How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 38: November 15th
Updated: Feb 8, 2021
Third wave of U.S. deaths accelerates upwards and surpasses worst of the second wave; Up, up and away: U.S. virus infections soar faster, higher and further out of control than ever before; World round up: Early hints that bulk of Europe may be turning the corner, while Sweden buckles up for a rough ride; Pandemic score table: Which countries are best at controlling the virus?; State roundup: Virus spreads in all 50 states as some hospitals approach tragic tipping-points: "We have no reserves. We have no backup plan. It's a number's game and we are danger-close."; Mixed signals from Georgia’s bellwether economy; Economy gets little reprieve from the weekly pummeling from newly lost jobs, while the threat from resurgent virus grows; Financial cliff update: White house turns over the reins to Congress; Corporate tenants dumping excess space send shivers through the commercial real estate office market; Eli Lilly’s Covid-19 antibody drug gets emergency FDA clearance (but unlikely to be available for vast majority due to inadequate supply); Markets soar on Pfizer’s press release claiming vaccine is "90% effective" against covid-19, but scientists urge caution; Update on my portfolio strategy.
(Usual disclaimer: I'm just an investor expressing my personal opinion and not a registered financial advisor, attorney or accountant. Consult your own financial professionals before making any financial decisions. Code of Ethics: I / we do not accept any money from any sponsor or platform for anything, including postings, reviews, referring investors, affiliate leads or advertising. Nor do we negotiate special terms for ourselves in the club above what we negotiate for the benefit of members.).
Quick Summary
This week there was the usual slew of information on virus spread, economic impact, investment repercussions, as well as some breakthrough news regarding vaccines and treatments.
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.
Third Wave of U.S. Deaths Accelerates Upwards and Surpasses Worst of the Second Wave
For the 30th 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 250,030 (versus 242,670 last Saturday morning). Here's a quick summary of what's happened so far:
The first U.S. death wave started in early March. It was overwhelmingly in urban areas (like New York City in the Northeast). It peaked on April 21st and the country fought it down until July 6th.
The second death wave started on July 7th. This ran predominantly through urban areas in the Sun Belt. It peaked on August 1st, before falling until October 8th.
Then the third death wave began on October 9th and is currently tracking upwards. Unlike earlier waves, this has been spread across the entire country and rural areas are being hammered worse than urban.
How did things go this week?
This week, deaths accelerated strongly upwards. And on Thursday, they achieved an unwanted record by surpassing the peak of the Second Wave. So, the Third Wave is now causing more deaths, per day, than occurred on the very worst day of the Second Wave. Unlike the two previous waves, this third one is widely distributed throughout the country, which many experts say will make it much more difficult to contain and to fight. And as we discussed in late October, this has already caused acute shortages of critical drugs and key medical personnel needed to fight the disease and limit deaths. Still, it’s early and anything is possible. So we’ll be watching this very closely to see what happens.
Up, Up and Away: U.S. Virus Infections Soar Faster, Higher and Further Out of Control Than Ever Before
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 chart is a disaster. Infections are accelerating even faster out of control than last week's kamikazee chart. And once again new virus cases shattered all previous records, including those from the initial, dark months when the pandemic began. Unfortunately, none of this was a surprise. As we discussed in early September, many health experts predicted this would be the inevitable result of lax behavior over the Labor Day weekend (September 7). And that itself wasn't a difficult prediction to make, since the exact same thing happened after the lax behavior over the Memorial Day weekend (May 23)… which ended all progress against the first wave and triggered the second. (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.
Later below, we’ll take a closer look at what happened at the U.S. state level, to better understand what might happen next.
But first, let’s complete our look at the rest of the world for the week.
World Round Up: Early Hints that Bulk of Europe may be Turning the Corner, while Sweden Buckles Up for a Rough Ride
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 another mixed week for South Korea. For the last several weeks, the country has been battling a third wave, which was triggered by n super-spreader event at a church in Seoul. This week, deaths plateaued and then went up slightly. But they are still lower than they were at the peak of this third wave. So, at this point anyway, the third wave remains under control. 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.) 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. How did Sweden do this week? We've been watching it very closely over many weeks because the country has pursued an unorthodox lockdown-lite strategy through most of the pandemic. And the hope has been that, if this ultimately worked well, it might provide another workable model for other countries looking to deal with the virus while still protecting the economy.
The country has done some lockdowns (like prohibiting gatherings larger than 50, instructing elderly people to stay home and young people to work remotely, enacting social distancing rules at restaurants, shutting down grade schools, etc.). But it never went into full lockdown mode. Unfortunately, the strategy has clearly not worked out in the short to medium term:
Economically: The lack of control of the virus has caused the economy to take a major pummeling (-5.6% projected) that is virtually as poor as projected for the U.S. (-5.9%). And both countries are 6x+ worse than top performers like South Korea.
Health: The health cost of the strategy has been stratospherically high. Swedish citizens have 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.
But, there still was hope that Sweden might turn things around in the long run. For the last couple of months, they had brought their death rate down to an extremely low level and kept it there. And if (1) they could maintain that low level, while other countries didn’t, and if (2) science wasn’t able to bring relief anytime soon (with an effective vaccine or other treatment), then Sweden could eventually overtake other countries.
Then, as we discussed last week, Sweden made a bombshell announcement that knocked down the first of those two “if’s.” Authorities stated that the virus was no longer under control, and that they would actually have to start implementing stronger lockdowns in local areas, as well as other new lockdown rules nationwide.
And, the second source of the hope of Sweden’s turn-around, the idea that a successful vaccine/treatment was very far off, also appears unlikely. This week, we had news from multiple companies, reporting success with various medicines to treat the virus. (See later section below). While the medical-breakthrough news may potentially be very good for humanity, it may be the final nail in the coffin of Sweden’s unorthodox model. As a result, we may start looking at Sweden on a less frequent basis going forward.
For now, though, here’s how they did for the week, with deaths:
Sweden’s deaths went up and down, but they are clearly still in their second death wave. And, looking at Sweden’s infections (since these tend to be an advance indicator of upcoming deaths):
If the U.S. infection graph, shown earlier in this article, was disastrous, the Swedish one here is almost apocalyptic. And they appear to be in for a rough ride. Let's hope that the change in strategy and the new lockdowns work, and that the Swedish authorities are able to get things under control sooner, rather than later.
Meanwhile, the other nations in Europe have been hit by a brutal second wave of deaths. Initially, the continent was bruised badly by the first wave, but used aggressive lockdowns to drive infections and deaths to extremely low levels. So then, countries loosened travel restrictions and reopened schools (despite warnings from many health experts). And, as colder weather hit, the death toll has skyrocketed. Accordingly, authorities have been forced to enact a variety of new lockdowns (which we've described in detail in previous weeks).
First, let’s look at Spain. The country is a popular travel destination and was one of the first to get hit by the second wave. And, in the last two months, they've been battling an increasingly bad situation. But then last week, they plateaued, which gave hope that they could be close to getting control of things. How did they do this week?
This week, the country’s death numbers plateaued and then had a significant drop. And this is Spain’s most promising-looking graph in months. This could be a sign that the delayed effect of locking down is finally kicking in, and they are getting control of their second wave. On the other hand, the country’s data has also been very noisy in this third wave. And they've seen lots of short-lived progress, cancelled out by more severe regression, stepping forward only to fall back by two steps the next week. So, we’ll watch them again, next week, to see if this positive downward trend continues. How did some of their neighbors in Europe do? Here's the U.K., France, the Netherlands and Belgium.
The Netherlands’ graph looks remarkably similar to Spain’s, and may have hit a top. We'll see if they continue this, next week. Belgium plateaued, and if they can sustain this, it would be an early sign of a top. The United Kingdom and France didn't do as well, and still had rising infections. At the same time, the silver lining for them is that, at the end of the week, their numbers seemed to taper off at a slower rate than previous weeks. Again, the key for them will be sustaining and improving on this.
So we’ll continue to monitor them and we’ll see how they're doing, next week.
Pandemic Score Table: Which Countries are Best at Controlling the Virus?
Meanwhile, which countries have done the best job through the entire pandemic of controlling the virus? 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, with worst death numbers at the top:
The results look very similar to last week’s, with three tiers of countries.
The worst tier countries: the United States, Brazil, and the poorest performers in Europe, who have stratospheric death rates ranging from 610 to 871 per million.
The middle tier countries: the better performers in Europe (Germany, Scandinavian countries other than Sweden) and an assortment of rich and poor countries, like Australia and India. These are doing approximately 8x-10x better than the worst tier, with death rates between about 54-147 deaths per million.
The top-tier countries: Asian countries, including Japan, South Korea, Taiwan and China. All have developed much more sophisticated virus control systems than the West, as a result of having to deal with previous infections from different virus epidemics and pandemics, over the last couple of decades. And they are doing approximately 41x-2,000x better than the worst tier, with death rates between 0.29 - 14.86 deaths per million.
State Roundup: Virus spreads in all 50 states as some hospitals approach tragic tipping-points: "We have no reserves. We have no backup plan. It's a number's game and we are danger-close."
For the last several months, we've watched individual U.S. states to get insights on what might happen next at the national level. And here's what we saw:
Second Wave: 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. And the people getting infected were significantly younger than the first wave (many of whom were going to parties and bars). 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 and fought the wave back down.
Third Wave: Then after the Labor Day weekend (in September) the U.S. also 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 then 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 Also, as discussed in a later section, most of the spread is now being driven by small, casual gatherings like dinner parties, carpools and game nights from lockdown weary (or resistant) citizens. Also, since the wave is spreading much wider spread than before, there are now chronic shortages of 29 of the 40 most crucial drugs needed to treat Covid-19 as well as crucially needed medical personnel in many areas.
What happened this week?
This week, one statistic summarizes the breadth of the escalating state situation better than any other. As of Tuesday: every single state had a higher seven-day average of new infections than in the previous week. Multiple states also set highs for new viral cases, including Illinois, Ohio, Pennsylvania, Colorado, Wyoming and Montana. And sadly, multiple states also set daily death toll records, including Missouri, Wisconsin, Alaska, Wyoming and North Dakota. The escalating situation has prompted multiple states to issue new lockdowns. Minnesota Gov. Tim Walts issued an executive order that requires restaurants and bars to close early and limit capacity. Maryland Gov. Larry Hogan reduced bar and restaurant capacity from 75% to 50%, and said state government employees who can do so will be required to work remotely. Additionally, nonessential travel to other states was further restricted (now totaling 35 states, with a new focus on the Midwest). And 11 California counties also enacted more restrictive lockdowns, as well.
So let’s dive down into the state data. And, let’s take a look at North Dakota first.
This week, both new infections and new deaths rose, compared to the previous week. And both set daily high records for the entire pandemic. Perhaps one silver lining is that deaths did at least drop a bit at the end of the week. However, the data is noisy, and this has happened before, only to be followed by acceleration the following week. So, we’ll see if this is truly a new trend or not.
As we discussed in previous weeks, North Dakota currently has one of the highest per capita death rates in the world. And the state’s general refusal to wear masks drew a scathing rebuke from the White House coronavirus task force’s Dr. Deborah Birx, two weeks ago:
“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.”
The situation has caused health officials to make louder and louder recommendations for a statewide mandatory mask rule. But Governor Doug Burgum has dug in and repeatedly refused to do so, saying, “It’s not a job for government.” And he claimed citizens would automatically do what was necessary to control the pandemic if simply empowered to take their own “personal responsibility.”
But, so far that doesn’t seem to be happening. Since October 1, coronavirus hospitalizations have tripled, with about a quarter of those staying in intensive care units. And so few were surprised when the Governor announced, this week, that:
"Hospital capacity is currently at 100% …[and] state hospitals are under enormous pressure."
At the same news conference, Gov. Burnham announced that due to the chronic medical worker shortage, the state was looking to hire additional contract nurses from out of state. And it is also pausing elective surgeries at many locations and implementing surge plans. Even more ominously, the state has been forced to invoke CDC “crisis rules” to try to keep up staffing. So healthcare workers who are infected with the disease but not showing symptoms will no longer be quarantined, but will remain on duty and continue to treat patients. And, those who are suspected of being infected, but have not yet gotten back test results, will also do the same.
How about South Dakota?
Infections this week climbed to a record high in South Dakota as well, and also set multiple daily records. Deaths also climbed to a record high this week, before falling back sharply at the end. So perhaps that fall is a sign of improvement, although it also could just be noise in the data.
How about Wisconsin?
This is about as bad as a graph can get with escalating cases and deaths. Both numbers set record weekly highs and multiple daily highs. This week, Wisconsin Gov. Tony Evers encouraged citizens to stay at home, saying:
“Wisconsin, this is serious.The crisis is urgent. It’s not safe to go out, it’s not safe to have others over — it’s just not safe. And it might not be safe for a while yet. So please, cancel the happy hours, dinner parties, sleepovers and play dates at your home. And if a friend or family member invites you over, offer to hang out virtually instead.”
(See section below on how the third wave is different than previous waves and is now being driven by casual get-togethers.)
But Governor Evers was unable to make the stay-at-home order mandatory, due to being "hamstrung" by legal decisions after attempting similar things in the recent past. In May, his Department of Health implemented a stay-at-home order to reduce travel, close some businesses and limit services at others (similar to that enacted in many other states). This was sued by the opposite political party and escalated to the Wisconsin Supreme Court, where that party holds a majority. And as a result, the stay-at-home order was rescinded.
Then last Friday, the Wisconsin Court of Appeals ruled that an October 6 order limiting the size of some indoor public gatherings was "invalid and unenforceable." Additionally, Evers had passed a mandatory mask rule through November 21, which was also challenged and is now in review by that same Supreme Court. Many are expecting it to also be invalidated.
This Thursday, the University of Wisconsin health system, which runs seven hospitals in the state, announced:
We are short of staff at all times, either because they have Covid or they have some other illness and we need to rule out Covid before we bring them back to work
[And we are] unable to shift doctors and nurses around to areas where there may be a greater need.
We’re finding that all of our hospitals are reaching their limit in capacity.”
And they warned that the dangers of hospital overload are not limited just to patients who contract the virus. The staffing shortages affect care provided to others as well:
“[The shortage effects] taking care of those who still have illnesses that haven’t gone away, whether it be cancer, traumas or other types of diseases.
The Wisconsin State Department of Health Services’ chief medical officer, Ryan Westergaard, was more blunt and said:
"We're very close to a tipping point. This could get much worse quickly and that tipping point is when we stop being able to save everyone who gets severely ill.... A lot of people in the population don't perceive themselves to be at high risk of severe COVID-19, but we are truly all at risk if we have hospitals and health systems that aren't able to be there for us when we need them."
Meanwhile how is Missouri doing?
New infections escalated rapidly in Missouri, this week. And unfortunately, that set new pandemic-highs for the week, as well as multiple daily records. Deaths went down and then back up, and essentially plateaued.
On Tuesday, multiple hospitals in central Missouri reported they are beyond capacity and are transferring patients to other areas. But even that is getting more challenging. The Chief Medical Officer at Boone Hospital Center, Dr. Robin Blunt, said:
"We’ve set a new record every day for the past 12 or 14 days. We are at capacity with our ICU, [for] bed reasons or staff reasons. [And] we can rarely find anything close and we are looking to St. Louis and Kansas City. Frequently [we] have to look at multiple places in those areas until we can find someone to take a patient."
Mary Becker, VP of the Missouri Hospital Association, said the problem is that:
“There’s really not enough staffing to go around right now. Nurses and other care givers for this patient population are really in short supply.”
Meanwhile, Missouri Gov. Mike Parson has repeatedly said that he will not implement a statewide mask mandate. Instead, he says, local officials are the best ones to make those decisions and Missourians should be trusted to control the pandemic by "taking personal responsibility."
But that strategy has come under increasingly intense criticism from health officials and analysts as ineffective. And this week, the head of the St. Louis Metropolitan Pandemic Task Force, Dr. Alex Garza, said at a press conference (where he fought back tears):
"Our health care heroes have fought valiantly day after day. [But] we have no reserves. We have no back up that we can suddenly muster to save the day. If we stay the path we are on, even just two more weeks, we will not have the staff we need to care for patients. It’s a numbers game. We are danger-close.
The best time to act was yesterday, but a good time to act is now. The statewide mask mandate is needed to save lives across the state.
We will be judged on the things that we do and we don't do after this is over."
Several voices also pointed out that local leaders can’t be entrusted to make the best decisions when they’re not accountable for the situation; after going wrong, they can offload their problems to others. For example, the city of St. Louis has a mask ordinance that helped it fight back the second wave. And yet, 50% of its Covid-19 beds are now being taken by out-of-county patients from rural areas without any such ordinance (like central Missouri, mentioned above).
Meanwhile how is Minnesota doing?
Minnesota also suffered escalating infections and deaths. And they also set unwelcome new daily and weekly records-highs for the entire pandemic on both.
Michael T. Osterholm, director of the University of Minnesota’s Center for Infectious Disease Research and Policy, said:
“It scares the hell out of me. … This is like one huge coronavirus forest fire, and I don’t think it’s going to spare much human wood out there unless we change our behavior.”
He also predicted that if the U.S. doesn’t change its current strategy, it’s on course to soon be logging more than 200,000 new cases each day.
Mixed Signals from Georgia’s Bellwether Economy:
One of the most important questions for investments (as well as for the health of the country) is "what will the shape and speed of the recovery be?" If it's V-shaped and quick, then many investments will be just fine. On the other hand, if it's one of the other shapes (U-shaped, swoosh, etc.), then some or many investments could run into problems. (See part 14 for more information on the possible "recovery shapes" and their ramifications).
To monitor the evolving situation, we've been watching Georgia very closely. It was one of the first states to reopen. So we expected this to make it a useful early indicator of what could be in store for some other parts of the nation. Back on April 24, Georgia Governor Brian Kemp reopened nail salons, hairdressers, bowling alleys and gyms (as long as they followed state protocols). Then, three days later, restaurants and theaters were also allowed to reopen. So they've effectively been open for 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?
Wow, this is the best week Applebee’s had since the pandemic started. They actually experienced +2% footfall versus a year ago. On the other hand, this is so unexpected from what was happening the last couple weeks, that it could also end up being statistical noise and a fluke. So we’ll watch them next week and see if this is something sustainable or not.
For retail, let’s look at Kohl’s, which is a value retailer that might be expected to do better in a recession than a more upscale retailer.
Ouch, that is -20% footfall versus last year at the same time. And since Kohl’s has high fixed costs and lower margins, that’s almost certainly unprofitable.
For fitness, let’s look at Anytime Fitness. This is a nontraditional fitness club where members have a key to the facility. So customers can visit anytime and minimize their contact with others. And this should be an advantage for them over more traditional chains during a pandemic.
This week, footfall was -6% versus a year ago. While any reduction is unpleasant, that’s actually exceptionally good versus what we’ve seen in other fitness chains, and even compared to what we saw with this chain in previous weeks. Again, this drop is also very new and very sudden, so it’s hard to say if it will be sustainable or not. We’ll see.
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.
That’s a disappointing graph, because not too long ago, it appeared that they may have finally recovered. This week, they are at a painful-looking -19.67% footfall versus year ago, which is essentially a repeat of last week. And hotels also have high fixed costs and low margins, so that looks very awfully unprofitable.
So, overall, it was a mixed week for Georgia’s Covid-19 sensitive businesses. Half of them showed tentative signs of significant improvement, while the other half continued to look distressed, or very distressed. We’ll continue to monitor.
Economy gets Little Reprieve from the Weekly Pummeling from Newly Lost Jobs, while the Threat from Resurgent Virus Grows
Unemployment has historically been one of the most reliable indicators of when the U.S. has entered a recession and when it’s left one. So that's why we examine it very closely, every week. And unfortunately, over the last 29 weeks, the economy has been hammered week after week by massive levels of new unemployment. This week was no different, with 709,000 people newly unemployed. This was a little lower than the 751,000 (adjusted results) from last week.
To put things into perspective: we’re eight months into the pandemic and yet are still getting weekly job losses that are more than three times the pre-pandemic level. 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. This week, the number fell 436,000 to 6.79 million. So there was modest improvement, but it was still disappointing to those hoping for a more meaningful drop.
In practice though, even this number isn't perfect (and may make things look rosier than they really are). The problem is that at this stage of the recession, 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.
When that happens people are added to a new program passed by Congress in the stimulus law called the Pandemic Emergency Unemployment Compensation (PEUC) program. And this gives them an additional 13 weeks of benefits. Again this may also understate the true joblessness because if a person stays unemployed for those 13 weeks as well then they will disappear from this statistic as well. But even though it’s not perfect, it’s still helpful to look at. And we know that this week the number on that program grew by 160,000 to 4.14 million
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, Eliza Winger, an economist at Bloomberg, summarized the situation, saying:
“Claims are well above pre-pandemic levels and rising infections pose downside risk. Developments on the pandemic front will shape the economy as fiscal aid remains in limbo.”
Fiscal aid means stimulus package, passed by both houses of Congress and the President, and has been almost universally called for by economists and analysts as necessary to prevent serious, long-term damage. However, as mentioned previously, the three parties have not yet been able to agree on a stimulus package to provide that support. (See section on the financial cliff, below, for the developments this week).
Meanwhile, public markets soared early in the week due to announcements from Pfizer (showing promising early results on their vaccine candidate) and Eli Lilly (announcing the FDA had gave emergency youth authorization for their antibody treatment). More details on both of these are described in a later section.
However, on Thursday, three of the world's top central bankers threw cold water on the enthusiasm.
Jay Powell, chairman of the U.S. Federal Reserve, first pointed out that these treatments aren’t a slamdunk, saying:
“Significant challenges and uncertainties remain regarding the effectiveness and distribution of treatments”.
(We’ll talk about these in detail in the section below on Pfizer’s and Eli Lilly's announcements). And even in the best case scenarios, none of these medicines will be available in large enough quantities to end the pandemic anytime soon.
"The main [immediate] risk we see … is clearly the further spread of the disease here in the United States. With the virus now spreading, the next few months could be challenging.”
And, even when we finally overcome all of the virus challenges, the work won’t be even close to complete. Powell warned there are still significant long-term issues that won’t disappear anytime soon without further stimulus:
“We’re recovering, but to a different economy. There’s going to be a substantial number of workers who are going to need support as they find their way in the post-pandemic economy, because it’s going to be different in fundamental ways.”
Financial Cliff Update: White House turns over the reins to Congress
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 couldn’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?
Last week, the President lost a bid for reelection to a new President-elect, which the President immediately challenged in a series of lawsuits alleging fraud. But legal experts almost unanimously agree that even if every case is won by the administration, there aren’t enough votes that would be converted to change the results of the election. And so far, five of the lawsuits have been thrown out almost immediately for lack of proof, and legal experts overwhelmingly agree that the rest will end up the same way. So, the wide consensus is that the President-elect will be sworn in on January 20th 2021 (Inauguration Day).
If that’s the most likely scenario, then the White House no longer has much of an incentive to push for a stimulus package, since it would only benefit the following administration. And so, this week, the White House unsurprisingly stepped back from its former front row seat at the negotiation table. And multiple sources inside the administration have said it’s now up to Congress to hash out a deal.
The President-elect then issued a joint statement with the head of the House of Representatives (controlled by the large stimulus party), saying that stimulus was needed and a deal should be struck before he takes office on January 20th.
But, there were no signs that the head of the Senate (controlled by the small stimulus party) was going to come above the original $500 billion offer.
So yet again, things remained at an impasse.
If no deal can be struck in this session of Congress, the new Congress will be seated on January 20th. And if that happens, then the fate of stimulus will depend on which party controls the Senate.
Currently, there are two seats that would be up for grabs in a January runoff in Georgia. If the large stimulus party wins both seats, then they would control both houses of Congress and the Presidency. And that would mean that a large stimulus would be all but guaranteed. However, the runoff for one of those Georgia Senate seats will remove alternative candidates that came from the small stimulus party. And so, many political analysts believe this will consolidate the vote for the small stimulus candidate and give that person the victory.
If that happens, then the small stimulus party would retain control of the Senate. And if that happens, the future of a significant stimulus would be highly uncertain.
Corporate Tenants Dumping Excess Space Send Shivers through the Commercial Real Estate Office Market
Companies that don't need or can't afford office space will often sublease it to another company. What this means is that they allow another company to occupy the space, collect rent from them and pass it on to their own landlord. Doing this isn’t a cure-all because the company frequently has to take a significant loss due to the "sublease discount" (typically around 20%). But it's a way to minimize the damage on what would otherwise be a complete loss.
And this week, Costar Group, a real estate data firm, reported that corporate tenants put a record 42 million square feet of office space on the sublease market in Q2 and Q3. This brought the total sublease space to about 157 million square feet, which is a record-breaking 1.7% of total office capacity. And this is the highest rate that Costar has ever recorded since it began measuring sublease space in the 2005, and exceeds even the worst of the Great Recession.
And this is sending shivers through the office market, which could suffer repercussions on office pricing and even defaults.
That’s because the major risk behind most commercial real estate investments involves paying off the loan. And if an office owner can’t do that, they can lose the entire property to foreclosure (along with some or all of their investment).
And so far in this pandemic, the damage in office space has been less than in other real estate classes. For example, only 2.5% of offices that have been converted into mortgage-backed securities were more than 30 days late as of mid-October. And in comparison, the numbers for retail real estate and lodging have been horrific (14.3% and 19.4% respectively).
To be fair, mortgage-backed securities are typically used on only the largest and often best properties. And as we’ve mentioned in previous weeks, this recession has been very unequal in effect on different demographics, with properties held by smaller investors/landlords and/or lesser quality ones being hit a lot harder. So, the overall office market is almost certainly worse than just 2.5%. But still, it has performed relatively much better today than some other real estate has.
But, as a result of this record-setting sublease space, analysts are now concerned about a huge glut of underpriced properties coming on the market. This could shave tens of billions of dollars off of the value of office buildings. And if that happens, that could create an inability for investors to refinance loans to fully cover the debts. And since these are almost universally balloon loans, this could cause defaults and major losses for investors.
Nancy Muscatello, a CoStar senior analyst, also added that this record amount of space may be telling us additional things about the market.
“The heightened amount of sublease space suggests that tenants’ positions are more precarious than the vacancy rate would suggest right now,”.
On the other hand, if a firm is one of the few that are lucky enough to be looking for office space right now, it’s a buyers market. Jonathan Adelsberg, the chair of the leasing department at law firm, Herrick Feinstein LLP, said:
"The sublease discount historically has been around 20% below market rate, but given the plethora of space on the market today, we expect to see discounts greater than that.”
Virus’s Third Wave Being Driven by “Safe-Looking” Dinner Parties, Game Nights, Sleepovers and Carpools
This week, the White House coronavirus task force reported that the latest virus surge is very different from earlier in the pandemic.
Early waves were driven by multiple clusters of cases, which were linked back to group nursing homes and crowded nightclubs. But this time, it’s the large number of small, private social gatherings that are causing infections to spike. Many of these are casual occasions, where the participants can often feel deceptively safe: dinner parties, game nights, sleepovers and carpools. Health experts hypothesized this may be due to pandemic fatigue and widening social bubbles. Also, informal gatherings are difficult to police. And as temperatures fall and the holidays approach, this dynamic isn’t expected to improve.
Nirav Shah, director of the Center for Disease Control and Prevention in Maine, which has seen soaring rates in the last two weeks, said:
“We’ve all gotten used to our bubbles, but I don’t think we’ve really asked whether someone who’s in our bubble is also in another person’s bubble. People’s bubbles are getting big enough to burst.”
David Rubin, the director of PolicyLab at Children’s Hospital of Philadelphia, said:
"As the weather becomes colder, these gatherings are taking place indoors, often in the absence of strict mask use, creating the perfect conditions for a virus that can spread among people who are crowded into a poorly ventilated space. These events are a sign that pandemic fatigue has set in, beset with mixed messages from political leaders on the value of masking and distancing to contain the resurgence this winter.”
They also pointed out that some schools need to rethink their current policies.
"With rising transmission and test positivity rates in counties across the country, we fear that local school outbreaks are now increasing in advance of Thanksgiving. While we offer a number of options above for reverting to distance learning, a plan we cannot justify is one that continues full in-school activities until a large outbreak happens.
We can only hope that as the election news settles, people realize what is really happening with resurgent caseloads and hospitalizations and commit to proactive targeted mitigation strategies. We are rapidly running out of time if our hope is to protect our communities and extend safe in-school instruction over the winter.”
Eli Lilly’s Covid-19 Antibody Drug Gets Emergency FDA Clearance (but Unlikely To Be Available For Vast Majority Due To Inadequate Supply)
This week, the Food and Drug Administration announced great news. The first antibody therapy cocktail for Covid-19 has passed human trials and was authorized for emergency use.
The drug is made by pharmaceutical company Eli Lilly and is called bamlanivimab. And it's been approved for use in mild-to-moderate Covid-19 in adults, including those who are 65 and older and pediatric patients. This is critical, because older people are believed to be less likely to be protected by some of the upcoming vaccine candidates (see next story on the Pfizer vaccine).
The therapy relies on lab-treated proteins that mimic the immune system’s ability to fight off the virus. However, it isn’t a cure-all.
First, it has to be given to patients who aren’t very sick and during a relatively narrow window. Eli Lilly says, "it should be administered as soon as possible after a positive Covid-19 test and within 10 days of symptom onset," The drug is not authorized for patients who are hospitalized or who require oxygen therapy.
Second, the need is expected to dwarf the supply. The U.S. government has a contract to pay Lilly $375 million for 300,000 vials of the treatment over the next two months. But in comparison, in the last week alone, more than 200,000 U.S. citizens were infected. Ultimately, the U.S. has the option to purchase an additional 650,000 vials through next June for as much as $812.5 million. But again, these numbers are not large enough to be expected to make a significant dent.
The U.S. intends to provide the therapy for free, to those lucky enough to get it. (Make that mostly free; health facilities may charge for the product's IV delivery.) But even without charging a price, delivery may get tricky.
The delivery of the treatment isn’t ideal, because patients have to get an infusion similar to receiving chemotherapy. And, health systems can't use the same facilities they’re using for cancer patients, who have weakened immune systems and would be put at risk by the Covid-19 patients. So it’s unclear, at this point, exactly how a network of facilities will be built to deal with this.
Markets Soar on Pfizer’s Press Release Claiming Vaccine is "90% Effective" Against Covid-19, but Scientists Urge Caution
This week, there was also more good news from Pfizer. On Monday, the company announced early results from the final stage III human trials of its mRNA vaccine candidate. And the company claimed that this suggested "90% effectiveness" in fighting the disease. If this holds and is accurate, it would be much better than many expected for a first generation vaccine (which was expected to be perhaps 70% effective if things went well). And it would be far superior to the results that Pfizer itself reported for this same vaccine in animal studies. So if the new results hold up, it would be a very positive development.
And immediately, the stock market soared as armchair investors, trading from home on apps like Robin Hood, imagined an immediate return to business for cruise ships, airlines, hotels and all sorts of Covid-19 sensitive businesses.
However, many scientists pointed out that the results so far are promising but ambiguous. And there’s no evidence, so far, that certain key hurdles will be overcome. For example:
Only early results: At least 164 study participants need to report infections, for Pfizer to be able to conclude the trial. So far, only 94 of the 43,530 participants have contracted the disease. As more data comes in, the numbers could change.
Only a vague press release: Scientists and the public did not receive the actual study results, but just a press release. And the study itself has not been peer-reviewed, nor even released as a preliminary preprint. Peter Doshi, from the University of Maryland School of Pharmacy, said: “All we have right now is a headline by Pfizer. The lack of data is very concerning.”
Much key information not disclosed: Many experts criticized the little information that Pfizer did release in the press release and said it could be causing the public to perceive a misleading message.
No information on severity: It's unclear if the vaccine simply prevented symptoms in mild to moderate cases or if it truly reduced severe outcomes. This is crucial, because an ideal vaccine would also reduce hospitalizations, ICU visits and deaths. Maria Elena Bottazzi, co-director of the Texas Children’s Hospital Center for Vaccine Development in Houston said, “The studies should give us a sense of severity, but they’re only looking at symptoms."
No information on most-needed high-risk populations: Does the vaccine work on the most high-risk populations in need of a vaccine, such as elderly people (which is a concern for first generation vaccines)? Without this, the ultimate effectiveness of the vaccine will be limited. Doshi said, “Pfizer hasn’t released anything indicating that this 90-percent effective statistic applies to those most frail, like older adults or those in nursing homes who are at highest risk. The headline could send a misleading message that the vaccine provides greater benefit than it really does"
No information on sterilizing immunity: Does the vaccine produce a sterilizing immunity (which means that a person cannot pass the virus to others)? If not, it would still be good for the vaccine taker, but would not prevent Covid-19 from spreading (and thus be less effective at ending the pandemic).
No information on length of protection: This is one that’s unlikely to be answered anytime soon due to the shortened testing schedules that all of these vaccines are currently on. For example, if protection lasts only a month or two (as it has in certain tests of naturally occurring antibodies), then the protection may be quite limited and people might be required to take booster shots quite often. This would limit the effectiveness as well as exacerbate the significant supply problems that already exist (see below).
If Pfizer can overcome all of these hurdles, then, unfortunately, enormous distribution obstacles remain.
Not enough supply: Pfizer expects to have as many as 50 million doses available at the end of the year. Since each patient requires two shots given three weeks apart, this means it's enough for only 25 million people worldwide. In comparison, there are 328 million people in the United States alone (and 7.8 billion in the world). So this will not be even close to enough to end the pandemic in the U.S. (let alone throughout the wider world, which will be needed, not only in their own interests but also in order to allow travel and other industries to fully recover). Pfizer does hope to up the production to 1.3 billion doses by the end of 2021 (which would treat approximately 650,000 million people worldwide). So this amount might be enough to treat all in the U.S., but would leave the overwhelming majority of the world uncovered and at risk. We’ve already discussed this potential risk in previous articles. And the hope here is that there will end up being multiple vaccine candidates that will perform well, which would help to fill this gap. Ultimately, the U.S. government has a contract for $2 billion to purchase 100 million doses of this vaccine. It also has an option to purchase 500 million more.
Distribution is difficult and expensive: Unlike other vaccine candidates, this one must be kept at an ultra low -94°F until a few days before it's used. This will most likely require the successful buildout of a new and expensive logistical system made up of freezers and/or dry ice. In comparison, Moderna's vaccine candidate, which uses the same mRNA technology, can be stored at more moderate temperatures (and some of the vaccine candidates can be stored at room temperature).
As a result, health experts and economists almost universally agree that investors imagining a quick return to pre-pandemic life are almost certain to be disappointed.
On Wednesday, Dr. Anthony Fauci, the head of the National Institute of Allergy of Infectious Diseases, reiterated this concept. And he predicted that despite the good of the new medicines, they are unlikely to come soon enough to prevent a long winter (and perhaps a long spring and summer in 2021):
“We’re talking probably …end of April, I would think [for the general public to get access to a vaccine]...but that is a guesstimate. [And]we have a lot of people in this country who may not want to get vaccinated right away. It may take well into the second or third quarters to finally get [enough] people to be convinced to get vaccinated.”
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 both 85%+ effective as well as 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.
Strategy:
No new investments in real estate or any asset classes that are correlated with the unemployment or the business cycle until there is more clarity about the unknowns concerning the virus and the upcoming financial cliff.
Invest in assets that are coronavirus resistant (and uncorrelated with the business cycle). That includes:
Music royalties (which can actually do better in lockdowns due to increased streaming).
Life settlements (which actually perform better when people are dying faster and in any event aren't directly tied to the business cycle).
Litigation finance (which performs based on winning or losing cases, and also isn't directly tied to the business cycle).
Invest in coronavirus "portfolio insurance" (i.e. an investment that would be expected to do better the longer coronavirus continues or if it gets worse).
N95 Mask Manufacturing Company. If the pandemic should disappear tomorrow (which I personally am not counting on), I would be happy to take a small loss here given that the rest of my portfolio would be doing extremely well. On other hand, if Covid-19 doesn't disappear and things go as I expect (or worse), then this investment could provide a welcome profit boost and improve my diversification.
Continue to hold cash and be patient for dislocated and distressed opportunities. The worse the economic damage, the more chance there will be for those once-in-a-generation or once-in-a-lifetime opportunities.
My opinions and strategy will change if we get some better or worse news on the science side or in some of the other X factors. For example, a new stimulus law could shift things in a more positive direction. And, as I mentioned above, the virus getting out of control again in large areas and forcing large lock-downs a second or third time, could easily make things worse.
