How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 30: September 19th
Updated: Feb 8, 2021
U.S. surpasses 200,000 deaths, as progress on second wave ominously grinds to a halt and reverses; World Round-Up; Last week's glimmer of hope fades as Midwest clearly loses control of second wave; Georgia's anemic economic recovery continues; When will the hammering stop? Economy forced to endure more record unemployment; Shocking 60% of business closures since March are now permanent; Financial cliff update: finally some slim hope for a compromise?; Update on my investment strategy.
(Usual disclaimer: I'm just an investor expressing my personal opinion and not a registered financial advisor, attorney or accountant. Consult your own financial professionals before making any financial decisions. Code of Ethics: I / we do not accept any money from any sponsor or platform for anything, including postings, reviews, referring investors, affiliate leads or advertising. Nor do we negotiate special terms for ourselves in the club above what we negotiate for the benefit of members.).
There was a lot of new economic and health information this week, but it was very light on new information about the virus.
This article is part of a multi-article series that's been published weekly since the pandemic began back in March 2020. It started with three introductory articles on the virus and its effect on the economy and on alternative investment classes. 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. Surpasses 200,000 Deaths, as Progress on Second Wave Ominously Grinds to a Halt and Reverses
For the 26th week in a row, the United States battled the coronavirus called SARS-CoV-2, which causes the Covid-19 disease. This week, the country observed a grim milestone with more than 200,000 people killed. And as of Saturday morning, the death toll had climbed to 203,108 (versus 197,675 last Saturday morning).
In comparison, in early March, pandemic models predicted only 100,000 to 200,000 Americans would die from the virus. And currently, few believe that the deaths will be ending anytime soon.
It was five weeks ago that the U.S. finally turned the corner on the second wave of deaths, and has been battling it lower ever since. How did things go this week?
The labeling makes it difficult to read, so let's zoom in:
This was not a good week. The ominous-looking bump at the end of last week grew into a nasty spike before a small drop at the end of the week. Even after that smaller reprieve, deaths were still higher than they were two weeks ago. So the numbers are progressing in the wrong direction.
And, as has been the case every week so far in the second wave: deaths today remain higher than they were in the trough of the first wave, over a month ago.
If this trend continues, we may even be headed for a third wave. But, the data is noisy, so we'll continue to watch.
Either way: if we're unable to make clear progress and deaths remain high, then the overwhelming consensus of economists is that this would sabotage hopes of a quick, V-shaped recovery. Instead, the recovery would assume a different shape (W-shaped, U-shaped, etc.). This would be slower, involve more long-term damage to health and economy, and potentially cause problems for some or many consumers, businesses and investments. (See part 14 for more information on the possible "recovery shapes" and their ramifications).
Since this is potentially so important, let's take a look at one of the leading indicators of upcoming deaths: virus infections. Virus infections tend to lead deaths by anywhere from 2 to 8 weeks (depending on how long it takes someone to die and how long it takes their particular location to report the information). These case numbers are not completely reliable due to testing labs' difficulties, in many parts of the country, with getting results back on time. But they can still provide a clue of what might lie ahead with deaths.
How do virus infections look, this week?
This is again a disappointing graph, showing infections moving in the wrong direction, increasing. If this continues, then it could also suggest that the U.S. is entering a third wave of infections.
A third wave wouldn't be entirely unexpected. In early September, many health experts warned that if Americans didn't take precautions, Labor Day (September 7th) could easily become a super spreader event and a repeat of Memorial Day.
Back in May, the country had made great progress fighting back the first wave. But in late May, many people let down their guard to celebrate Memorial Day and ignored social distancing and other virus prevention safety measures. A few weeks afterwards, all progress fighting the first wave ground to a halt and the second death wave began.
So it's disappointing to see that so far, Labor Day is looking like a repeat. Still, the data is noisy and it's still too early to tell for sure. So we'll continue to watch.
World Round Up
How did other countries do this 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). And through most of the epidemic, it has been one of the world leaders in both minimizing deaths (one of the lowest per million) and also minimizing economic damage (their economy is now mostly open and growth is projected to barely shrink this year. In comparison, the U.S. still has significant closures and is projected to take a -5.9% hit to GDP).
This week, South Korea looked like this:
South Korea had been fighting a third wave triggered by a surge of 400 infections that were traced back to a church in Seoul.
After shooting up last week, this week they went up and down multiple times but essentially plateaued. And they ended the week lower than at the beginning. So perhaps there is some hope that this might be the end of their third wave. But we will have to wait until next week to tell for sure.
The one big positive is that their death rate is so extraordinarily low that, compared to other countries, this is still a great result (see chart below for comparison to other countries). At the same time, if they completely lose control of the third wave, they won't continue to be stay in the top tier forever. So we'll continue to monitor and see how they do.
Meanwhile, Sweden has opted for a lockdown-lite strategy (see part 8). While they have enacted some lockdown measures (they've shut down grade schools, prohibited gatherings larger than 50, instructed elderly people to stay home and young people to work remotely, enacted social distancing rules at restaurants, etc.), they never went into the full-on lockdown seen in many other countries.
The hope has been that if this worked well, it might provide another workable model for other countries looking to deal with the virus. Here's how they look this week:
After a setback last week, they have again resumed progress and looked very good this week.
Sweden's road to this point has been bumpy. The country enjoys a number of unique advantages in fighting the virus that most countries don't have, including an extremely large number of people who live alone, are young and have no children. Despite this, their death rate has been many times worse than other Scandinavian countries (with similar demographics) as well as worse than other countries in general (who lack these advantages). However, they have hoped that if they continued to push down their death curve, they eventually might be able to make up their deficit.
How did Sweden's cumulative deaths look this week? To see, we need to look at deaths per million. Again: unlike raw deaths, this puts countries of different sizes on an equal playing field. Here's how they did:
So this week, they marked a huge milestone and surpassed the United States. So that was positive news for them.
On the other hand, their numbers are still stratospherically bad at about 580 deaths per million. Compared to its next-door neighbors with similar demographic advantages, it's doing almost 6 times worse than Denmark, almost 10 times worse than Finland and 12 times worse than Norway.
And compared to the best-of-show countries, it's almost 100 times worse than South Korea and almost 2000 times worse than Taiwan.
Many health experts believe we will likely get an effective vaccine/treatment later this year, and perhaps a rollout to wider populations sometime in mid-2021. If so, then there may not be enough time for Sweden to ever catch up. On the other hand, the Swedish model could still prove itself on deaths, if other things happen. It's possible we may not get an effective medicine; and/or the pandemic could mutate, leading it to run wilder than expected in 2021; and/or other countries may stumble while Sweden doesn't (which is what happened with the U.S. and Sweden in the graph above). We'll continue to watch.
The other big issue for Sweden to overcome is that lockdown lite has thus far failed in its main goal: protecting its economy. 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.
But again, if they can sustain their progress against the virus, then their economic outlook could improve as well. For now, it still appears that Sweden has suffered the worst of both worlds (receiving more damage to its economy and its public health than have others). We'll continue to watch.
Meanwhile, in Europe, some health experts had previously warned that the dropping of travel restrictions would cause an additional wave of virus infections and deaths. And so for the last few weeks, we looked at one country in particular that was alarming: Spain. How does that nation look this week?
Unfortunately, this was another bad week for Spain. For the third week in a row, they're showing escalating deaths and so far have not gotten control of their latest death wave.
Last Week's Glimmer of Hope Fades as Midwest Clearly Not in Control of Second Wave
For the last 11 weeks, we've closely watched individual states to get insights on what might happen next at the national level. We saw the second wave of infections (and eventually deaths) start in the Sunbelt and spread across the country. In response, many states put in place virus control measures, including reinstatements of key portions of lockdowns and rules mandating the wearing of masks (in more than 50% of states). And in the last three weeks, we saw Sunbelt states make huge progress in reducing infections and eventually deaths. However, this was accompanied by surges in the Midwest and Northeast, along with warnings that school re-openings might cause additional increases. Then, last week, we saw glimmers of hope that perhaps the Midwest might be making a turnaround (with drops in multiple states near the end of the week in infections and/or deaths).
What happened this week?
Here's West Virginia:
At the end of last week, both infections and deaths in West Virginia had dropped, suggesting perhaps they might be getting on top of their virus problems. Unfortunately, this week, infections climbed to a new high. So they do not appear to have gotten their second wave under control. And deaths, also, climbed sharply and on one day even matched their previous record high.
How about North Dakota?
Last week, North Dakota also had a drop in infections (suggesting perhaps the start of turning things around) and deaths had held steady.
Unfortunately, it turned out to be just a temporary reprieve, as infections this week clearly increased to record highs.
So they still have not gotten control of their second wave, either. Additionally, their deaths also hit record highs.
How about Iowa?
Last week, Iowa had shown a huge drop in infections, and deaths had dropped a little, too.
But this week, infections started surging again.
Also, based on the shape of the data, it's looking possible that what earlier appeared to be a huge drop wasn't real, but was, instead, a statistical aberration. Previously, the state was not properly recording antigen tests, so last week, they finally added them to the official statistics. Looking at that data now, it appears that Iowa then committed another error: they did not properly backdate the results of the antigen tests. Instead, it appears they simply threw them on top of the other existing infections (unhelpfully mixing the dates).
If that's accurate, then the "hump" in the middle is very exaggerated and inaccurate. And if so, then Iowa may never really have peaked and come down, but is rather continuing in its second, still-increasing wave.
Either way, this was not a great week for Iowa, with infections rising.
On the other hand, Iowa's deaths did decrease a little bit, so that was encouraging to see. We'll continue to watch them.
How about Kansas?
Like other Midwest states, Kansas had previously had a drop in both infections and deaths at the end of last week.
But, this week, that trend reversed with infections increasing. So, they do not appear to have turned things around at this point, either. Additionally, deaths surged to a record high.
We'll see how these evolve, next week.
Georgia's Anemic Economic Recovery Continues
One of the most important questions for investments (as well as for 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 we expected this to make it a useful early indicator of what could be in store for some other parts 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 four months.
How are they doing? Since there's no official government or state data on this, we've previously looked at Placer.ai. This is a service which tracks mobile phone usage to different types of businesses to measure foot traffic. And we will look at Georgia's four primary Covid-19 sensitive industries: restaurants, retail, fitness, and hotels.
So this week, in the category of restaurants, let's take a look at Wendy's. This is a fast food restaurant with a heavy focus on drive-in business. So it would be expected to do much better during Covid-19 than sit-down restaurants.
Wendy's is currently at -16% footfall versus last year at the same time. Restaurants generally have low margins and high fixed costs, so this does not look very profitable. This week was at least better than last week, but their progress recently has still been uneven. And overall, they still haven't managed to improve over where they were in early August.
How about retail? Let's take a look at Banana Republic, which is a moderately upscale clothing retailer.
Banana Republic is currently at -7.5% footfall versus last year. On one hand, retailers also have relatively low margins and high fixed costs, so they are unlikely to be thrilled with this. And under normal conditions, these numbers would be considered "bad" and recessionary. But, on the other hand, compared with how badly things have gone previously for them this year (and continue to be for others), this may still feel like a "win." And they have improved over the last couple of weeks.
Their performance has been strangely erratic. For example, they appeared to have fully recovered in August. But for some reason, they then regressed and are now worse than they were before. So, some unpredictable factors appear to be in play with them, and it's difficult to predict what might happen next. So we'll just continue to watch and see.
How about fitness? YouFit is a low-cost health club, expected to do better in a recession than a high-end club.
This YouFit graph is showing a catastrophic -48% footfall versus the same time last year. And worse, they have been trending in the wrong direction for the last three weeks. Additionally, they are also now underperforming their numbers from back in July. Sadly, these are the kind of numbers that will most likely to lead to bankruptcy if they're sustained.
How about hotels? Holiday Inn Express is a low-cost hotel and would be expected to do better in a recession than a high-end hotel.
After reaching only -5% footfall two weeks ago and perhaps being on the brink of recovery, they unfortunately moved in the wrong direction. This week, Holiday Inn Express showed a dismal -23% footfall. And currently, they also have not been able to improve beyond where they stood back in July.
So overall, Georgia's Covid-19 sensitive industries appear to be continuing their anemic and weak economic recovery.
When Will the Hammering Stop? Economy Forced to Endure More Record Unemployment.
Unemployment has historically been one of the most reliable indicators of when the U.S. is entering a recession and when it has recovered. So that's why we look at it so closely every week. And unfortunately, over the last 23 weeks, the economy has been hammered over and over again by massive levels of new unemployment.
This week was no different, with previously unthinkable numbers of new people losing jobs. This week, it was 860,000 (which was a tiny improvement over last week's 884,000).
Meanwhile, 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 within this report. That's because jobless claims give us only half of the picture: how many jobs have been lost. The continuing claims number removes the people who have been rehired from this. And so, that tells us how many continue to be unemployed right now.
This week, continuing claims fell to 12.6 million (from 13.4 million last week). So, this was at least a small decline. On the other hand, those hoping for a quick improvement that would support a V-shaped recovery were again disappointed. And there are still more Americans unemployed now than at the height of the Great Recession.
Eliza Winger, an economist at Bloomberg, said:
“The recovery in the labor market appears to be slowing, but not reversing. ... Jobs data remain well shy of the pre-pandemic peak, and well-targeted fiscal aid is needed to sustain momentum in spending through year-end and into 2021.”
Unfortunately, fiscal aid is not guaranteed, and is a story all on its own. See section below on the "financial cliff."
Jerome Powell, chairman of the Federal Reserve, said:
"The labor market has been recovering, but it’s a long, long way from maximum employment. And it will be some time getting back there.”
Then on Wednesday, the Federal Reserve rate-setting committee acknowledged the possible challenges ahead by announcing a major official overhaul to its interest rate policy.
Traditionally, the central bank lowers interest rates to support the economy when it's weak. However, it also has had a twin goal of preventing inflation from exceeding 2%. So typically, as an economic recovery is taking root, the Fed has raised interest rates, to avoid hitting the ceiling.
However, on Wednesday, the committee said that they were lowering the bar on the official policy. And now, it will be acceptable to allow inflation to "moderately exceed 2% for some time." Chairman Powell did not specify how much higher he’d like to see inflation run. But Dallas Fed President Robert Kaplan later in the day said that he would be content with a range around 2.25%-2.5%.
Fed officials went on to state that rates are expected to stay near zero until they see evidence of a tight labor market and looser inflation conditions.
So, many analysts believe this will mean historically low interest rates for some time.
Federal Reserve officials also seem to agree. A recent survey of their opinions showed rare and unanimous agreement, with all 17 saying they expect rates to remain near zero at least through the end of 2021. And 13 of the 17 projected rates would stay near zero through at least 2023.
If this does indeed happen, it will mean an even longer extension of the multi-decade interest rate bull run that started in the 1980's.
Shocking 60% of Business Closures since March are Now Permanent
Meanwhile, on Wednesday, Yelp released an updated version of its business closure report. And it showed that a shocking number of business closures since March have become permanent. Out of 163,735 businesses that closed between March 1 and August 31, 97,966 have closed permanently (which is about 60%).
This was a 23% increase in shutdowns from its July 10 Q2 economic average report.
Unsurprisingly, restaurants were hit the hardest with 19,590 (61%) having to close their doors forever. Bars and nightlife have also been hammered with a little over 3000 (54%) also permanently gone.
Retail and shopping also suffered from 58% permanent closures, and beauty was struggling from 42%.
On the other hand, professional services, like lawyers, real estate agents, architects, accountants and health-related businesses, had some of the smallest rates of closures.
So once again, this report showed that the damage from this recession is being borne unequally as it's hitting low-wage workers much harder than high wage workers. (See "The cleaving of America's two worlds: a tale of two recessions." )
Financial Cliff Update: Finally Some Slim Hope for a Compromise?
As we've discussed over the last several weeks, tens of millions of unemployed and underemployed Americans are either falling off or teetering on the edge of a huge financial cliff. And if it's not resolved well, there could be significant pain for them, the economy, and also businesses and investors in virtually every alternative investment asset class (especially real estate and private equity).
Why does this cliff exist? Well, so far, the economy has taken unprecedented damage through record-setting unemployment. But, this has been mitigated by the $3 trillion Covid-19 stimulus package passed by Congress at the beginning of the pandemic. Unemployed workers got an extra $600 per week and many citizens got free stimulus checks ($1200 per adult and $500 per child). Also, governments at the federal, state, and local levels passed moratoriums on evictions and foreclosures that let unemployed people stay in their homes.
None of these programs was perfect, and we talked in past weeks about how snafus caused millions to be unable to get much deserved and needed aid. But still, these programs have contained untold amounts of damage. Zach Parolin, a researcher at Columbia University, estimates that together, these programs stopped 17 million people from dropping below the poverty line.
But, more recently, there's been a huge problem. The $600 unemployment payments expired 5 weeks ago, the stimulus payments were a one-time event, and many of the moratoriums have ended as well. And unfortunately, the two political parties and the president were unable to come to agreement on a new stimulus law.
One party passed a $3.5 trillion stimulus package and offered to reduce it to $2 trillion. The other party could not get its members to agree to come up with even $1 trillion. So things remained at an impasse.
So the President unilaterally passed executive orders to temporarily pay the unemployed an extra $300-$400. But the fund from which this money was appropriated has been exhausted. And the President doesn't have the constitutional power to spend new money. So, any real solution must involve Congress and the President cooperating to pass a new law. And up until now, that has not happened.