. This one will be different.” He claims data shows that more residents are wanting to move to suburban garden apartments versus urban core buildings. And that family-forming millennials are likely to permanently shift away from expensive, densely-populated cities even after the pandemic ends.
Caught Covid-19 And Think You're 100% Immune? Think Again. Multiple Scientists Around The World Document That It's Possible To Catch Covid 19 Twice.
For months, we've heard stories from people claiming they've caught Covid 19 twice. However, many health experts have been highly skeptical of these claims. They suggested that perhaps these people never really recovered the first time and only believed they got it twice. Some citizens retorted that they had a test confirming that they had recovered and another one showing they got it again. But scientists suggested perhaps they were victims of a false positive. Or perhaps the second test picked up residual, dead virus that was still floating around in their bodies.
On Thursday, a public health laboratory in Nevada reported the first confirmed example in the U.S. of a coronavirus reinfection. A 25-year-old Nevada man caught the virus the first time on March 25. He was still positive on April 18 (about three weeks later) and finally recovered on April 27 (about one month later). And he was tested twice to confirm that negative, which made the possibility of a false negative extremely low.
Then on May 28, two months after the initial infection he started to feel sick again. On June 1, he sought medical help and on June 5, he had to be hospitalized for shortness of breath and lack of oxygen. Ultimately, the man contracted pneumonia and his X-rays showed he had the typical "ground glass opacities" of severe covid-19.
Researchers genetically sequenced the viruses from both illnesses, and they were too different to have been the same one. So this confirmed that he actually had been reinfected.
In addition to this patient, three other confirmed re-infections were reported this week: one in Hong Kong, one in Belgium and one in the Netherlands.
The patient in Hong Kong was a 33-year-old man who was infected in late March, and then contracted the virus again one half months later while traveling in Europe. Again, the virus was sequenced both times and they didn't match: showing the two were actually unique infections. In his case, the second infection was less severe than the first.
Too little is known about the virus to explain exactly why this is happening. Some health experts hypothesized that perhaps these people didn't develop antibodies after the first infection. And there were several studies on antibodies that have shown that the way people respond can vary widely.
Another theory is that perhaps they do have antibodies, but their immune response was simply overpowered by a massive dose of the virus. Or, perhaps they might be suffering antibody-dependent enhancement in which the immune response will worsen symptoms on a second encounter. This can happen with some viruses, such as dengue fever.
Angela Rasmussen, a virologist at Columbia University, said “[We] really are going to need to look at a lot of these cases to try to start to narrow down which hypothesis is probably right”.
This also raises a bunch of very important questions that individual case studies can't answer.
How common is reinfection? If this is something that happens to one in a million, then it probably isn't significant. On the other hand, if it happens with any frequency, it could be highly problematic to resolving the pandemic. Right now, we don't even know if it's possible to create an effective vaccine to fight the virus. But if that is possible, then this discovery about reinfection would mean that even after taking the vaccine, the patient might still be at risk. This could undermine the utility of such a vaccine in ending the pandemic.
Also, is the second occurrence of infection usually better or worse than the first? The former would be a much better outcome than the latter.
So scientists are now conducting follow-up studies to answer many of these questions.
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 I have no changes and it's 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, until well into 2021. If that happens, then it will not be enough to super-charge the economy right away. And there may potentially be a huge quality-of-life difference between the treatment-haves and treatment have-nots. This will be divisive and will exacerbate existing tensions in our society and world between both rich and poor citizens and 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 reopened but were forced to backtrack. Many businesses have reopened but customers are staying away. 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 the second and/or third waves of the virus. Unfortunately this is looking more and more likely. My slim hope is that, as of this week, the second wave is at least starting to come under control. So if this can be maintained, avoiding a 3rd wave from school openings and cooler weather.. and if the US government also passes a generous stimulus law, then the worst effects of the additional waves could be mitigated. That's a lot of "if's"...so we'll see. And I'll continue to monitor the data very closely. Currently, I still believe we will have a three stage combo-shaped recovery that starts off (1) quickly 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 return and a slow swoosh will become apparent. If we get a second (or third) 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 third stage and an accelerated recovery. But this most likely won't be a straight-V recovery, because it will probably take time to ramp up production and delivery to enough Americans to get herd immunity (not until well into 2021). So the boost will be slower and smaller at first. Also, if the first generation medicines are significantly less effective than 100% (which many health experts believe will be the case), the boost will be even smaller. (All of this will depend on which treatment makes it that far... which we don't know at this point). But we also could get a little lucky (for example, if the successful vaccine treatment is a newer type that can be scaled up more quickly or is more effective). If so, then the third 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 will 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 sub-sectors 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:
No new investments in real estate or any asset classes that are correlated with the unemployment or the business cycle until there is more clarity about the unknowns concerning the virus and the upcoming financial cliff.
Invest in assets that are coronavirus resistant (and uncorrelated with the business cycle). That includes:
Music royalties (which can actually do better in lock-downs due to increased streaming).
Life settlements (which actually perform better when people are dying faster and in any event isn't directly tied to the business cycle).
Litigation finance (which performs based on winning or losing cases and also isn't directly tied to the business cycle).
Invest in coronavirus "portfolio insurance" (i.e. an investment that would be expected to do better the longer coronavirus continues or if it gets worse).
N95 Mask Manufacturing Company. If the pandemic should disappear tomorrow (which I personally am not counting on), I would be happy to take a small loss here given that the rest of my portfolio would be doing extremely well. On other hand, if Covid-19 doesn't disappear and things go as I expect (or worse), then this investment could provide a welcome profit boost and improve my diversification.
Continue to hold cash and be patient for dislocated and distressed opportunities. The worse the economic damage, the more chance there will be for those 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 in some of the other X factors.
For example, a new stimulus law 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 or third time, could easily make things worse.
Next article
U.S. creeps forward fighting second death wave while ominous signs of a potential third wave brew; State round up: Ground-zero shifts to the Midwest and Northeast; College re-openings: a slow-motion train wreck in the making?; Forgetting history and doomed to repeat it: Will Labor Day be an unwelcome repeat of the debacle of Memorial Day? Another week with more massive new unemployment and a tepid recovery; Financial cliff Update: More showmanship and gridlock but no results; U.S. federal deficit balloons to worst in post World War II era; CDC's botched moratorium could cripple some landlords, tenants and homeowners for decades; Update on my portfolio. Click here for next article.
