How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 14: May 30th
Updated: 3 days ago
U.S. marks grim milestone of 100,000th death, but also makes further progress; World showdown: Who's fighting the virus the best?; A reopening dud in Georgia? ;U.S. employment continues painful freefall, but could be closing in on bottom; Backbone of U.S. economy crumbled in April as salaries were slashed; What will the economic recovery look like? V-shapers, U-shapers and W-shapers face off; Researchers uncover more positive clues about Covid-19 antibodies; Update on my personal investment strategy.
(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 aking 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.).
Lots of things happened this week that affect investors. Interestingly, the torrent of information about the virus itself slowed down. So our discussion will be tilted a little bit more toward news and analysis of the economic repercussions of the crisis. Before jumping in, here's a quick summary of the series so far:
US Marks Grim Milestone With 100,000th Death but Also Makes Further Progress
The U.S. continued its battle against the Coronavirus, and as of Saturday afternoon, the death toll had climbed to 105,353 (from 97,414 the previous week).
And many observed a solemn milestone as the 100,000th death was passed. More people have now died from the virus than from 9/11, the Korean War and the Vietnam war combined (2,753, 36,050 and 58,000 respectively). And, no one is expecting it to end tomorrow so the final toll will inevitably be higher.
In retrospect, the sheer scope of the devastation has caught even many experts by surprise. As recently as mid-April, U.S. officials were officially projecting only 60,000-100,000 deaths if a lockdown was enacted.
A health institute at the University of Washington created a disease model which contributed to those projections. This week, the director of that institute (Christopher Murray), said, "Back in March, I did not think this would be possible — I was not expecting 100,000 deaths."
The disease has not affected all equally. Unsurprisingly, the elderly have been hit hardest with 86% of the deaths happening in people 65 or older. But race and low income also ended up being risk factors, as more Blacks and Native Americans were killed in proportion to Whites and Asian Americans.
However, amidst the bad news, the U.S. also continued to make progress as well. The country's death doubling rate (the time it takes for deaths to double) continued its drop to increasingly sustainable levels. This week, it fell to 8 weeks (56 days) from last week's 7 weeks mark (49 days).
The country also continued to slowly push down the daily death curve. This progress was good to see:
On the other hand, the U.S. has not yet succeeded in putting the threat of a second Covid wave behind us. In comparison, some of the top tier Asian countries (which have also opened their economies more than the U.S.) have done better. For example, Japan shows us what it looks like to actually bend down the daily death curve:
and South Korea:
Sweden had a bad week. They've implemented a "lock-down lite" policy, which many have been hoping would be successful. If so, it might suggest other countries could have some success with less stringent countermeasures. They had a rocky start and relapse, and last week, they looked like they might have finally conquered their second wave. Unfortunately, this week, their deaths skyrocketed:
And arguably, they may have entered a third wave of the virus.
World Showdown: Who's Fighting the Virus the Best?
Now that we've passed the 100,000 death, there's enough data to see how well or badly different countries have done in comparison with each other in containing Covid.
The U.S. has by far the most raw numerical deaths in the world. But using that metric isn't actually a fair comparison. That's because most countries also have a much smaller number of people than we do. So looking at just the raw numerical deaths artificially makes us look worse.
To compensate for that, we can compare deaths per million people instead. And here's how the U.S. compares versus two European countries (United Kingdom and Italy), two Scandinavian countries (Sweden and Switzerland) and two Asian countries (Japan and South Korea). First, here's where the U.S. is:
Out of eight countries, we're disappointingly ranked in fifth place. Here's how all the countries stack up:
The Asian countries (South Korea and Japan) have done by far the best in their #1 and #2 spots, respectively. From the start, they implemented aggressive use of the 3 T's of pandemic control (tracing, testing and treatment) which the West has been reluctant or slow to adopt.
Next up are Germany and Switzerland (#3 and #4). Both countries did relatively early lock-downs. Germany claims part of that success comes from using an old-fashioned, low-tech version of contact tracing (involving humans instead of the app favored by places like South Korea). Germany requires mandatory use of masks while Switzerland makes it optional.
As mentioned earlier, the U.S. is at #5. We currently have no national contact tracking system, are not testing in large quantities, and have not made masks mandatory.
At #6 is Sweden which has gone with a "lock-down lite" policy. They claim that ultimately all the strategies will end up being about the same and their death rate will even out with others. We'll see if they turn out to be correct or not.
At #7 is Italy which was the first European country to be hit and was pummeled the hardest. It has one of the oldest, unhealthiest populations in the E.U., as well as a lot of international travelers. Like much of Europe now, they are currently exiting lockdowns.
In dead last at #8 is the United Kingdom. They were among the later countries to start lockdowns. More recently, they plan to ramp up testing as well as implement technology-based contact tracing and testing.
Ironically, the U.S. and the U.K. both have vaunted healthcare systems, and the U.S. has the most expensive healthcare system of any in the world. So, if experts had been asked to predict these rankings three weeks ago, most likely very few would have predicted that both countries would be in the bottom half of the chart.
A Reopening Dud in Georgia?
This week, again, several states opened up further and loosened lockdown restrictions. It's expected we will not see the results of these actions for 2 to 4 weeks. That's because that's how long it takes the disease to progress from infection to death. So we can't judge the results of this for a while.
But, since Georgia was one of the first to open up, it's a great test case to see how things are going. And as we discussed in part 12, they started opening up on April 24.
On that date, Governor Brian Kemp allowed nail salons, hairdressers, bowling alleys and gyms to reopen as long as they followed state protocols. Restaurants and theaters were allowed to open three days later on April 27. So they've effectively been open for a little more than a month.
How are they doing? There's no state agency that publishes weekly data on this kind of statistic. But, fortunately, we can get the info from other places. For example, pacer.AI tracks mobile phone usage to different types of businesses to measure foot traffic.
Two weeks ago, we looked at their mobile data for McDonald's. Back then, it had recovered from a -68% drop in foot traffic at the worst point (year on year) to a still dismal -40%.
Then last week we looked at Applebees restaurant. It had recovered from a low of -84% at the worst point, to a still very unprofitable looking -40%.
This week, we'll look at The Cheesecake Factory. Historically, this has often been one of the most profitable restaurants per square foot in the country.
Foot traffic improved modestly from -72% last week to -64% this week. And it's somewhat rebounded from a low of -90% a year ago. But, unfortunately, the numbers are still awful. It's hard to imagine even the Cheesecake Factory operating at a profit like this.
Also, another disturbing fact is that the pattern isn't looking like a quick V-shaped one. As we talked about in part 10, that's the type of recovery that would mean minimal economic pain. Instead, it's looking like the much slower and more economically painful "Nike swoosh" or "U-shaped" recoveries. (See section below for more information on different types of economic recovery possibilities). We'll continue to monitor and see how it evolves.
So how has this correlated to deaths? Here's how the state looks this week:
On one hand, the deaths don't appear to be escalating, which is good to see. On the other hand, they aren't bending the curve down and reducing deaths, either. At best, they may be in a holding pattern. But, the data is also really choppy and arguably the trend could be difficult to make out. So we'll continue watching and see how it looks next week.
US Employment Continues Painful Freefall, But Could Be Closing In On Bottom
A 2004 song from Britney Spears talked about a serial heart-breaker and was called "Oops, I did it again". That song could also have been written about the U.S. jobless claims report. For the last nine weeks of this pandemic, it's consistently brought repeated bad news.
Once again, the report showed brutal levels of new unemployment over the past week. This time, 2.12 million people filed jobless claims. This was little changed from 2.4 million last week (and 2.69 million the previous week). This was a disappointment for those who were hoping that state re-openings would mean more people working, and thus cause a steep drop-off, indicating at least an end to the increasing pain.
On the other hand, the unemployment report also hinted that a long hoped-for bottom could be coming. Eventually, some of the people who lost jobs are expected to be rehired or get new ones. Of course, simply looking at the total of all the jobless claims does not tell us if and when that's happening. Fortunately, the Department of Labor also reports another statistic called "ongoing benefits." Someone who gets rehired or finds a new job can no longer claim ongoing benefits. So their numbers show up here and we can use this statistic to see what's really happening (see above chart).
For the last nine weeks, ongoing benefits have risen ominously every week. So this means that people who had been laid off were simply not getting rehired. But this week, for the first time since the pandemic started, this number actually fell. And it was by a lot: almost 4 million people (from 25.1 million last week to 21.1 million this week).
At face value, this would be a potentially major turning point. It seems to says that 1.6 million more people got jobs this week than lost them. And if true, that would be strong proof of finally hitting rock bottom.
However, it may be premature to breathe a sigh of relief. Unfortunately, some states hit hardest by unemployment (like California and Florida) file their updates with the Labor Department only every other week. And theirs weren't included in the numbers this week. So this means the ongoing benefits shown this week are probably skewed in that the strength of the rehiring is probably overstated. But we'll continue to monitor this and hopefully will get more clarity next week.
Meanwhile, the Commerce Department reported durable good sales for April. These plummeted a harrowing -17.2% (on top of what was already a brutal 16.6% decline in March).
Next week, we'll get the highly anticipated May unemployment report. This is expected to include the new U-COV unemployment statistic we discussed in part 13, which should provide a much more accurate reading of unemployment than the traditional statistic.
If so, then this will be very helpful in getting a better bead on where we stand.
Backbone of U.S. Economy Crumbled in April as Salaries Were Slashed
Consumer spending is the backbone of the U.S. economy and drives 70% of all activity. On Friday, the Commerce Department reported that April consumer spending had plunged a gut-wrenching -13.6%. The freefall was the largest ever recorded since the government started tracking it in 1959. And it shattered the previous all-time record that was set just a month before in March (-6.9%).
Simultaneously, the Department of Labor found that aggregate weekly pay fell 11% in April. Again, this was an all-time high since the government started keeping records on it.
Pay cuts are particularly difficult for the average American who typically has little savings. And since the economy relies on consumer spending to be able to grow, this can have a spiraling negative affect. The chief U.S. economist at Barclays, Michael Gapen, explained that most people “might have little, and in some cases maybe nothing, left over after that for discretionary purchases. It’s one of the reasons why we don’t expect a so-called V-shaped recovery.” (See next section on economic coverage shapes).
On the other hand, there was also some good news. The government stimulus checks from the CARES law came in during April for many, and caused incomes to rise 10.5%. This also caused personal savings to hit a record high of 33% (from 12.7%). However, this was a one-time, temporary boost rather than a sustainable trend. And currently, it's unknown if the government will pass another stimulus law or not.
What Will the Economic Recovery Look like? V-shapers, U-shapers and W-shapers face-off
The failure or success of many alternative investments will hinge on one crucial thing: What will be the shape and speed of the economic recovery?
If we get a quick, speedy recovery, then virtually all investments classes will be fine. On the other hand, if it's very slow and prolonged, virtually all will be in for a world of hurt. A third possibility is that we'll see something in-between and, if so, then certain classes will be hit harder than others. That might be especially likely if different industries experience different shaped recoveries.
So what shapes are we seeing so far? Even though I'm writing this 2 1/2 months after the first article, there's still no broad consensus on that.
Back in part three, I mentioned that I feel it's important for every investor to come up with their own theory on how the recovery will look. Only then can an investor strategize and figure out which asset classes they want to avoid and which ones they want to deploy into.
So today, we'll look at some of the possibilities in more detail. Here's a good picture to help you visualize the main ones:
1) V-Shaped: this is a speedy drop followed by a speedy recovery. It minimizes the economic damage and would be the most positive outcome possible. If this happens, then virtually all alternative investments will end up being fine.
Earlier this month, St. Louis Federal Reserve chief James Bullard said he believes this is the recovery we will see.
In a remote speech to the economists at the National Association for Business Economics (NABE), he compared the U.S. to the patient that's been deliberately put into a frozen state (similar to a medically induced coma). Record levels of stimulus and market-supporting actions by the Federal Reserve have kept the patient alive. Now that the patient is being woken up with reopenings, he believes a swift V-shaped recovery will ensue.
2) U-Shaped: this is a much slower recovery than V-shaped.
As we've discussed in past weeks, many of the stimulus programs have been beset by bureaucratic snafus and bungles that appear to have prevented millions from taking advantage of intended benefits. If the scale of this is large enough, then when the chairman Bullard's U.S. patient "wakes up," they might not be well enough to quickly recover. For example, if significant numbers of job cuts and wage cuts are permanent rather than temporary, it would slow down consumer spending and also the recovery.
Another way the scenario could play out is if significant numbers of people feel the virus isn't under control, and are unwilling to frequent certain types of reopened businesses.
If we get a U-shaped recovery, it could be problematic to many alternative investments. And the longer the bottom of the "U", the worse it will be. This was discussed in more detail in part 3.
3) Swoosh-shaped: this is another scenario where it takes longer to recover. First, there is an initial fast rise due to the reopening of industries that are able to adapt pretty well to a post-lockdown world where there still is no vaccine. Examples of this are grocery stores, drive-through food and pick-up food, manufacturing plants, etc. But, progress slows because other industries prove to be more difficult to reopen (such as entertainment, hotels, sit-down dining and airlines).
Again, this would be problematic for many types of alternative investments. And the longer before full recovery, the more difficult it would become for those affected.
Mark Schneider, chief executive of Nestlé SA, the world’s biggest packaged foods maker, believes in this scenario. “This is going to be a several-quarter, if not several-year kind of process.”
4) Z-shaped: this is every optimist's dream come true. Not only do we have a quick V-shaped recovery but after that, pent-up demand boosts a huge surge in spending. If the boost were high enough, we would end up "back on trend" to where we were before the recession, and it would be like it never happened.
While there were quite a few z-shaped recovery believers early in this crisis, these days they seem to be few and far between. So far, I have not been able to find any current advocates.
5) W-shaped: this is a scenario where we shoot ourselves in the foot. Things start off fine with a decent recovery, but then there is a second wave of the virus which spirals out of control. This forces another shutdown, which is both psychologically and economically costly.
Theoretically, there's no reason why the scenario would be limited to just a second wave. For example, the Spanish flu pandemic of 1918 had three waves.
If we get more than 2 waves, then the result would look like the jagged teeth of a saw.
This kind of recovery would be one of the more treacherous and difficult ones for an investor to navigate. Investments that appeared to be out of the woods during the recovery, could easily find themselves at death's door during one of the downturns. This would make strategizing and planning very difficult. It would also make it very difficult for businesses to plan for the future, which would most likely stifle investment and further depress the recovery.
Federal Reserve Chairman Jerome Powell described a possible "jagged teeth" scenario last month. He said if we can't get the disease under control, we could suffer repeated peaks and troughs, which he thought could theoretically go on for as long as a year.
6) L-shaped: this one is the favorite for pessimists. In this scenario, the recovery starts off like a U-shaped (or even a Swoosh) but we never get that big full recovery at the end. Or maybe we do eventually, but it takes so long (years) that it effectively doesn't show up on a shorter-term view of the economy looking at just 2020-2021.
For example, there are some diseases that we have not been able to create a vaccine for. So that could happen with this virus. And there are also other diseases where antibody resistance is too short or never occurs. If that happens, we will never achieve herd immunity. And if so, then we would never get from out from under the thumb of the virus and would be depressed for a long time.
Or, it could be a situation where the virus is like the flu and mutates very quickly. So, like the flu, we might have to learn to live with it, which could depress things for a long time.
Obviously, this is the worst case scenario. If it happens, practically every alternative investment would potentially be in serious jeopardy.
7) Combo shape: it's also possible we could have a combination of any of the above. For example, we could start off with a slow U-shaped recovery for several months and then suddenly science delivers a breakthrough virus treatment that can be delivered at scale. Suddenly, we might see a swift recovery that could look like the backside of a V recovery (or a "Z").
HSBC predicts a different type of combo...a "jagged u-shaped" recovery. They described this as a slow U-shaped recovery that is compounded by several "false dawns" (which they didn't elaborate on, but could be caused by additional virus waves, for instance). In this case, the bottom of the "U" becomes jagged.
So those are the main possibilities and viewpoints. I've also added my current opinion on what we will see, in the "Update on My Investment Strategy" section at the end of this article.
Researchers Uncover More Positive Clues About Covid-19 Antibodies
Some of the most economically important facts about the virus are still a mystery. And as we talked about in part 13, the biggest question mark is about antibodies.
Are people who recover from the virus immune from getting it again? Some viruses proffer immunity and others don't. And if people are immune, then how long are they immune for? With other viruses, it may be as short as a few weeks, or as long as years.
If people are immune for at least a couple of months, and we're able to detect that, it would be a game changer. This would allow us to issue "immunity certificates" to those people and clear them to go back to work and school safely. And this would allow us to reopen the economy much more quickly.
So far, we still don't have definitive answers to most of the above. But last week, a study found that other coronavirusus like SARS create antibodies for 9 to 17 years. If that applies to Covid-19, that would be fantastic. And another study of children may have detected the actual antibody that makes them more resistant to the disease than adults (although it was not conclusive and is not yet peer-reviewed).
And, this week, we received another positive clue. On Tuesday, researchers in eastern France revealed the results of a new study of 160 hospital staff who caught the disease. After 20 days, they found that 79% of them had neutralizing antibodies (NAbs) in their blood. And by the 41 day mark, 98% of them did.
The Institut Pasteur’s Arnaud Fontanet and colleagues suggested in the paper: “This finding supports the use of serologic testing for the diagnosis of individuals who have recovered from SARS-CoV-2 infection."
The researchers will continue the study to see how long the response lasts and its "associated neutralization capacity."
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 my general conclusion is essentially the same as last week.
Treatment: I believe chances are good we'll have an effective treatment 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. If also feel it's unlikely it can be manufactured and distributed in large enough quantities to treat everyone who wants and needs it. If that happens then it will not be enough to revive the economy completely. And there may be potentially huge quality-of-life difference between the treatment-haves and treatment have-nots. This will be divisive and exacerbate already strong tensions in our society and/or around the world.
Economic recovery: Pretty much everything that's happened to date has been much worse than the consensus expected. More people have been killed. Many more than expected have lost jobs. The stimulus and unemployment aid was enormous but has too many unexpected holes and isn't getting to many of the people who need it the most. States are starting to reopen but most individuals are still choosing to stay at home anyway. Unfortunately, I currently feel a V-shaped recovery is unlikely and it will take on the long-end of scenario # 3 "longer" at 4-6 months (or more). We've already had one quarter of negative growth in Q1 (-4.8%) and Q2 will be record-breakingly bad. So a technical recession (2 consecutive quarters of negative GDP growth) is inevitable.
Shape of the recovery: As I said above, I personally don't think a V-shaped recovery is going to happen, but would like to be wrong. And I'm concerned about a "W", which is why I continue to monitor the state reopening data very closely. At this point though, there aren't any signs of a second wave, so until I see that, I'm going with a combo shape that starts as U-shape initially (or possibly Swoosh if we are lucky/innovative and enough businesses can adapt to the current situation). Then in fall/winter, I think it's likely we may see a treatment and/or vaccine. If so, that would be the trigger for a faster recovery. The back-end of the recovery would look like the backside of the V-shaped recovery. I think, most likely, it will take time to ramp up production and delivery to enough Americans to get herd immunity, in which case it would be a slower recovery. But if we get lucky (for example, we get a successful vaccine treatment of a newer type that can be scaled up more quickly), then it would be much faster. If I'm wrong, and we don't get a treatment or vaccine this year, then the economic damage caused by long-term job loss and wage cuts will most likely be severe and further exacerbate (and slow down) whatever type of recovery we do get. Let's hope we don't have to find out.
Investments: If the above is correct then it will unfortunately be painful for many individuals and some investors. And some subsectors of alternative investing (like certain real estate classes) will come under heavy stress. Many may fold in the coming months. At the same time, I think there will also be an opportunity to purchase 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. More details on my personal economic outlook and strategy are here.
Strategy: 1) Invest in assets that are corona-virus resistant (and uncorrelated with the business cycle). That includes: 1a) Music royalties (which can actually do better in lock-downs due to increased streaming). 1b) Life settlements (which actually perform better when people are dying faster and in any event isn't directly tied to the business cycle) 1c) Litigation finance (which performs based on winning or losing cases and also isn't directly tied to the business cycle). 2) Continue to hold cash and be patient for distressed opportunities. The worse the economic damage, the more chance there will be for once-in-a-generation or once-in-a-lifetime opportunities.
My opinions and strategy will change if we get some better or worse news on the science side or some of the other X factors. For example, the stimulus bill being debated in Congress is one that could shift things in a more positive direction (depending on what it does). The virus getting out of control again in large areas and forcing large lock-downs a second time, could make things worse.
U.S. progress against the virus suddenly stalls; The Swedish roller coaster continues; Georgia's mixed reopening; 1.88 Million more unemployed, but bottom appears to be coming clearer into sight; Government data suggests astounding one third of unemployed have been stranded without benefits; Non-political Congressional Budget Office releases a dark 10 year economic forecast; Heavily criticized paycheck protection program (PPP) is revamped;Anti-malaria drug hydroxychloroquine is miraculously resurrected from grave, only to stumble back in again; Real estate investment rundown; Hotel and retail commercial mortgage delinquencies soar; Brutal 42% of top retail chains didn't pay their rent; Formerly "safe" trophy properties hit the skids; Self-storage rents fall across 97% of the country; Nursing home occupancy plunges a painful 10-18%; Is your Office investment really ready for a post-lockdown world?; A tale of two (multifamily) classes; Pandemic will probably be deathblow to many movie theaters; Crowdfunding platform Crowdstreet experiences the best and worst of times; Update on my investment strategy. Click here for next article