How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? (Part 1: The Virus)
Updated: 4 days ago
Uncertainty and potential risk are sky-high, because so much about the virus is still unknown. But we now know enough to start making some intelligent guesses and planning for (what I believe) are the 4 most likely scenarios.
(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.).
The Month from Hell
The first week in March was one of the ugliest for public markets in a long time. Fears over a new virus spreading across the world caused the Dow to plunge almost 9%.
Unfortunately, that was only the warm-up for the second week, easily one of the craziest in decades:
Monday brought an oil price war (which could bankrupt many in the U.S. oil industry if it's sustained).
Tuesday brought stock market drops so huge that the exchange suspended trading briefly, to try to interrupt the panicked selling (the 1st time since 1997).
On Thursday, stocks had their worst day in 33 years (since 1987) with a 9.5% drop (after the EU announced their healthcare system may be overwhelmed and the U.S. announced only low-ambition countermeasures).
And Friday, the US announced stronger countermeasures and stocks whipsawed back up with 9.3% rise.
After the roller coaster week was done, stocks were down more than 20% from where they were just a few weeks ago and the record-breaking (11 year) U.S. bull market was dead. At one point the U.S. Treasury dropped to its lowest rate since records started in 1871. And even the gold-bugs got burned (10% drop) as well as the bitcoin-believers (with a gutwrenching 55% drop).
Then today, the Federal Reserve dropped interest rates to near 0 and announced that it would relaunch quantitative easing. However, this is not a traditional economic challenge. So the Fed's usual monetary moves are helpful but not expected to truly solve the problems caused by the challenges ahead.
No Hot Stock Tips in This Article
This article series is not about what hot stock you should buy or sell next. Study after study has shown that investors who try to time public markets virtually always fail over the long term. And personally, I think anyone telling me what to buy or sell next is just guessing.
For the record, my public market strategy is to buy-and-hold forever using low-cost index funds. So temporary news of the latest crash has no effect on my plans. And (as in all downturns) I won't be changing my plans, or even looking at the value (to avoid the temptation to panic sell).
Instead, this article is about how the coronavirus will affect alternative investments: real estate, life insurance settlements, litigation financing, etc. These are generally uncorrelated to public markets and/or are on their own cycles that don't always match. Also, since they aren't publicly traded, they're inefficient markets. In my opinion, this lets a shrewd investor outperform with careful investment selection and portfolio rebalancing.
Figuring that out requires a careful review of what we do and don't know about the virus at this time. So that's Part 1. Then, in Part 2 we'll talk about what this may mean for the economy. And then in Part 3, we'll talk about how these insights could affect different alternative investments and my personal investment strategy. Here's the entire series:
Dealing with misinformation overload
First, I want to talk about Covid misinformation, and my sources for the accurate information for this article. In the lead-up to today, I've seen what I consider to be an immense amount of inaccurate information about Covid-19. Of course, there's the constant flow of politically motivated misinformation. But also, normally authoritative sources are reporting information that was believed right at the time but later proven wrong. Other times, technically accurate information has been presented in a way that's easily misunderstood (and sometimes so easily misunderstood that I feel the value of passing it on in the first place was questionable). Then there are people playing "telephone" by passing on originally accurate information in an inaccurate way.
So, I don't want to be adding to this problem. That's why I've stuck to sources that I feel are credible and as politically neutral as possible (like the CDC, scientific journals and research papers, etc.). And I will be updating this article as information changes.
So let's start off with what we do and don't know about Covid today.
What is Covid-19/coronavirus?
Covid 19 is a disease caused by a type of virus called a coronavirus. The name "corona" means crown and describes the spikes around that enable it to attach to cells to attack the human respiratory system.
Researchers believe the 1st case originated in the Wuhan province of China in November 2019. After initially downplaying the virus, China got serious and imposed draconian martial law on millions of people in an attempt to contain it. But containment was unsuccessful. By the time of this article in the middle of March 2020, the virus had spread to over 134,000 people in numerous countries around the world and killed 5000.
But isn't that more mild than the flu?
Some people have pointed out that the flu has killed more people than this over the same time period (12,000). On average, since 2010, about 36,000 Americans die of flu each year. So what's the big deal?
The problem with Covid is that it's unlikely to stay in 2nd place for very long. Here's why:
1) More contagious: Covid spreads about twice as easily as the flu. (The average Covid victim infects 2 - 3 others versus just 1.6 for the flu).
2) More deadly: researchers currently believe Covid is at least 8-10 times more deadly than the flu. This is based on a conservative estimate of a 0.8% - 1% U.S. fatality rate for Covid vs. only 0.1% for the seasonal flu. If the U.S. does not do better than China at containment (which we'll talk more about below), then we might see even higher fatality rates than this, as they did in China (i.e., 14 -23 times more deadly than the flu at 1.4%-2.3%). More on this in a minute.
3) Can't be contained via vaccine: The flu has a vaccine. This does not yet, because it's so new. And a vaccine isn't expected until at least November at the earliest. So this won't help us any time soon.
How deadly is it and to whom?
In China, Covid killed the elderly and people with certain pre-existing health conditions at far more alarming rates than mentioned above. In a recent study of 72,314 cases, researchers found the following death rates:
Of people 70-79 years old who became infected: 8% died.
Of people 80+ years old who became infected: 14.8% died.
Additionally, those with health conditions were more likely to die: Cancer: 5.6% of infected died
Hypertension: 6% of infected died
Chronic respiratory disease: 6.3% of infected died
Diabetes: 7.3% of infected died
Cardiovascular disease: 10.5% of infected died
One silver lining is that teenagers and children were very unlikely to show noticeable symptoms or die. This was a nice surprise, because typically, young children suffer the most from common coronaviruses. Here were the stats:
20-29 years: 8% became noticeably infected
10-19 years: 1% became noticeably infected
<10 years: 1% became noticeably infected (and no deaths)
Unfortunately, a lot of the media misinterpreted the above, and incorrectly passed on that "young people don't get the disease" and so therefore don't spread it. However, the study focused only on people showing overt, classic symptoms of Covid. And (as I will discuss in a minute) it is likely that more than 50% of the infected show no symptoms.
So another study addressed these issues and found that young people are just as likely as anyone else to catch the disease (7-8%) and spread it to a family member (15%). They're just much less likely to show the symptoms. Or in other words, young adults and kids tend to be asymptomatic carriers/spreaders.
"So what?" you might say. "As long as the kids aren't harmed, why keep them home from school?" Well, unfortunately, they are harmed if their colds infect/kill their parents or grandparents, teachers or others. The ability of young adults and children to easily spread the disease increases the possibility of a catastrophic medical overload, which would increase the risk of death significantly for all ages. (We'll talk about this in a minute). And this is why the CDC is currently recommending shutting down many universities and schools, along with other large gatherings.
Too late to contain it
Before we knew much about the virus, there were some early hopes that the U.S. might avoid Covid completely by quarantining people who were showing certain symptoms (fever, cough, respiratory distress) and had recently visited known hotspots.
Unfortunately, doing that was always going to be a challenge, because most of the people who get Covid don't show any symptoms. (55.6% of the infected on a Japanese cruise ship of 4061 people showed no outward signs. People can have Covid and appear perfectly healthy, no fever, cough etc.).
So from the outset, our only hope to truly contain Covid was to test a lot of people and do it very quickly. But unfortunately, as documented in Science Magazine, the U.S. ended up squandering this one-time chance. The early tests were erroneous, facilities got contaminated, and there were neither enough kits nor labs to process them. As a result, in March 3, 2020, the U.S. had been able to run only 459 tests in total (versus 1.2 million *per day* in China). This was too little and too late.
And things were only made worse by numerous blunders such as multiple patients with Covid incorrectly sent home to spread the disease to others. And Health & Human Services employees greeted quarantined Americans without proper safety gear or training (going home to potentially spread the disease to others).
Ultimately, the quarantine collapsed, and the virus jumped and spread into the general population ("community spread"). And experts now agree that for every one case we see reported in the official statistics there are many more who are infected and who are infecting others. The evidence we have suggests that each infected person goes on to infect 2 to 3 more people. Things will now get worse before getting better. Efforts have moved from trying to contain the disease to trying to mitigate the negative effects.
And unless and until the testing situation changes dramatically, the high probability of many uncounted cases is something to keep in mind when looking at any of the U.S. figures. They are almost certainly way too low.
Okay, I get it. So what's the bottom line of what we're in for?
Here's where things get trickier. To figure out the potential damage, we need to know what percent of the U.S. population will get sick. That's difficult to figure out with the limited information we have now. But it's still possible to take an educated guess.
What percent of the U.S. will get sick?
This is a vitally important question, but one that can't be answered definitively yet.
We do know it's estimated by the CDC that, on average, every one person infected is then infecting another 2 to 3 more people. But there are many factors to consider.
Marc Lipsitch, a leading epidemiologist and professor at Harvard T.H. Chan School of Public Health, estimates that 20 to 60% of people worldwide could end up getting infected. Note, many sources are inaccurately reporting his earlier figures of 40-70%, which he has since retracted.
Lipsitch has given us a global estimate. We want to look at the U.S. alone. It's not clear how he arrived at his numbers, and presumably different countries will have very different rates, based on factors such as population density, propensity for interaction, and public health habits and infrastructure.
Since the largest data set is from Wuhan, it would help us begin to estimate how many people could get infected in America, if we knew what percentage of people in Wuhan caught the virus. While China provided their numbers of infected, it's doubtful they tested the entire population. Even if we had this number, there's an argument that China was caught by surprise and we aren't. So theoretically we should do better. (But there are also some structural aspects that will make it hard for us to follow China's example, which I'll talk about in a minute also.).
A study of a quarantined Japanese cruise liner is most helpful, because all passengers were tested. Additionally, the collection of diverse passengers on a cruise may balance out other above-mentioned factors. The study found that 17.36% of the 4061 passengers caught the virus. (The mortality rate here was not as useful, because the sample size of 6 who died out of 705 infected is a bit small. It could be skewed by just 1 more or less death).
The cruise ship did have the advantage of being able to confine everyone to their rooms (something that might be more difficult to do in the U.S. where we have freedom of movement), so that could make their outcome better than ours. Or on the other hand, if perhaps an unknown means of transmission existed via the ship's plumbing system, that could render their outcome worse than we'd see. But for now, this looks to me like the most useful data we have.
What percent of the U.S. will die?
There are 327.2 million Americans. So if 17.36% were infected, that would mean 56.8 million people would get the virus.
If we use the earlier-mentioned conservative estimate of a .8%-1% mortality rate, then 454,400 to 568,000 Americans would die. That would be approximately 12 to 16 times worse than the deaths caused by seasonal flu.
If we were to experience the same 1.4-2.3% mortality rates as Wuhan, then 795,200 to 1,306,400 would die, which would be approximately 22 to 36 times that of seasonal flu.
Using the most conservative estimate of mortality rate, the number-crunchers at The Economist felt a plausible scenario might be "one-fifth of the population falling ill, and a 0.5% fatality rate—would lead to 327,000 deaths, or nine times that of a typical flu season."
To visualize the contrast between various estimates, it may be helpful to look at this chart created by former CDC director Tom Frieden, modeling 9 possible scenarios, and comparing them to the flu. Frieden oversaw the U.S. response to the 2009 H1N1 influenza pandemic, the 2014 Ebola epidemic and the 2016 Zika epidemic.
The X Factor: No Martial Law and Poor Preparedness
Fingers are crossed that we'll see the more conservative predictions come true. However there's no guarantee. And there's a genuine possibility of a much higher death rate from several factors.
First, Wuhan brought its epidemic under control by cracking down in a way that would be unacceptable here. Martial law was imposed by assigning block captains in charge of every 3 houses to ensure people were not allowed to leave their homes (other than once per 3 days and only for groceries). People who broke rules were tied to trees, paraded around town by police and made examples of, or forcibly barricaded inside their houses against their will. This made for a very effective quarantine. But, we don't have the ability or desire to do that here. So we will almost certainly have a harder time controlling the virus this way, than they did.
Second, China and most of the close-by Asian countries had a very high level of infectious disease preparedness before the Covid outbreak. This is because they had to deal with the wake-up call of the 2003 SARS crisis which hit them hard. China alone has increased its public health spending since then by 14 times.
In comparison, we and the Europeans were not really affected by SARS. So epidemic preparedness was not a huge priority for us. We've had only a minimum growth of spending and even eliminated the primary oversight department that was in place at the time of SARS. This has already shown up as a factor in the testing debacle (discussed earlier) and the slowness to implement control measures (discussed next). And it may come back to bite us again.
Third, the vast majority of China's citizens strongly supported all the control measures (more on what these are in a minute). After the SARS epidemic they were afraid of what this virus might do, and leadership successfully framed control measures as a patriotic war against Covid. Americans, by contrast, are divided on the topic with many believing social distancing is not necessary. Without widespread support and compliance, control measures are much less effective.
The truly horrific X factor: "hospital overload"
But the most disruptive and potentially horrific X-factor is what I call "hospital overload". In an epidemic, the number of people needing care can easily flood the capacity of the healthcare system. And when that happens, the death rate climbs dramatically. Doctors are forced to make horrific choices about who gets care (i.e who lives) and who doesn't (who will be left to die). And as care is rationed, and quality of service goes down, the death rate begins to include not only those who are infected, but also those who are the hospital for completely unrelated reasons.
Unfortunately, this isn't just a hypothetical situation. It is currently happening in Italy. Italian doctors (many working around the clock to meet the high demand) are being forced to completely deny care to the elderly and those with existing conditions -- including people who would normally, given correct care, be survivors. In an article in the respected British medical journal, The Lancet, the Italian doctors estimate that they will run out of beds completely in about one week.
This could happen here, too. Here's how the numbers could crunch out, here in the U.S.
A recent study of over 72,000 cases in China found that 5% of Covid patients needed to be admitted to the intensive care unit (where patients require very specialized equipment to keep them alive).
Let's take our earlier estimate of the total number infected, 17.6%, and round that to an even 20% (which is also the estimate provided by The Economist). If that happened here, that would mean 20% of 327.2 million Americans would be infected (65.44 million) with 5% of those people needing ICU beds (3.272 million). In other words, that's 1 out of every 100 Americans needing intensive care.
The Economist reports that only 272 out of 6000 U.S. hospitals offer the most intensive treatment needed, and America currently has only 95,000 ICU beds and 62,000 mechanical ventilators. If all of those items were available, we would still need about 35 times this number of beds, and over 50 times this quantity of ventilators. However, most of these supplies are already being used for current patients.
If all 3.272 million people became intensely sick at once, we would not have nearly enough resources to keep these people alive. And the death toll would almost certainly skyrocket.
And worse yet, these may be under-estimates of need. In Italy, 10% of infected have needed treatment in the ICU, and over half of infected required hospitalization. However, they are an older and more unhealthy population than China's, and hopefully, than ours..
Hospitalizations other than ICU.
The above-mentioned study of China also found that an additional 14% required non-ICU hospitalization. And 14% out of an infected 20% of Americans is 9.16 million hospitalized people. Total staffed beds in all U.S. hospitals is 924,107. For the 9 people fighting over each 1 ordinary hospital bed, we can lay out temporary beds in gymnasiums and stadiums, but we cannot do that with ICU beds, given their need of special equipment.
Again, China was able to cope with hospital overload in a way that we just can't. As an authoritarian dictatorship, they were able to build 2 brand-new coronavirus-dedicated hospitals in Wuhan in just 10 days.
If we do experience hospital overload, younger and non-infected people will also be at increased risk of dying. In 2014-16, African hospitals were overloaded by the Ebola crisis, and a large number of the people who died didn't even have Ebola, but were simply in the hospital for other things and could not get adequate care.
The solution to hospital overload: keep your distance
Thankfully, hospital overload isn't a foregone conclusion. It can be avoided if we can stretch out the time it takes for the epidemic to run its course, with appropriate control measures. These include eliminating large gatherings and non-essential travel, teleworking, handwashing, etc.
Unfortunately, the U.S. has been slow to implement control measures versus other countries. And since an epidemic grows exponentially, every day wasted can have huge, negative effects.
On Friday, the markets rallied (after days of losses) when the U.S. finally declared Covid a national emergency which mobilized additional money and resources to the problem. Later that day, the CDC officially recommended banning gatherings of 50 or more people and this closed schools in many areas of the country (in addition to some that were closed earlier).
Hopefully, this is the start of a serious effort to implement control measures.
However, other areas of the country are currently still allowing large gatherings and schools to remain open. As mentioned earlier, the danger here is that areas that appear safe from infection due to the official numbers, have a high likelihood of being wrong (due to lack of full community testing and community spread).
My hope is that more of us will implement control measures for ourselves and family members, and will do it sooner rather than later.
Instead of shopping in stores, a person can order online. Instead of eating out at a restaurant, a person can order in using Uber Eats. And we can support local businesses by buying gift certificates now, to use later when the virus is under control.
FYI: Keeping 6 feet from a stranger is not really a "control measure"
I've personally been happy to see more people take control measures a lot more seriously over the last week (and especially since Friday). But I've also seen some inaccurate information being relayed by well-meaning people as well.
Many believe that keeping a 6 foot distance from other people in public is an effective control measure. This is only true if you are not in an area of high community spread. Such areas ought to be marked as quarantined, but we don't know, thanks to lack of testing, if cases have or have not spread.
We now know that when infected people sneeze and cough, it leaves tiny particles in the air. In the absence of air circulation, these particles can infect others for up to 3 hours.
So even if you stay 6 feet apart from someone at the store and never touch them, you can definitely still catch the virus by walking into the trail they have left. Or you could spread the virus to someone else (potentially elderly or unhealthy) in the same way. (And by the way, we also now know that the virus can live and infect for up to 3 days on a metal surface and 1 day on cardboard).
So "social distancing" is nice. But the only real way to stop hospital overload is if enough of us practice "social removal" (i.e., those who can should stay at home, order-in, telework etc.). Doctors and others in health care, grocery store employees, delivery workers and some others may not have that luxury. This is even more reason for the rest of us to isolate.
So how long will control measures be in place?
This is the million-dollar question for figuring out the economic fallout (and thus the best investment strategy). If control measures are in place for only a month, it'll hurt some individuals and companies but not cause much lasting damage to the broader economy. That's a very different scenario than if they're in place for several months or close to a year.
Unfortunately, it's too early to have definitive answers here. But we do have some very helpful clues.
Just three days ago, Wuhan announced that it has closed all 16 of its temporary hospitals (which includes the two they built from scratch as well as 14 others converted from gymnasiums, sports arenas etc.). So it took them 3 to 4 months to go from first observing the virus to getting it under control.
As mentioned earlier, China has several structural advantages in fighting the virus that we can't duplicate here (ability to impose better control measures, ability to scale up infrastructure faster, better epidemic preparedness). But we also have a lot more advantages than they did at the same point in time (the virus is now already fully sequenced, we understand a lot more about it and how it spreads, and several large studies have been done to provide us with a lot more information). Nobody knows for sure which of these 2 factors will win out over the other.
Hong Kong, Taiwan and Singapore appear to have also gotten their situation under control (and in shorter time, since they started a little bit later than China). These are countries that are not as draconian and more similar to us, which is encouraging. But they are also much smaller, which allows them to contain a virus more easily than we can in our large and spread-out country. So again, it's difficult to use this information to make a prediction for us.
Nonetheless, some are predicting it will last a month or so. Others are saying to expect several months. Still others are saying that it could be several months to a year. We will dig into these scenarios in the next part of this article series. But at this point, it's too soon to tell for sure who's right.
X factors: vaccines and heat
There are a couple X factors that could dramatically reduce the spread of the virus and minimize the economic damage.
1) Covid-19 vaccine: scientists around the world are working furiously on a vaccine, but that process generally takes 1 to 1.5 years. So this is unlikely to be helpful anytime soon.
But some existing drugs could potentially be repurposed for Covid and slow the spread or severity. A drug which lessened the severity of a hospital stay by even just 5 days could greatly reduce hospital overload, save uncounted lives and reduce the economic fallout.
One of these, Remdesivir, has already gone through human testing because it was developed for Ebola (and shelved when another medicine worked better). It's in trials for Covid right now and analysts are giving it a 50/50 chance. We'll know the results in April.
Kaletra (a protease inhibitor), Favipiravir (developed for flu), Chrloquine (developed from malaria), Camostat mesylate (developed for cancer) are in similar tests. Individually, all of them are probably long shots. But together, perhaps the odds eventually fall in our favor. Only time will tell
2) Warm weather: Early on, some hoped that warm weather would kill Covid (like the flu).
On one hand, coronaviruses look like they could be theoretically susceptible to heat. But we never got to test this theory with SARS, because it's spread was stopped by restrictive travel bans. And MERS is a coronavirus that spreads without problem in 110° F weather. Covid could be the same, or different, and there's no way to know right now.
But here's a potentially tantalizing paper from a Chinese university that just came out last week. I don't believe it is been peer-reviewed so the authors may or may not be reputable, the information may or may not be accurate and the conclusions may or may not be reasonable. The conclusion of the paper is that for every 1° increase in temperature and 1% increase in humidity, the number of people each infected person goes on to infect (the R Value) is reduced by .03 and .02 respectively. If accurate, then a 15 degree increase in temperature (-0.45) and 15% increase in humidity (-0.2) would reduce the infection rate by a significant 0.65. So instead of infecting 2 to 3 others, it would be 1.5 - 2.5. While still much more contagious than the flu, this could again buy hospitals more time and reduce the amount of overload. This could reduce the human and economic damage considerably.
This would be welcome news. We'll have to wait and see.
So the above was a summary of what we know today about the virus. In part 2, we'll talk about what this means to the economy. Then in part 3, we'll talk about what this means to different alternative investments and my own personal investment strategy going forward. Click here for Part 2