How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 17: June 20th
Updated: 3 days ago
U.S. continues to plateau in potentially uncomfortable position; How to create a raging pandemic without even really trying; Georgia's economic reopening continues to flop; Ominous signs of second wave in Florida, California and Arizona; Apple forced to re-close 11 stores in Florida, Arizona, North and South Carolina; China goes into hyper-reaction over tiny infection cluster in Beijing; U.S. can't seem to stop "bleeding out" millions of jobs while rehiring has ominously flat-lined; Battered U.S. oil companies breathe sigh of relief as oil makes fragile recovery to (barely) sustainable level; Businesses who cater to richest 25% of Americans have suffered most; Record levels of food insecurity hit U.S. and U.K.; Covid-19 stimulus programs drive global debt to stratospheric World War II levels; The outbreak that wasn't: Could $5 facemasks be the best way to stop a second wave?; Radical at-home antiviral pill could make millions of doses available to fight Covid-19 as early as fall.
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A lot happened this week that could affect investors. This week, the major news tilted toward 2nd-wave related virus data, and the economic repercussions of the crisis. Before jumping in, here's a quick summary of the series so far:
U.S. Continues to Plateau In a Potentially Uncomfortable Place
This week, the U.S. continued to battle the coronavirus that causes the Covid-19 disease. And this week, more than 4,300 people died as the death toll climbed to 121,451 (versus 117,141 last week).
For the third week in a row, the country has stalled out in reducing the death curve. The national death doubling rate (the time it takes for deaths to double) remained unchanged at two months (eight weeks):
What does this mean as far as controlling the epidemic? This plateau is significantly higher than many European and Asian countries (with U.K. and Japan at 3 months, Germany at 5, Italy at 8, France at 11 and South Korea at 11+ months).
And John Hopkins University released data this week showing how this translates into maintaining control of the disease. Below are new coronavirus cases in the U.S. versus E.U. (which are roughly the same size). The comparison is actually unfair to the E.U., because they have more people (445 million versus 328 million) and have tested a larger percent of their population. So it will make them look worse than they really are. And yet sadly, they are currently trouncing the U.S. in controlling the virus:
Some epidemiologists have pointed out that this has puts the U.S. in a much more uncomfortable position, if we have to endure a second wave. A serious second wave could cause significant re-lockdowns, wiping out all the economic progress we've made so far, and would be crippling to the recovery.
Ominously, the tail end of the U.S. data looks like that wave could already have begun (more on this in the section below). Currently, the E.U. shows no such signs.
We must keep in mind that it does take time for any new infections to show up as deaths (3 to 4 weeks, sometimes more). At this point, the death rate is not yet rising. And in fact, this week, there was actually a modest improvement (similar to last week). So, at least for the moment, that is looking good:
How are other countries doing?
This week, South Korea continued to lead most of the world again for both minimizing deaths (one of the lowest per million) while also minimizing economic damage (growth is projected to barely shrink this year, and without needing to borrow trillions of dollars for stimulus). This week it stayed largely in the (low) plateau that it was in last week:
As we discussed in part six, South Korea uses an aggressive mixture of the Three T's of disease control (testing, tracing and treatment).
Japan has gone with a similar strategy (although much lighter on testing and more low-tech on contact tracing). And previously they had significant success. But this week was not a good one and they appear to be caught in a second wave:
On the other hand, Japan is rolling out a new high-tech contact tracing app which they hope will be part of turning things around.
We'll see how they do next week.
Meanwhile, Sweden has opted with a lockdown-lite strategy (see part 8). The hope has been that if this works well, it might provide another workable model for other countries looking to deal with the virus.
However, Sweden has been plagued with uneven performance and multiple waves of infection. But this week, the country proved that it really did turn a corner last week by continuing to beat down their fourth wave:
This was good to see. In the past, Sweden has done this only to relapse with another wave. Hopefully, we'll see them successfully sustain this trend into the next week (and beyond).
Sweden's death rate continues to be three to seven times higher than their Scandinavian neighbors (see part 12). And lockdown-lite continues to appear to have failed its main economic objective. 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.
How to Create a Raging Pandemic without Even Really Trying
When the U.S. and Europe went into virus lockdown a few months ago, there was no scientific evidence on the best way to do it. Would it be better to lock in restrictions as early as possible, or wait to fine tune the response? Would it be better to lockdown hard (universally), or better to gently ease into it based on the circumstances and local conditions? And would either of these two factors (speed and severity) be more important than the other?
Since there was no consensus, different countries tried different things. And even though this was chaotic and confusing, we now have a lot of very useful data that can be analyzed. So it's now possible to look back at what happened and see what worked well and what didn't.
On Tuesday, economists at Bloomberg released a fascinating study that did exactly that. They combined lockdown stringency data from Oxford University and virus health data from John Hopkins University to see how these affected the success each country has had. And the results were intriguing and also surprising to many.
Countries who enacted their full suite of containment measures within the first 35 days of reporting a case were considered "fast responses". Others (like the U.K., which initially was taking a do-nothing "herd immunity" approach before changing at the last minute) were considered "slow responses".
Countries that implemented a broad array of mandatory measures on things like size of gatherings, domestic travel and restrictions for the entire country were considered "strong" responders. Others that merely made recommendations or put in place smaller measures or only regionally were considered "weak". (Japan, Sweden).
So what did they find?
Unsurprisingly, the severity of a lockdown mattered. Strong lockdowns resulted in much less deaths per million then weak ones.
But, surprisingly, severity was not the most important factor. The speed of the lockdown was even more important than the severity. In other words, a weak lockdown that was implemented early was a lot better than a strong lockdown implemented late (resulted in less deaths per million). Here's how it ended up working out:
If this analysis is correct, it would explain the puzzling success of Taiwan. The country has been a huge success story and has currently beat down their deaths per million to almost 0. This is especially impressive since they are located right next to China and heavily interconnected with hundreds of flights going back and forth on a daily basis. So they were hit hard and fast and without any warning. And they have not locked down very severely (lock-down stringency of only 30%). And yet they've gone from a peak of about 18 cases per million to now virtually containing the virus (at less than 1):
(By the way, the reason I do not include Taiwan in my weekly world analysis is that it's almost impossible to get their data. This is because China wants to ultimately take it over and "reunify" it with the rest of the country. And toward that goal, they have strong-armed virtually every other country in the world into refusing to recognize Taiwan as a separate country. This includes the U,S. Thus, it's not possible to get any health data on it from the U.S. CDC sites or other authoritative sources. This is a shame, considering how successful they've been, and the lessons they could probably teach many countries.)
In comparison to Taiwan, others such as the U.K., Russia and Brazil locked down much harder (75%, 87% and 81% respectively). But all of them took much longer to do it. And they paid an enormous price: peaking anywhere from 6000 to 30,000 cases per million (versus just 18 in Taiwan).
Perhaps this also explains the failure-to-date of Sweden's "lock-down lite" to live up to expectations. They went with a weak lockdown, but took their time implementing it. And today, they have far and away the highest deaths per million of all Scandinavian countries (3x - 7x more per part 12)
On the above graph, you can also see the U.S. Despite the first case occurring in January, most states did not cancel large gatherings or close schools until mid-March. So this puts it firmly in the "slow responses" category. And even though the lockdown was relatively hard (72%), the deaths per million have been high compared to a lot of other countries (see part 14).
The researchers noted that the reason the U.S. lockdown was not considered to be the hardest, is that it was actually laxer than the hardest crackdowns. For example, a ban on travelers from China was placed early, but then virtually nothing else (until a much later freeze on just Europe). There were no other travel bans, and virtually all people were allowed to travel between states.
Additionally, containment measures in the U.S. were often just suggestions rather than requirements. And they were handled inconsistently and haphazardly by different state and local governments which often didn't agree.
If this report is accurate, then what does this mean in terms of fighting back a potential second wave?
It means that speed is of the essence. And as you'll see in the following section, some states are indeed responding to the possible threat quickly and reversing course. This may prove later to be very wise. Others are not, and may unfortunately end up paying the price. (See more below).
Georgia's Economic Reopening Continues to Flop
One of the most important questions for investments (as well as the health of the country) is "what will the shape and speed of the recovery be?" If it's V-shaped and quick, then many investments will be just fine. On the other hand, if it's one of the other shapes (U-shaped, swoosh, etc.), then some or many investments could run into problems. (See part 14 for more information on the possible "recovery shapes" and their ramifications).
To monitor the evolving situation, we've been watching Georgia very closely. It was one of the first states to reopen. So this makes it one of the most useful early indicators of what may be in store for the rest of the nation.
Georgia Governor Brian Kemp reopened nail salons, hairdressers, bowling alleys and gyms (as long as they followed state protocols) on April 24th. Then three days later, restaurants and theaters were allowed to reopen. So they've effectively been open for almost 2 months.
How are they doing? Since there's no official government or state data on this, we've been looking at Placer.ai. This is a service which tracks mobile phone usage to different types of businesses to measure foot traffic.
In past weeks, we've looked at McDonald's, Applebee's, the Cheesecake Factory, Gold's Gym, Denny's and IHOP. To date, all have been very unprofitable-looking (ranging from -41% to -48% foot fall versus the previous year) and appear plagued with a slow (swoosh-shaped) recovery.
Kohl's and Anytime Fitness were doing relatively the best at -20.22% and -20.83% (foot fall versus the previous year) respectively. While still at depressed levels, the speed of their recovery was much faster and looked like a quick-er, V-ish shaped recovery. But both stalled last week, which was potentially troubling.
So let's start with these two, and take a look at how they did this week:
Wow. Kohl's is looking great for the first time since the pandemic hit, at just -4% foot fall from the previous year. They recovered from their plateau and are looking very good.
How about Anytime Fitness? This is an unconventional gym where customers have the key, so they don't have to talk to a front desk person and should theoretically be able to exercise with less people around by going during off hours.
Unfortunately, this was not a good week for them as they not only failed to improve at all but actually regressed. Footfall is actually worse this week than last week at -20% versus the previous year (in comparison to -15% last week). We'll see how they do next week.
Next, let's take a look at a more traditional gym. This week we'll try a new one: LA fitness:
Business actually was worse for LA Fitness this week as well, dropping from an already debilitating -55 to -60%. This looks very unlikely to be profitable:
How about a retailer like Barnes & Noble?
They improved ever so slightly from -43% to -40%. While better than LA Fitness, this is still not good. After what looked like arguably a very slow V-shaped recovery, it stalled out this week into more of a slow swoosh. We'll see what happens next week.
Let's try another retailer like Bloomingdale's:
This one is even worse. They have stalled out at essentially -72% footfall. This looks like a company that may be going out of business if this keeps up for too much longer.
Finally let's take a look at one more. McDonald's is a business that never had to fully shut down and does a lot of take-out. So it should theoretically be recovering much better than sit down restaurants:
On one hand, McDonald's is looking a lot better than many of the other sit-down restaurants we've seen at just -26% (versus -29% last year). On the other hand, that's not enough to return to former profitability. And the other thing is that the fast V-shaped recovery that started early off has deteriorated into a slow swoosh (with some backtracking in the middle as well).
Overall, Georgia looks like it has a few bright spots (certain retail like Kohl's). But the vast majority of in-person retail, gyms and even take-out restaurants are doing pretty poorly so far.
We will continue to monitor and see what happens next week.
Ominous Signs of a Second Wave in Florida, California And Arizona.
As we talked about previously, a second wave of the virus that is uncontrolled could be economically catastrophic. If we have to reimplement lockdowns, all of the progress so far could be lost. And the result would probably be a W-shaped recovery which would be painful. (See part 14 for more information on the possible recovery shapes and their ramifications).
So far, the U.S. has avoided using the more aggressive techniques that have worked to control the virus in other parts of the world (See part 6 for the 3T's of disease control: testing, tracing and treatment. And some epidemiologists had feared this avoidance might not be a sustainable strategy.
Last week, we looked at how new virus cases are swelling in Arizona, Texas, North Carolina, and South Carolina. And it could not be explained away by increased testing, because the increases exceeded that. This indicated the virus was spreading and was a very troubling sign.
What does it look like this week? Let's first take a look at a new state: Florida. This week it grabbed headlines, because Apple announced that it would be closing stores in that state due to virus concerns (see below). And every day of the past week, the state set a new, grim record for the most positive corona-virus cases ever. And in each case the record lasted only one day as it was beat by the following day:
On Tuesday, Florida Governor Rick DeSantis reiterated his previous claim that Florida is not experiencing an actual virus outbreak. Instead, he said, this was just a statistical aberration caused by increased testing showing higher cases.
Is this accurate? Here's a look at the data over the previous 14 days, prior to June 14:
So DeSantis was correct that testing had increased (by 20%). However, positive cases had increased by 120% (almost 6 times as much). So, increased testing cannot fully explain the very troubling acceleration in cases.
As we've discussed previously, though, no statistic is perfect. And if the testing is picking up something real, the truth will eventually show up in deaths as well. And since it typically takes a couple of weeks for a person to test as infected, and several more to die, there is a lag before an outbreak will show up here.
As you can see in the graph above, so far, deaths are holding steady. So we will monitor this over the following weeks to see what happens.
In the meantime, Gov. DeSantis said the current plan is to continue full steam ahead. On Tuesday, he vowed, "We are not shutting down, we are going to go forward."
Can Texas Two Step Around a second wave?
So how was Texas looking this week?
Eerily, it looked like almost a mirror image of Florida and also set seven consecutive record highs this week for most cases ever. And it also would then beat the record the next day. In just two weeks, cases have soared 66%:
Unlike Florida, the Texas death rate did increase a small amount. Again, it will take at least a couple of weeks for new cases to show up in the statistics so we will be monitoring to see what happens.
In the meantime, some intermediate statistics do not look promising. Virus-related hospital admissions increased 38% in the past 14 days. And currently only 1/4 of hospital beds are still available (15,000 of 60,000 total).
On Tuesday, Texas Governor Abbott claimed that there was "no reason today to be alarmed" and said that the hospitalizations are at a manageable level. Some epidemiologists noted that the nature of exponential growth means that the situation can be manageable one day and then unmanageable the next.
Additionally, the Governor came under fire from the mayors of nine major Texas cities (Houston, Dallas, San Antonio, Austin, Fort Worth and El Paso). Back on April 27, Abbott had signed an executive order prohibiting local jurisdictions from imposing any civil or criminal penalties to people who don't wear face coverings. But many health officials believe that mask wearing is crucial to controlling the virus. So on Tuesday, the nine mayors sent a letter to the governor saying that in order to protect their cities, they need the authority to set their own rules on face coverings. As of yesterday the governor had not granted them that authority and is not expected to do so.
Ironically, Governor Abbott has also come under criticism from his own political party for that same executive order, but for a different reason. State Senator Bob Hall criticized the health orders for placing enforcement responsibility on overwhelmed business owners and called them "...bizarre, convoluted, and confusing. Business owners will become a de-facto law enforcement arm, but the only tool they will have to enforce the mask requirement is to refuse to sell to their customers and to kick them out of their store," Hall wrote. Requiring a business to do this can be potentially dangerous and even lethal. In some parts of the country, employees have been assaulted and even killed for asking customers to wear masks.
Meanwhile, Arizona also set several all-time highs for new corona-virus cases this week:
Similar to Texas, Arizona has also seen a surge in the death rate (up about 30% since the trough in late May).
And intermediate statistics also look troubling as beds and ventilators, used for Covid-19 patients, hit record numbers this week.
Arizona Govorner Doug Ducey admitted in an interview today that the state was "headed in the wrong direction" and that he'd made "mistakes". At the same time, he also did not announce any plans to pause the state's reopening or implement statewide mask requirements seen in other states.
Meanwhile, the Governors of Utah, Oregon and Nevada have announced that they are taking the opposite approach, and have halted their states' reopening plans until they get on top of the new infections. In addition, Roy Cooper, the Governor of North Carolina, is expected to make a statewide mask requirement this week. If he does, this would match mask requirements in Connecticut, Delaware, Hawaii, New Jersey New York Pennsylvania and Rhode Island.
Apple Forced to Re-close 11 Stores in Florida, Arizona, North and South Carolina.
Way back on March 22, Apple came out with some encouraging news. After having to close all of their Chinese stores in mid-February because of the pandemic, things had drastically improved. The company had determined that things were safe enough for their employees and customers to reopen all 42 of those stores. (See part four.)
This was especially encouraging because at the time the U.S. was just starting to enter the virus crisis. And Apple had been forced to shut down all of its U.S, stores just a week and half before. So it was promising to get a glimpse of our future and see that there was indeed light on the other side of the tunnel.
Then, from mid- to late May, the U.S. hit another important series of milestones. During that time, Apple announced that everything was safe in the U.S. to reopen all of its domestic stores.
So this week, more than a few were discouraged to learn that Apple is being forced to backtrack in some parts of the U.S. On Friday, the company announced that they are closing 11 stores in Florida, South Carolina, North Carolina and Arizona over the dramatic increases in positive Covid-19 testing and concerns about the negative publicity from a possible outbreak linked to their stores.
Apple wasn't the only company to reverse course this week. In a significant setback for the cruise industry, the major lines agreed to suspend voyages from U.S. ports until at least September 15th. And AMC, which initially said it would make facemasks optional when it opens next month, came under withering criticism. So it backtracked and said it would require all moviegoers to wear facemasks when it reopens.
China Goes Into Hyper-Reaction Over Tiny Infection Cluster In Beijing
As we discussed in part 1, China has used a combination of impressive high-tech and scary authoritarian tactics to control the disease in the country. It has sophisticated contact tracing that gives every citizen a color code on their mobile app. Those with a yellow or red code (meaning they've been in contact with an infected person) are not allowed to travel on public transportation, go to work and generally can not even leave their homes. Those who didn't follow orders have been barricaded into their homes against their will. And people who have not worn masks have been publicly shamed by parading them around the city and tying them to trees in public places.
So, while extreme from the point of view of the West, these tactics have been extraordinarily successful in virtually eliminating the virus. While many in the US question the complete accuracy of official Chinese statistics, U.S. companies with boots on the ground confirm that virus infections are indeed very rare. And they confirm that the official statistics below (while probably not perfectly accurate) are most likely roughly correct:
So last Saturday, it was notable when Beijing authorities suddenly announced a new outbreak in the heart of the capital city. A single man tested positive after buying salmon from a vegetable market, which caused authorities to immediately go into hyperspeed control mode. They immediately removed salmon from all markets and stores in the city, and forced all frozen and fresh meat to be screened. (A few days later, they confirmed that the disease was unlikely to have been spread by food and reversed the ban).
Additionally, they began mandatory mass testing of 365,000 people in all surrounding areas over the next five days. And they kicked in their high-tech contact tracing.
Ultimately, they tracked down 150 infections in the cluster. And through contact tracing, they determined the outbreak was actually caused by asymptomatic people starting in late April.
The advantage of contact tracing is that it is a very precise tool. They never had to shut down the whole city and instead just targeted very specific parts of a small district where the infected people had visited. Within those targeted areas, they reacted quickly and severely: shutting down all hotels, restaurants and schools (nine kindergartens and elementary schools). They also closed flights and designated five residential compounds as high risk (confining 32 people to their homes for two weeks). This seems to have done the trick and brought the cluster under control. They will know for sure in the next week or so.
Meanwhile, some pointed out that this event clearly illustrates the differences between Chinese and U.S. strategies in dealing with the disease. In the U.S., it's difficult to imagine that any state would care enough about a small cluster of 150 people to change policy at all, let alone move so aggressively. But in China, they mobilize the entire state, and apparatus moves quickly and decisively.
Some further surmised that if we don't get a treatment/vaccine sooner rather than later, we may need to adopt at least some of their strategies (modifying the more severe techniques to work in a free society). Others opined that this would not be necessary and the U.S.'s current strategy would prevail over China's in the end.
We will continue to monitor in the coming weeks to see what happens.
U.S. Can't Seem To Stop "Bleeding Out" Millions of Jobs While Rehiring Has Ominously Flat-lined.
The weekly jobless claims report came out again this Thursday. For the 12th week in a row, more than a million Americans lost their jobs. This week, it was 1.51 million, which was barely changed from the 1.54 million last week. So economists hoping for signs of an end to the blood loss were again disappointed.
As we've talked about in the past, the "continuing claims" is an even more useful report to examine at this stage of the crisis. That's because jobless claims give us only half the picture of how many jobs have been lost. We also need to know how many people have been rehired to get the full picture..
Unfortunately, for the second week in a row that picture was not looking great. As you can see in the above graph, continuing claims (people who remained unemployed after previously filing a claim) were stuck at 20.5 million people. This was imperceptibly down from 20.9 million last week. After peaking three weeks ago at 25.1 million, some hoped that we would see a rapid descent. That kind of rehiring would be expected to also cause consumer spending to recover quickly. And since that spending is the bedrock of the economy, it could enable a wider V-shaped recovery all around.
However, not only was there no rapid descent, but there was barely even any descent, at all. If anything, the recovery looks more like a patient that has almost flatlined.
Let's hope that next week the statistics look a lot better.
Meanwhile, federal chairman Jerome Powell testified to Congress on Tuesday, and claimed most believe a full recovery won't be quick. "We would expect to see large numbers of people during this period coming back to work... call it the bounce back or the beginning of the recovery. ... I think most if not all forecasters think that will leave us well short of where we were in February.”
On the other hand, the economy got some good news on retail sales. On Tuesday, the Commerce Department announced that sales had advanced by 17.7% which is a record not seen since the data was recorded in 1992.
On the other hand, this was arguably only a record because it had fallen by previous record amounts in the last two months. While it was not enough to make up for those declines, the rapid V-shaped improvement was welcomed.
At the same time, some economists noted that when paired with the very poor unemployment data, it suggests that much of the spending was probably done via one-time stimulus checks. So if unemployment doesn't turn around quickly, we would need Congress to pass additional stimulus to sustain the momentum. But currently, Congress has not been able to come to an agreement on this. So, without any further stimulus, it's likely that this improvement will quickly fade in the next month or two, and will not be sustainable.
Also, digging deeper into the data, the recovery wasn't as broad as some were expecting. The vast majority (44.1%) was driven by motor vehicles. These traditionally make up only a fifth of retails sales, so it's also questionable how much carrying power this dynamic could be expected to exert in future months.
Looking even closer, some of the other sectors recovered spectacularly and yet are still hurting. For example, clothing was the biggest gainer and skyrocketed up 175% from last month. But even this merely placed it at a very painful and unsustainable -60% year on year. Other sectors that continue to be hurt, despite tremendous month on month gains are clothing, department stores, bars and restaurants and gas stations.
So, the data is showing a recovery in some areas, but not a broad one overall. And an uneven recovery is unlikely to support an economy-wide V-shaped recovery.
Battered U.S. Oil Companies Breathe Sigh of Relief As Oil Makes Fragile Recovery to (Barely) Sustainable Levels
This pandemic has been a nightmarish train-wreck for many U.S. oil companies.
Before it hit, the industry employed 1.7 million workers. And fracking had revolutionized the country's foreign and economic policy by making the country virtually energy-independent and an oil exporter for the first time.
But, frackers are also heavily indebted and generally need oil prices at $40-$50 a barrel just to break even. And back in mid-April (see part 9), prices cratered to a devastating $10 per barrel. This was because lockdowns had caused the need for oil to plummet, and prices collapsed along with the demand. In the brutal carnage, numerous U.S. companies announced the cessation of operations and/or the shedding of thousands of jobs.
But unfortunately, the train wreck was only beginning. In late April (see part 9), all the oil-producing countries (OPEC, Russia, U.S., Mexico) agreed to cut supply to try to turn things around. But it was too little too late. As U.S. frackers ran out of room to store the excess oil, the futures price of oil dropped below a mind-boggling $0 per barrel for the first time in history. This means that companies were actually paying oil purchasers to take oil off of their hands. And at its worst, it got as low as an apocalyptic -$40.32 per barrel.
However, on Friday, about two months later, an important milestone was hit. The futures price for U.S. oil (West Texas Intermediate or WTI) rose back above $40 per barrel for the first time since the crisis hit. And the recovery has been global with the price of European oil (Brent Crude) also hitting the same mark:
Why has this happened? Europe, India and Japan are still depressed but China's oil consumption is now close to pre-crisis levels. And different parts of the oil market have done better than others. Gasoline is seeing a quick, V-shaped recovery. On the other hand, diesel (which is more closely linked to the business cycle because it powers industries and freight) is still hurting. And jet fuel remains abysmally depressed and has barely moved off the lows from the peak of the crisis. Expert opinions vary widely on the full extent of the damage. But some believe that consumption may now be about -10% to -15% below normal levels.
For this reason, few traders currently expect prices to return to $50 per barrel in 2020, let alone the $70+ per barrel peak from 2019. Morgan Stanley estimates that the shale industry will need two years of WTI trading at least $50 per barrel for shale output to rebound to pre-Covid 19 levels.
In the meantime, Chapter 11 bankruptcies in the industry have risen and are expected to continue to do so. Yesterday, Extraction Oil & Gas, a large shale driller in Colorado, declared bankruptcy. And Chesapeake Energy, which many consider to be the poster company for debt-driven shale fracking, is expected by analysts to file for bankruptcy any day.
And there are some concerns that the fragile recovery could be aborted. In the past, oil-producing countries have tended to break their agreements once prices recover. So many are looking very closely to see if everyone complies or if some countries are tempted to flout the rules. Also, some analysts are concerned that a second wave of the virus that requires renewed lock-downs could throw the recovery into reverse and exacerbate the damage even more. So, many will be closely watching the latest developments, and so will we.
Businesses Who Cater To The Richest 25% of Americans Have Suffered the Most
Which businesses in the U.S. have been hit hardest by the crisis? A Harvard research group analyzed data from credit card processors, payroll companies and financial service firms to find out. And on Thursday the published a treasure trove of information on consumer spending.
The first thing they discovered was that the richest 25% of Americans cut their spending the most during the pandemic:
For example, last month, high income Americans cut spending by 17% (versus just 10% and 4% for medium and low income Americans, respectively). And this effect was compounded by the fact that the wealthiest normally tend to spend a lot more than the rest anyway. As a result, since January, 50% of the total dollar reduction in credit card spending has come from the highest quartile group while only 5% came from the bottom quartile.
Most of the drop came from huge reductions in goods and services that require in-person contact: hotels, transportation and food services. Meanwhile, spending on things like landscaping and home swimming pools held steady.
The researchers also found that "State-ordered reopenings of economies have little impact on local employment" and "the primary barrier to economic activity is depressed consumer spending due to the threat of Covid-19 itself as opposed to government restrictions on economic activity." If accurate, this matches up with what we've seen so far in the Georgia data.
They further theorized: “The only path to full economic recovery in the long run may be to restore consumer confidence by addressing the virus itself." This echoes the opinions of a growing number of economists who believe there can be no long-lasting recovery until the virus is somehow brought under more control.
The researchers also found that the worst hit businesses were those that cater to the top 25% or are located where the top 25% live. For example, small businesses in wealthier regions laid off 65% of their low wage earners while only 30% lost their jobs in low-rent areas. And revenues in the most affluent ZIP codes in large cities fell by more than 70% between March and late April, compared to 30% in the least affluent areas.
This led them to conclude that "Stimulus payments to low-income households increased consumer spending sharply, but had modest impacts on employment in the short run, perhaps because very little of the increased spending flowed to businesses most affected by the COVID-19 shock." And even though small businesses were hammered the most, this led them to conclude that "Paycheck Protection Program loans have also had little impact on employment at small businesses."
If true, this would be consistent with what we have seen in previous weeks, where significant amounts of government stimulus have not seem to have gotten to the intended targets.
Covid-19 Stimulus Programs Drive Global Debt To Stratospheric World War II Levels
It's unusual to get economists to agree. Yet, when the pandemic hit, virtually all agreed that governments needed to unleash massive stimulus. Even though this meant heavy borrowing, it was the only way to "live to fight another day" and avoid the Covid-19 shock becoming permanently debilitating.
However, governments aren't the only ones strapped for cash. Consumers in every country are also tapped out, and taking on record levels of debt.
This week, Goldman Sachs put out a report using International Monetary Fund (IMF) data. And they found that the level of debt taken on by country governments and people is truly stratospheric. Debt in developed economies is now higher than it was in the 2008 financial crisis and similar to World War II. And emerging economies are even more indebted and have exceeded both:
Some economists argue that huge debts like this could be difficult to pay off and could continue to be a drag on growth for a long time. And since the poor tend to have more debt than the wealthy, it may contribute to growing inequality and social unrest. And more than a few believe that we may be coping with the consequences of these debt levels for years or decades after the crisis is long gone.
Record Levels of Food Insecurity Hit U.S. and U.K.
On Friday, the UK's Northumbria University released a bombshell survey in which they found that almost a quarter of UK citizens (about 16 million) have been unable to afford adequate food during the pandemic. And almost one in four adults who have children have eaten less so they could afford to feed their children.
The U.K. isn't alone as the hunger crisis is spreading globally along with the virus. Sadly, the U.S. has not been immune and has also been experiencing record levels of food insecurity.
In April, the Covid Impact Survey (in cooperation with The Hamilton Project and Future of the Middle Class Initiative Survey of Mothers with Young Children) found that a startling 22% of American households couldn't afford adequate food. And that number rises to a mind-boggling 34% of households with children under 18 (more than a third).
This is the worst on record since the survey began in 2001 and dwarfs even the worst of the Great Recession (which peaked at about 16% of households and 21% with children under 18). And households with children under 12 have done even worse, climbing up to horrifying percentages, with 41% going hungry (which is almost double the worst of the great recession at 22%).
Many adults in that last category reported that they are going without food to keep their children fed. As a result, child hunger was less, but still shocking at 17% (or about 1 in 6).
Unfortunately, the situation is expected to get worse before it improves. Feeding America, a nonprofit devoted to addressing hunger, projects that up to 45 million Americans (including one in four children) may be going hungry at some point in 2020.
Some economists fear that this could produce a drag on recovery, since hungry workers are less likely to be able to find work and/or be productive. Meanwhile, Feeding America reports that demand is already surging enormously and over 40% of the increase is from people who have never been to a food bank before. Typically, they are people who have recently lost a job or are supporting sick family members.
While all professions are seeing large jumps in hunger rates, professions involving the service industry, transportation, production, construction, sales, and office support, installation, maintenance and repair have been hit the hardest:
As a result, many Covid-19-assistance food lines are backing up traffic around the country. For example, the photo below was taken of a food line in my hometown of Tampa, Florida, at the end of April. And it's only a portion of the thousands who waited in that car line for hours that day.
Feeding America reports that awareness of the hunger crisis is rising, but aid is still insufficient to meet the need. As a result, growing numbers of local civic leaders (like Mayor Jane Castor in my town) are asking citizens who are doing okay, to consider lending a hand to those who aren't.
The Outbreak That Wasn't: Could A $5 Facemask Be The Best Way To Stop A Second Wave?
In part 12, we shared the fact that many Covid-19 outbreaks have started with an infected person who is not sick enough to feel they have to stay home. Typically, they go to an indoor place and interact with other people for a period of time (with louder talking or singing more likely causing more spread). And contrary to popular belief, the 6-foot rule has often been woefully inadequate. Sadly, more than a few have caught the disease (and even died) despite maintaining at least that distance and having no physical contact with the infected person.
So, all of these ominous conditions were present in late May at a Great Clips hair salon in Springfield Missouri. Two of the stylists, who were later diagnosed as Covid-positive, felt sick but continued to work. Technically, this was a violation of company rules, but some suspect they probably felt immense pressure to hide their symptoms, because they needed to continue earning money.
The stylists then interacted with 140 customers at close range for 20 to 30 minutes of time over a period of several days.
When the infections were finally uncovered, 46 of those clients were tested and the remainder were quarantined for two weeks. Amazingly, local health officials reported that not a single one of those tested was infected. (It is still possible the non-tested were sick but asymptomatic.)
What was the difference between this and the other super spreader events we discussed, where many were infected and some were killed? Scientists believe that the essential factor was that both the stylists and the customers wore masks.
In many Asian and European countries, mask wearing has become widely accepted as an important public health tool. However, in the US, mask wearing is much more spotty. According to a Gallup poll in April, only a third of Americans said they always wear a mask in public (36%). Another third said they sometimes do (32%) and another third said they never do (31%). Since this was self-reported data, the actual numbers wearing masks may arguably be even lower:
Women tend to wear them more than men (44% versus 36%) and the highest-educated more than the lowest (46% versus 30%).
Experts theorize that, at least in part, the reason for so much mask ambivalence is because the health message from authorities has been garbled. Initially, for instance, the CDC actually discouraged wearing face masks until it reversed course on April 3.
Additionally, the wearing of masks has become politicized with people of one political party tending to wear masks less reliably than the other.
Radical At-Home Antiviral Pill Could Make Millions Of Doses Available To Fight Covid-19 As Early As The Fall
On Friday, US biotech company Ridgeback Biotherapeutics announced its experimental Covid-19 antiviral treatment had passed phase 1 human safety trials and is now recruiting patients for the second phase.
The drug is called EIDD-2801. And unlike a vaccine, it works by planting molecules in the virus's RNA genetic material. In test tube experiments with human lung and airway cells, this triggered mutations with every replication. And this ultimately stops the spread in its tracks, as the virus becomes unable to duplicate itself.
Before the human safety trial, some were concerned that EIDD-2801 might also cause unexpected mutations in the DNA of the human patients. This was the case with other drugs in the same family, which were not able to pass animal tests for this reason. So the passing of both animal tests and human phase 1 trials was a much more significant milestone for this treatment than most. Both Ridgeback Biotherapeutics and Merck claim the risk of unexpected mutations is mitigated because the medicine will be prescribed only for a short five-day course.
Unlike more complex treatments that have to be delivered in a hospital setting (like Remdevisir which has to be administered by an IV), EIDD-2801 is in pill form. So it's easy to take and could be self-administered by quarantining patients at home. The regimen is two tablets twice a day for those five days.
And its use may not be limited to just Covid 19. There's also early clinical evidence which suggests it may be effective against other coronavirus strains including Secure Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS). The lead author of the initial laboratory study of EIDD-2801, Timothy Sheahan, of the Department of Epidemiology at the University of North Carolina at Chapel Hill, said in a statement from the journal. "This has the potential to be as ubiquitous as Tamiflu in the future, as long as it proves to be safe and effective in people."
The drug also has another good quality: a remarkably high barrier to resistance. Many drugs tend to cause viruses to quickly develop viable mutations to fight it, and this makes the drug itself obsolete. But so far, scientists have not seen any evidence of that with EIDD-2801 in lab tests that were designed to try to force that situation to occur.
Phase 2 will involve 100 patients in two trials being conducted at Emory University in the North Carolina and Baltimore campuses. If successful, it will prove efficacy (that the drug works) and allow progression to phase 3 (expanding it to a larger number of people).
If that succeeds, then the company will need to ramp up production quickly. In anticipation of this, RideBack signed a partnership deal with Merck, a huge U.S. pharmaceutical group. But the transaction is still pending regulatory clearance. So in the meantime, they are proceeding with their own production plans.
The firm says they have already started manufacturing hundreds of thousands of doses of the drugs without knowing what the final verdict will be. If the trials fail, then the money will have been wasted. But if it succeeds, that it will give them a huge time boost. The company plans to “produce as many as a million treatment courses” by the fall.
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 everything is essentially the same as last week.
Treatment: I believe chances are good we'll have an effective medicine for Covid-19 (i.e. antibody treatment, vaccine, etc.) by fall or winter of this year. And with some luck we could even have more than one. Unfortunately, it's also unlikely it can be manufactured and distributed in large enough quantities to immediately treat everyone who wants and needs it. If that happens then it will not be enough to super-charge the economy right away. 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 between rich and poor countries.
Recession? We've already had one quarter of negative growth in Q1 (-4.8%) and Q2 will be record-breakingly bad. So a technical recession (2 consecutive quarters of negative GDP growth) is inevitable.
Shape of the recovery: In part 14, we talked about how the shape of the recovery (V-shaped, U-shaped, swoosh-shaped, W-shaped, L-shaped, combo-shaped etc.) will have a huge effect on the ultimate outcome of many different investments. So far, pretty much everything that's happened has been much worse than the consensus expected. Pretty much no one saw the lock-downs coming back in February. More people have been killed than originally projected. Many more than expected have lost jobs. The stimulus and unemployment aid was enormous but has too many unexpected holes and isn't getting to millions who need it the most. States are starting to reopen but most individuals are still choosing to stay at home anyway. 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 a second wave of the virus and a second lock-down. Unfortunately this is looking more and more likely. The one slim hope is that for now it has not shown up strongly in the death stats. So I'll continue to monitor the data very closely. Currently, I believe we will have a 3 stage combo-shaped recovery that starts off (1) quick 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 and a slow swoosh will become apparent. If we get a second 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 3rd stage and an accelerated recovery. But this most likely won't be a straight-V up recovery because it will probably take time to ramp up production and delivery to enough Americans to get herd immunity. (And that will depends on which treatment makes it that far...which we don't know at this point). So it will be a slower boost. But we also could get a little lucky (for example, if the successful vaccine treatment is of a newer type that can be scaled up more quickly). If so the 3rd 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 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 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 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: 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 dislocated and 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. And, as I mentioned above, the virus getting out of control again in large areas and forcing large lock-downs a second time, could easily make things worse.
How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 18: June 27th
U.S. appears to stuck on uncomfortable plateau for 3rd week; European Union will probably ban U.S tourists on July 1; Watching hospitalizations: The kids are not so all-right; State death rates: last sign of hope for smooth sailing or calm before the deluge?; Georgia's reopening: The haves and have-nots; Is reduced restaurant spending this week the canary in the coal mine?; Comatose jobs recovery flat-lines at dangerous levels; Study Finds Most middle-class Americans would get squeezed in a slow recovery; The upcoming state-budget train wreck?; Record number of US companies ask for relief on their loans; Did the coronavirus really start in Wuhan? Spanish sewer study suggests it didn't; Update on my investment strategy. See Part 18: June 27th weekly update (and latest update on my personal strategy)