How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 33: October 10
Updated: Sep 6
For the third week in a row, U.S. progress fighting virus death stalls out; World round-up: Europe continues to battle its second wave; State roundup: infections continue to escalate uncontrolled in third wave; Another painful and underwhelming week for Georgia's bellwether economy; Economy forced to take another week of new record-setting job loss; Financial cliff update: the roller coaster week; Apartment landlords in tourism-dependent, high-expense cities start to feel the heat; Chasm between commercial real estate buyers and sellers grows even wider; Study finds that two-thirds of those who get Covid-19 are still battling chronic side effects months later; 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.).
Quick Summary
This week, there was new economic info, health info, scientific studies and news 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.
For Third Week in a Row, U.S. Progress Fighting Virus Death Stalls Out
For the 27th week in a row, the United States battled the coronavirus called SARS-CoV-2, which causes the Covid-19 disease. And as of Saturday morning, the death toll had climbed to 218,685 (versus 213,543 last Saturday morning).
Eight weeks ago, the U.S. turned the corner on the second wave of deaths and wrestled it down lower for six weeks. Then, two weeks ago, progress stopped and came to an ominous plateau. How did things go this week?
The label on the CDC site is blocking our view of the most recent week. Here's how it looks, zoomed out:
Unfortunately, for the third week in a row, progress has plateaued.
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. In fact, some states are not reporting all of the positive tests (specifically, the antigen tests). But they can still provide a clue of what might lie ahead with deaths.
How do virus infections look, this week?
For the third week in a row, infections are moving in the wrong direction and increasing. And the contours of a third wave continue to stay in place.
As we discussed earlier, a third wave was expected by many. A few weeks after Memorial Day weekend, back in May, the country ended up ceasing all progress against the first death wave and ultimately kicked off the second. And many health experts warned that Labor Day (September 7th) was shaping up to be a repeat. (See "Forgetting History and Doomed to Repeat It: Will Labor Day Launch the Third Wave, like Memorial Day Kicked Off the Second Wave?" )
So it's disappointing to see that so far, it's looking like Labor Day did indeed kick off a third wave. Still, we don't know what size this wave will be, or how long it will last. We'll continue to watch.
World Round Up: Europe Continues to Battle It's Second Wave
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.
This week was a good one, as they appear to have turned the corner on their third wave and are now beating it down. Still, it's early, so we will continue to monitor.
Either way, the biggest positive for South Korea is that even at their highest, worst peak in all of their death waves, their rates have been extraordinarily low compared to virtually every other country in the world. (See chart below for comparison to other countries.) And this is been a major factor allowing them to keep their economy open and suffer far less damage than everyone else.
Meanwhile, Sweden has opted for a lockdown-lite strategy (see part 8). So the hope is been that if this works well, it might be a workable model for other countries looking to do with the virus.
Note, they have actually implemented some lockdown measures and applied the 3 T's: 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. Additionally, they do extensive testing and contact tracing. And when a person tests positive, they and their entire family are required to quarantine for 5 to 7 days (although school children receive an exemption). This mandatory quarantine would be difficult to implement in some other countries (like the U.S.).
But, they also never went into the full-on lockdown seen for various stretches of time in many other countries.
So how are they doing? Here's how they look this week:
This was a good week for Sweden, as they continued to reduce their death curve after a temporary, two-week spike.
On the other hand, some of Sweden's achievements are most likely due to unique advantages that other countries can't duplicate. That includes an extraordinarily large number of people who live alone, are young and have no children (versus countries like the U.S., which contain a lot more families).
And when compared to other Scandinavian countries, which have similar demographics, Sweden's road to this point has been extremely bumpy. Their death rate has been many times worse than those neighbors. And it's even been many times worse than poorer countries who have controlled the disease well (and who lack all their built-in advantages). However, Sweden has hoped that if they continued to push down their death curve, they eventually might be able to make up their deficit.
How is Sweden doing there? To see, we need to look at deaths per million. Unlike raw deaths, this puts countries of different sizes on an equal playing field. Here are the numbers this week:
On one hand, for the third week in a row, Sweden has pulled ahead of the United States and is doing slightly better. And they are also slightly better than the United Kingdom. (See more on how the U.K. is experiencing a second wave, below.)
On the other hand, those two countries are among the worst performers in the world. So simply outdoing them isn't that difficult. And Sweden's numbers are still stratospherically bad at about 580 deaths per million. This is about five times worse than the average country in the world.
And again, when 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. Also 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. in the graph above).
The final 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 both its economy and its public health than have others). We'll continue to watch.
Meanwhile, in Europe, health experts had previously warned a second death wave was likely to occur, due to the loosening of traveling restrictions, reopening of schools, and public weariness/resistance to following precautions, and possibly also as a result of cooling weather.
And sure enough, the second wave hit numerous countries across the continent, which has caused them to tighten restrictions again. As we discussed in previous weeks, this tightening has included locking down cities that have been affected, restricting specific industries, reducing movement and requiring stronger adherence to antivirus guidelines.
Among the first to get hit was the popular travel destination of Spain. And they've been battling an escalating second wave for two months. How did they do this week?
This week brought Spain a welcome respite, with deaths plateauing for the first time in a long while. So perhaps they're finally getting control of things. We'll see how they look next week.
How about the U.K.? About two weeks ago, we discussed how officials imposed lockdowns in several cities after infections had skyrocketed. Here's how they look this week:
Unfortunately, this was not a happy week for the U.K.. For the fifth week in a row, deaths continued to rise rapidly in the second wave. On the other hand, there was perhaps a tentative sign of reaching the top, near the end of the week, as deaths plateaued. We'll watch them and see how they do.
How about France? Officials there have also imposed lockdowns due to the growing spread of the disease:
For yet another week, deaths continue to rise. However, France's increases are starting to slow, so they may be showing signs of nearing their own top, as well.
State Roundup: Infections Continue to Escalate Uncontrolled in Third Wave
For the last 14 weeks, we've closely watched individual states to get insights on what might happen next at the national level. First, 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). Then, in the last four weeks, we saw Sunbelt states make huge progress, but this was accompanied by surges in the Midwest and Northeast. And in the last couple of weeks, the virus has been surging amid school re-openings, the Labor Day weekend and, perhaps, the colder weather in the north).
What happened this week? Let's start with the four states that have the highest escalation in infections last week: North Dakota, South Dakota, Wisconsin and Montana. First, North Dakota:
Unfortunately, North Dakota had a bad week and continues to experience both escalating infections and deaths. And they do not appear to have their second wave under control.
How about South Dakota?
The story here, in South Dakota, is almost a mirror image of North Dakota. It was another ugly week of escalating infections and deaths.
How about Wisconsin?
The analysis is starting to sound like a broken record. Wisconsin also had a bad week of record high infections and deaths.
How about Montana?
Montana also had a painful week of rapidly escalating infections. The one positive is that deaths did not hit a new high. At the same time, they remained at painfully high, elevated levels.
How about Oklahoma?
On one hand, Oklahoma didn't hit new highs on either infections or deaths. On the other hand, both those numbers remained at historically high levels. So perhaps this is a sign that they are getting control of the second wave. Or it may end up being just noise. We'll see.
How about Iowa?
Iowa's bump in infections around September is most likely artificial (and the result of adding positive antigen tests from previous weeks all at once). Ignoring that: this week, they had a small drop in infections but then another increase, effectively leaving them at all-time highs. Deaths also continued close to or at all-time highs for the second wave. So this was a discouraging week for them.
This week, Kansas's infections continue to climb, although at a much lower level than other states. And deaths continue to stay elevated, to near-record highs for the second wave.
So all in all, it was not a great week at the state level.
Another Painful and Underwhelming Week for Georgia's Bellwether Economy
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 also allowed to reopen. So they've effectively been open for over five 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 in the category of restaurants, let's take a look at Wendy's. This is a fast food/low-cost restaurant with considerable drive-in business. So it would be expected to do better in this recession versus higher cost/non-drive-in oriented restaurants. How is it doing?
This week, Wendy's stayed at a painful -18% footfall versus a year ago. Restaurant profit margins tend to be very thin, so this is unlikely to be profitable. And worse, they have not improved and have actually backtracked since their best point in the recovery back in September.
Let's take a look at retail with Burlington Coat Factory:
For the last four weeks, Burlington's numbers had been improving and they looked like they might be moving to sustainable levels. Unfortunately, this week, year-on-year footfall fell off a cliff to a brutal -25% again.
For fitness, let's take a look at Gold's Gym. This is a traditional gym, so would be expected to be doing about average along with other similar gyms.
Unfortunately, they are at a crushing -33% versus last year's footfall. And worse, they have seen no reasonable form of relief at all, this entire pandemic. These look like the kind of numbers that cause bankruptcies.
Finally, let's look at hotels. Holiday Inn Express is a budget hotel that would be expected to be doing better in a recession than others.
For the last four weeks, they had been steadily improving. Unfortunately, this week, they experienced a little bit of backtracking at a painful -12%. Still, their data is noisy, so we'll continue to watch them.
Overall, it was another painful and underwhelming week for Georgia's economy.
Economy Forced To Take Another Week Of New, Record Job Loss
Unemployment has historically been one of the most reliable indicators of when the U.S. is entering a recession and when it has recovered. That's why we look at it very closely every week. And unfortunately, over the last 26 weeks, the economy has been hammered over and over again by massive levels of new unemployment. And each week has set records, each higher than any previous week before the pandemic.
This week was no different, with 840,000 newly unemployed. Not only was there no improvement from the previous week, but it was actually slightly worse (with only 837,000 last week).
However, as we mentioned last week, some of the data was not completely up-to-date. California, which is the largest state in the country, didn't report any data this week to the Department of Labor for the second week in a row. This was intentional, so they could catch up on a backlog of filings and improve their systems. So, for this week and the last one, the numbers have simply been a repeat of what they were the previous week. And many analysts believe this has the effect of making them look artificially lower. We'll see, next week, when California comes back online.
Meanwhile, as we've talked about every week for the last several months: "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 were 11 million. If accurate, this was a slight drop from the 11.8 million last week. And this was a modest improvement. But once again, those hoping for a quick improvement that would support a V-shaped recovery were disappointed. And for yet another week, there are still more Americans unemployed now than at the height of the Great Recession.
The biggest increases came in Florida, Illinois, Virginia and Massachusetts and may reflect cuts from major airline hubs (which we discussed last week).
Some economists warned that this metric may have already started to become less useful. The unemployment crisis has continued for much longer than originally expected, and so some of the chronically unemployed are believed to have already exhausted their federal benefits. If that's correct, then they would no longer show up in this metric, even though still unemployed. And if so, then this will cause the number to be artificially lowered.
Incidentally, after losing their federal unemployment benefits, people are often moved to state benefits. And when they exhaust that money, then they are able to access the new Pandemic Emergency Unemployment Compensation (PEUC) for a while. And we do know the number of people who are at that stage. In the past week, 153,700 new people began PEUC (bringing the total number of people in the program up to 1.96 million). This further suggests that the number of long-term, chronically unemployed is increasing. And economists widely agree that this type of long-term unemployment is potentially crippling both for the people suffering through it and for the economy in aggregate.
Unfortunately, there were more announcements of future pain, across a spectrum of industries:
Cineworld, the second biggest cinema chain in the world announced on Thursday it will close 536 Regal theaters in the United States (and 127 in the U.K.), which will affect 45,000 employees. As we've talked about in past weeks, the cinema industry has been decimated by lack of attendance, as well as by movie studios continuing to push back big releases. The latter helps the studio avoid a pandemic-related flop, but also means even fewer people visiting the theater than in a normal year.
AT&T announced a plan to lay off thousands at HBO, Warner Bros. and other parts of Warner media, in order to cut costs by 20%. The company had previously laid off 600 people in August. The company is coming under severe strain, as revenues have dropped significantly from movie tickets, cable subscriptions and television ads.
Wells Fargo, the largest employer in the U.S. banking industry, announced on Wednesday that it would begin workforce reductions. An immediate 700 people in commercial banking will be laid off, and insiders are reporting that potentially "tens of thousands" more pink slips are on the way.
Then on Friday, cosmetics and fashion firm L'Oreal announced it would be closing retail locations and cutting 400 US jobs. Cosmetic brands are suffering due to people socializing less. And luxury brands have been hit hard as well, thanks to the falloff in tourism and buyers' squeezed budgets.
On Saturday, Chevron announced that 700 employees will be laid off as part of a cost-cutting program that is expected to eliminate up to 15% of its workforce. As we've discussed previously, the U.S. oil industry has been devastated by the collapse in oil demand.
Multiple colleges announced that they would be laying off staff, as enrollment is down and budgets are tight. Ithaca College, Duke University and Memphis University all announced that pink slips would be going out.
Meanwhile, Federal Reserve Chairman Jerome Powell acknowledged that unemployment is not disappearing and called for lawmakers to provide additional stimulus:
"It appears that many will undergo extended periods of unemployment, there is likely to be a need for further support... Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. ... By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste."
Meanwhile, Philadelphia Federal Reserve Chief Patrick Harker, specifically said that "at least another $1 trillion" of additional stimulus will be needed to sustain the recovery. “We really could use that additional fiscal stimulus to get through this period," he added.
How did lawmakers respond to these calls, this week? See the next section for an update ("Financial Cliff Update: The Roller Coaster Week").
Financial Cliff Update: The Roller Coaster Week
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 months 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.
Here's a brief recap:
Back in May, one political party (which we will call the "large stimulus" party) passed a $3.5 trillion stimulus package in the House. But the other party (which we will call the "small stimulus" party) which controls the Senate, wanted to wait and see if stimulus would be necessary or not.
Then in August, the large stimulus party offered to reduce their bill to $2 trillion. The small stimulus party balked and counter-proposed $1 trillion (but wasn't able to get enough of its own members to approve a counter-bill at that amount). This meant that for a bill to pass the Senate, it would require cooperation between the two parties.
Later in August, 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 now been exhausted and the President doesn't have the constitutional power to spend new money. So, any real solution requires Congress and the President to cooperate to pass a new law.
In September, the small stimulus party attempted to pass a $650 billion plan (nicknamed the "skinny package") in the Senate, but could not muster enough votes to bring it to the floor to begin discussion.
In early October, a bipartisan group of 50 lawmakers came up with a proposal to split the difference. But it did not gain any traction.
Last week, the large stimulus party passed a new $2.2 trillion stimulus bill (to solidify what previously was just a verbal counteroffer). And Treasury Secretary Mnuchin upped the White House offer from $1 trillion to $1.6 trillion by repurposing some unused small business relief funds. Both sides agreed on another stimulus payment for up to $1200 to individuals, aid for airlines, coronavirus testing and extending the PPP (Paycheck Protection Program). However, by the end of the week, the progress had come undone, and there was still no agreement.
What happened this week? In one sentence: it was a roller coaster.
Over the weekend, the President had tweeted White House support for additional stimulus from his hospital room in Walter Reed Hospital (where he is recovering from an infection of Covid-19):
WORK TOGETHER AND GET IT DONE
Many took this is a hopeful sign for an imminent deal in the upcoming week.
However, then, on Tuesday, just hours after Federal Reserve Chairman Jerome Powell called for additional stimulus, the President tweeted:
“I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business."
This surprised many. The public markets did not react well to the news that the deal was off, and fell rapidly:
Political analysts were also caught by surprise, and pointed out that many U.S. voters in the most competitive, moderate/swing districts are in favor of new stimulus. So they wondered why a politician of any party would choose to explicitly take responsibility for not giving them what they want, and do so less than a month before the election.
After the announcement, vulnerable Senators in the President's political party petitioned him to change course. Senator Joni Ernst, who is running behind her challenger in Iowa, was one of these. And she tweeted that she had told the president, “Iowans need additional COVID-19 relief.”
Then on Thursday, word leaked that the White House was preparing a $1.8 trillion counteroffer (up from the previous $1.6 trillion). Then, the next day, on Friday, the President said in a video interview:
"I would like to see a bigger stimulus package, frankly, than either the Democrats or the Republicans are offering... I'm going the exact opposite now."
A few hours later, the White House communications director, Alyssa Farah, told reporters the administration wants a package "below $2 trillion." This caused many to believe that a deal might be close.
However, shortly after that, Secretary Mnuchin then walked into negotiations with the opposite party with the lower $1.8 trillion offer. This confused both observers and participants.
Ultimately, the leader of the large stimulus party in the House rebuffed the offer, saying it was "one step forward and two steps back." She felt there was not enough aid for Covid-19 affected states, election security, Covid-19 testing and treatment and not enough oversight to ensure that money would go to where it was intended. (As we have discussed, the White House has recently diverted some funds allocated by Congress to different places than Congress specified in an attempt to unilaterally address the standoff.).
Meanwhile, the head of the small stimulus party in the Senate again expressed skepticism about a stimulus deal happening before the election. Even if it could be passed tomorrow, it took 19 days, the previous time, for money to begin going out. And there are currently only 24 days left before the election.
“I believe that we do need another rescue package, but the proximity to the elections and the differences of opinion about what is needed are pretty vast.”
He also mentioned that a significant number of his Senate majority feel that enough has already been spent and do not want to approve anything more.
Finally, he said that there is limited time left and their "first priority" is confirming a new Supreme Court justice.
This led Goldman Sachs analyst Alec Phillips to conclude on Friday:
"Many of the policy issues are at least as controversial as the top-line number. An appearance of additional progress seems likely over the next several days. But we haven’t changed our view that substantial fiscal stimulus is unlikely to pass before the election."
Apartment Landlords in Tourism-dependent and High-Expense Cities Start to Feel the Heat
On Monday, RealPage, a real estate property management and data company, released information on September rental payments. Their data isn't representative of the whole market, because it only covers larger, professionally managed apartments. And as we talked about, these have done a lot better than smaller buildings, older buildings and those with poorer tenants, who were more vulnerable to job loss. Additionally it doesn't cover the single-family market.
Having said that, they found that across the nation, 7.8% of renters are struggling and have been unable to make payments. This is up 1.5% from last year.
And, not all markets are doing as well as others. For example, New Orleans topped the list with 12.9% of renters who have stopped paying. Typically, the city depends heavily on tourism, which has been hit hard in the pandemic.
And the largest percentage increase from last year happened in another tourism-dependent city: Las Vegas. Sin City reported 10.6% of tenants unable to pay (versus 4.1% last year). High-expense cities like Los Angeles, New York City and San Jose also topped the list for largest increase in rent-skippers from last year:
Greg Willett, chief economist at RealPage, said:
“There’s more stress in hospitality-focused and expensive markets. [But] the wild card in everything is what happens in the economy, and what happens in the economy is dependent on what happens with the pandemic.”
Chasm Between Commercial Real Estate Buyers And Sellers Gets Even Wider
As we've discussed previously, the pandemic has caused a rift between the expectations of many real estate buyers and sellers. Many sellers are still wanting to sell at the pre-pandemic prices they could've gotten only a few short months ago. But many buyers are unwilling to purchase at that price because of the extra risk, and are demanding a significant Covid-19 discount. This has caused many transactions to abort and sales volume to plummet. And eventually, either one side or the other will end up capitulating.
This week, CBRE, a commercial real estate service and data company, released survey results showing that in the meantime, the gap actually grew wider in the third quarter than in the second. And 61% of buyers are now demanding a Covid-19 discount, but only 9% of sellers are willing to offer one.
Chris Ludeman, Global President of Capital Markets, said:
“Buyers and sellers remain apart on many asset types, especially value-add where the bid-ask spread remains wide. Uncertainty about how to underwrite net operating income will remain until the pandemic is under control."
As a result, investment volume is down substantially across all property types, compared to pre-COVID-19 levels. Spencer Levy, Chairman of Americas Research and Senior Economic Adviser, said:
“The bad news in the COVID-19 era is that current and projected NOI are at risk, causing a pause in investment activity for most commercial real estate assets."
On the positive side, he added: "The good news is that cap rates have remained relatively stable.” And Chris Ludeman agreed, saying: "Cap rates have remained relatively stable and in fact have gone down for the best industrial and multifamily assets."
As has been the case for most of the light cycle, there is still a lot more dry powder than deals to invest in. "There is no shortage of equity capital, both foreign and domestic, targeting real estate and debt markets are increasingly accommodative.”
Two-thirds of those surveyed said that they believe investment sales volume will recover to pre-pandemic levels within a year. The most bullish sector was for industrial investors, with almost 90% expecting a recovery in that timeframe (with multifamily a close second at 84%).
Study Finds that Two Thirds of Those Who Get Covid-19 are Still Battling Chronic Side Effects Months Later
Most people believe that recovering from Covid-19 is a relatively short process. And they think that if they are not one of the minority who ends up dying from the disease, then they will be back to normal again within 2 to 3 weeks.
However, as we talked about in the past, more and more evidence is accumulating that this isn't accurate. And there are thousands of so-called "long haulers" who claim that they were formerly healthy but now dealing with debilitating symptoms months after getting the disease. These symptoms include chronic fatigue, chronic heart damage, scarred lungs and more. And several early studies appear to confirm the idea that for some people, recovery is not a quick process. If accurate, this would be similar to what studies have already found with other coronaviruses, such as SARS (where a significant percent of people suffer from things like chronic fatigue years after being initially infected).
This week, Tours University Hospital released a study to the Journal of Clinical Microbiology and Infection. They studied 150 people who were infected between March 17 and June 3, and monitored them one week, one month and two months after testing positive. Unlike previous studies, which focused on more severe cases, they deliberately included less severe cases to get out more holistic picture. As a result, the average age of the person tested was much younger than in some other studies (49 versus 62-73 years).
Their findings were dramatic. At the two month mark, a startling 66% of patients reported they were still battling at least one of the primary symptoms of Covid-19. Also, 40% reported chronic weakness (asthenia), 30% reported labored breathing (dyspnea), and 23% have still not regained the ability to smell or taste (anosmia/ageusia).
And amazingly, 37% reported that at two months out, they either still felt sick or in worse clinical condition than when the disease first hit them.
Most surprisingly, they also found that the patients most at risk for long-term symptoms were those who were relatively younger and between 40 to 60 years of age (who would be less likely to die of the disease than older people). And, while those hospitalized were a bit more likely to have long-term symptoms than those with mild cases, no group was spared.
Additionally, 16% reported chest pain, which the study called "particularly frightening for patients." The researchers felt that this potential area of concern has not been examined closely enough and said that more serious work on this must be done: "Rigorous studies with chest explorations seem necessary."
They concluded with a chilling warning that the disease may cause a significant burden to the world, long after the initial pandemic ends:
"We were able to assess the evolution of the disease and demonstrate that even the mildest presentation was associated with medium-term symptoms requiring follow-up. Thus, the COVID-19 pandemic will involve a care burden long after its end."
On Monday, the Executive Associate Dean at Emory University School of Medicine, Carlos del Rio, and colleagues, wrote an editorial in the Journal of the American Medical Association on the same topic. They called it "post-acute Covid-19" and summarized what has been found so far:
"The most commonly reported symptoms after acute COVID-19 are fatigue and dyspnea. Other common symptoms include joint pain and chest pain. In addition to these general symptoms, specific organ dysfunction has been reported, involving primarily the heart, lungs, and brain.
The researchers went on to hypothesize why this might be the case:
These complications could be the consequence of direct tissue invasion by the virus (possibly mediated by the presence of angiotensin-converting enzyme 2 receptor), profound inflammation and cytokine storm, related immune system damage, the hypercoagulable state described in association with severe COVID-19, or a combination of these factors."
As a result, post-Covid-19 clinics are opening up in many places to help recovering patients deal with the long-term consequences. Del Rio and the others noted this as well in the editorial and said much more detailed studies must be done if we hope to understand and treat the effects on "hundreds of thousands, if not millions of people who recover from COVID-19."
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, I have only minor changes and my strategy is essentially the same as last week.
Treatment: I believe chances are good that 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 in the U.S. who wants and needs it, until well into 2021. If that happens, then it will not be enough to super-charge the economy right away. And, there may potentially be a huge quality-of-life difference between the treatment-haves and treatment have-nots. This will be divisive and will exacerbate existing tensions and conflicts between rich and poor countries. And it's likely to cause considerable instability in "have-not" countries that could easily cause unexpected global consequences, not just for themselves but also for the U.S. and the world.
Recession? When the U.S. was first hit by the virus, many pundits claimed the U.S. economy was so strong, it would have little to no effect (or if it did, then it would rebound quickly and things would be back to normal in a jiffy). But, after looking at all of the micro data week after week, I said I couldn't see any way the country could avoid plunging into a technical recession (two consecutive quarters of negative GDP growth). Ultimately that happened (-5% in Q1 and -32.9% in Q2). Going forward, I believe Q3 will show strong double digit growth. But this will be only because it's measured relative to the chasm of Q2 (i.e. an almost 40% plunge from 2019). And it will come up disappointingly well-short of the amount needed to "break even" to where things were back in January (and thus well short of a true V- shaped recovery).
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 virus spreading in the U.S. in any meaningful way. Virtually no one came close to imagining that lock-downs would occur in May. Hundreds of thousands more people have been killed than originally projected. And now, even the later May projections, which maxed out at 200,000 dead, have proven to be too optimistic. Tens of millions more people than expected have lost jobs. The stimulus and unemployment aid was enormous, but had too many unexpected holes and didn't get into the hands of millions who needed it the most. States reopened, but were forced to backtrack. Many businesses have reopened, but customers are staying away. 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 the second and/or third waves of the virus. Unfortunately, this is looking more and more likely. My slim hope is that the 3rd wave (from school openings, Labor Day and cooler weather) can be controlled and kept small. If this happens... and if the US government also passes a generous stimulus law... then the worst effects of the additional waves could be mitigated. That's a lot of "if's"... so we'll see. And I'll continue to monitor the data very closely. Currently, I still believe we will have a three-stage combo-shaped recovery that starts off (1) quickly 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 return, and a slow swoosh will become apparent. If we get a second (or third) lockdown, 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 third stage and an accelerated recovery. But this most likely won't be a straight-V recovery, because it will most likely take time to ramp up production and delivery to enough Americans to get herd immunity (not until well into 2021). So the boost will be slower and smaller at first. Also, if the first generation medicines are significantly less effective than 100% (which many health experts believe will be the case), the boost will be even smaller. And all of this will depend on which treatment makes it that far... which we don't know at this point. But, we also could get a little lucky (for example, if the successful vaccine treatment is a newer type that can be scaled up more quickly or is more effective). If so, then the third-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 very severe, and will 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 sub-sectors 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:
No new investments in real estate or any asset classes that are correlated with the unemployment or the business cycle until there is more clarity about the unknowns concerning the virus and the upcoming financial cliff.
Invest in assets that are coronavirus resistant (and uncorrelated with the business cycle). That includes:
Music royalties (which can actually do better in lockdowns due to increased streaming).
Life settlements (which actually perform better when people are dying faster and in any event aren't directly tied to the business cycle).
Litigation finance (which performs based on winning or losing cases, and also isn't directly tied to the business cycle).
Invest in coronavirus "portfolio insurance" (i.e. an investment that would be expected to do better the longer coronavirus continues or if it gets worse).
N95 Mask Manufacturing Company. If the pandemic should disappear tomorrow (which I personally am not counting on), I would be happy to take a small loss here given that the rest of my portfolio would be doing extremely well. On other hand, if Covid-19 doesn't disappear and things go as I expect (or worse), then this investment could provide a welcome profit boost and improve my diversification.
Continue to hold cash and be patient for dislocated and distressed opportunities. The worse the economic damage, the more chance there will be for those 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 in some of the other X factors. For example, a new stimulus law 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 or third time, could easily make things worse.
