How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 37: November 7th
Updated: Nov 16
No doubt anymore: Third U.S. death wave has clearly arrived; World Round Up: Sweden walks-back controversial “lock-down lite” strategy after it crumbles from second round of viral onslaught; State round-up: “A whole lot of hurt”; Georgia’s bellwether economy: Dismal is as dismal does the; Yet again, economy pummeled by more record job loss as initial recovery bounce continues to weaken; Financial cliff update: No progress and control of new Senate still unresolved; U.S. military battles silent enemy of Covid-19 within its ranks; Multifamily rents start to show cracks and decline at record pace in Q3; Many investors can’t exit core real-estate funds; Study suggests virus killing t-cells can last in the body for at least 6 months; German CureVac vaccine looks promising in early human trials; Nightmare scenario hits Denmark: Coronavirus mutation from minks is resistant to existing antibodies; could cause 2nd pandemic and render all leading vaccines weakened or useless.; Update on my portfolio strategy.
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This week, there was a ton 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.
No Doubt Anymore: Third U.S. Death Wave Has Clearly Arrived
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 242,670 (versus 235,453 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 in the beginning of October, progress stopped, then plateaued, and then ominously headed back up (for a week and a half). This looked disturbingly like it could be the start of a 3rd death wave.
How did things go this week?
Unfortunately, the climb upward continued. And clearly we are now in a third death wave.
Unlike the two previous waves, this one is widely distributed throughout the country, which many experts say will make it much more difficult to contain and fight. Still, it’s early, anything is possible. We’ll be watching this very closely to see what happens.
Gazing At The Crystal Ball: Infections Continue To Rocket Into The Stratosphere
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?
There’s nothing to like about this chart. Infections are continuing to accelerate. And they have again shattered all records, including those from the initial, dark months when 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 5 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.
World Round Up: Sweden Walks-back Controversial “Lock-down lite” Strategy After It Crumbles from Second Round Of Viral Onslaught
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 mixed 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 in Seoul. This week, deaths went down and up, and so they essentially plateaued. But so far anyway, they still appear to be in control of their third wave. The biggest positive for South Korea is that throughout this pandemic, 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). So on ond hand, they’ve enacted some lockdown measures (shutting down grade schools, prohibiting gatherings larger than 50, instructing elderly people to stay home and young people to work remotely, enacting 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.
So far though, it’s been a dual failure. Economically, the country has been thrown into a deep recession (roughly equivalent to the recessions of others that enacted a full lockdown). And the country has had to pay a horrific public-health price (with stratospheric levels of total deaths compared to others). (See last week’s article for full details). But, in early August, Sweden suddenly brought their deaths down dramatically. And when that happened, and the numbers continued to stay down, the world took notice. Some even whispered that perhaps the country had achieved “herd immunity,” which would mean the virus had nowhere else left to run and would die down on its own. Regardless of the reason, if Sweden could keep deaths ultra low, and other countries stumbled, and if we got no effective medicines from science, then by Q2 of 2021, their strategy might have been proven to be the most effective.
However, this week, the entire strategy got up-ended. First, let’s take a look at what happened with deaths:
We’ve watched them over the last couple of weeks, and seen this increase slowly building. But, Sweden’s data tends to be so noisy, and it was hoped that noise is all that this was. But, this week, it's clear that the country is now in a third death wave, which started around the beginning of October.
Again, infections are generally a good leading indicator of what deaths will be doing in the coming weeks. How do infections currently look?
This is a nightmare scenario graph. Infections are not just increasing (and in a very easily visible third wave) but they are accelerating.
Last week, Anders Tegnell (who is the architect of the Swedish strategy) acknowledged the emerging crisis, saying:
“The country [is] approaching a critical juncture."
He also criticized those who theorized that Sweden had achieved herd immunity without a vaccine, saying that was highly implausible:
“Throughout history, there has up to now been no infectious disease whose transmission was fully halted by herd immunity without a vaccine.”
Tegnell went further, and added that deliberately pursuing a herd immunity strategy in a prevaccine world would be "futile and immoral.” And, he also met with local health officials to enact additional local health restrictions and plan what might happen if the situation escalated.
Then, this week, the Swedish government announced that new national rules will put total capacity limits in restaurants and cafés and also mandated that no more than 8 people may sit at a single table. The country also announced new local restrictions in three additional counties, which include the largest cities in the country. Still, Swedes pride themselves on taking personal responsibility without need for orders. And so perhaps this is why the government didn’t put strong teeth behind some of the restrictions like other countries have done (with strong penalties). Instead, Swedish Prime Minister Stefan Lofven pleaded with citizens to voluntarily comply:
"We are going in the wrong direction. The situation is very serious. Now, every citizen needs to take responsibility. We know how dangerous this is."
We’ll see how they do in the coming weeks.
No Relief for Europe as Virus Continues to Run Amok
Meanwhile, the other nations in Europe have been hit by a brutal second wave of deaths. Initially the continent was pummeled by the first wave, but with the use of aggressive lockdowns infections and deaths fell to extremely low levels. Then a public that had gotten tired of health precautions cheered the loosening travel restrictions and reopened schools (despite warnings from many health experts). And, as colder weather hit the death toll has skyrocketed. So authorities have been forced to enact 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. But then last week they plateaued which gave hope that they might be close to getting control of things. How did they do this week?
Unfortunately, Spain’s deaths kicked up into high gear this week, and came close to all-time highs. So the impression of progress, last week, was just a mirage caused by a temporary glitch.
How about the U.K., France, Netherlands and Belgium?
This is a disaster of a chart as deaths clearly continued to accelerate. And if this continues for a week or two more, they’ll eclipse even the record deaths from early on in the pandemic (which many had assumed would be the worst we would endure).
In the U.K., government science advisors warned that, at this rate, British hospitals will be overwhelmed in six weeks. And one-time virus skeptic Prime Minister Boris Johnson (who later spent three days in the ICU fighting a severe case of he disease), had to announce that the country will be entering a second lockdown. Johnson said:
“We will get through this, but we must act now to contain this autumn surge.”
All nonessential shops, pubs, cafes, restaurants and gyms in England have been ordered to close until December 2nd. Grocery stores, child-care facilities, schools, colleges and universities will remain open.
Several other countries also tightened restrictions in the face of escalating deaths. For example, Portugal announced a lockdown affecting 70% of the country, starting November 4th. And Austrian Chancellor Sebastian Kurz said his country would implement “hard measures” beginning Tuesday, with a nationwide lockdown that includes nightly curfews from 8 p.m. until 6 a.m.
Kurz said private visits among family and friends was the main driver behind the surge in Austria and said:
“We’ve seen an exponential increase in cases in the last few weeks, and an almost explosive increase in the past seven days . People will still be allowed to go to work, to provide help, and to stretch their legs, but it is a ban on visiting other people during these hours.”
State Round Up: “A Whole Lot of Hurt”
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 progress.
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 in late October, 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 crucial drugs.
What happened this week?
First let's look at Colorado:
Unfortunately, new infections continued to skyrocket in Colorado. And deaths also rose modestly, which was enough to set a third-wave high.
Colorado Governor Jared Polis warned citizens:
“We’re not doing a good enough job, my fellow Coloradoans. We need to do better. Three days in a row with more than 2,500 cases. Now remember, six weeks ago, we had 300 to 400 cases a day. We’re reaching an alarming inflection point. If this trend continues, our hospitals will run out of capacity in the weeks ahead.”
How did North and South Dakota do? Here's North Dakota:
And here’s South Dakota:
These are both terrible graphs, and show infections and deaths both continuing to soar at all-time highs.
How about Wyoming?
Unfortunately, this is the same story as the Dakotas, with increasing infections and deaths both setting unwanted records.
How about hospitalizations across the nation? According to the Covid-19 tracking project, these are also surging dangerously in a third wave, and ominously approaching the unwanted peaks of the second and first.
And in a startlingly short time (just the week from October 30 to November 6) hospital admissions increased more than 30% in Michigan, Florida and Ohio and more than 20% in Minnesota, Illinois, Arizona, Wisconsin and Missouri. Texas currently has the most patients at 6,377 hospitalizations (and an increase of 6.7% versus last week).
Nationwide, 50,678 beds were occupied by people with the disease. Additionally, almost 11,000 coronavirus patients were being treated in intensive care units.
Last weekend, Dr. Anthony Fauci, the nation’s top-ranking infectious disease expert, summed it all up with a dire warning:
“We’re in for a whole lot of hurt. It’s not a good situation. All the stars are aligned in the wrong place as you go into the fall and winter season, with people congregating at home indoors. You could not possibly be positioned more poorly.”
Georgia’s Bellwether Economy: Dismal Is As Dismal Does
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 Applebee’s. This is a fast-casual restaurant and would be expected to do better in a recession, versus a higher-priced fine dining restaurant. How is it doing?
After recovering relatively well, the last two weeks have been unkind to the Applebee’s chain. And currently, they are at an unprofitable-looking -17.5% footfall versus last year.
For retail, let’s look at JCPenney, which is a retailer that sells a variety of goods in stores that are usually anchors in malls.
That is a devastating graph, showing -45% footfall versus last year. No retailer would be expected to stay in business for long under those circumstances.
For fitness, let’s look at Orange Theory Fitness. This is a higher end fitness club with personal trainers. And since high income employees have tended to be spared much of the worst of the pandemic, this might be expected to have better results than a middle-of-the-road club.
On one hand, gyms have high fixed costs and low profit margins. So a -13% footfall is probably extremely painful for them and unlikely to be profitable. On the other hand, it’s better than some of the much worse results we’ve seen in other gyms.
Finally, let’s look at hotels. Holiday Inn Express is a budget hotel that would be expected to do better in a recession than a more expensive, middle-of-the-road one.
This graph is very disappointing, since Holiday Inn has been one of the few bright spots over the last couple of weeks. But it’s currently at a painful looking -13% footfall versus a year ago. Still, it was doing well only a week ago, so we might hope that maybe it’s just a glitch. And we’ll continue to monitor.
Overall, it was a pretty dismal week for many of Georgia’s Covid-19 sensitive businesses.
Yet Again, Economy Pummeled by More Record Job Loss As Initial Recovery Bounce Continues to Weaken
Unemployment has historically been one of the most reliable indicators of when the U.S. is entering a recession and when it’s recovered. So that's why we examine it very closely every week. And unfortunately, over the last 28 weeks, the economy has been hammered week after week by massive levels of new unemployment. And each week the new damage has continued to be worse than any pre-pandemic week on record. This week was no different, with 751,000 people newly unemployed. This was almost imperceptibly lower than the 758,000 (adjusted results) from 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 very slightly to 7.3 million from 7.76 million million last week (and 8.37 million the week before). So this disappointed those hoping for a more meaningful improvement.
Additionally, this number suffers from a measurement issue that can cause it to understate the damage. And that’s because it goes down (making continuing unemployment look “better”) when people have exhausted their state benefits without being able to get a job (which is not an improvement). How many of these people are there? Unfortunately, it doesn’t directly tell us, but we can try to guess. We know that 363,000 more people are now on the Pandemic Emergency Unemployment Compensation (PEUC) program versus last week. This is a program passed by Congress, which gives people who fall through the state unemployment safety net and additional 13 more weeks of benefits. And this increase was lower than the 587,000 people that were added last week, but nonetheless continued to push up the grand total. So at least some of the “improvement” in continuing unemployment was probably an allusion. Regardless of the interpretation of these issues: once again, those hoping for a quick improvement in support of a V-shaped recovery were disappointed.
And this week, Ann Elizabeth Konkel, an economist at the jobs website, Indeed, summarize the situation, saying:
“The economy is on its own against the virus. Accelerating cases are an ever-present threat during winter, and a virus surge means economic uncertainty for businesses. Until that uncertainty is eliminated, the labor market will struggle to return to what it used to be.”
And unfortunately, there were announcements of more pain to come:
Chevron, an energy company that's been hammered by the collapse in demand for oil, said this week that it planned to cut a quarter of the employees at its recently acquired Noble Energy.
Charles Schwab, a financial services firm, announced after completing its purchase of TD Ameritrade, that it would cut 1,000 jobs from the combined company.
Boeing, an aerospace manufacturer experiencing depressed demand for new planes, announced it would cut another 11,000 employees (on top of the 19,008 announced three months ago).
Later in the week (on Friday), the Bureau of Labor Statistics released its much-anticipated payroll report.
It showed that nonfarm payrolls increased to 638,000 (versus 672,000 last month) and that the unemployment rate fell one percentage point to 6.9%. So on one hand, this was positive progress, which was good to see. On the other hand, the level for jobs is still 10 million less than where it was before the pandemic. So this is far short of a full recovery. And worse, this increase was worse than the month before, meaning that momentum is fading increasingly with each subsequent report. Many economists agreed this is a very troubling sign and not enough to facilitate a quick, V-shaped recovery.
Further, as we talked about in part 24, the headline unemployment rate of 6.9% doesn't include all of the unemployed. The problem is that it omits people who have given up looking for work. That might makes sense in normal times, but now when many people who want work can't get it, because the jobs aren't available yet. So, to get the full picture, we need to look at the U-6 rate, which is 12.1%. This was barely improved from the 12.8% of last month (and 14.2% prior). And it still means an unhealthy economy with more than one in ten Americans out of a job (which was essentially the same as last month).
On Thursday, Federal Reserve Chairman Jerome Powell said during a press conference that:
“The recent rise in new COVID-19 cases, both here in the United States and abroad, is particularly concerning to the central bank and dangerous to the fragile U.S. economy. As we have emphasized throughout the pandemic, the outlook for the economy is extraordinarily uncertain, and will depend in large part on the success of efforts to keep the virus in check.”
He also said that fiscal support (meaning new stimulus) would be needed to keep the fading recovery going:
“We'll have a stronger recovery if we can just get at least some more fiscal support, when it's appropriate, and to the size Congress thinks it's appropriate. There are plenty of people on Capitol Hill—on both sides of the aisle, on both sides of the Hill—who see a need for further fiscal action and understand perfectly why that might be the case.”
So far though, stimulus efforts have been stymied. For the latest on what has happened with that, this week, see the “financial cliff” section, next.
Financial cliff update: No progress and control of new Senate still unresolved.
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 many alternative investment asset class (such as real estate).
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 or will be in January of 2021. As a result, the Federal Housing Authority (FHA) estimates that 8 million delinquent homeowners are currently facing eviction in January of 2021. If this happens, it would spark a tidal wave of foreclosures that would dwarf the Great Recession. And the Federal Reserve Bank of Philadelphia found that there are millions more delinquent renters (owing an estimated $7.2 billion by the end of the year). These also currently face the same threat in January.
Federal Reserve officials and virtually all economists have called for additional stimulus to head off this threat. But unfortunately, the two political parties and the president were unable to come to agreement on a new stimulus law before the election. Here are their current positions:
One party (which we’ll call the large stimulus party) wanted a $3.5 billion spending package, which was later reduced to $2.2 trillion (including aid for increased testing, higher unemployment benefits, and states whose revenues have been reduced by coronavirus.
The other party (which we’ll call the small stimulus party) wanted a $1 billion spending package, and then a $500 million law (with no aid for testing, lower unemployment benefits and no aid for states). However, it can’t get a large enough number of its own members to agree to support either of these packages to pass one as a bill. This is because a significant number feel that there should be no additional spending.
The White House has held a variety of positions, ranging from endorsing the package of less than $1 billion to saying it would prefer to go higher than the $2.2 trillion currently offered by the large stimulus party.
Since all parties must agree to pass a law, nothing has happened so far.
What happened this week?
This week, the U.S. had a presidential election. Shortly before, the President reiterated that he wanted to do a stimulus deal afterwards. And the Senate leader of the small stimulus party said he was also willing to do a deal.
"We need another rescue package. The Senate goes back in session next Monday. ... I think we need to do it and I think we need to do it before the end of the year. I think that's job one when we get back.”
However, later in the week, he expressed an important caveat. He claimed:
“[The jobs report (mentioned above)] is a stunning indication of a dramatic comeback of the economy. [And] paired with the surge in GDP in the third quarter, [shows] our economy is really moving to get back on its feet.
That, I think, clearly ought to affect what size of any rescue package we additionally do. Something smaller, rather than throwing another $3 trillion at this issue, is more appropriate.”
In response, the House Speaker of the large stimulus party said:
“No, [the idea of a small package] doesn’t appeal to me at all, because they still have not agreed to crush the virus. That [stimulus] isn’t anything that we should even be looking at.”
Then on Saturday, the presidential nominee for the large stimulus party won the Presidential election and became the President-elect. However, he will not be put in place until January 20th. And until that time, the current President and the current Congress continue to be in place during what’s called a “lame-duck” session. However, this complicates stimulus, because the President (as a “lame-duck”) may no longer have the political capital to bend Congress to his will (like he did before the election).
Mark Harkins, a former congressional staffer and senior fellow at Georgetown’s Government Affairs Institute summarized the situation as:
"It truly is up to the Senate leadership to determine whether they want to work a deal or not... At the moment, it seems like neither side’s willing to give up.”
Others had previously expressed hope that the new Congress might change the political calculus. We know that, on January 20th 2021, the large stimulus party will hold control of the House. But, control of the Senate is still up for grabs. Both parties currently look to have 48 senators and the final two will be decided by a runoff in Georgia in January. This was automatically triggered by Georgia law, because the difference between the two candidates’ votes was less than 1%. So currently, the outcome is still unclear. And this makes the prospect for future stimulus in 2021 equally unclear.
U.S. Military Battles Silent Enemy of Covid-19 Within Its Ranks
This week, the U.S. military, the most well-financed and powerful in the world, released figures showing that Covid-19 infections passed 50,000 (as of last month).
In September, there was an outbreak of 450 cases at Fort Sill in Oklahoma. An anonymous trainee told the Financial Times:
“You could already hear [all] the coughing and sneezing at night. Some people were complaining to the drill sergeants about it".
The trainee claimed he ultimately was also quarantined.
Colonel Alan Boyer, at the Department of Military Instruction at West Point, officially said:
“[We were] not able to accomplish some of our training this year because of coronavirus. We are concerned with the coming weather."
Michael O’Hanlon, a military expert at the Brookings Institution, said:
“The fact that [Covid’s] happening at basic training makes you wonder if the armed forces have gotten a little lax."
Currently, the army is the branch of the military with most cases at over 20,000. In June, it overtook the Navy, which was previously in the lead thanks to over a thousand cases on the aircraft carrier USS Theodore Roosevelt (which we discussed in a past article). That incident resulted in the captain (who claimed he was not getting help dealing with the outbreak from further up the chain of command) being fired, and also resulted in the secretary of the Navy resigning for the sacking. One sailor also died.
James Stavridis, retired U.S. Navy Commander of European and Southern Forces, admitted frankly that the U.S. military was "initially on our back foot” in responding to coronavirus among its ranks. And he claimed there was “too much of a tendency to understate the danger.”
Commander Stavridis said that senior officials and military officers initially described coronavirus to him as “just another flu,” and said it would pass with warmer weather. They also claimed that most people wouldn't even notice they had it. A special operator at another U.S. base said that, as a result of these claims, special operations training exercises had men climbing over each other and breathing in each other's faces during combat trauma training -- even in April (eight weeks into the pandemic).
"We were all gathered up close together in a big group. And training continued long after the military had intervened to stop big-ticket exercises and other large-scale training because of the disease. If one person was sick, you would have to write off the whole unit.”
Mark Cancian, a military expert at the Center for International and Strategic Studies summarized the situation, saying:
"The disease has disrupted military routines. And the armed forces could be heading for another wave along with the rest of the country."
Multifamily Rents Start To Show Cracks And Decline At Record Pace In Q3
So far, most multifamily (apartment) investments have been holding up well during the pandemic. True, smaller properties and those catering to lower income workers (i.e. class C) have been hammered. That’s because those renters overwhelmingly have jobs that require face-to-face contact, and have been hammered disproportionately hard by the economic fallout. And yes, certain markets with high exposure to Covid-19 sensitive industries (such as portions of Texas and the oil industry) have suffered.
But, in contrast, higher-end properties that rent to higher-income workers (who are more easily able to work from home) have been mostly spared. So overall, the foundations of this asset class have been surprisingly strong for many.
However, this month, Moody's Analytics REIS (the real estate analytics branch of the research firm) announced some cracks starting to appear across the board. They said that “job losses and the expiration of unemployment benefits” caused multifamily rent to fall at record speed in Q3.
Asking rents and effective rents fell 1.8% and 1.9%, respectively, which was the largest quarterly drop ever recorded. The previous record setter was right after the September 11 attacks of 2001, and in comparison was only 0.7%.
Vacancies increased by 10 points, which put it at 5.0% at the end of quarter. This was the highest since 2012.
Moody’s Analytics REIS summed it up, saying:
“The complicating factor in this downturn was the immense amount of fiscal and monetary support dispensed to help the economy withstand the lockdown – with several policies like eviction moratoria and the Payroll Protection Program helping keep occupancy levels stable and rent collection losses relatively low. However, given the duration of the lockdown, and ongoing uncertainty about the speed and trajectory of the so-called recovery, even multifamily performance metrics have begun reflecting the strain.”
Many Investors Can’t Exit Core Real-Estate Funds
Core real estate funds are generally huge, billion-dollar funds. They purchase the highest quality properties with low debt, and are extremely popular with institutional investors seeking a steady, low-risk return.
However, many of these have come under stress during the pandemic, due to tumbling values in many of their holdings (specifically hotels, retail properties and office). And at the same time, they also have many institutional investors who are looking to cash out.
These managers could sell properties to liquidate them, but don't want to do it at fire sale prices (which would lock in large losses). Instead, they are gating (preventing) investor withdrawals and telling them it may be some time before they can let them out. For example, the National Council of Real Estate Investment Fiduciaries says that 15 of the 25 open-ended core funds currently have tens of billions of dollars of requested investor redemptions that they are gating.
One example is the $9.5 billion AEW Core Property Trust fund. And the San Diego Employees Retirement System tried to redeem about $85 million in Q1, but so far has received only a measly 16% back. A consultant for the fund hopes that perhaps "over several quarters they will receive the full amount".
Some funds appear to be in worse shape than others. And the longest queue in the industry is with UBS Trumbull Property Fund, where investors want to liquidate a breathtaking amount (almost 40%) of the fund’s $18 billion of assets.
Marquette Associates, a pension consultant, says its client is trying to withdraw $32 million from UBS, but they don't expect to see the money back anytime soon. “ We anticipate a significant lag, extending beyond 2021 before the redemption request is met."
According to the Wall Street Journal, UBS Trumbull, has been dumping at least a few properties at highly discounted prices. It sold a retail property called Stamford Town Center, which was once valued at over $200 million for a mere $20 million. And sources claim that it also sold its investment in Water Tower Place (a mall in Chicago) for a nominal amount.
Study Suggests Virus Killing T-Cells Can Last In The Body For At Least 6 Months
As we discussed in past articles, the body has multiple defenses against an intruder. One of these are antibodies, which identify and attack the virus. However, some studies have shown that Covid-19 antibodies fade surprisingly quickly (as little as a month). And if accurate, this may complicate creating a vaccine for the disease that is effective and long-lasting.
But if this is true, then there are still other possibilities. One of them involves T-cells. These are white blood cells that can mount a more generic attack against an intruder, and usually join the battle quicker than antibodies. And some researchers have theorized that perhaps T-cells may be the key to creating an effective and long lasting vaccine. But for that to work, T-cells would need to last for a while. And since this virus is so new, no one really knows about that duration for sure.
This week, a new study came out on the subject, from a group of immunologists spanning 17 U.K. universities (called the U.K. Coronavirus Immunology Consortium). The paper has not yet been peer-reviewed. But researchers looked at 100 people and measured how their T-cells did against a variety of coronavirus proteins (including the infamous Spike protein that's used as a marker in many vaccines). And if accurate, the results were promising. They found that people still had T-cell protection a hefty six months later. And while they were unable to test longer amounts, the findings left open the possibility that it could last even longer. The researchers claimed:
“This is the first study to show a robust immunity against the virus that persists for this long."
And interestingly, they found that T-cells were equally as protective in those who showed no symptoms during infection. This could be especially crucial since some previous studies have suggested that asymptomatic people produce less antibodies.
It’s also possible that T-cells could last a very long time. For example, a study was done in 2003 of people who were infected by Severe Acute Respiratory Syndrome virus (SARS). This is a relative of the coronavirus that causes Covid 19. And the study found that people retained T-cell responses as long as 17 years later. If that’s also true of SARS-CoV-2, then that would be very welcome news. But, at this point, very little is certain and we’ll have to wait on more studies to be done.
German CureVac Vaccine Looks Promising in Early Human Trials
The German company CureVac NV announced this week that its mRNA vaccine candidate produced a good immune response in early human trials. The test was run on 250 volunteers and advanced clinical trials are expected to start before the end of the year.
We’ve talked about the mRNA technology in detail in past articles. This is the same new technology used by the Moderna and Pfizer vaccine candidates. And while it has never produced a successful vaccine yet, both of the above vaccines have passed early trials and are now in final stage III human trials. Those vaccines may produce final results as early as this month or December.
Nightmare Scenario Hits Denmark: Coronavirus Mutation from Minks Is Resistant To Existing Antibodies; Could Cause 2nd Pandemic and Render all Leading Vaccines Weakened or Useless.
Denmark is the largest mink-producing country in the world, and supplies 40% of the industry's pelts. And since June, the industry has been battling outbreaks of Covid-19 on these farms (after it traced back human infections to the animals). As a result, thousands of minks have been slaughtered to prevent the virus from spreading to even more people.
And Denmark wasn't alone. The Netherlands was forced to slaughter more than 10,000 after Covid-19 outbreaks in the summer. And Spain slaughtered almost 100,000 after an outbreak in a farm in the Aragon province.
So right now, the mink is something of a unique case in the animal world. We know many animals can catch the disease from humans. In fact, 50 different species have been documented doing this, including cats, dogs, tigers, apes, bats etc. But so far, the mink is the only known species that we definitively know can pass the disease to a human without being eaten (some believe Covid-infected bats eaten by pangolins that were eaten by humans, and Covid-infected fish, specifically salmon, eaten by humans, did infect those doing the consuming).
However, before this week, all discussion of the mink assumed that the disease they spread was the current strain of the coronavirus (that we all know very well).
This week, Danish scientists made a shocking announcement that upended this assumption. Researchers from Copenhagen’s Statens Serum Institute said they had been studying 5,000 people infected by the coronavirus and sequencing their genes. And they found quite a few of them (214) that were carrying a mutated strain that they hadn’t seen before.
The researchers traced this back to minks, which was not a huge surprise, since the animals were known to pass the current strain to humans, as well.
But what happened next was a surprise. The researchers noticed that the mutations fell into five different clusters. And within those groups, they found seven different mutations that had occurred to the virus’s crucial spike protein. This raised some mild alarm bells. The spike is the portion of the virus that sticks out from the spherical shell, and is what gives the virus its distinctive shape (and it’s distinctive weapon for entering cells so efficiently). And so naturally, this is the structure that all of the leading vaccine candidates target. What those vaccines do is to mimic the production of an antibody, which recognizes this spike and allows the body to neutralize it. And that’s how the body becomes immune to the disease.
But, there’s also a risk with this approach. It relies on the spike staying the same, looking and acting in the same way, in the future, that it is currently. And if a significant mutation occurs to it, those antibodies might get confused and work a lot more poorly (or even stop working completely).
As we talked about in past articles, most scientists said the odds of this kind of mutation happening were extremely unlikely. But others were less sure.
So the Danish scientists knew it was important to follow up on this. And they took the mutated coronaviruses and attacked them with antibodies from several people who had been previously infected with the primary strain of the disease and recovered. Normally, this should have easily knocked out the virus. But unfortunately, these antibodies actually had difficulty overcoming the mutated spike protein.
This was potentially shocking news. Not only could this cause a problem for vaccines, but it also strongly suggests that people who got the original strain of the disease, and recovered, might be easily reinfected by this new strain. If this happened, the likely result would be a second pandemic.
Kare Molbak, the country’s top epidemiologist, told reporters that they shared the information with the World Health Organization (WHO). And he said:
“[WHO representatives] made clear they are very worried about the findings. The worst-case scenario is a new pandemic, starting all over again out of Denmark.”
Molbak said that people who have contracted the new form of the virus don’t appear to have more severe symptoms. So if that holds, that’s a little bit of good news. And so far, Denmark hasn’t received similar reports from other countries with large populations.
So, experts say containment right now is key. But due to the asymptomatic nature of the virus, researchers can’t be sure how much of this new mutation is spreading out in the wild. Currently there are twelve known human cases of this new Denmark strain. All of these are currently in isolation.
So on Saturday, Prime Minister Mette Frederiksen announced new restrictions in western Denmark. Locals will no longer be able to use public transport, and people are being urged to work from home. Also, school children in grades five to eight will now have to stay home.
Five minks were also found with the new mutation. So all workers from more than 1,100+ mink farms are currently under observation (and quarantine, as necessary).
And the researchers warned that there could be more cases in the mink population. Additionally, continued mink breeding could significantly increase the risk of even more mutations, which might further escalate issues.
So on Saturday, Frederiksen made a shocking announcement. As a native from one of the Danish mink-raising areas, she had resisted previous calls for mink culling for many months. But now, she reversed course and announced the difficult decision had been made to kill every last one of the 17 million minks in the country.
In the announcement, she said to the mink farmers affected:
“You’re losing your life’s work, which in some cases has been passed down through generations. The government is well aware that this is a day of mourning for those of you who work in this industry. But the situation is very, very serious. Not just for Denmark, but for how the whole world handles the coronavirus.”
Police and military personnel have culled 400 mink farms already. And the total economic damage is estimated at $785 million.
Shortly after the announcement, the U.K. imposed a travel ban on all Danish citizens and prevented them from entering the country. U.K citizens returning from Denmark will have to isolate along with all members of their household for 14 days.
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.