How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 36: November 1st
Updated: Feb 8
Signs show unwanted third U.S. death wave raising its ugly head; Crystal ball: U.S. infections hit record highs and continue to spiral upwards; U.S. State Update: infections and hospitalizations accelerate across record-setting numbes of states; Groundbreaking study finds mask mandates associated with dramatic reduction of Covid-19 hospitalizations; U.S. economy hammered by more record-setting unemployment; Georgia’s bellwether economy: a glimmer of success amid otherwise cloudy to stormy skies; Financial cliff update: senators head home to face their voters with no deal in hand; Shocking 8 million delinquent homeowners could spark foreclosure tidal wave in 2021, larger than the great recession; Millions who can’t afford rent may cause eviction tsunami in 2021; Human trials on Eli-Lilly Covid-19 antibody therapy canceled by feds for ineffectiveness; Safety monitoring committee tells Regeneron to stop using its antibody cocktail on hospitalized patients; Yet another study suggests that antibody defenses to Covid-19 fade startlingly quickly; When will things get back to normal? Fauci predicts mid to late 2021; Update on my portfolio strategy.
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This week, there was a lot of news on virus-related spread, economic impact, and health and treatment info.
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.
Signs Show Unwanted Third U.S. Death Wave Raising Its Ugly Head
For the 29th 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 235,453 (versus 229,376 last Saturday morning). Here's a quick summary of what's happened so far:
The first U.S. death wave mainly hit urban areas in the Northeast, started in early March and peaked in early April. Then the country fought it down until early July.
That marked the start of the second death wave, which ran predominantly through the Sun Belt. It peaked in mid-August, before starting falling.
Then since the beginning of October, progress fighting the second wave also stopped, and the U.S. essentially plateaued.
How did things go this week?
Unfortunately, not only was there no progress, but deaths went into reverse with the numbers clearly climbing up. This was a continuation of the trend that we saw at the end of last week. And if it continues, then that means that the country has now entered a third wave of deaths. Unlike the two previous waves, this one is profusely distributed throughout the country, which makes it worse. Still, it’s early, so it’s possible this could be just noise and could reverse itself next week. We’ll be watching this very closely to see.
Crystal Ball: U.S. infections hit record highs and continue to spiral upwards
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 a disturbing graph. Not only was there no progress, but new infections are spiking upwards rapidly. And like last week, the U.S. again set unwanted new records for most coronavirus infections since the pandemic began. We’ll take a closer look at what happened in the state section below.
Looking at the broader picture, this means that the third infection wave (which began about four weeks ago) is still uncontained and has continued to strengthen.
As we discussed earlier, this was unfortunately exactly what many health experts predicted. Super-spreader events triggered by Americans not following health precautions on the May 23rd Memorial Day weekend led to the end of all progress in the first wave and triggered the second. And when the same thing happened on Labor Day (September 7th) they warned we could expect 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?" ).
Sadly, 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 Crisis Continues as France and Germany reluctantly lockdown
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 was a good week for South Korea. For the last several weeks, the country has been battling a third wave, which was triggered by an super-spreader event at a church. This week, deaths went down and they also now appear to be in control of their third wave.
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 virtually 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:
This was a bit of an up-and-down week, as Sweden experienced a rise in deaths and then a fall. But their death rate remained low and has come down a lot from where they were previously. So this was good to see.
On the other hand, Sweden's experience is not necessarily 100% applicable to non-Scandinavian countries. One of the main causes of virus spread is through families, and an unusually large number of Swedish households are single-person homes (more than 50%). In contrast, only about one third of households in the U.S. are single-person. And Sweden also has a much larger than usual number of young people living by themselves as well (versus countries like the U.S., which tend to have larger families).
Either way, the biggest problem for Sweden, so far, is that the economic results of their experiment have been dismal.
No economy has been successful staying fully open while allowing the virus to run amok at high rates. And due to Sweden's unusual strategy, the country's death rate up to this point has been stratospheric (versus many other countries that are following more traditional strategies). For example: the country has endured a 6 to 10 times higher death rate than their Scandinavian neighbors with similar demographic advantages. And they have performed 100 to 2000 times worse than top-tier countries like South Korea and Taiwan. (See chart below).
So, due to the uncontrolled spread during much of pandemic, Sweden's overall economic performance has been very poor. The country is expected to plunge into a severe recession this year with GDP projected to be -5.6% in 2020. This is essentially no better than the -5.9% projection for the U.S. In its defense, this would be a bit better than the average -8.1% projected for the Euro Zone. But it's also still an economic failure compared to other countries with models that have controlled the virus well. For example, South Korea is expected to experience only a small blip of a slowdown of less than -1%, which would be 5.6x times less severe than Sweden’s deep recession.
Still, Sweden could turn things around and outperform other countries both economically and healthwise. To do that, they need:
To continue to have success keeping deaths low (which they did this week).
Lots of time to pass, and for other countries to stumble (lose control of the virus and experience a higher level of cases).
If this happens, then in the end, other countries would do worse and it would ultimately prove that Sweden made the right choice with lockdown-lite.
However, there are some impediments to this scenario playing out. 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 to late 2021. If so, then there may not be enough time for Sweden to catch up. But, they are also not completely out of hope. Vaccines and treatments may not end up being effective and/or the virus could mutate and run more rampant than expected in 2021. If so, then the Swedish model could eventually prove itself.
How is Sweden doing, right now? 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 6th 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, Sweden’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. But we will continue to watch Sweden, of course, and see if things turn around.
Across the Baltic Sea, other nations in Europe have 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).
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. How did they do this week?
On one hand, deaths have continued to rise. On the other, the rate has been slowing over past weeks. This could mean that virus countermeasures are taking effect, and that they may be getting close to turning things around. Let’s keep our fingers crossed for them and we’ll see next week.
How about the U.K., France, Netherlands and Belgium?
This is a bad chart. All four countries compared here are experiencing accelerating deaths. And if this continues for several more weeks, they’ll eclipse even the record deaths from early in the pandemic (which many had assumed would be the worst that would be seen).
“The virus is circulating in France at a speed that even the most pessimistic forecast didn’t foresee. The measures we’ve taken have turned out to be insufficient to counter a wave that’s affecting all Europe.”
He said that ICUs currently have 9,000 patients and, if nothing is done, they will be close to capacity in two months. If that happened, it would trigger hospital overload, and projections estimate that overload would cause the deaths of a staggering 400,000 French people.
On Wednesday, both France and Germany (the two largest countries in the E.U.) announced new nationwide lockdowns for at least a month. Both will be closing bars, restaurants and nonessential services. However, unlike in the first wave, they will be allowing schools and most businesses to continue operating. This is an attempt by French President Emmanuelle Macron and German Chancellor Angela Merkel to strike a balance between protecting public health and striking a debilitating blow to the economy.
U.S. State Update: Infections and hospitalizations accelerate across record-setting numbers of states
For the last several months, we've watched individual U.S. states in order to get insights on what might happen next at the national level. And here's what we saw:
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 progr
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. And while earlier waves hit mostly urban areas, this new wave is being led by rural places.
And last week, we saw 38 states showing increased hospitalizations and 14 reporting record highs. This caused public health officials in several areas to plead with the general public to be more careful as they experienced shortages of critical hospital workers. And in many areas, there are now chronic shortages of 29 of the 40 most crucial drugs needed to treat Covid-19.
What happened this week?
Unfortunately, infections and hospitalizations both continued to spike up, as their third waves continued:
As a result, a startling 14 states recorded all-time highs of new infections. And this record number of states also hit that unwanted milestone all at once, which illustrated how the virus is now spreading much wider than ever before.
The states setting new case records included: Arkansas, New Mexico, Wyoming, Colorado, Pennsylvania, Kansas, South Dakota, Illinois, Indiana, Iowa, Minnesota, North Dakota, Ohio and Oregon.
Additionally, Covid-19 hospitalizations increased by an unsettling 10% or more in a 32 different states.
Let's take a closer look at the some of these.
Here’s South Dakota:
Unfortunately, this week, the state again saw escalating new infections and deaths. And once again, both sets of numbers set record highs.
Back in August, we talked about how South Dakota hosted a biker rally that was attended by over 400,000 bikers. Despite warnings by health officials, these attendees were overwhelmingly unmasked and ignored basic virus prevention guidelines.
As one biker said:
“I would rather die than wear a mask. Its a false flag pandemic.”
What was the result of this attitude in South Dakota? Many health officials have expressed dismay over the fact that the U.S. doesn’t have a national test and trace system like other countries do. So we are unable to easily track the repercussions of potential super spreaders events, as others can:
However this week, several economists published a paper describing an ingenious and indirect way to figure out these repercussions. The study, published by the Institute of Labor Economics, described how the researchers used cell phone data to document where the bikers visited and where they came from. (The data was anonymized to protect their privacy). Then they paired this up with data from the Centers for Disease Control and Prevention (CDC) to see the results.
The researchers found that, as many locals had feared, Covid-19 cases rapidly spiked up in the county. A month after the rally, it had increased approximately 6-7 cases per 1000. However, this was only a small part of the overall effect. Most bikers turned out, actually, to be from out of state. So the researchers then tracked what happened when they went back home. And they found that counties with the highest number of biker attendees experienced a 7 to 12.5% increase in Covid-19 cases, versus counties that didn’t.
Even this wasn’t illustrating the total effect, though. The problem with super-spreader events is that they can set up a cascading series of events as each person in the first group of infected people then goes on to infect multiple people, and each one of them infects multiple people, and so on. This is how viruses can spread exponentially ,causing outsized damage with a speed that can be startling.
After looking at the larger picture, the researchers concluded that approximately 250,000 of later U.S. Covid-19 cases could be traced back to that single event. Let’s turn our attention to North Dakota. How did it do this week?
Unfortunately, North Dakota’s week was essentially a mirror image of South Dakota’s. The state experienced escalating infections and deaths and both numbers set record highs.
And as we discussed in previous weeks, some hospitals in the state are experiencing overload and having to transfer patients to other states. That continued this week, and caused North and South Dakota (along with Montana) to now have the unwanted distinction of having the most current covid-19 patients per capita in the nation.
But that wasn’t the only bad news. This week, Christopher Murray, director of the Institute for Health Metrics and Evaluation at the University of Washington announced some stunning additional news:
“North Dakota has the highest Covid-19 death rate per capita in the world right now. At the same time, data compiled from Facebook indicates that the state has the lowest mask-wearing rate in the United States, between 45 and 49 percent.”
On Wednesday, White House Coronavirus task force coordinator Deborah Birx toured the state and offered her own scathing review of mask usage in the state.
“Over the last 24 hours, as we were here and we were in your grocery stores and in your restaurants and frankly, even in your hotels, this is the least use of masks that we have seen in retail establishments of any place we have been.”
Dr. Birx made the remark shortly after participating in a roundtable that included North Dakota Governor Doug Burnham. The governor has refused to implement a mask mandate and has insisted that the decision should be a personal one.
Meanwhile how did Oklahoma do?
It’s starting to sound like a broken record, but Oklahoma experienced the same week as the others: record levels of new infections and deaths.
On Wednesday, the state released new data that showed that it had also shattered new records for Covid-19 hospitalizations. And stunningly, it had done the same thing for 12 of the past 15 weekdays in a row. On Thursday, it again set a new record for hospitalizations with 956. In comparison, the worst of the second virus wave was only 663 in the summer. And the worst of the initial wave was only 560.
On Wednesday, St. Francis, the largest hospital system in Oklahoma, took the unprecedented step of paying for a for a huge, two page ad in the Tulsa World, in which they pleaded with the general public to follow basic virus control guidelines recommended by hope officials. They warned the hospital system is “at a critical capacity,” “headed in the wrong direction,” and “losing ground to a common enemy”:
CEO Jake Henry Jr., said:
“The trend isn’t sustainable for St. Francis. Our folks are just kind of exhausted when they leave their shift after having worn PPE for 12 hours. And we’ve brought in additional nursing staff, but it’s still a stretch as these numbers go up. We thought by using the graphic and letting folks see where we started and where we are today might be a gentle nudge to always wear a mask, wash hands and watch your distance.
Meanwhile, how did Tennessee do this week?
Unfortunately, the state looks like a repeat of the other states we’ve looked at so far. They too experienced rising infections and deaths and set new records for both.
So overall, it was not a great week at the state level. We'll continue to watch them and see what happens next week.
Groundbreaking Study finds mask mandates associated with dramatic reduction of Covid-19 hospitalizations
We've covered numerous studies in the past that have suggested that consistent facemask usage could have a dramatically limit the spread of Covid-19 (and even end the pandemic in as little as eight weeks).
This week, more information came out from a groundbreaking study by researchers from Vanderbilt University. Their home state of Tennessee has inadvertently become a valuable experimental laboratory, due to its somewhat unusual regulatory environment. While the governor of Tennessee has refused to mandate statewide mask usage, he has not prohibited individual counties to make that decision on their own. And so the state is a mishmash of counties that are and are not mandating masks. And this has created a natural experiment, which researchers can use to see the differences between the two methods. The Vanderbilt researchers examined the many hospitals in the states and compared the ones serving counties with mask mandates versus those located in counties that had none. The study has not yet been peer-reviewed, but if it’s accurate, the findings were exciting.
Hospitals in areas where less than 25% of the patients come from counties with mask requirements, have been plagued with 3x more hospitalizations since July 1 (a 200% increase).
In hospitals where 26 to 50% of patients come from counties with mask requirements, hospitalizations have “merely” doubled (a 100% increase).
In hospitals where at least 75% of patients came from counties with mask requirements, hospitalizations are still approximately the same (a 0% increase).
For months, Tennessee Governor Bill Lee has refused to enforce a mask mandate at the state level. He claims “it's a matter of people taking personal responsibility.”
U.S. Economy Hammered by More Record-Setting 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 751,000 people newly unemployed. This was down modestly from the 787,000 last week.
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 substantially to 7.76 million versus 8.37 million last week (and 10.02 million the week before). So on one hand, that was a good sign. On the other hand, once again, at least some of the improvement is an illusion. And that’s because some of the change in numbers actually resulted from people who’ve exhausted their federal benefits without being able to get a job. How many of these are there? Well, we know that 387,000 more people are now on the Pandemic Emergency Unemployment Compensation (PEUC) program. This is a program passed by Congress, which gives them up to 13 more weeks of benefits, when state benefits expire. And this increase was lower than the 510,000 people that were added last week, but nonetheless brought its grand total up to a hefty 3.68 million.
But unfortunately, the PEUC number suffers from the same potential undercounting flaw as continuing claims, because people who exhaust these benefits without finding a job are also treated the same as people who got a new job (and not counted). So even if it may understate the true long-term joblessness, but 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 on Thursday, there was some additional news of more pain to come. Exxon (an energy company) has been hammered by collapsing energy demand. And they will be laying off 1,900 US workers by the end of 2022 as part of larger efforts to reduce its global workforce by a whopping 15%.
Meanwhile, on Wednesday, the U.S. Bureau of Economic Analysis released its much-anticipated report on third-quarter GDP.
On one hand, this report showed a 33.1% annualized increase in a record-setting bounce back. So that was encouraging.
On the other hand, the losses in previous quarters were so large, that even this heroic effort came up well short of the amount necessary to recover. And at this point, the economy is still stuck at about -3.5% year to date, which is equivalent to the -4% at the worst of the Great Recession. And, so those hoping for a quick, V-shaped recovery were disappointed. Additionally, analysts almost universally agree that future gains will be much tougher, since Covid-19 sensitive industries like hotels, restaurants, entertainment, gyms, etc. are unlikely to recover until the virus is brought under control. Diane Swonk, chief economist at Grant Thornton, said:
“Record gains aren’t enough to get us out of the hole that Covid left us in. And there are risks from a recent U.S. surge in infections as a potential economic headwind in the current fourth quarter. It’s hard to reopen an economy unless workers and consumers feel safe and healthy.
A group of Bloomberg economists emphasized the last point, saying:
“The pandemic will cap economic growth going forward, especially if case counts continue to accelerate into the winter months. The delay in the next round of fiscal support will exacerbate the slowdown.”
When they reference fiscal support, they are talking about the potential for additional stimulus spending from the U.S. Congress and White House. We'll talk about this further in the “financial cliff” section below.
Chief economist Nariman Behravesh of the forecasting firm, IHS Markit, described the third-quarter results as a "bounce and fade." And he elaborated:
“There was a lot of pent-up demand early. Now that's spent itself. It's a very, very uneven distribution of the pain and the benefits from this recovery. There are a lot of jobs in tourism, for example, which we may not get back for five [or] 10 years." And then you've got the rising infection rates, which are making everybody very cautious. And then the fact that we haven't had any additional stimulus to help us through this next phase. All of that suggests we're looking at pretty limp numbers going forward."
Georgia’s Bellwether Economy: a glimmer of success amid otherwise cloudy to stormy skies.
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 IHOP. This is a budget restaurant known for serving breakfast throughout the day, and would be expected to do better in a recession, versus a higher-priced fine dining restaurant. How is it doing?
Foot traffic versus a year ago is stuck at a very painful looking -18%, and is essentially unchanged for the last six weeks. Since restaurants are low margin businesses this is unlikely to be profitable or sustainable.
How is retail looking? Let’s look at T.J. Maxx, a discount retailer that would be expected to do better in recession.
Unfortunately, their foot traffic versus year ago has also stalled out at an unhealthy -14%. And this is substantially worse than they were even three weeks ago.
How about gyms? Let’s look at YouFit health clubs, a discount fitness chain. This would be expected to do better than a high-end chain in a recession:
They are at an almost unfathomable -42% footfall versus last year. And they have never improved to better than -27% through the entire reopening. Unfortunately, this looks catastrophically bad for them.
Finally let’s take a look at hotels. Holiday Inn Express is a budget hotel chain that would be expected to do better in a recession than a high-end chain:
This week, they lost ground a bit and fell to -5.71% foot traffic versus a year ago. Still, compared to the bloodbaths in other Covid-19-sensitive industries, this is a relatively fantastic result. On the other hand, it’s unfortunate to see backtracking and let’s hope that it doesn’t continue. But we’ll continue to monitor them.
Overall, the small glimmer of success at Holiday Inn Express was obscured by the larger gloom of continuing losses in other Covid-19-sensitive industries.
Financial cliff update: Senators head home to face their voters with no deal in hand
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.
Four 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.
Three 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.
In the last 2 weeks, 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). But the Senate leader announced that any such agreement would be too high for his own members in the small stimulus party.
This week there was more bad news. After confirming a new Supreme Court justice, U.S. Senators left the capital for a pre-election break. This means it’s now almost impossible to put a stimulus package together before the election.
There’s still a small chance that Congress may come to an agreement in the “lame duck” session between the November election and when the new Congress is sworn in, in January. And, both the President and the leaders of the large stimulus party have said that if they win in the November election, they will prioritize a stimulus package. But, predicting what the new political calculus will look like after November is very difficult at this stage. So most analysts are not going out on a limb to make a prediction, but rather taking a “wait and see” approach.
Shocking 8 Million Delinquent Homeowners Could Spark Foreclosure Tidal Wave In 2021, Larger Than the Great Recession
This week, the Federal Housing Authority (FHA) released a report that found that a shocking 8 million single-family mortgages that it backs are delinquent by more than three months. This is almost 10% of all loans. And it dwarfs the 3.8 million homeowners who were foreclosed on throughout the entire Great Recession period of 2007-2010. And 86% of those unable to pay reported the reason as related to the national pandemic.
The FHA said the delinquencies are heavily concentrated among loans with lower credit scores. And that would be consistent with numerous other data points that we’ve talked about in the previous weeks, which have shown that the economic fallout from the pandemic has been borne very unevenly. So far, those at the bottom of the economic ladder, and minorities, have been hammered the hardest. And most of those at the top have been left relatively unscathed.
In normal times, this tidal wave of delinquent borrowers would already be causing massive disruption. But, the Cares Act, passed in March by the U.S. government, included a forbearance provision and delinquent borrowers can postpone or reduce their FHA payments for up to 12 months for Covid-related financial hardships. Additionally, other moratoriums have been passed by state governments, as well. However, none of these has provided any recent financial assistance to help these borrowers get caught up. So when moratoriums expire at the beginning of 2021, the overwhelming majority are expected to be unable to pay. One solution to this would be more stimulus to provide a larger financial cushion to the unemployed. But so far, there’s been no agreement in Washington for passing this. (See “financial cliff” in previous section). So unless something changes, many analysts expect a wave of foreclosures to come crashing down next year.
Millions Who Can’t Afford Rent May Cause Eviction Tsunami in 2021
Unfortunately, many renters are in the same boat as the underwater house owners we just talked about in the above section. As a reminder, we’ve discussed in previous weeks how millions of renters have been unable to make their rental payments due to Covid-19 related unemployment. This has predominantly hit lower income, workforce housing tenants who tend to have public-facing jobs that can’t be done online. In contrast, many higher-income tenants are doing much better. And, similar to house owners, many renters are currently protected by federal and state governments eviction moratoriums. These have prevented landlords from evicting them. But these moratoriums are also set to expire at the beginning of 2021, and none of these provide aid for them to be able to catch up on their payments. So, if no additional stimulus passes, most expect a tidal wave of rental evictions to begin next year, as well.
This week, the Federal Reserve Bank of Philadelphia released even more information on this potential disaster. They did a study and calculated that outstanding rental debt will reach a staggering $7.2 billion by the end of 2020. Moody’s also released a report estimating that if there is no stimulus, 12.8 million Americans would owe an average of $5400. They concluded that renters would end up owing a mind-blowing $70 billion.
Retail commercial real estate absorption falls most since Great Recession
As we’ve discussed in previous weeks, retail tends to be extremely Covid-19 sensitive, and many offerings have not done well in this pandemic. This week, CBRE (a commercial real estate analytics firm) released a report showing that net absorption of retail space in the third quarter was a -14.8 million square feet. This was the largest decline since 2009.
Most analysts do not expect retail to recover until the virus is under control and the public feels safe visiting at rates similar to before the pandemic.
Dr. Anthony Fauci fleshed out a possible timeline for this, as described in the following section below.
Human Trials on Eli-Lilly Covid 19 Antibody Therapy Cancelled by Feds for Ineffectiveness
This week, the U.S. National Institutes of Health (NIH) pulled the plug on Eli Lilly’s Covid-19 antibody therapy trials, called ACTIV-3.
The trial had previously been paused due to safety concerns. However, on October 13, an independent data safety monitoring board concluded that the issues were not caused by the antibody, known as LY-CoV555. But then, the mortal blow came this week, when the NIH looked at the results and determined that the treatment had no positive effect on patients who had been hospitalized with Covid-19. The study had signed up 326 patients and given them a combination of the antibody therapy along with antiviral drug Remdesivir. But, since there was no indication of effectiveness, the study was closed down. And, the study was also yet another nail in the coffin for the previously front-running Remdesivir treatment. Early results with the antiviral looked promising, but it has since failed to deliver results on all larger and more scientifically sound studies.
Still, there’s still hope that Eli Lilly’s LY-Cov555 could work in a different scenario. An early trial on un-hospitalized patients taking lower doses of the medicine produced promising results. On the other hand, this company-sponsored trial was only preliminary and not conclusive. Still, the hope is that monoclonal antibodies may work if they are given early enough in the course of the coronavirus infection (before the virus has been able to penetrate deep into the lungs and cause damage that it cannot treat).
So Eli Lilly says that clinical studies and trials are continuing on the drug for use in an outpatient setting and as a preventative treatment in nursing homes.
Safety Monitoring Committee Tells Regeneron To Stop Using Its Antibody Cocktail On Hospitalized Patients.
Eli Lilly was not the only antibody treatment to get bad news this week.
As we've discussed in detail in previous articles, Regeneron is in final phase 3 human testing of its REGN-COV2 antibody cocktail. Some early trials have been favorable and it was most famously used by the President when he contracted the disease.
Still though, no one can predict in advance exactly what will happen to a drug in its final trials. And on Friday, the independent data monitoring committee (IDMC) told Regeneron that the company needed to remove the sickest patients from its test due to unspecified "safety concerns" and "an unfavorable risk/benefit profile." They also recommended no further enrollment of patients requiring “either high flow oxygen or mechanical ventilation”.
All hope is not lost for Regeneron, either, though. Like Eli Lilly's drug, there is a belief by many that it will end up being effective in mild to moderate outpatients who would normally be at high risk for poor outcomes. And the FDA is still currently assessing whether they will grant an emergency use authorization to the drug for that. As of Saturday, it was not clear if this news would impact that process or not.
Yet Another Study Suggests That Antibody Defenses To Covid 19 Fade Startlingly Quickly
This week, yet another study came out suggesting that antibody defenses to the SARS-CoV-2 virus fade startlingly quickly. This particular study looked at 365,000 randomly selected U.K. adults who tested themselves at home. While 6% tested positive in June, only 4.4% still had antibodies in September. If accurate, this corresponds to a 26% reduction in patients with detectable antibodies in just three months. In contrast, detectable antibodies for some viruses can last years.
Like previous studies, this one also showed that patients who tested positive but didn't show outward symptoms of the disease (asymptomatic patients) lost antibodies more quickly than those who had more severe symptoms.
However, as we've discussed in previous weeks, antibodies aren't the only defense the body has. T-cells are a more generic protector, and can usually be marshaled by the body more quickly. And this has led some to hypothesize that T-Cells may be even more important in preventing the disease than antibodies. Time will tell as more research is done.
When Will Things Be Back To Normal? Fauci Predicts Mid to Late 2021
As we’ve talked about in previous weeks, many health experts believe it’s likely we’ll get one or more vaccines or treatments that will effectively combat Covid-19 before the end of the year. And if that happens, most people erroneously believe that this will mark the end of the pandemic and a quick return to normal.
Unfortunately, health experts have warned this is almost certainly a highly improbable expectation for several reasons:
It will take time to ramp up sufficient volume to treat the 328.2 million people in the country.
Many health experts believe first-generation vaccines are unlikely to be highly effective. And there are numerous things we still don’t understand about the virus, such as which bodily defenses are important in fighting it (antibodies versus T cells), how long they last, and whether the virus will or will not mutate. Any of these knowledge gaps could end up making treatment of the virus more difficult than hoped.
A worryingly large percentage of the American population (currently more than 50%) have said they will not take any vaccine (or will be hesitant to take one). This attitude would further reduce effectiveness, if not changed.
As a result, many health experts say that those expecting a quick return to normal in 2020 are bound to be disappointed.
This week, Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases reiterated this idea, when he fleshed out the likely timing of a vaccine based on the current developments. He said that as a first step, the vaccine studies that are currently underway must hit certain required testing milestones. But most of these trials don’t look likely to achieve their goals until sometime in November or December. For example, on Tuesday, Pfizer said that its late stage study of its Covid-19 vaccine can't even do the first of four planned interim reviews because that requires hitting the milestone of 32 cases of coronavirus infections. And so far, it hasn’t yet reached that level, despite having 42,000 participants. Fauci concluded:
“We will know whether a vaccine is safe and effective by the end of November, beginning of December. I think at least one and maybe two of the companies will have enough safety data and perhaps even sufficient prolonged efficacy findings to apply for emergency use of their vaccines by December. Exactly when the EUA will be granted – could be January, could be later – we don’t know".
If that happens, then the ramp-up and rollout will also take more time:
“The amount of doses that will be available in December will certainly not be enough to vaccinate everybody -- you'll have to wait several months into 2021.”
Then, later in the week, he warned that even with an effective vaccine, social life in the U.S. will probably not return to normal until the tail end of 2021.
“I can foresee that even with a really good vaccine, mask wearing will continue well into the third or fourth quarter 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 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). Then as the Q3 data unfolded week after week I predicted we would see strong double-digit growth but also disappointingly short of the amount needed to break even to where things were before the pandemic. Ultimately both happened: 33.1% increase from rock-bottom but still -3.5% year to date (similar to the worst of the Great Recession at -4%) Going forward I unfortunately believe that all of the easy gains are gone the rest will be a long, tough slog. Q4 will bring us up modestly but it will still come up short of the amount needed to "break even" to where we would have been in Q4 without the pandemic (and thus short of a true V-shaped recovery). And then unless we get more stimulus or extension on eviction/foreclosure moratoriums, Q1 of 2021 will be brutal and might even be bad enough to cause a double dip recession.
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.
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.