How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 28: September 5th

U.S. creeps forward, fighting second death wave, while dark clouds gather; State round-up: ground-zero shifts to the Midwest and Northeast; College re-openings: dodging a slow-motion train wreck?; Forgetting history and doomed to repeat it: will Labor Day launch a third wave, like Memorial Day kicked off the second wave?; Another week with more massive new unemployment and tepid recovery; Financial cliff update: more showmanship and gridlock, but no results; U.S. federal deficit balloons to worst in post-WWII era; CDC's botched moratorium could cripple some landlords, tenants, and homeowners for decades; 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 for the 2nd week in a row, not much new was discovered about the virus itself.

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 and its effect on the economy and on alternative investment classes. 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. Creeps Forward Fighting Second Death Wave, While Dark Clouds Gather

For the 25th 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 192,146 (versus 185,986 last Saturday morning).

Three weeks ago, the country finally turned the corner in battling a second wave of deaths. How did that go this week?

The labeling makes it difficult to read, so let's zoom in:

(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).

So, deaths continued to decline this week which was a positive sign. On the other hand, the pace of the improvement was more like a creep than a run. And progress continued to be much more tepid than the dramatic turnaround that happened during the first wave (when stricter lockdowns were in place).

Additionally, deaths still remain significantly higher than they were at the trough of the first wave.

If we're 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 lie ahead with deaths.

How do virus infection look, this week?

Let's zoom in again to be able to see it better:

Unfortunately, as we suspected from the trend last week, progress ground to a complete halt this week. This makes sense, as the drop of infections in the Sunbelt has been accompanied by an increase in the Midwest and Northeast (see state roundup in next section).

And, infections appear to have plateaued at a point that is significantly higher than the trough of the first wave. If this trend of losing control of infections continues, then we could be looking at a third death wave. We'll watch and see.

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:

This week, they appear to have gotten on top of their third wave of deaths. This wave may have been the inevitable result of the surge of 400 infections that were traced back to a church in Seoul.

Still, using deaths per million (which puts countries of all sizes on an equal footing), South Korea's third wave is exceptionally small, and would be considered an "A+" result almost anywhere else. (See below for deaths per million comparison of countries).

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 have 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:

This was really good to see as they have continued to squash down the death curve after previously stalling out a couple of weeks ago.

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 about 577 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 failed 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 against 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 its economy and 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 last week, we looked at one country in particular that was alarming: Spain. How does that nation look this week?

This is not a good graph, as it shows infections continuing to escalate. Unfortunately, they appear to be losing control of their third wave.

Spain initially was pummeled worse than many countries very early in the crisis, and locked down hard. This brought deaths way down. Now, however, they appear to be squandering many of their early gains.

State Round up: Ground-Zero Shifts to the Midwest and Northeast

For the last nine weeks, we've closely watched individual states to get insights about on what might happen next at the national level. We saw the second wave of infections (and eventually deaths) start in the Sunbelt and spread across 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 three weeks, we saw Sunbelt states make huge progress in reducing infections and eventually deaths. However, this was accompanied by surges in the Midwest and warnings that school re-openings might cause additional increases.

What happened this week? On Tuesday, Axios published a map using data from the Covid Tracking Project, which showed how the situation is continuing to evolve:

The epicenter of the second wave in infection has shifted to South Dakota (+100% increase in seven-day average versus three weeks ago), Iowa (+94.7%), West Virginia (+67.5%), Delaware (+55%) and Alabama (+50.8%).

And even more disturbingly, large swaths of the Midwest and Northeast are now experiencing significant surges (anywhere from 10 to 50%). And this includes places like New York and New Jersey, which were hit hardest in the first wave and had previously made enormous sacrifices to get their infections under control.

Amesh Adalja, a senior scholar at the Johns Hopkins University Center for Health Security, said “This is a virus that’s established itself into the population. It’s going to be... [a] rolling fire, with ... flare-ups that occur in different parts of the country at different times.”

Let's take a closer look at some of the states we were following last week. Here's how North Dakota did this week:

Infections in North Dakota are still in an uptrend and are at some of the highest levels reported during the pandemic. Deaths rose as well, but their data tends to be noisy. So it's unclear if this is a real trend indicating a second wave or not. So we'll continue to monitor it.

Let's take a look at West Virginia:

That's a doubly bad-looking graph, with both infections and deaths clearly surging in a second wave in West Virginia.

How about Kansas?

In Kamsas, infections came down and then had a rebound, but remained at close to record high levels. Disturbingly, deaths surged. But like North Dakota, their data is noisy, so it's unclear at this point if this is truly a second death wave or not. We'll keep an eye on them.

How about Iowa?

Iowa had not been reporting antigen tests earlier, and they added them this week (in what appeared to be a huge batch of data from previous weeks). So that artificially inflated the seven-week average when that happened, and then artificially deflated it afterwards. So really we need to wait until next week to eliminate that factor and get a better view of what's happening.

But, just eyeing the data after the change, the trough this week was higher than any other trough in the pandemic. And two other days this week (the last 2) were amongst the top four worst days in the pandemic. So it looks very unlikely that infections have actually started dramatically dropping (as someone might assume if they didn't understand the data change).

Initially, deaths appeared to have dropped substantially, earlier this week. However, the end of the week set a record for most deaths in the second wave. So unfortunately, this looks likely to have been just noisy data, rather than signs of a new trend.

We'll see how these evolve, next week.

College Reopenings: Dodging a Slow-Motion Train Wreck?

The reopening of colleges has complicated things for many states. Previously, many health experts warned that in-person classes (and afterschool fraternizing) would be likely to cause outbreaks. Despite this, about one-third of state colleges opened up campuses anyway. During the first week of classes, a minority of colleges (who saw huge upticks in infections) switched to online. But the majority have stayed the course.

How's that been going?

As of Friday morning, there were over 50,000 cases on campuses, and colleges have now become one of the primary sources for the spread of the disease. And startlingly, this number was more than double what it was just the previous day.

As mentioned, some colleges are still staying the course. For example, this week the University of Iowa reported that a disturbing 1,395 students and 19 employees have contracted the disease after campuses were open for only a couple of weeks. This included 253 new cases on the previous day alone. Additionally, many experts say these numbers are almost certainly an undercount, since the University relies on people to voluntarily self-report their illness. School administrators had previously elected to not test any students before they returned to campus and have not yet announced any plans to switch to online.

On Wednesday, the director of the National Institute of Allergy and Infectious Diseases, Anthony Fauci, recommended that infected college students should stay on campus for the Labor Day holiday rather than going home. Otherwise, their return would contribute to virus spread among older family members who are at higher risk of dying from the disease. As of today, it's unclear how many (if any) schools will be following this advice. (See next section on Labor Day Weekend).

Meanwhile, the University of Illinois at Urbana-Champaign had previously been touted by many during the summer as an exemplary model of how to reopen in-person classes safely and without fear of spreading the virus. This included a much vaunted twice-a-week testing plan.

But last week, just two weeks after reopening, school officials reported that cases were already escalating wildly:

On Wednesday, the Illinois News Room reported that Chancellor Robert Jones announced a two-week lock-down of the campus. And all students were prohibited from any nonessential in-person contact.

Jones blamed the situation on what was apparently a completely unexpected set of circumstances: students "threw parties, ignored directives to quarantine or isolate" and ultimately "caused super spreader events". And he warned that if the situation did not improve, all students would be sent home. (No comment was made concerning the warning by Dr. Fauci that sending students home would be likely to increase the spread of the disease, rather than reduce it).

Forgetting History and Doomed to Repeat It: Will Labor Day Launch the Third Wave, like Memorial Day Kicked Off the Second Wave?

Speaking of the Labor Day weekend, Fauci and some other health experts say they're nervously eyeing the upcoming holiday as a potential repeat of what happened about three and half months ago, back on Memorial Day.

Back on May 31, the country was celebrating after weeks of strict lockdowns had apparently conquered the first wave. Health experts warned that restriction-weary citizens should be careful about ignoring health recommendations and letting their guard down too quickly. Despite this, social media was flooded with pictures of throngs of people ignoring all social distancing and virus safety precautions.

The result was this:

That week ended up marking the end of all progress fighting the first wave. And about two weeks later, the country experienced a surge of disease infections, which ultimately led to the second wave of infections. Then, about two weeks after that (the later part of June) the second wave of deaths began:

Fauci warned that if people don't take better precautions this Labor Day weekend, we could see another similar jump. And he pointed to several states in particular.

“There are several states that are at risk for surging, namely North Dakota, South Dakota, Iowa, Arkansas, Missouri, Indiana, Illinois. Those states are starting to see an increase in the percent positive of their testing; that is generally predictive that there’s going to be a problem.”

So we will watch what happens over the weekend and in the coming weeks.

Another Week with More Massive New Unemployment and a Tepid Recovery

Unemployment has historically been one of the most reliable indicators of when the U.S. is entering a recession and when it has recovered. So that's why we look at it so closely every week. And unfortunately, over the last 22 weeks, the economy has been hammered over and over again by massive levels of new unemployment.

This week was no different, with previously unthinkable numbers of new people losing jobs.

Officially, the Department of Labor jobless report said that 881,000 people lost jobs this week on a seasonally adjusted basis. And at face value, this appeared to be a small improvement over the 1.01 million who lost jobs last week (and 1.1 million and 963,000 the two weeks prior).

However, the Labor Department changed its method of measuring adjusted claims this week, which makes comparisons with the previous weeks potentially inaccurate. So, we'll have to wait for next week to do a true week-to-week comparison.

Why did they make this key change? Seasonal events like Christmas, holidays and summer shutdowns can cause huge weekly swings in the data which make it difficult to compare to the week before. So, in the past, the Labor Department has used a statistical method (called multiplicative factoring) to account for this and smooth things out. And they reported the raw unadjusted claims as well as the adjusted claims using this method.

This works well during normal times, but the unusual nature of the pandemic has caused strange distortions from week to week (both positive and negative). So this week, they switched to additive factoring, which is expected to reduce the volatility. So we'll be able to do a week-to-week comparison on this updated metric, next time.

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 13.3 million (from 14.5 million and 14.8 million the two 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.

The Federal Reserve echoed this sentiment on Wednesday when it released its Beige Book survey:

"Economic activity increased among most districts, but gains were generally modest and activity remained well below levels prior to the Covid-19 pandemic. Continued uncertainty and volatility related to the pandemic, and its negative effect on consumer and business activity, was a theme echoed across the country.”

Also on Wednesday, ADP released its private sector payroll report. This disappointed economists by showing that payrolls only increased by 428,000 in August, which was well short of the 1 million+ that many were expecting.

However, this is only the first estimate, and at other times during the pandemic, they have made large adjustments when reporting final numbers. So it's possible this could change.

On Friday, the Bureau of Labor Statistics released its much-followed unemployment report:

The good news was that this showed that the net number of working Americans has increased for four months straight (i.e. more are getting jobs than losing them). On the other hand, like many of the other statistics, the rapid early progress has disappeared and further improvement is getting increasingly difficult. And, it remains very depressed and short of original pre-pandemic levels.

The official headline unemployment rate was reported as 8.4% (in comparison to the 3.5% back in February). However, as we talked about in part 24, 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 make sense right now, because many people who want work can't even begin to look, because jobs still aren't available yet.

So, to get the full picture, we need to look at the U-6 rate, which is 14.2%. On one hand, this shows a small improvement from the 16.5% of last month (and 18% prior). On the other hand, it still means an unhealthy economy with more than one in seven Americans out of a job (which was essentially the same as last month).

And on top of all this, there's another issue that skews the results. As we've discussed previously, the unemployment report survey technique isn't suited for the pandemic and has a known problem. Each week, a certain number of workers accidentally mis-classify themselves as "taking leave" when their interview information shows that they're actually unemployed. The Labor Department says that correcting for this increases the numbers by 0.7 percentage points (i.e. headline unemployment is 9.7% and the real/U-6 unemployment is 17.2%).

Meanwhile, there was some other potentially troubling news from the report as well. So far, most unemployed have said that they believe that their job losses are temporary. But, this month, a record number of unemployed people said that their job losses will be permanent (now just above 25%):

This dramatic increase from last month was the highest seen since records have been kept (including the Great Recession). And it translated into about 3.4 million permanently lost jobs: