How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 18: June 27th
Updated: 3 days ago
U.S. stuck in uncomfortable plateau for 3rd week; European Union likely to ban U.S tourists starting 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 flatlines at dangerous level; Study finds most middle-class Americans would get squeezed in a slow recovery; The upcoming state-budget train wreck?; Record number of U.S. companies ask for relief on their loans; Did the coronavirus really start in Wuhan in December? Spanish sewer study suggests it didn't; Update on my investment strategy
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A lot happened this week that affects investors. And the major news again tilted toward Second-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. Appears Stuck In Uncomfortable Plateau for 3rd Week
For the 15th week in a row, the U.S. continued to battle the coronavirus that causes the Covid-19 disease. And by Saturday morning, the death toll had climbed to 127,649 (versus 121,451 last week).
An additional 6,198 people were killed, versus only about 4,300 the previous week. At first glance, this looks alarming since the number of dying people had gone down every week for the past two months. Taken at face value, it might mean that the country is starting to backtrack. And initially, the daily death statistics seem to back this up:
However, the European CDC notated that on June 26, some states added "probable deaths" to their statistics. Per the Connecticut CDC, this means: "Probable cases of COVID-19 involve persons who have not had confirmatory laboratory testing (RT-PCR) performed for COVID-19, but whose symptoms indicate they are likely to have a COVID-19 infection. In Connecticut, most of the probable COVID-19 cases involve persons whose death certificates list COVID-19 disease or SARS-CoV-2 as a cause of death or a significant contributor."
This is in line with the recommendations of many health experts, who point out that test supply has been too insufficient/untimely to meet demand; that many times, hospitals use a lung x-ray to diagnose rather than waste a test or have to wait for results; and that some people opt to stay home and self-treat rather than get tested or venture into the hospital. So this death-certificate method makes the statistics more reliable.
But, it also makes it hard to compare the data from last week. So let's take a look at the more noisy (un-smoothed) daily data.
It's notoriously difficult to accurately eyeball weekly data from a daily chart. But this week looks roughly to me like it was almost the same as last. So I'm going to call it "essentially plateauing" and, if accurate, that would be the third week in a row.
Meanwhile, in what may be confirmation of this, the national death doubling rate (the time it takes for deaths to double) remained unchanged this week at a two month (eight week) period:
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 some epidemiologists have pointed out that this 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 some or all the economic progress we've made so far, and would be crippling to the recovery. Meanwhile, other countries have a lot more headroom in which to work. As an example, here's the difference in current virus infections between the E.U. and the U.S.:
Note: this comparison unfairly penalizes the E.U., because they've tested a larger percentage of their population and they also have more people (445 million versus 328 million). But despite this, they've clearly trounced the U.S., and are in a much stronger position. Additionally, the U.S. infections look worse than last week and clearly show signs of a worrying second wave (see next section). In the meantime, how did other countries do this week?
South Korea continued to lead most of the world again for both minimizing deaths (one of the lowest per million) and also minimizing economic damage (growth is projected to barely shrink this year, and without needing to borrow trillions of dollars for stimulus). This week, their death rate's decrease actually broke through the (already very 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 epidemic 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 last week, it appeared they might be encountering a second wave. The country then started aggressively cracking down, and rolled out a high-tech contact tracing app.
This week, the data brought better news: it appears that their second wave quickly crested and is retreating again:
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 exceptionally uneven performance and multiple periods of backtracking and waves of infection. But for the last two weeks, it has looked like they might have turned the corner and had beaten down the last wave.
This week was an exceptionally noisy one (even for them). On one hand, the overall long-term trend still appears to be continuing down. On the other hand, the extreme volatility makes it easy to argue that Sweden's trends are unreliable and they may very well be about to reverse.
So we'll see how their situation evolves next week.
Unfortunately, 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.
European Union Will Probably Ban U.S. Tourists on July 1.
The European Union's hospitality industry depends heavily on tourists. However, in the early stages of the virus crisis, their block of countries was hammered really hard. So, in mid-March, they banned all leisure travel from other countries.
Since then, the E.U. has had considerable success in breaking the infection curve of the virus and getting it under control. And this week, diplomats discussed how they would lift this travel ban. On July 1, they plan to accept tourists again from all countries who have done at least an equally good job of controlling the virus themselves.
However, the U.S. was not one of the 15 countries that made the provisional list on Friday. And sources have told Bloomberg that the U.S. is not under consideration to be added. (The final decision is expected to be made over the weekend or early next week).
If U.S. tourists are indeed excluded, it will continue to be crippling for both the E.U. and the U.S. economies. As mentioned above, E.U. tourism industry depends heavily on travel, and a lot of that is U.S. travel. And the European tourist market is crucial for the profitability of both U.S. and European airlines. For example, carriers like Delta profit from almost 40% more premium seat business on North Atlantic flights than on those to anywhere else in the world.
Health experts said they were not surprised by the news, because the U.S. has significantly lagged the E.U. in successfully controlling the virus (see previous section).
And as we've discussed in detail over the weeks, the countries in the E.U. have each used different strategies to fight the virus. Some of these mirror what we have done in the U.S., and others differ. So this has caused some to question if there are any common factors across the E.U. that would explain their relative success vs. the U.S.'s. And a study released by Bloomberg this week examined this question in detail.
The study used data from Oxford University and the Kaiser Family Foundation to compare European states with several U.S. states that are currently experiencing an upswing in virus cases and/or hospitalizations (Arizona, Florida, California and Texas).
After crunching the data, the economists did indeed find two consistent and interesting differences:
The European countries were more patient during lock-downs and took the time to get their epidemic under much tighter control before they reopened. The U.S. on the other hand was less patient and reopened much sooner. For example, hard-hit Spain waited until infections had dipped down to 23.2 infections per million before it opened up. Arizona reopened while it was still at 52.4 infections per million.
Once they did reopen, the European countries were much better at keeping their reinfections down. For example, a month after reopening, all of the European countries had drastically improved their situations (for example, Spain dropped to 8.4 infections per million). Not only did the U.S. not do this, but progress actually went into reverse and all the states regressed. (For example, Arizona regressed to a mind-blowing 177.2 infections per million). And the differences only accelerated over time. The most recent data for Spain showed that their infections have continued to drop to 7.3 infections per million. Meanwhile, Arizona infections were practically bursting off the top of the chart at 374.5 infections per million. This is probably due to the E.U.'s much more aggressive use of the Three T's of epidemic control (testing, tracing and treatment).
So which countries did make the E.U.'s list? Currently there are 15. Included are South Korea and Japan. We've been watching them over multiple weeks and seen their success, so this is not a surprise.
The list also includes two countries that we have not looked at before: Canada and Australia. So let's take a peek at them, now.
Here is the daily death rate in Canada:
Clearly, Canada has been successful in stopping the exponential growth of the virus and controlling it.
How about Australia? Similar to South Korea, they have gone with a strategy of aggressive use of the 3T's of pandemic control (testing, tracing and treatment). They have also similarly scaled up testing and implemented a nationwide contact tracing app.
How has this translated in so far as deaths? For whatever reason, Australian daily death data is not reported by the European CDC. However, I was able to find a wealth of information directly from the Australian government's Department of Health. That included this detailed infographic, which they update daily and which contains demographic information that is difficult to find in other countries:
As you can see, Australia has had much more remarkable success than even Canada. First, the graph of their new cases shows dramatic progress in beating down the virus.
And second, even more impressively, they have had only 104 deaths over the entire span of the pandemic in a population of 24.99 million. That is about 4.1 deaths per million. In comparison, the United States has suffered 377.76 deaths per million (or almost 94 times worse).
As you can see from the above graph, Australia's tiny number of deaths per million puts it in the upper echelons of world performance, and their death rates are similar to Japan and South Korea. These three countries are faring so much better than the U.S., to such a similar degree, that they almost look indistinguishable from each other on the chart (when it is formatted to include all the countries).
Canada is more similar to the U.S., but is still doing about one third better.
Second Wave of Virus Infections Accelerates Alarmingly
Last week, we saw troubling signs of a second wave of virus infections reported in multiple states. At the time, some had hoped they could be explained away as statistical aberrations caused by increases in testing. But unfortunately, when we dug into the numbers, infections were clearly rising faster than testing. So, the "increased testing" theory did not invalidate the spikes that were happening.
This week, the same trend not only continued but, in many states, it accelerated at an alarming rate.
Here are Arizona, Florida, Texas, South Carolina and Missouri, which are all significantly higher than their most recent troughs from a couple months ago. Arizona:
And here is North Carolina. Since it never really experienced a trough, it is arguably still in a very slow-emerging first wave:
Many health experts believe the rapid speed of the increases is an indication that the virus is again spreading exponentially in many communities.
Watching Hospitalizations: The Kids Are Not So All-Right
Some have hoped that these spikes in infections might not translate into increased hospitalizations. That's because multiple states have reported that many of the people infected currently are younger than those hit by the initial wave. For example, 44% of those testing positive in California are below the age of 35 (versus 29% a month ago). And many believe that young people are mostly immune to the disease and/or can't be seriously affected.
Unfortunately, as we discussed back in part 4, a growing body of evidence shows that the concept of youth invulnerability is inaccurate. The U.S. CDC found that 20.8% of the U.S.'s 20- to 44-year-old's with Covid actually get the disease so severely that they require hospitalization. And thousands of younger people (many very healthy and with no previous health conditions) are reporting debilitating long-term side effects from the virus, months after they were first infected. (See "Long Haulers" in Part 16).
Last week, we saw how Covid-19 hospitalizations were increasing in a couple of key states. This week, the issue appeared to escalate, with the U.S. CDC reporting increasing hospitalization rates in multiple regions across the country: Southeast, South Central, Southwest and Coastal.
The CDC also warned ominously that the actual rate of people severely affected is almost certainly higher than what hospitalization rates are showing. This is because hospitals are now using telemedicine more than they did in the first wave. And they have also recommended that patients not visit the emergency room unless it is a severe emergency. So this will artificially depress the statistics in comparison to the first wave.
And this week, more local officials raised warnings about increasing Covid 19 hospitalizations and potential hospital overload.
On Monday, officials in Houston, Texas, said virus hospitalizations were up and the city's intensive care units (ICU's) were becoming dangerously stretched.
Then, on Wednesday, administrators at Houston's Texas Medical Center reported that 97% of ICU beds were occupied. They projected they would hit 100% later in the week.
Even more ominously, they projected that overflow capacity would be maxed out at current growth rates as soon as July 8.
This caused local officials to scramble. They say they are preparing to convert a local stadium into a temporary hospital, should more overflow be needed. If this happened, it would be reminiscent of the pop-up hospitals that were required in New York City during the height of its epidemic in April (see part 6).
Many health officials urged the public to take virus precautions (like wearing masks, socially distancing and staying home as much as possible) to avoid this. And at the state level, Texas Gov. Greg Abbott reversed his earlier decision to continue reopening and agreed to pull it to a halt. He re-banned elective surgeries, closed all Texas bars (other than for takeout) and reduced restaurant capacity to 50%.
Meanwhile, in Mississippi, State Health Officer Dr. Thomas Dobbs also raised an alarm about increased hospitalizations.
"It's not just the cases. We have seen the highest number of hospitalized patients. I'm terrified we will overwhelm the health care system, the hospitals, the ICUs. Not in the fall, I'm talking about this week".
Dobbs warned that if residents did not take more care to "wear masks" and follow other guidelines, that by "late summer or fall", "Mississippi will look like New York".
Meanwhile, Mississippi State Epidemiologist Dr. Paul Byers said the state is seeing "broad community transition" that was traced back to recent cases of "parties, barbecues and other social events" in which participants weren't wearing masks.
Earlier this week, Florida Gov. Rick DeSantis also reversed his position from last week (when he planned reopening further for the July 4th weekend). Noting the large increase in Covid-19 cases among young adults, he re-closed all Florida bars.
Geoff Beere, a student at the University of Miami, claimed that despite social distancing regulations, Florida bars have been packed since they reopened in June.
"College kids are gonna be a little bit more stupid about things than older people, maybe a little more reckless,”. He also says he wears a mask during his daily life when he goes to the gym or grocery shopping, but not at a club or a party. “I’m not anti-mask, but you really can’t drink with it on.”
Beere further claimed that the crackdown would cause partiers to switch to private parties and pool parties.
State Death Rates: Last Sign of Smooth Sailing Or Calm Before The Deluge?
Currently, there's one silver lining in the dark clouds surrounding the apparent second wave. So far, many states continue to show death rates that are either up only modestly or flat. And some are hoping that will continue, and point to three factors:
Younger patients: As we talked about earlier, the average age of people infected by the disease has dropped from the first wave. And some are hoping that this will translate into a lower death rate. On the other hand, in the areas of the country being hit by the second wave, the whole population -- including the younger demographic -- tends to be significantly unhealthier than in those vicinities that were hit by the first wave, and therefore, these young people may be more vulnerable to the virus. For example, the Kaiser Foundation found that more than a quarter of the high risk population in Southern states like Arkansas, Alabama, Kentucky, Tennessee, Louisiana and Miami is relatively young. In comparison, in Washington state, where the coronavirus first hit, only 19% of young people have those underlying health conditions. So at this point, it's unknown how the two conflicting factors might play out.
Better medicines: Care for Covid-19 patients has improved since the first wave. So some hope this will translate into a lower death rate. As we talked about in part 10, Remdesivir was approved by the FDA for emergency use in May. And preliminary results of studies suggest that it may help hospitalized patients recover about four days faster (11 days instead of 15). If this is accurate, then it would seem logical that deaths might be reduced as well (although so far, there is no conclusive data supporting this conclusion from scientific studies). Perhaps a more promising possibility is the fact that some doctors are now using newer therapies that are more effective than ventilators. As we've discussed in previous articles (including part 10), ventilators currently have a shockingly poor track record for treating Covid-19, and ventilated patients suffer from a high death rate. And those who do manage to survive both Covid and the ventilator cure are suffering ventilator-caused debilitating symptoms, and some are permanently disabled. On the other hand, less invasive techniques (such as used at the University of Chicago Hospital discussed in part 10) have been found to be much more effective. These include using nasal prongs and placing the patient in a prone position. So the hope is that this will result in lower death numbers.
Milder in the summer? Several studies have concluded that the virus appears to be less hardy in warmer weather. (And we've discussed one such study in part 1.) Unfortunately, many of them are not peer-reviewed and at this point, all the evidence is circumstantial rather than conclusive. Still, there are many that believe that the virus does not persist as well in warmer weather. If that's true, then perhaps this could translate into a lower death rate than the first wave. On the other hand, the warmer weather is also encouraging people to leave their houses and in many cases, to socialize in large groups. And this encourages the spread of the virus and increases the death rate. So again, it's uncertain how these two conflicting factors might play out.
Ultimately, the only way to tell what will happen with the death rate, will be to wait and see.
And unfortunately, it will take a while: at least 2 to 3 weeks and even longer in some sections of the country. That's because there is a significant lag between when a person becomes infected and when the results can be seen in the virus death statistics.
Death lag: First, it generally takes about 2-3 weeks for a person to progress from catching Covid-19 to dying. (Some can succumb sooner or take much longer).
Administrative lag: Then, it takes time for the death to be reported. A death certificate has to be completed. Sometimes a state or other agency has to certify it. Then it has to be submitted (for example to the NCHS) and then it has to be processed. And every location has its own unique rules. As a result, the CDC says administrative lag time can delay the results from showing up in the statistics from "1 week to 8 weeks or more" depending on location and cause of death.
But, many health experts expect we should begin to see some results from the initial surge of infections, next week and the following week. We will continue to monitor and see.
Georgia's Reopening: The Haves and Have-Nots
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.
Back on April 24, Georgia Governor Brian Kemp reopened nail salons, hairdressers, bowling alleys and gyms (as long as they followed state protocols). Then three days later, restaurants and theaters were allowed to reopen. So they've effectively been open for over 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, Barnes & Noble's, Bloomingdale's and IHOP. To date, many have been very unprofitable-looking (ranging from -20% to -48% foot fall versus the previous year) and the majority appear plagued with a slow (swoosh-shaped) recovery.
Additionally, both LA Fitness and Anytime Fitness appeared to be suffering a W-shaped recovery as they regressed last week. And Kohl's was actually looking great at only -5%, and McDonald's relatively okay at -26%, but they appeared to also be backtracking from previous improvement.
How do they look this week?
First, let's look for some good news at Kohl's. They have continued to do well and are now fully recovered at an amazing +8% year on year:
This is great to see. If all the Georgia businesses were doing this (and we don't get a second wave), we could expect to see a quick V-shaped recovery.
On the other hand, here's another retailer: Nordstrom.
Nordstrom is in a much different situation and deep trouble at -57% year on year. It also appearing to have backtracked and may be experiencing a W-shaped recovery.
How are the gyms looking this week? In the past, Anytime Fitness has done relatively well with its unorthodox, low personnel, smaller crowd model. The advantage in a post-lockdown pre-vaccine world is that this should have a lower chance of transmitting the virus to customers than a traditional gym:
After progress stalled out last week, it returned to about where it was two weeks ago at -15% year on year foot-fall. This isn't bad and it could be back on the path to recovery.
On the other hand, LA Fitness does not look likely to be so lucky:
It appears to be stalling out in a very uncomfortable place. It's at a very unsustainable -55% year on year, which is about the same as it was last week (and the week before). Unless things turn around for them, it's hard to imagine that they would be able to stay in business long like this.
What about in-person dining? Let's look at Applebee's:
While they did backtrack this week to -13%, Applebee's is looking much better than the last time we checked them out. And they are looking exceptionally good in comparison to many other businesses.
For instance, here is Denny's:
This was not a good week, as they have regressed into a W-shaped recovery and at a very unsustainable -51% foot fall versus last year.
And in the middle, here is IHOP:
IHOP is progressing somewhere between Applebee's and Denny's. While the -20.92% would be considered absolutely horrible in normal times, it's a lot better than how some others are doing currently. More importantly, they are continuing to improve slowly but steadily (and arguably a very slow V-shaped recovery).
So overall, the progress of Georgia's Covid-19-sensitive businesses is mixed. On one hand, some stores appear to be recovering well or relatively well. Others appear to be struggling or close to insolvency.
So we will continue to monitor to see how it changes.
Also an X factor here, is the possibility of a second wave in Georgia, which might halt or reverse re-openings. How's the battle against Covid-19 doing in Georgia? So far, it looks modestly better than some of the other states we looked at above:
While it is definitely experiencing a surge in new cases, it is more recent (only the last one half week versus three weeks for others).
So we will continue to watch this as well.
Is Reduced Restaurant Spending This Week The Canary In The Coal Mine?
Open Table (a restaurant coupon website) reported something usual this week. Over the past month and half, restaurants in different states have shown uneven progress. But in general, most had been improving each week. However, this week, at least 2/3 of states in the country experienced backtracking. In other words, for the first time, business was worse this week across a large part of the nation,(based on year on year metrics):
On Wednesday, Jefferies LLC economists Aneta Markowska and Thomas Simons theorized in a note to clients: "The public is not psychologically immune to Covid-19 and will retrench if the virus starts spreading again, regardless of government restrictions (or lack thereof)"
This concept may be especially true of older Americans who are most at risk of being killed by the virus. Peter Hooper, global head of economic research for Deutsche Bank AG, said Wednesday, "The baby boomers account for something like 30% to 35% of consumer spending in this country. If this virus continues to get worse, consumer spending is not going anywhere down the road."
JPMorgan Chase & Co.'s Chief U.S. Economist, Michael Feroli, said that if Covid-19's spread worsens, it would cause “real problems” for many U.S. businesses with low profit margins and would be forced to operate well below capacity due to limited demand.
Federal Reserve Bank of Chicago President Charles Evans went further and said: "My forecast assumes growth is held back by the response to intermittent localized outbreaks -- which might be made worse by the faster-than-expected reopenings.” So, in other words, he is already projecting a W-shaped recovery.
Former Treasury Secretary and Harvard University professor Lawrence Summers said, the U.S. efforts in controlling the disease so far have been like "playing mediocre Whac-A-Mole." He said the (modest) bounce back we've seen so far "has happened. [But] we’re not going to see a lot more bouncing back until we get a vaccine.”
Comatose Jobs Recovery Flat-lines At Dangerous Levels
Employment is one of the main drivers of spending and the economy. But for the thirteenth week in a row, the jobless report showed that more than 1 million new people are now out of work. This week, 1.48 million lost jobs, which was essentially no improvement from the 1.51 million lost jobs last week (and the 1.54 million who lost jobs the week before).
As we've talked about in the past, at this stage of the crisis, the "continuing claims" is an even more useful statistic to look at in this report. That's because jobless claims tell us only how many jobs have been lost (which is only half of the picture). Continuing claims remove the people who have been rehired from that, to give us a better picture of how many have not only lost a job in the past, but are still unemployed right now.
Unfortunately, for the third week in a row, the picture wasn't great. Continuing claims declined very slightly to 19.5 million versus 20.5 million last week. And that number itself was almost imperceptibly lower than the 20.9 million the previous week.
As recently as three weeks ago, some had expressed hope that perhaps we would see rapid improvement, which would support a quick V-shaped economic recovery. So far, the recovery is looking painfully slow/U-shaped.
Meanwhile, the University of Michigan produced its U.S. consumer sentiment report this week. On one hand, it showed its fastest advances since 2016.
On the other hand, even this only brought the index back to a fraction of where it was before the pandemic:
And additionally, the index was lower than it was just two weeks ago (dropped from 78.9 to 78.1). Some theorized this could have been caused by consumers processing the news of coronavirus cases climbing in many states.
Study Finds Most Middle-Class Americans Would Get Squeezed In A Slow Recovery
If we get a long recession, consumer savings can mean the difference between surviving and falling through the cracks.
And as we talked about in part 14, an unexpectedly large number of Americans did not spend the CARES law stimulus checks they received, but instead saved them. This caused the personal savings rate to hit a record high of 33%.
And while this may have discouraged lawmakers who intended the money to be spent and revive the economy, it also improved the ability of these households to weather a financial storm.
However, since then, Congress has not been able to agree on additional stimulus. Additionally, one of the major political parties says it won't even consider looking at the idea until next month.
So with record levels of chronic-looking unemployment, it raises an important question. How long can the average household survive on their savings when a breadwinner has no job?
To answer that, we need to look at how much savings people probably have.
Before checks were issued, the average American was not in great financial shape. As we talked about in part 10, almost half had less than $500 in savings before the pandemic hit.
Stimulus checks were issued in April at $1,200 for individuals, $2,400 for married couples and up to $500 for each qualifying child. However, as we discussed in part 7, about 60% of Americans were not signed up for direct deposit with the IRS. And so these did not receive the checks immediately. The IRS is mailing out checks to these Americans at a paltry 1.5% per week and is not expected to finish until October 7. So a significant number of people have not yet received this (and arguably these are the people who need it the most).
Perhaps this at least partially explains the record levels of people showing up at Covid-19 hunger relief food lines across the country (see part 17).
But it turns out that it's not just the poor who are vulnerable. A report came out this week from Princeton economist Giovanni Violante that shows that even many well-off middle-class families are unlikely to be able to come up with enough cash to sustain themselves through a drought of more than a couple of months.
This is because middle-class Americans overwhelmingly hold their savings in illiquid assets that are "smart and convenient" during good times: their homes and 401(k)s. But these can be difficult and costly to access in an emergency. Violante calls these cash-poor savers "wealthy hand-to-mouth".
What does this mean? When a crisis hits, hand-to-mouth households typically have to make a painful choice. They can try to sell investments in their retirement account. On one hand, this is made easier by the CARES act allowing up to $100,000 to be withdrawn without penalty. But, on the other hand, they are generally doing that at the worst possible time, because their securities have dropped significantly in value.
The other option is to take on more debt. However, borrowing money isn't always a no-brainer, as lenders have been tightening their standards and making it more difficult to access loans. For example, in April, Wells Fargo and J.P. Morgan announced they've suspended issuing new home equity lines of credit. And some economists are skeptical about certain industries' jobs reviving soon (especially in travel, hospitality and other customer-facing businesses).
In a best case scenario, a hand-to-mouth household can borrow enough money to tide them through until they are rehired. Even in that case though, the increased debt is likely to cause a burden on cash-poor households in the medium to long term. If this happens to enough households, some experts believe this could cause a significant long-term slowdown in future U.S. growth.
The Upcoming State-Budget Train Wreck?
This week, the Urban Institute reported that the virus crisis is causing significant trouble for the finances of virtually every U.S. state.
Before the pandemic, it was a different story. States are generally required to run balanced budgets, and this has made virtually all of them much more fiscally conservative than the U.S. and many municipal governments. And they overwhelmingly used the last expansion (from 2010 onward) to build up considerable reserves. According to Pew Charitable Trust, these reserves reached a record $75 billion in 2019 (or 8% of spending) which is the highest ever.
But, the virus changed this formerly comfortable situation overnight. About two thirds of state revenues come from sales tax and income tax. And sales tax revenue was devastated by the closure of shops and restaurants (and the failure of many to successfully reopen to pre-pandemic levels). Also, large portions of income tax revenue have evaporated due to record levels of unemployment. The result has been a devastating drop in revenue.
The Federation of Tax Administrators, which advises state governments, estimates that between April and June alone, state income tax revenue will fall by half and sales tax revenue by 44%. If this happens, it would cause total tax revenues to fall by a staggering $150 billion. And this would be significantly worse than the $100 billion drop caused by the entirety of the Great Recession (which took three years, versus just three months for the Covid-19 pandemic).
Why does this matter? States are responsible for providing the majority of the coronavirus response and aid, such as unemployment insurance, public health aid and Medicaid. Additionally, in a time of mass protests, they're also required to spend increased amounts on public safety, like policing, etc.
The bipartisan National Governors Association estimates that states need about $500 billion to tide them over. And currently the government has allocated about $110 billion, which isn't enough, and is also limited in what it's allowed to cover. So, one of the major political parties passed a bill in a chamber of Congress to provide this aid. But further progress has been so far stymied by the other party, which declared opposition to the idea. And the leader of the opposite chamber instead suggested that states "declare bankruptcy".
However, experts universally agree that the current bankruptcy law would not actually allow this.
And some believe that, as the pandemic begins to affect more states controlled by the holdout political party, an agreement may be more likely to be reached. We'll see what happens.
In the absence of federal aid, states have only one choice: making big spending cuts. For example, Ohio's chopping its budget by 20% and Washington state by 15%.
These may cause significant problems to states' citizens expecting services. According to Pew, even before the pandemic hit, most states were suffering from shortages of teachers and were spending on infrastructure at 50 year lows. Now, the budget squeeze will be even tighter, at a time when states' citizens will be expecting even more from their governments than they did before.
Additionally, spending cuts will contribute to the already chronic unemployment. About 1.5 million state workers have already been fired or furloughed in just the months of March, April and May and many more are forecast for the future.
Also, state governments collectively constitute about 17% of U.S. GDP, which makes them almost as important to the economy as the federal government (which is at 20%). So state job losses and reductions in spending will exacerbate the economic slowdown and further inhibit a quick recovery.
Record number of U.S. companies ask for relief on their loans
S&P Global Market Intelligence reported that a record number of U.S. companies financed by leveraged loans asked for debt relief last month. This was caused by rising debt and falling earnings.
A record 43 companies asked for debt modifications, which blew away the previous high of 25 set in the depths of the great recession (March 2009):
The largest amendment was for $4.5 billion for struggling cruise operator Royal Caribbean cruises. This allowed them to take on more debt without violating previous covenants.
Did The Coronavirus Really Start In Wuhan in December? Spanish Sewer Study Suggests It Didn't.
In a stunning announcement on Friday, Spanish virologists announced that they believe they have found traces of the novel coronavirus in a sample of Barcelona wastewater that was collected way back in March 2019. The results have not yet been peer-reviewed, but research leader Albert Bosch claimed, "The levels of SARS-CoV-2 were low but were positive.”
Since the virus that causes Covid 19 is similar to other coronaviruses, it's possible it could be a false positive (and presumably that will be reviewed). On the other hand, if the study withstands scrutiny and is accurate, then this would be a bombshell discovery. That's because it would mean that the disease was spreading in Spain about nine months before the first known cluster occurred in December 2019 in Wuhan, China. And that would mean that we fundamentally misunderstand both the origins and spread of the disease.
Bosch is not the first to make this type of claim. Back in late March, the prominent Italian doctor Giuseppe Remuzzi (who first sounded the alarm about Covid 19 in the influential British medical publication, The Lancet) also reported anecdotal evidence of a similar nature. He claimed that he had talked to multiple local, general practitioners in Italy. And that, as early as November 2019, they had seen evidence of "a very strange pneumonia, very severe, particularly in old people." And he said these doctors believe that it was actually the novel coronavirus being misdiagnosed (because no one knew what it was at the time). (See part 4).
Back in Spain, Bosch, who is also president of the Spanish Society of Virologists, said that they tested other samples and did not find any more evidence of the virus until January 2020. And he claimed that if Spain had run the test in January and known about the infection, it could have dramatically improved their response to the pandemic. Instead, he believes patients were misdiagnosed with common flu, and this contributed to community transmission and the severity of the ultimate peak of the outbreak.
It seems strange for the virus to have popped up only once, in March 2019, not to appear again until January 2020. Perhaps this bolsters the argument that the data is mistaken, or perhaps it means that a traveler carried Covid through Spain in March 2019 without stopping there long enough to infect others or cause spread.
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. In the meantime, that's the review for this week. And I hope you and your loved ones are staying safe and healthy.
How Will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 19: July 4th
U.S. remains stuck on uncomfortably high plateau for 4th week; "Surfs up" on the second virus wave and the water start to get choppy; Georgia's economic reopening appears to stall out; Another brutal jobless report shows continuing damage and a comatose recovery; Gargantuan $600 billion stimulus lending program touted as a bazooka looks more like a dud; Newer Covid-19 mutation appears be 3x - 9x more contagious than the original; How about a second helping of pandemic? Study finds that swine flu could be just one mutation away from an unappetizing second course; "Muh, Muh, Muh, My Corona!"; Did George Floyd Protests kick off the second wave of infections? One study gives a surprising answer; Once again a big four auditor blows it and misses billions of dollars of blatant, massive fraud; Covid-19 ventilator death rates still high but also look vastly improved; Covid-19 treatment, Remdesivir, to cost thousands of dollars per patient, despite study arguably showing only marginal personal benefits; Pfizer announces that radical mRNA vaccine has passed combined phase 1+2 human trials; Are Moderna execs sending a silent vote of no-confidence on the company's much-hyped covid-19 vaccine?; Was the simple face-mask improperly maligned by u.s. health officials and experts? And could it be key to saving the us economy from a second wave?; Update on my investment strategy Part 19: June 27th weekly update (and latest update on my personal strategy)