How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 17: June 20th
Updated: Feb 8, 2021
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.
By the way, this is one article in a multi-part series that has been published weekly since the pandemic began back in March 2020. The series started with three introductory articles on the virus, effect on the economy and alternative investment classes. And then it moved on to weekly updates on the latest and greatest developments (along with weekly updates on my evolving personal portfolio strategy). You can see the links to every article in the series here.
U.S. 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: