How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 28: September 5th
Updated: Feb 8, 2021
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:
That is the highest permanent loss of jobs seen since 2013.
After seeing the report, Boston Federal Reserve President Eric Rosengren said:
"At 8.4% unemployment, that is a very significant recession... it’s going to take quite a while to bring all those people back, particularly if it takes us a long time not only to get the pandemic resolved but also to get a workable and safe vaccine that is widely distributed. I think it really is going to take that before we see a completely normalized market.”
As if to reinforce that point, Bill McBride of CalculatedRisk.com released a chart this week showing where current U.S. unemployment falls in relation to previous recessions:
Even after all the bounce-back progress made so far, the percentage of jobs loss is staggering. It's currently significantly worse than any recession the U.S. has ever suffered during the entire post-World War II era (including the worst depths of the Great Recession).
Meanwhile, record levels of Americans are going hungry. More than one in ten households are now "food insufficient" (meaning parents and/or children sometimes or often do not have enough food to eat).
Unfortunately, the situation is expected to get worse. Second Harvest Heartland, a nonprofit that delivers truckloads of food to the hungry warned direly:
"The peak is yet to come."
Feeding America, a nonprofit which provides 200 food banks to the hungry across the nation, projects that by the end of the year, the hungry will have increased by 45% to more than 50 million.
Currently, little additional help is coming from the government (see next section on the financial cliff). So, most can only hope for a small helping hand from charity. Feeding America COO, Katie Fitzgerald, said this week:
“We would view this as the most significant challenge that the U.S. charitable food system has ever faced.”
Personal note: if you happen to be looking for a way to help out, Feeding America needs volunteers to hand out food as well as donations to make the food pantries possible. They have the highest four-star rating from Charity Navigator and a one dollar donation allows them to provide ten meals. My wife and I have donated multiple times before and during this pandemic and have only good things to say about them. To learn more, click here (like all links on this site, this is a non-affiliate/non-compensated link).
Financial Cliff Update: More Showmanship and Gridlock, But No Results
As we've discussed over the last several weeks, tens of millions of Americans are either falling off or teetering on the edge of a huge financial cliff. And if it's not resolved well, there could be significant pain for them, the economy, and also 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 together, these programs stopped 17 million people from dropping below the poverty line.
But, more recently, there's been a huge problem. 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 (such as paying 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, and much more is needed to adequately address the problem.
So what happened this week?
On Tuesday, the White House issued an order through the Centers of Disease Control and Prevention (CDC) declaring that tenants and homeowners who don't pay can't be evicted until at least December 31, 2020. However, since it was done without Congress, it was not allowed to use any funds to implement the ban. So the problem has been shifted to landlords and investors who will bear the brunt of the cost. And even tenants and homeowners will also suffer, because there is no financial relief when it's over. As a result, it drew intense criticism from both sides of this debate. (More on this below).
Part of the above-described lack of political will is caused by the fact many lawmakers disagree on the severity of the issue and what's appropriate to do about it. So, on Wednesday, a team of economists posted a research paper to the National Bureau of Economic Research where they quantified some of this in a way that had not been done before.
Using detailed data in their home state of Illinois, they calculated that the reduction of unemployment insurance from $600 to $400 would reduce local spending by a painful 12%. And allowing it to expire to $0 dollars would lead to a stunning collapse of an average of 44%.
They found a wide variation in different counties. For example, more well-off Champaign County would take a very stiff, but relatively smaller, 15% drop with no benefits. While, less affluent Macon County would take a body blow from a staggering 60% loss.
This fits in with what we've been seeing more recently in this pandemic, where poorer and minority citizens and populations are taking a much harsher health and economic hammering than wealthier, non-minority people and communities (See "The Cleaving of America's Two Worlds: A Tale of Two Recessions" in part 26.)
This week, the president's administration looked forward to Congress returning to Washington after a month-long recess and continued its push to get a stimulus deal done ahead of the November elections. The house of Congress controlled by the opposing party had previously passed a $3 trillion stimulus bill (and proposed dropping it to $2.2 trillion as part of a compromise). But additional spending has been strongly opposed by many in the President's own party. So this has made it a tricky, three party negotiation.
On Tuesday, Treasury Secretary Steven Mnuchin testified to Congress: “What is most important is that we deliver some relief quickly to the American workers impacted by this.”
However, on Thursday, the leader of the president's political party in the Senate didn't express confidence in the idea. “I don’t know if there will be another package in the next few weeks or not." The problem is that 20 of the 53 members of his own party are opposed to spending even one additional dollar. And this greatly reduces his ability to produce any meaningful legislation.
Several of his party in the Senate tried to break the internal party impasse, by proposing an even more downsized bill. This would be just $500 billion versus the $1 trillion the party had proposed about a month ago. To get the price tag down that low, unemployment benefits would have to be slashed to just $300 per person. And no one would get any stimulus checks (which is something that both the White House and the opposing party agree they want).
One conundrum for that political party is that any bill needs at least 60 votes to be brought to a vote. So a plan that is small enough to be accepted by its own members is unlikely to be large enough to be acceptable to the other party and even brought to a vote.
Things could change though, if negative economic data mounts as the election gets closer. So we'll continue to monitor and see how it goes.
U.S. Federal Deficit Balloons to Worst In Post-WWII Era
Meanwhile, the nonpartisan Congressional Budget Office (CBO) reported this week that the federal deficit is projected to hit a jaw-dropping record of $3.3 trillion. This is a combination of more than $2 trillion that was spent in previous stimulus, as well as the government taking in substantially less tax revenue (because so many people have lost jobs and businesses gone under).
While, the raw numbers look enormous, a more fair way to look at the deficit is as a share of GDP. This puts comparisons with the past on the same playing field since the country has had a smaller GDP in the past. Unfortunately, even by this metric, things don't look good:
The country is already at levels far beyond anything seen in the post-World War II era. And if the projections for next year come true, then the U.S. will quickly surpass even the worst of World War II itself.
How does this compare to other countries? Exceptionally badly. According to the International Monetary Fund, the U.S. now has the third-worst (highest) debt-to-GDP ratio in the entire world. Only two countries (anemic Japan and troubled Italy) are doing worse.
This has caused some pundits to forecast that a default by the U.S. government is imminent, as well as radical domestic and global changes. Others counterclaim that the debt is a medium to long-term problem and claims of a short-term crisis are alarmist.
This week's report shed some very interesting light on this argument.
The CBO reported that, despite the enormous increase in borrowing, the amount the government pays each month for it (the net interest cost of servicing the debt) has not increased at all. And it's actually decreased by a surprising 12% the first ten months of this year (compared to last year). And the CBO expects this cost to be lower over the decade.
How is this possible? The reason is that the U.S. government has been able to finance this debt using record-low interest rates. For example, on Wednesday, the yield on the benchmark 10 year treasury fell to a minuscule 0.643%.
So the U.S. is like someone who has a huge credit card bill, goes on a shopping spree, and then opens up their credit card bill reluctantly to look at the damage. But when they open it, they're surprised to see that their monthly payment has actually gone down instead of up. And they were let off the hook because their interest rates dropped. BUT... unlike a consumer acting on credit, the U.S. government doesn't have a floating rate loan (but instead borrows at a fixed rate). So the rate is locked in for anywhere up to 30 years and there is no ability for it to go up in the short term (like with a credit card).
So this is why a consensus of economists across the political spectrum agree that this unprecedented and enormous increase in debt is a medium- to long-term problem, and extremely unlikely to be a short-term issue.
On the other hand, that same consensus also agrees that the economy will have to deal with this problem eventually. But right now, there is a completely different short-term issue, which is indeed a significant potential problem. And that's the risk that tens of millions are allowed to fall off the financial cliff (see previous section).
Brian Riedl, a senior fellow at the conservative Manhattan Institute for Policy Research, says:
“In the short term, you have to spend what it takes to minimize the recession and keep the economy afloat."
That leaves the country alive and well to fight the longer-term battle, since:
"A soaring debt-to-GDP ratio is unsustainable [in the long-term], even if interest rates remain low.”
CDC's Botched Moratorium Could Cripple Some Landlords,Tenants and Homeowners for Decades
As mentioned above, on Tuesday, the White House issued an order through the Centers of Disease Control and Prevention (CDC) declaring that evictions and foreclosures during the pandemic are national health hazard. And as a result, they will not be allowed until at least December 31, 2020.
However, unlike the stimulus law passed by Congress early in the pandemic, this order does not provide any financial assistance to landlords and investors. So it just passes the cost along from the renters and mortgage-payers to the landlords and investors. And the vast majority of property owners are still required to make mortgage payments, or they will potentially lose their properties and be wiped out of all their equity. Let's go into this in a little more detail. Contrary to popular belief, many landlords are not huge, faceless corporations. For example, 97% of the nation's nearly 23 million single-family rentals are held by mom-and-pop investors who own only one to three properties.
David Howard, executive director of the National Rental Home Council pointed out that:
“With this new moratorium, some landlords in this country will end 2020 without having received rent for 9½ months, and there’s absolutely nothing being done about it”
So, many landlords and investors are extremely unhappy with this order.
On the other side of the fence, tenant and homeowner advocates also feel the moratorium was botched. Since it doesn't allocate any money to forgive missed payments, a person who stops paying this month will be on the hook for an enormous four-month payment in January. That amount would be insurmountable for the average employed American (who before the pandemic had an average savings of less than $250), much less for someone who has been unemployed for multiple months.
Emily Benfer is a law professor at Wake Forest University and co-creator of the COVID-19 Housing Policy Scorecard with the Eviction Lab at Princeton University. She said that unless something is done to address the deficiencies in this order, both sides will suffer severe, long-term negative consequences.
“The CDC order is really quite extraordinary, but if it’s not coupled with rental assistance, it’s just pushing the issue down the line and it will snowball into a crisis that landlords and tenants will be recovering from for decades."
The root problem with the moratorium is that it was passed unilaterally by the executive branch. And under the Constitution, that branch (the office of the President) is not allowed to issue new spending. Since only Congress can do that, no real solution can occur without new legislation being passed. (See previous section on the "financial cliff").
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 only minor changes and my strategy is essentially the same as last week.
Treatment: I believe chances are good that 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 and conflicts between rich and poor countries. And it's likely to cause considerable instability in "have-not" countries that could easily cause unexpected global consequences, not just for themselves but also for the U.S. and the world.
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. After that, I believe growth will resume in Q3 (although from a very low level and only partially compensating for the previous initial losses).
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 virus spreading in the U.S. in any meaningful way. Virtually no one came close to imagining that lockdowns would occur in May. Hundreds of thousands more people have been killed than originally projected. Tens of millions more than expected have lost jobs. The stimulus and unemployment aid was enormous, but has too many unexpected holes and didn't get into the hands of millions who needed 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 the second wave can be controlled (although this is looking less likely by the week). But if this can be maintained, avoiding a third wave from school openings, Labor Day 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 most likely 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
US progress on second wave of death makes slow but increasing improvement;World round up;Major stall-out continues in all 7 of the planets' largest economies; Escalating virus infections continue in the midwest (but perhaps a glimmer of hope for a turning point); Economy again gets no respite as its pummeled by massive new unemployment; The financial cliff: More empty showmanship and still no results; "You want herd immunity ? You can't handle herd immunity!": The chilling story of Manuas, Brazil; Scientists say "nyet" to test results from Russia's claimed Covid 19 vaccine; Yes, Covid 19 is probably an intestinal disease as well; You can't catch Covid-19 from refrigerated food, right? New study says "not so fast"; Update on my investment strategy. See article
