How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 35: October 24
Updated: Feb 8, 2021
U.S. continues to stall out while fighting second wave of deaths; World round up: Europe in crisis, and the Belgian triple-shortage nightmare; State round up: third infection wave surges across uncomfortably large swaths of the U.S.; Why the third wave may be much more challenging than the second; Georgia economic update: a mixed bag of good and awful; Economy gets tiny but welcome reprieve on new unemployment; Financial cliff update: little progress made as the clock continues to tick; Previously immune apartment REITs squeezed by rising vacancies and declining rents; FDA inspectors flag Eli-Lilly plant that's producing experimental Covid-19 vaccine for "major failure of quality assurance"; AstraZeneca and Johnson & Johnson vaccine trials are back on; Update on my portfolio 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 a lot of news on virus-related spread and economic impact, and less health-breakthrough information than usual.
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. continues to stall out while fighting second wave of death
For the 28th 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 229,376 (versus 223,681 last Saturday morning).
Ten weeks ago, the U.S. turned the corner on the second wave of deaths, and wrestled it down lower for six weeks. But for the last four weeks, progress has stalled out and plateaued. How did things go this week?
Once again, there was no progress reducing deaths. And at the end of the week, deaths actually moved in the wrong direction and rose slightly. It's too soon to say that this is definitively the start of a new trend. But, it is concerning and we will watch it closely.
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 both 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. And 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 did virus infections look, this week?
This is not a good graph. On Friday, the U.S set an unwanted record with the most coronavirus infections since the pandemic began. This was higher than the peak in the first wave (which was primarily in New York City and New Jersey) and the peak of the second wave (which was primarily across the Sun Belt). In contrast, the third wave is spreading primarily in rural areas across the country. We'll dive into this further in the state section below.
So for the fifth week in a row, infections have also moved in the wrong direction and increased. And for yet another week, the third wave has continued to strengthen.
As we discussed earlier, a third wave was expected by many. Back in May, Memorial Day weekend ended all progress against the first death wave and ultimately triggered the second wave. And many health experts warned that Labor Day (September 7th) could be a repeat if people didn't take better precautions. (See "Forgetting History and Doomed to Repeat It: Will Labor Day Launch the Third Wave, like Memorial Day Kicked Off the Second Wave?" ).
Unfortunately, so far, they've been right. Still, we don't know what size this wave will be, or how long it will last. So, we'll continue to watch.
World Round Up: Europe in Crisis and the Belgian Triple Shortage Nightmare
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, while 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:
This week, South Korea's deaths rose slightly but were still lower than the peak of their third wave. So they appear to be in control of it. Still, their data is noisy, so we will continue to monitor.
Either way, the biggest positive for South Korea is that even at their highest and 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 has been a major factor allowing them to keep their economy open while suffering far less damage than everyone else.
And this week again, the South Korean economy continued to remain predominantly open for business.
Meanwhile, Sweden has opted for a lockdown-lite strategy (see part 8). 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.). But, they never went into the full-on lockdown seen in many other countries. And 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 did this week:
After deaths bounced back up last week, this week they bounced back down to a low level. So this was good to see.
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 they're compared to other Scandinavian countries (who have similar demographics) Sweden hasn't done very well, with a death rate that is many times worse than all of their neighbors (see chart below).
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 (see chart below).
However, the hope for Sweden is that if the country can keep its deaths low (while others stay high), they might be able to eventually dig themselves out of this hole (and even end up ahead).
How is the country 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:
For the fifth week in a row, Sweden has maintained its lead ahead of both the United States and United Kingdom (see more on the U.K. below). So this was good to see.
On the other hand, those two countries are among the worst performers in the world and simply outdoing them isn't that difficult. And Sweden's numbers are still stratospherically bad at about 580 deaths per million (which is about five times worse than the average country in the world).
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, Europe has been hit by a second wave of deaths. Many health experts said this was the inevitable result of loosening travel restrictions, reopening schools, public weariness/resistance to following health precautions, and also likely due to colder weather. And as the death toll has skyrocketed, authorities have enforced a variety of lockdowns (which we've described in detail in previous weeks). How are things going this week?
Spain is a popular travel destination and was one of the first to get hit by the second wave. And they've been battling an increasingly bad situation for more than two months. But last week, they finally plateaued, which gave hope that they might be finally getting control of things. Looking at their chart:
Unfortunately, they broke out of that plateau in the wrong direction and deaths increased. So, they still don't appear to have their second wave under control.
How about the U.K., France and the Netherlands?
This is a worrisome chart for the U.K., France, and Netherlands. If any of them continue like this for another month, they're going to surpass their record number of deaths from the darkest days of the early pandemic.
Meanwhile, in Belgium, Foreign Minister Sophie Wilmès (who stepped down as prime minister earlier this month) was admitted into an intensive care unit for Covid-19 on Wednesday. She is only 45 and had formerly been in good health.
And Belgian officials say that so many in the country are sick or in quarantine that there aren't enough healthy police on the streets, medical staff in hospitals and teachers in classrooms.
How did things go for the country this week?
Unfortunately, the numbers did not go well for Belgium, this week. Their third wave of deaths has now eclipsed the peak of the second. And like many other European countries, they are on track to eclipse the first wave, unless they turn things around.
On the ground in Belgium, things are not looking much better:
1) Police shortage:
In the month of October, the distressing number of 2,368 police officers across Belgium have tested positive or had to quarantine. Vincent Gilles (the head of the police union) says that as a result, the province surrounding the city of hard-hit Liège is suffering: “around 50 percent of police officers are not at work."
2) Health worker staffing shortage:
Philippe Devos, an intensive care doctor at a hospital in Liège (and also president of the Belgian Association of Medical Unions), says:
"The situation is catastrophic. We have a lot of doctors and nurses affected. At some hospitals in the city, between one-fifth and one-quarter of the medical staff is sick or quarantining. We are in deep."
Belgian Health Minister, Frank Vandenbroucke, warned:
“We are the most affected region in all of Europe. We are really close to a tsunami … that we no longer control what is happening. Today, we can still control what is happening, but with enormous difficulties and stress.
If it continues to increase, the number of hospitalisations will be such that we will have to postpone more and more non-Covid care, which is also very dangerous.”
Only last month, Belgium had been cited by U.K. Health Secretary Matt Hancock as a model of how to deal with the second wave of infections. And many believed that Belgium's policy of limiting people's interactions to small social bubbles had been effective.
But, success may have been the trigger for failure. Government authorities decided to remove the mask mandate while adults went back to work and children returned to school.
Marc Noppen, chief executive of one of the biggest hospitals in the Belgian capital of Brussels, summed it up in a tweet:
"March 2020 revisited. ANGRY that we were unable to avoid this predicted scenario.
3) School staffing shortages:
Meanwhile, Isabelle Allelyn, principal of a school in a village in one of Belgium's worst hit eastern regions, said this week:
"Half of my teachers are sick or quarantining. Of 225 students, 37 are quarantining and 45 can't come in because there's no teacher for them. In one classroom, first, the teacher got sick and then, her substitute did too. We are doing our best to cope with the pandemic. But now, the situation is pretty unstable and is almost getting out of control.”
Allelyn made the quote from home, because she herself had also tested positive for the virus.
State Round Up: 3rd Infection Wave Surges Across Uncomfortably Large Swathes of the U.S.
For the last several months, we've watched individual U.S. states to get insights into what might happen next at the national level. And here's what we saw:
1) After the Memorial Day weekend (in May), we saw the second wave of infections (and eventually deaths) start in the Sunbelt and then spread to the Midwest and Northeast. 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 the Sunbelt states made huge progress.
2) Then after the Labor Day weekend (in September) the U.S. reopened schools and cooler weather began in the north. Almost immediately, a third wave began. While this started in just the Midwest and Northeast, it has now spread across every major area of the country. Last week, 44 states reported higher infections than a week ago. And while earlier waves hit mostly urban areas, this new wave is being led by rural places.
What happened this week?
1. The pandemic is evolving.
As we mentioned earlier, the country registered an all-time high for new coronavirus cases this week, when it hit 80,000 in a single day for the first time.
The last daily record was back in the second wave on July 7, with cases at 76,533. And at that time, only four Sunbelt states accounted for 40,000 of those: Arizona, California, Florida and Texas. On Friday, it was 11 completely different states who were responsible for the lion's share of spread. And in the past two weeks, 24 states have broken their records for single day highs.
And as we discussed last week, the new hotspots aren't just more plentiful and widespread...but they are disproportionately located in rural areas. This is very different from the early pandemic, when urban areas were hammered the worst.
And this week, the Financial Times put out a piece which dug into this further. Not only is there a rural/urban divide, but there are even different subsections of rural and urban America that are experiencing the third wave very differently:
It all depends on how many people live nearby. So small cities are doing worse than medium ones, which are doing worse than larger ones.
2. The third wave may be much more challenging than the second
Many health experts say this third wave is shaping up to be very different from the last one. First, the third wave's infections started off at a much higher level than they did during the second wave. And the more widespread nature of this wave may prove to be much more problematic than the relatively isolated hotspots of prior waves.
Eleanor J. Murray, an epidemiologist at Boston University, said:
"One key way we got through previous waves was by moving health-care workers around. That’s just not possible when the virus is surging everywhere. [And] we are starting this wave much higher than either of the previous waves... it will simply keep going up until people and officials decide to do something about it.”
Healthcare workers aren't the only shortage that is exacerbated by this third wave. Michael T. Osterholm, director of the University of Minnesota’s Center for Infectious Disease Research and Policy, says that many areas across the nation are also experiencing a critical drugs shortage.
Specifically, Osterholm found chronic shortages across the U.S. in 29 of the 40 critical drugs needed to treat Covid-19. This includes generic drugs as simple as antibiotics, to sedatives needed to calm patients during intubation (like propofol) and heart medication (like norepinephrine).
And unlike before, we can't simply pull from full stockpiles in other regions to relieve the local scarcity. Stephen Schondelmeyer, a doctor and co-author of the study, said:
"Last spring, when we had [just] a few states hitting their peak COVID-19 demand, the wholesalers and manufacturers were able to adjust by shipping supplies from the Midwest to the Northeast when New York and New Jersey needed it, or from the South to California and Washington. But when you have 30 to 35 states or more all hitting a peak at one point in time, there's a much higher peak and really no place with excess drug supply to redistribute. Complicating the situation, the United States cannot expect to draw upon drug supplies from other parts of the world, when most other countries are also facing increased need and demand due to COVID-19."
Meanwhile, some had hoped that the third wave of infections might be just a statistical aberration caused by increased testing and not a sign of increased spread. And with a much younger subset of people getting infected, along with improved techniques and treatments, they theorized that we would not see any actual increase in hospitalizations or deaths.
Unfortunately, this idea has crumbled in recent weeks, as hospitalizations have also surged across the country. And this week, that trend accelerated with 38 states seeing an increase in the average number of hospitalizations versus last week. Additionally, 14 states reported record highs: Kentucky, Nebraska, Ohio, Oklahoma, South Dakota, Tennessee, Wisconsin, Wyoming, Iowa, Utah, Montana, West Virginia, Missouri and Kansas. And the speed of this trend has been startling to some. In the last three weeks, four states have doubled their number of hospitalizations: Connecticut, Montana, New Mexico and Wyoming.
3. Low level state-by-state data
Let's dive in to the low-level state data to get a closer look at what's happening to some of these affected states. Here's how Utah did this last week:
Unfortunately, Utah's new infections went into the stratosphere, and they blew away their previous record with 2000 cases in a single day. Deaths had previously spiked to a new high two weeks ago, and have since come down slightly. But still they're staying elevated at uncomfortably high levels.
As a result, Utah authorities are now trying to open up a field hospital at an exposition center to handle the anticipated hospital overload. And at a press conference, state epidemiologist Angela Dunn pleaded for a skeptical general public to take health warnings seriously.
"The health-care system is at capacity, hospital staff are exhausted, and Utahans are getting scared.
You know, I just don’t know what to do anymore. I’m really not trying to scare anyone. I’m just trying to inform you of what’s going on.”
Meanwhile, how did Wisconsin do this week?
That's a depressing set of charts. This was a doubly awful week for Wisconsin, with the state setting records in both new infections and deaths. In fact, on multiple days, the new deaths set soaring and unwanted records.
This week, Wisconsin governor Tony Evers said that 90% of hospital ICU beds in the state are full. And he also announced that the emergency field hospital (which we discussed in previous weeks) has been opened and accepted its first patients.
How did Idaho do this week?
Sadly, Idaho also saw increases in infections and deaths. New virus cases set a record, while fatalities remained below the previous record peak, but at high levels.
On Wednesday, hospital officials in northern Idaho announced that the entire region is at 99% capacity and has no ability to take any more patients. So people who come in with Covid-19 have to be sent to the neighboring state of Washington (Portland or Seattle) for treatment. However, they warned that even that capacity was very limited.
“Because all regional hospitals are experiencing the same situation, there will be limited opportunities to transfer patients to other facilities once at capacity. If there is no room available, Kootenai Health is currently looking at hospitals in Seattle or Portland to find space to transfer patients, but it is very limited.”
So far, Idaho Governor Brad Little has declined to mandate steps recommended by federal and state health officials to slow the spread of the virus, including rejecting enforcing a statewide mask mandate.
Meanwhile how did Minnesota do this week?
Unfortunately, Minnesota also experienced record new infections and surging deaths. Deaths also hit a high for the second wave.
Michael T. Osterholm, director of the University of Minnesota’s Center for Infectious Disease Research and Policy, raised concerns this week about staffing shortages of critical medical personnel:
"Creating beds is relatively easy, but what do you do when you outstrip ICU nurses, doctors and teams?”
Meanwhile how did Illinois do this week?
Unfortunately, Illinois is experiencing the same sad story as many of the other states. New infections climbed up to dizzyingly bad record heights and deaths climbed as well (setting a new record for the second wave).
On Friday, director of the Illinois Department of Public Health, Ngozi Ezike, teared up at the governor's press conference as she announced the record numbers of new cases and fatalities. And she made a plea to those experiencing burnout from following health restrictions.
“If you’re talking about Covid fatigue from having to keep wearing a mask, think about the Covid fatigue for health care workers, respiratory therapists, who are going to have to go through this whole episode again of trying to fight for peoples’ lives, because we couldn’t figure out how to control this virus by doing some of the simple measures that have been prescribed.
I am desperate to find a message that will work."
At the same conference, Illinois Gov. J.B. Pritzker urged citizens to wear masks and socially distance.
Meanwhile, what happened this week in North Dakota? Here's how they did:
Unfortunately, North Dakota also experienced record new infections. One bit of good news was that deaths dropped a little bit from their peak last week. But they remained at elevated levels and worse than anything in previous waves.
North Dakota Governon Doug Burgum has previously declined to require citizens to socially distance, wear masks and avoid gatherings. And this week he doubled down, when he declared:
“It’s not a job for government."
On Friday, Tom Inglesby, director of the Johns Hopkins Center for Health Security, said:
"[There were] plans and metrics many states laid out last spring for reopening. That’s been completely disregarded in many places... We have state leaders openly defying public health guidances... There’s [also] this false sense of calm right now ... [because some leaders are] saying, 'We’re rounding the corner'."
He also added:
"It’s been framed as this false choice between full shutdowns and doing nothing, but that’s not the case."
Emily Landon, an infectious disease expert at the University of Chicago School of Medicine, agreed, saying:
“Instead of asking these questions about what we’re seeing across the United States, we’re just kind of saying go back to work, ignore everything… which I think is the wrong message to send.
She also added that the virus will continue to spread if there is no change in public attitude.
"A major cultural shift is needed to change the collective behavior to better follow mitigation efforts like mask wearing and social distancing. Consistent and clear messaging can help achieve this. You’ve got to have everybody speaking with the same voice and you’ve got to agree on what it is you want everyone to do."
Georgia Economic Update: A Mixed Bag of Good and Awful
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 about 6 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 Panera Bread. This is a fast casual restaurant that would be expected to do better in a recession, versus a higher-costing fine dining restaurant. How is it doing?
That's a depressing graph. Footfall decreased to an unsustainable -22% versus the same time last year. And worse, there's been essentially no improvement since the peak back in August (which itself was not that great at -18% footfall). If they don't turn things around here, things could get very ugly.
For retail, let's look at Bed Bath & Beyond. This is a slightly upscale retailer that sells home goods:
This is the first good news we've seen in retail for a long time. Bed Bath & Beyond's footfall is actually 2% better than it was the same week last year. So this was nice to see. On the other hand, their performance has been up and down and they've had good improvement before, only to fall backwards later. So let's hope they can keep it up this time and we'll continue to watch them.
For fitness, let's look at Anytime Fitness. This is an gym where members have the key and can visit at any time. So this can allow people to exercise at a time where there'll be fewer other guests and staff around, which should be a significant benefit in a pandemic (versus a traditional gym). How are they doing?
For the last four weeks, Anytime Fitness has been improving slightly. But the pace of improvement has slowed and they are currently stalled out at about -13% footfall versus the same week last year. Gyms typically have high fixed costs and low margins, so this looks painful.
Finally, how are hotels doing? Let's take a look again at Holiday Inn Express. This is a discount hotel and would be expected to do better in a recession than a higher-end brand:
Last week, Holiday Inn Express had almost fully recovered their footfall, and this week they fell back slightly from that progress to -6.67% versus a year ago. This isn't bad at all, especially when compared to many other businesses. But is also moving in the wrong direction. They appear to have noisy data, so we will continue to watch them.
Overall, Georgia's recovery this week was a mixed bag. Bed Bath & Beyond was very promising, but other businesses' outlooks ranged from weak to unsustainable.
Economy Gets Tiny But Welcome Reprieve on New 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. That's why we examine 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 been much higher than any pre-pandemic week on record.
This week was no different, with 787,000 people newly employed. Still, this was a modest but welcome improvement from the previous week (which was also revised downwards from 898,000 to 847,000).
And, for the first time in three weeks, California came back online (after a hiatus to clean up their backlog) and reported data. So this made their reported data more accurate than in previous weeks.
Meanwhile, as we've talked about every week for the last several months: "continuing claims" is also a useful statistic to look at within this report. Jobless claims only tell us who lost jobs over the last week, but continuing claims removes the ones who have been rehired. So in theory, continuing claims tells us how many continue to be unemployed right now. In practice though, even this number isn't perfect. The problem is that some people have been unemployed for so long that they've exhausted their unemployment benefits and unhelpfully disappear from view. And the more people who fall out, the more this number will understate the true long-term joblessness. Still, it's better than nothing.
This week, the number fell quite a bit to 8.37 million from 10.02 million. So on one hand, that was a good sign. On the other hand, we know that a significant part of that reduction was caused, not by people getting rehired, but simply from those who have exhausted their benefits without being able to get a new job. Recently, 510,000 people were added to the new Pandemic Emergency Unemployment Compensation (PEUC) program passed by Congress, which will give them up to 13 more weeks of benefits.
But, the PEUC number suffers from the same potential undercounting flaw as continuing claims, because people who exhaust their benefits without finding a job are treated the same as people who got a new job (and not counted). But even if it may understate the true long-term joblessness, it's can still be helpful to look at.
Regardless of the interpretation of these continuing-claims-related numbers: once again, those hoping for a quick improvement in support of a V-shaped recovery were disappointed. And, the amount of newly jobless still blows away anything in recent memory and since records have been kept (including the darkest days of the great recession):
Bloomberg economist, Eliza Winger, said:
“The reported national tally has been artificially higher, but the week ended Oct. 10 still saw a hefty increase in the number of claims. The overall picture remains unchanged -- the downtrend has been stalling even though the latest decline is somewhat encouraging.”
On Thursday, Bloomberg released the results of its weekly consumer confidence poll. Since consumer spending drives the majority of the American economy, consumer confidence can be a useful predictor of future economic activity. And the Bloomberg Consumer Comfort Index showed that consumer confidence fell suddenly in the past week (1.6 points to 46.6) to a seven-week low:
Some speculated that this could be due to the continuing lack of resolution of the "financial cliff," which is affecting millions of unemployed Americans. (See next section for more).
Financial Cliff Update: Little Progress Made As the Clock Continues to Tick
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 was not 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.
Three weeks ago, 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.
Two weeks ago, we had a roller coaster week. The President pronounced the negotiations dead, then a few days later announced them restarted, and then a few days later, said he was willing to go even higher than the opposing political party had proposed.
Last week, the White House and the large stimulus party announced they were getting close to agreeing on dollar amount (between $1.8 trillion in $2.2 trillion). Within a short time, however, the Senate leader announced that any such agreement would be too high for his own members in the small stimulus party.
This week, the large stimulus party said that Tuesday was the deadline for agreeing on a package that could be implemented before the November election. But, Tuesday came and went with no announcement of a final deal.
Still, the White House and the large stimulus party continued to hold talks. And on Friday, White House Chief of Staff Mark Meadows said:
“Hopefully we can get a deal in the next day or so. We’re still working through it, Secretary Mnuchin and I have talked and we’re still working with our teams, but actually making adjustments and trying to look at language to reach a compromise.”
However, both sides acknowledged that despite the progress on the price tag, at least one of the original sticking points in negotiations remains unresolved. The large stimulus party wants more aid to states and local governments that have had tax revenues hammered by Covid-19 layoffs and business closings. But the White House is resistant to this and wants less spending.
And even if the two parties can come to an agreement, a much bigger impediment is that the final price tag will be an amount that has been denounced as unacceptably large by a majority of the small stimulus party members in the Senate.
So on Friday, the large stimulus party and Secretary Mnuchin said they sent the issue to Senate congressional committees to have low level talks and try to hash out an agreement. But, aides on those committees confidentially reported that little progress had been made.
White House economic director Larry Kudlow said, on Bloomberg Television:
“The ball’s not moving much right now. The clock is ticking.”
And as of today, there is still no resolution to the issue.
Previously Immune Apartment REITs Squeezed by Rising Vacancies and Declining Rents
Moody’s Analytics REIS, a commercial real estate data analytics firm, released a report this week on the apartment market. They looked only at public REITs, which tend to own the largest, most expensive buildings. And as we've discussed in previous weeks, this segment of the market has done significantly better in this crisis than smaller investors and mom-and-pop's. That's because the latter tend to have smaller, older buildings and/or are housing less affluent renters, who have been hit disproportionately hard due to the unequal nature of the pandemic and the recovery.
But, this week, Moody's reported that even these top-tier properties are starting to show signs of stress cracks. And this quarter, effective rents dropped a startling 1.8%. This was the largest fall on record since 1999 and worse than even the depths of the Great Recession. Moody's said that 62 out of 82 major apartment markets declined in Q3, versus only two in the same quarter a year ago.
Most of the pain is being felt in big cities like New York and San Francisco. New York rents fell 7.2%, which beat the previous record decline of 4.6% in late 2001. And San Francisco saw an even larger drop at 9.6%.
Joshua Clark, an economist at Zillow Group, said:
“It’s totally a renters’ market in those large metros. In many cities, we’re seeing extremely high shares of listings with concessions, the vast majority being actual months of free rent.”
Haendel St. Juste, managing director at Mizuho Securities USA, said:
“You can get two months free rent without even asking. That tells you the extent that demand has dropped off. The question is: are we starting to get to the bottom of that?”
Additionally, the report said that despite these significant concessions, the national vacancy rate for apartment REITs still rose to 5% in Q3 (versus 4.6% in Q3 of 2020). This was the worst national vacancy rate since Q2 of 2012. And Moody's further forecasts that vacancies will climb to 5.4% by the end of this year and continue rising in 2021.
So far, the year has not been good to many publicly traded REITs. The FTSE Nareit All Equity REITs Index, which includes 159 REITs, has returned a dismal -11.1% (including dividends). In comparison, the broader S&P 500 Index is up about 8.2% (including dividends). And apartment REITs have been especially unloved. The 15 that are included in the Nareit Index have plummeted -26.2%.
Still, there are some areas of the country doing better than others. Apartment REITs in Sunbelt cities like Atlanta, Houston and Dallas were reported as doing better than coastal metropolitan areas.
FDA Inspectors Flag Eli Lilly Plant Producing Experimental Covid-19 Vaccine for "Major Failure of Quality Assurance"
On Wednesday, an informant revealed previously confidential government documents produced by U.S. drug inspectors at the Food and Drug Administration (FDA). These revealed that FDA inspectors had discovered serious quality control problems at an Eli Lilly plant that is manufacturing an experimental Covid 19 treatment called bamlanivimab. The drug is similar in design to the Regeneron antibody cocktail that was given to the President during his recent hospitalization, and which we've discussed in detail in previous weeks.
In an October 2 memo, FDA compliance officers wrote that their inspections of the facility in July and August found “a major failure of quality assurance" that "leave room for significant potential impact on product quality." And they said it was "imperative that FDA take action.”
In one case, a Lilly employee allegedly used the wrong material in a critical purification step. In another, after routine checks revealed a potential impurity in the drug product, the employee didn't follow procedures to investigate the discrepancy and instead sent it back to testing to get a passing result.
A whistleblower also informed the FDA that Lily managers had documented more details of quality concerns that were so severe that employees were written up for them in the Ely Lilly's human resources systems. But when inspectors repeatedly asked for this information, they were denied by Lily.
The company has previously applied to the FDA for an emergency use authorization for the treatment. And should the inspectors' recommendation for a warning be followed (which is one of the most severe actions the FDA can take), this approval may be delayed.
However, the FDA leadership is not obligated to follow FDA inspectors' advice and has occasionally overridden it. As an example, back in 2017, an inspector raised red flags about drug ingredient contamination coming from a facility in China and recommended a warning. Instead, the FDA chose to allow the company to fix the problem themselves (without that level of supervision).
Ultimately, about a year later, the same company manufactured millions of blood pressure pills that were contaminated with the chemical that can cause cancer. This resulted in a huge recall.
As we discussed last week, the government-sponsored clinical trial of Lilly’s antibody therapy was also paused due to a potential safety concern. The company says that the trial of their other treatment is still continuing.
AstraZeneca and Johnson & Johnson Vaccine Trials Are Back On
As we discussed several weeks ago, AstraZeneca and Johnson & Johnson both had their experimental Covid-19 vaccine trials put on hold after a patient became seriously ill. AstraZeneca's trials were frozen about a month ago and Johnson & Johnson approximately two weeks ago.
Health experts noted that it isn't uncommon for large trials to have patients that experience adverse effects. So continuation might be possible if the reviews went well.
Then, this week both announced that the reviews have been completed, and that they had been authorized to continue on.
Earlier in the week, AstraZeneca said "no clear cause for the illness could be identified". However, they said that an independent state's safety monitoring board recommended that the trial continue and they had received FDA approval to do so.
Then, on Thursday, Johnson & Johnson announced “We have found no evidence it [the serious illness affecting the volunteer] was linked to the vaccine." In addition to their internal studies, they also claimed three independent outside medical consultants had analyzed the data and felt the same way.
Neither drugmaker disclosed any information on what actually happened to either patient. And this has caused them both to face significant pressure to disclose more information about the episodes. Both of these drugs are by far the fastest ever produced in the history of vaccines. So some health experts advocated for more transparency to demonstrate to the public that shortcuts are not being taken. Ultimately though, both companies refused to do so, citing patient privacy and the integrity of the trial process as overriding public concerns over the process.
Johnson & Johnson said trial sites would be up and running by Monday, and that they had continued to work on other things, so the entire incident had only resulted in a very limited delay. The company also suggested they may ask for emergency use authorization with the FDA as soon as the beginning of 2021.
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 will be 85%+ effective and that 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 either 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 push towards 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.
