How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 45: January 9th
Updated: 3 days ago
Progress against third U.S. death wave appears a temporary blip, as new fatalities climb relentlessly and shatter records; Crystal ball: After brief reprieve, third infection wave accelerates again; World round up: multiple countries losing war to virus as Sweden prepares hard lock-down, U.K. hospitals become "a war zone" and quicker-spreading mutation gains stronger foothold; State Roundup: More hospitals “stretched to the absolute limits” as a record 16 states simultaneously set Covid-19 hospitalization highs; Georgia’s bellwether economic recovery: revisited in three weeks; Unemployment: Strong headwinds to recovery continue; Dual monthly unemployment reports show economic recovery dangerously stalling; Financial cliff (part 1): Covid-19 relief law passed at last; Financial cliff (part 2): Losers of the new pandemic aid law; “Large stimulus” party flips two key seats to control Congress as President-elect demands more pandemic-relief; New faster-spreading mutation found across multiple states as scientists criticize anemic U.S. response as “a scandal”; U.S. vaccination effort comes under intense criticism after falling well short of goals; Update on my portfolio strategy.
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I hope you and your loved ones are having a happy and healthy new year. This week there was a flood of new information on virus spread, economic impact, investment repercussions, the financial cliff, faster-spreading mutations and the lagging vaccination effort.
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.
Progress against third U.S. death wave appears a temporary blip, as new fatalities climb relentlessly and shatter records.
For the 35th 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 official death toll had climbed to 381,497 (versus 338,263 2 weeks ago on 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 was led by rural areas (although now it is spreading across the entire country and surging in all areas).
How did things go this week?
This was a disappointing week. After promising hints last week that things might be turning around, the situation reversed. And once again, deaths continued their relentless climb. Sadly, this not only shattered third wave records but created new highs for the entire pandemic. 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. And in November and December, we talked about how this is causing hospitals to overload in certain areas of the country. When this happens, hospitals are forced to deny care to incoming patients, both those infected with the virus and uninfected. And not only do more people die of Covid-19 unnecessarily, but others (via heart attacks and other completely unrelated problems) die unnecessarily, too. In response, many states have enacted varying lockdowns which may start to kick in and change the trajectory. But, lurking under all of this is the threat of the new mutated strain, which may prove much more difficult to contain than the original. So we’ll be watching this very closely to see what happens.
Crystal ball: After brief reprieve, third infection wave accelerates again
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?
Unfortunately, the last couple of weeks are hidden by the country label. So let’s change the scale so that we can view it closer:
Over the last several weeks, the increase in U.S. infections had been slowing dramatically, and last week, the number even came down. This gave hope that things might be turning a corner.
Unfortunately, infections once again climbed upward this week and set new pandemic highs. This new surge wasn’t a surprise to some. Many health experts have repeatedly noted that many Americans ignored health advice over the holidays and mingled with family and friends outside of their homes. And so many predicted this would happen. Sadly, it looks like they were right. If this feels like déjà vu, it’s because we’ve seen the same story happen twice before. Experts made the same predictions in May for Memorial Day and in September for Labor Day. And sadly, both of these events also triggered surges which ultimately fueled brand-new waves. What could be different this time around is that we now have multiplevaccines with which to fight the disease. But, the rollout for these has been going much slower than expected (see later article). And there’s also now a new mutated strain, which spreads more easily than previous strains. So we’ll watch to see how these conflicting factors play out over the next couple of months.
World round up: multiple countries losing war to virus as Sweden prepares hard lock-down, U.K. hospitals become "a war zone" and quicker-spreading mutation gains stronger foothold.
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).
However, in recent weeks, South Korea has been experiencing a third death wave that's been more difficult to control. And while this wave is minuscule compared to other countries’, South Korean officials are still very concerned and have announced stricter lockdowns. Recently, the country also discovered the presence of the new mutated strain of the virus (which spreads more quickly and may be more difficult to contain). There’s no way to know how widespread it is. But if it becomes widespread, then it may make partial lockdowns much less effective than before.
How are things going now? This week, South Korea looked like this:
So the last two weeks have been better, with deaths slowing. Let’s hope this continues for them next week and we see them turn the corner.
How is Sweden doing? We used to look at Sweden’s stats in depth every week, because it was following an unorthodox lockdown-lite strategy. And the hope was that it might prove itself as a successful alternate model for other countries to follow. But after a recent surge of infections, hospitalizations and deaths, they’re reversing course and their strategy is becoming much more similar to others. And so far, lockdown-lite has resulted in worse economic damage and a stratospheric death toll (versus the top countries). So we’re now switching to a one-month schedule.
Here’s how they been doing:
This is not a good-looking graph for Sweden. Over the last month, their second death wave has continued. And this last week’s numbers not only shattered second wave records, but also eclipsed the previous record held by the first wave.
And more potential bad news came last week, when the country announced it had detected a case of the mutated strain of the virus. As mentioned above, this spreads more quickly than the original and may be much more difficult to control with partial lockdowns. Sara Byfors of Sweden's Public Health Agency also added there are probably more cases that have not yet been detected.
This Friday, Sweden's Parliament passed an emergency law empowering the government to impose coronavirus-related lockdowns for the first time. This was something the country has resisted for a long time. Swedish Prime Minister Stefan Löfven said:
“We see a great risk that we will be in a difficult situation for some time ahead. Of course, that means the pandemic law should be utilized, and we will use it in the near term.”
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. So authorities were forced to enact a variety of new lockdowns (which we've described in detail in previous weeks). So how are things going?
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 in the last month, they finally peaked and deaths mercifully dropped off a little bit. This gave hope that they might finally be getting control of things and turning the corner. How did they do this week?
For the last couple of weeks, they’ve made great progress. This week though, that flattened out and infections ended up being a little worse at the end of the week than the beginning. Still, one week doesn’t set a trend. So let’s hope that this is just a temporary blip, rather than the start of something new.
Meanwhile, the new, mutated strain of the virus appears to have established a foothold in Spain, as well. Four days ago, scientists announced they had detected it in two patients in the Valencia area of the country. And most worryingly, they couldn’t find any connection between them and the United Kingdom (which was the first country to identify the new strain). So, the authorities believe it has been spreading "in the wild" freely for at least two weeks. And many health experts are concerned that this could throw a monkey-wrench into the fragile progress the country has made.
How did some of their neighbors in Europe do? Let’s look at the U.K., France, the Netherlands and Belgium. In early December, all of them appeared to be turning the corner simultaneously. But two weeks ago, the U.K. and Netherlands lost control, while France flattened out. And only Belgium continued to turn the corner. What happened this week?
Unfortunately, the United Kingdom, France and Netherlands all suffered bad weeks. Deaths increased, and all three appear to have lost the earlier control they had.
The one bit of good news belonged to Belgium. It continued to make progress turning the corner and was the only one of the four countries that had fewer new deaths at the end of the week (versus the beginning).
The U.K. boasts one of the best genetic testing systems in the world, and was the first country to detect the new, mutated strain. And as we talked about in previous weeks, that version has become the dominant variant there. The increase in infections, hospitalizations and deaths caused the country to reverse their previous relaxation of lockdowns and implement tight restrictions in many areas. So far at least, that reaction has not yet shown up as an improvement in the death statistics, as they hit new highs and shattered previous pandemic records.
Meanwhile, many U.K. hospitals announced this week that they’re under siege and being pushed to the brink. Ben Schischa, a London paramedic with eight years' experience, said:
"Covid-19 cases have exploded exponentially compared to even a week or two ago. It's become like a war zone again.
I've seen patients wait in ambulances for hours until the hospital had enough space for them. One patient waited six hours outside a hospital. It's gone completely crazy."
Yesterday, British Prime Minister Boris Johnson agreed, saying:
"Our hospitals are under more pressure from Covid-19 than at any time since the start of the pandemic."
As a result, the country announced on Monday that it would implement even stricter lockdowns (similar to the tightest ones back in March). The public has been asked to stay at home and leave only for very specific reasons. That includes essential shopping, exercise, Covid-19 testing, medical help, escaping domestic abuse and those who absolutely cannot work from home. Additionally, primary and secondary schools, and colleges will have to switch to remote learning starting Tuesday. People who don't live together are not allowed to mix, but support and childcare bubbles are still allowed.
Prime Minister Johnson announced the restrictions and added:
"I know how tough this is and I know how frustrated you are. But now more than ever, we must pull together."
The Prime Minister had previously been a virus skeptic and even bragged about shaking hands with many Covid-19 patients without suffering any bad effects. He later contracted the disease and was hospitalized with a serious case, which he claimed “could have gone either way” and killed him.
Meanwhile, France announced on Wednesday that it had confirmed 19 cases of the more transmissible mutated strain (that some are calling the U.K. variant, because it was first identified there, although it may have originated elsewhere). They’ve also identified three cases of another faster-spreading strain, that some are calling the South African variant (which was first identified in that country). Contact tracing on a patient in the Paris region could not find a link to anyone with any travel history, which caused many to fear that it may be too late to stop its further spread.
As of Saturday morning, scientists reported that the U.K. variant has now been found in 47 countries. This includes North America (both the United States and Canada), Europe (the U.K., Denmark, France, Germany, Ireland, Greece, Belgium and many more), the Middle East (Iran, Oman and Israel and many more), Asia (China, Singapore, South Korea, Vietnam and many more), Oceana (New Zealand, Australia and many more) and South America (Brazil).
State Roundup: More hospitals “stretched to the absolute limits” as a record 16 states simultaneously set Covid-19 hospitalization highs
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 those afflicted by 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 was led by rural places 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?
Covid-19 hospitalization surged in many areas of the country. And a jaw-dropping 16 states reported pandemic-high records. Most were in the South, including Alabama, Arkansas, Maryland, Georgia, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia. Additionally, Arizona, California, Delaware and Maine also set records.
The combination of all these unwanted highs set yet another pandemic record: “most states hitting a high in one week”:
Let’s take a closer look at some of them and start with Arkansas:
These are all terrible graphs for Arkansas. Infections, hospitalizations and deaths all climbed this week. And infections and hospitalizations both broke new records, while deaths remained close to pandemic highs.
Last week, Arkansas hospitals had only 56 ICU beds left out of 1155 statewide.
And in response to the staffing shortage, hospitals announced plans to reduce the usual ratio of 1 to 2 patients per ICU nurse to as high as 3 or 4 by bringing in non-ICU support staff. State doctors and nurses had previously excoriated this strategy (which was called a "team-based care model") for causing worse care for patients, increasing burnout from medical providers and increasing deaths. Few experts disagreed, but they also pointed out that hospitals are stuck between a rock and a hard place and have little choice. Let’s turn our attention to another state. How did North Carolina do?
This week, North Carolina did a “hat trick” by setting three unwanted records at once. Covid-19 infections, hospitalizations and deaths all surged to set pandemic highs.
On Thursday, the State Secretary of Health and Human Services, Dr. Mandy Cohen, said:
"This is the most worried that I have been for our state. The anticipated holiday surge is upon us."
The President of the North Carolina Nurses Association, Dr. Dennis Taylor, said:
“Hospital capacity and ICU capacity are both being stretched to the absolute limits. We’re seeing ICU capacities at 100 percent, and we’re seeing hospital capacities at 90, 95 percent."
WakeMed hospitals' chief medical officer, Dr. Charles Harr, said:
"All of our beds are full. We have some patients who we are maintaining in what we call surge spaces.”
And on Wednesday, this field hospital was opened in Lenoir to accommodate additional patients:
But, as in other states, the North Carolina bed shortage is not actually being driven by a shortage of physical beds or physical space. The problem is insufficient medical personnel to staff them.
“Hospitals are under a lot of strain. It’s not just the increase in cases, it’s also a lack of staff availability.”
Harr agreed, saying:
"Our main challenge is keeping all the staff available to care for patients."
He also admonished the public on being lulled into complacency:
"Folks still are not wearing the masks the way they should. I think that people really need to take the virus very seriously. Unfortunately, I work with COVID patients every day, and I see them die."
Meanwhile, Greensboro-based Cone Health recently posted its hospital system monitoring and forecasting system on the web.
At current rates, the hospital capacity in this area of North Carolina is expected to be exceeded in 10 days. A Cone spokesperson said this would be bad, not only for Covid-19 patients, but for any patient seeking care.
"This would mean delays in care for nonemergency services and could eventually impact urgent care for problems such as heart attacks and strokes."
Georgia’s bellwether economic recovery: revisited in three weeks
(Note: Georgia’s economy is now being reviewed only once a month, as described below. So we'll dive into it in 3 weeks.).
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've watched them week by week across all of Georgia's four primary Covid-19 sensitive industries: restaurants, retail, fitness, and hotels.
How’s that gone over the last six or seven months? We've seen different sectors moving back and forth during that time, as well as different individual businesses in those sectors. But overwhelmingly, results have ranged from disappointing to dismal. And while there have been occasional spurts of improvement to celebrate, these have almost always been quickly followed by disappointing backtracking.
So at this point, the Georgia experiment has failed to achieve its goal of a V-shaped recovery. This is why I’ve called a halt to the weekly monitoring of the state and will only be checking in monthly. We will look again in three weeks.
Unemployment: Strong headwinds to recovery continue
Unemployment has historically been one of the most reliable indicators of when the U.S. has entered a recession and when its left one. So that's why we examine it very closely, every week. And unfortunately, over the last 31 weeks, the economy has been hammered week after week by massive levels of new unemployment. This week was no different, with 787,000 people newly unemployed. This was barely improved from last week (790,000):
Unfortunately, at nine months into the pandemic, we’re still getting weekly job losses that are more than three times the pre-pandemic level (216,000 in February of 2020). Back in June, virtually no one expected the continuing damage to last this long.
Meanwhile, as we've talked about every week for the last several months: "continuing claims" are 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. On the other hand, this statistic isn't perfect, because people who stay unemployed for a large number of weeks lose state benefits and fall off of the statistic.
However, these people then show up in the Pandemic Emergency Unemployment Compensation (PEUC) stat. But this number also has the same problem (people lose this benefit after 13 weeks of unemployment). And at that point, these people have nowhere else to go and simply fall out of both statistics and “disappear”. This can cause the numbers to give the appearance of improvement, while the underlying situation is not actually improving. Also, as we talked about in early December, the U.S. Government Accountability Office (a non-partisan government watchdog) found that statistical issues are causing both under- and over-counting of the PEUC stats. So they should not be viewed as individual people. Still, virtually all economists agree that over time, many of the inaccuracies tend to even out and the trend is still useful to look at.
So how did continuing claims look this week? This week, continuing claims also declined slightly to 4.52 million.
The report also showed that long-term unemployment set a seven-year high in November at nearly 4 million.
The chief U.S. economist at JPMorgan Chase & Co., Michael Feroli, said:
“The current wave of infections is weighing on activity. What we are seeing, I think pretty clearly, is a notable deceleration in the labor market over the last several weeks.”
Dual monthly unemployment reports show economic recovery dangerously stalling
This week, two much-anticipated monthly unemployment reports also came out.
First out was the ADP monthly payroll report. And unfortunately, the numbers weren’t good.
Payrolls contracted for the first time since the early pandemic (now declining by 123,000 in December). Leisure and hospitality were hit the hardest, and most of the cuts came from large businesses. ADP also estimated that companies laid off a net 19.4 million workers in April, and only 9.9 million of those have been recovered. If accurate, this would mean a startling 9.5 million workers remain unemployed. And many of these are believed to have been suffering from unemployment from as long ago as March and April.
Later in the week, an even more anticipated monthly unemployment report came out, tracking Nonfarm Payrolls. This is published by the U.S. Bureau of Labor and Statistics. Unfortunately, it also delivered bad news:
Nonfarm payrolls not only failed to increase, but the numbers moved in the wrong direction and decreased by 140,000 from the previous month. And for the first time in eight months, the U.S. lost more jobs than it created. The trend also appears to put a nail in the coffin for the the few remaining “true believers” who had steadfastly held to the theory that the economy would naturally have a V-shaped recovery. Instead, this is exactly what a double dip recession would be expected to start off as. The bad numbers were mostly driven by huge losses in leisure and hospitality:
Senior portfolio manager at investment firm BlackRock Inc., Jeffrey Rosenberg, said:
“The report is remarkably weak with regards to leisure and hospitality. That’s really what’s taking the headline number down. This is very clearly about the Covid resurgence we are seeing and underscoring the need for more fiscal policy.”
The report also said that the headline unemployment rate was 6.7%. This was the same as the previous report and broke a previously positive string of seven successful improvements in a row. And it’s almost double what it was in the pre-pandemic report of December 2019 (3.4%). And unfortunately, it’s known that the headline unemployment rate understates true unemployment in the pandemic and the bigger picture is actually worse. As we've discussed in past articles, this headline unemployment rate statistic was designed for a pre-pandemic age and doesn’t count discouraged workers, workers attached to who lost jobs the labor force who lost jobs and those who want full-time work but are forced to settle for a part-time job.
The more complete U-6 unemployment rate corrects for these issues. So, the true gauge of employment, this month, was at a very unappetizing 11.7% (which is almost double the headline rate). And this also stalled out and was barely improved from the 12% in August.
However, Bloomberg economist Eliza Winger pointed out a potential silver lining.
“While the labor market is stalling, the recent passage of substantial fiscal stimulus will provide critical support to the economy over the next several months."
And we’ll talk about that in the next section on the financial cliff.
Financial cliff (part 1): Covid-19 relief law passed at last
As we've discussed over the last several months, there's a huge, but invisible problem with the economy, that's largely unrecognized by the general public. But an overwhelming consensus of economists, analysts (across the political spectrum) and policymakers at the highest levels (including the Federal Reserve) all agree that it's essential we find a solution to it. And if we don't, millions of Americans and businesses are destined to fall over a financial cliff with devastating long-term consequences. If this happens, then we may suffer a debilitating double dip recession (the dreaded "w-shaped recovery"). And investors in many alternative investment asset classes (including certain real estate sectors) could be caught up in a world of hurt.
This financial cliff is caused by several things:
Impending collapse of crucial safety nets: At the end of 2021, 10-12 million people who lost jobs due the crisis were scheduled to lose critical benefits they're currently depending on. These were provided by two government programs created by the stimulus package passed by the government earlier in the year. The first is the Pandemic Emergency Unemployment Compensation (PEUC), which gives workers, who've been unemployed so long that they've exhausted state unemployment benefits, an additional 13-week lifeline. The second is the Pandemic Unemployment Assistance (PUA) for workers in the gig economy who are otherwise unable to get the same benefits that traditional workers receive when they lose their jobs. If they don't get any additional help, the damage to the economy will be severe, immediate and potentially long-lasting.
Foreclosure and rental eviction tsunami: in January 1 2021, moratoriums on evictions and foreclosures were scheduled to expire. If this happened, then a tidal wave of 8 million delinquent homeowners are set to be foreclosed on and lose their homes (dwarfing the worst of the Great Recession). And 12 million more delinquent renters (owing an average of $5850 in back rent and totally $25 billion as well as more in utilities) will be evicted, as well. If the tsunami is allowed to occur, then it will have a devastating effect on real estate and the wider economy.
Student loan resumption: The CARES Act suspended payments and interest on $1.7 trillion in student debt during the pandemic. And the Federal Reserve estimated this saved borrowers from paying about $7 billion a month. But on January 1st, this protection was scheduled to be lifted and payment will become due. If this is allowed to occur, it has the potential to exacerbate the other two issues.
All of these things could have been addressed months ago, if Congress and the President had agreed at that time on a new stimulus bill. However, all efforts to agree were stymied by enough twists and turns to write a novel. (For those who’re interested see the detailed summary here in Part 44 on December 26th, 2020).
But, at the very last minute (at the end of December), a new law was successfully passed. The legislation was a combination of $1.4 trillion of regular government funding along with a $908 billion Covid-19 relief bill.
And that Covid-19 relief included:
$284 billion in more money for the Paycheck Protection Program (PPP) for smaller businesses affected by the pandemic. The first version was criticized for ignoring many key businesses. So the new version allows participation by nonprofits, local newspapers and TV and radio stations. Also $15 billion was reserved for live venues, independent movie theaters and cultural institutions. The new PPP rules also include stricter provisions to correct what many viewed were abuses of the original program (including the majority of funds flowing to a tiny fraction of large companies who were never intended to be recipients). This new money is available only to companies with fewer than 300 employees and which experienced at least a 25% drop in sales from a year earlier in at least one quarter. $12 billion was also specifically set aside for minority-owned businesses which have been hit disproportionately harder.
$166 billion for stimulus payments of $600 payments to most Americans (those with incomes under $100,000) and their children.
$120 billion for $300 per week of extra unemployment benefits for the unemployed (to supplement state benefits) for 11 more weeks (until March 14). This also includes an extension of the insurance programs for gig workers and the long-term unemployed.
$82 billion for schools and universities to assist with reopening, including $2.75 billion for private K-12 education.
$68 billion for purchase and distribution of Covid-19 vaccines (to make them free of cost to U.S. citizens) and to help states conduct testing.
$45 billion in transportation aid, including $16 billion for airlines (to pay for salaries of workers and contractors), $14 billion for mass transit agencies, $10 million for highways and $1 billion for Amtrak.
$25 billion for rental assistance to help workers who are unemployed more than 90 days pay their rent and utilities.
$13 billion for farmers and agriculture, including food assistance programs for growers, as well as livestock, dairy and poultry producers.
$13 billion for food assistance for the poor (Supplemental Nutrition Assistance Program)
$10 billion to help childcare centers reopen.
$7 billion to increase access to broadband Internet for the millions of student families of unemployed workers who cannot afford it.
Additionally, rental eviction moratoriums were extended to the end of January 2021 (with many analysts expecting the incoming new administration to possibly extend this). Shortly after this, the Department of Housing and Urban Development also issued a new moratorium extension that protects homeowners against foreclosures until February 28th.
Unemployment benefits were also extended to 50 weeks (from the typical 26 weeks for states before the pandemic).
Mark Zandi, of Moody’s Analytics, summarized what was at stake in creating this package:
“If lawmakers had not come through, the economy probably would have suffered a double-dip recession in early 2021.”
Financial cliff (part 2): Losers of the new pandemic aid law
Still, many pointed out that the final result was far from perfect and significant economic issues were left unaddressed. We’ll talk about those now.
Restaurants and bars left out in the cold
This industry has endured one of the worst economic hammerings of any in the pandemic. And the road ahead is expected to be just as treacherous, with the virus surging and the potential of faster spreading mutations. But the new law provided no direct funding for this industry. And as we’ve discussed previously, the restrictions of the PPP loan program makes that program unusable for many of these types of businesses. So once again, many of these business people found themselves left out in the cold. And many found the snub especially difficult to take, because several other industries (like transportation) received direct funding this time around. The Independent Restaurant Coalition summarized the likely consequences, saying:
“Independent restaurants and bars will continue to close without additional relief this winter, leaving millions more out of work.”
Rental assistance helpful but not enough to avert financial cliff
The $25 billion in rental assistance goes a long way by matching the $25 billion in back-rent that is estimated to be owed by January 1. But, this doesn't cover utilities and late fees, which are significantly more. It also doesn't include the rent that’s expected to be missed at the start of January (which 30% of renters say they have no confidence in paying, per a recent U.S. Census survey).
Mark Zandi, chief economist at Moody’s Analytics, said:
“It’s not enough. I think this is a good bridge to the other side of the current administration, but a lot more building needs to be done to avoid an eviction crisis.”
The co-creator of the Eviction Lab COVID-19 Housing Policy Scorecard, Emily Benfer, said:
“Make no mistake, while the emergency rental assistance is critical, it is a narrow bridge that will not end the eviction crisis or provide safe passage through the pandemic for all renters at risk of losing their homes."
And tenants and homeowners aren't the only ones affected. Shenetta Malkia is a property manager in Washington, D.C.. She said that, in a building she manages, only 3 of the 10 tenants have been paying rent and this has caused severe problems:
"We are bleeding, literally bleeding. It has been horrific. It has been stressful. My owners can’t pay the mortgage. My owners can’t take care of their bills. They’re suffering because we have damage at properties, and no money to fix it. I'm living on hope right now, because there isn't much else."
Not enough funding for crucial transit industry
The reliability of urban bus and rail systems is crucial to supporting the economy of many cities, as well as to the country’s broader economic recovery. But as we've discussed in past articles, the transit industry has been hammered hard. And if ridership doesn't rebound and service cuts become permanent, then we can expect more job losses, and non-transit workers who can't afford alternative transportation will be left stranded. This would be bad not only for them, but for the entire country.
And while the $14 billion allocated will be welcome, Transportation for America's Jenna Fortunati pointed out that:
“This $14 billion is less than half of what the transit industry needs to avoid devastating service cuts and layoffs.”
Student loan moratorium not extended
Unfortunately for students finding it difficult to repay their educational loans, the moratorium on student loan repayment was not extended. This means borrowers will need to resume repaying an estimated $7 trillion in payments to avoid default.
$600 Stimulus checks criticized for being insufficient for the unemployed
In a rare display of consensus across the political spectrum, the $600 stimulus checks came under intense criticism from many. For example:
“Large stimulus” party flips two key seats to control Congress as President-elect demands more pandemic-relief
In the U.S., there are two primary political parties. And we've been calling the one that has been pushing for more stimulus the "large stimulus" party and the opposing party the "small stimulus" party.
This week, the large stimulus party won an important political advantage. As we talked about in previous weeks, the state of Georgia was required by law to have a runoff election for its two senatorial seats, because the results were so close (within 1%). And the large stimulus party surprised many political experts and flipped both of them in their favor.
As a result, they now control the Senate with a 50-50 tie that would be broken by their incoming vice president elect. And this will enable that party to pass a lot more legislation that previously would’ve been blocked. However, achieving that 50-vote hurdle isn’t necessarily a slam dunk. The party itself is diverse, and it will require dealmaking across a wide political spectrum.
Also, many items of legislation require a 60 vote Senate majority to pass (and avoid a fillibuster). So these will be impossible to do without bringing considerable cooperation from the other side of the aisle. And many analysts have noted that, the last time the "small stimulus" party was in a minority position, they successfully implemented a defensive strategy of staying united and blocking as much legislation as possible. So, many are projecting that it will be possible for the large stimulus party to achieve smaller, more moderate changes, but broader, large-scale changes are exceptionally unlikely.
Despite that, there has been growing political consensus that the $600 stimulus checks were insufficient (although many in the "small stimulus" party are still very resistant). And this week, the President-elect called for a new round of checks at $2000, saying:
“People are lined up for miles in their automobiles waiting to get a meal to put on the table for their family.
The overwhelming consensus among leading economists left, right and center is that in order to keep the economy from collapsing this year, getting much, much worse, we should be investing significant amounts of money right now.
If we don’t act now, things are going to get much worse and harder to get out of a hole later.”
As mentioned above, a lot of legislation requires a 60 vote Senate majority (to avoid a fillibuster). And that kind of consensus doesn't appear to exist so most analysts believe it’s unlikely to happen.
But stimulus like this potentially falls into a special category. Since it involves spending changes, it’s considered a unique type of proposal called a "budget reconciliation". And this type of bill would require only a simple majority to pass (meaning just 50 votes).
There are some additional restrictions that limit the use of the budget reconciliation process. For example, the "Byrd rule" (which was adopted to protect the minority party from being overrun by a very slim majority) requires that the change be “sunset” (ended) in 10 years or less. But that could be done with this proposal and wouldn't be an issue here.
So this week, the House leadership announced that they would make passing the $2000 stimulus package the first priority of the new Congress.
But despite all of these factors, many political analyst still believe passage of such a bill is highly unlikely. And that’s because of two potential reasons.
First, the 50-vote threshold can only be achieved by the "large stimulus" party’s 48 members caucusing with two independents. In the past, this has been tricky, although currently, both are expected to agree to more stimulus.
The second reason is more serious. Joe Manchin is a West Virginia moderate from the "large stimulus" party, and his vote would of course be needed to pass the threshold. And on Friday, he said that he opposes writing out new checks:
“I don’t know where in the hell $2,000 came from. I swear to God I don’t. That’s another $400 billion dollars.
If they can direct money and they say, ‘This will help stimulate the economy,’ hell yeah I’m for it. But basically right now, you better get them vaccinated.”
After getting a lot of pushback, Manchin clarified his position, saying:
"I am on board by helping people that need help. People that really can't make it. People who don't have a job. They can't put food on their table. I am in total support of helping them.
"[But] sending checks to people that basically already have a check and aren't going to be able spend that or are not going to spend it, usually are putting it in their savings account right now, that's not who we are. We have done an awful lot of that. It's time now to target where the money goes."
So currently, this appears to be a significant roadblock.
In the new Congress, Manchin (and any swing voters) will have considerable new power to set the legislative agenda. And perhaps that was why he also added his suggestion on a better way to spend the money:
"If you want to spend $2 trillion, $3 trillion: invest it in infrastructure. There's a lot we can do to put people back to work."
New faster-spreading mutation found across multiple states as scientists criticize anemic U.S. response as “a scandal”
As we've talked about in previous weeks, the U.K. has detected a new strain of virus that's much more contagious and spreading faster than the original. The new version has several mutations that appear to dramatically improve the effectiveness of the spike protein, which the pathogen uses to invade the human body. And in a matter of just months, this variant quickly became the dominant strain in London and across many areas of the country. And this extreme contagiousness has been a big problem. To avoid overloading hospitals, the country has had to switch from partial to full lockdowns, and enforce restrictions that are as severe as back in March.
If the virus spreads, then this could be a major problem for economies across the globe. So, some had hoped that travel restrictions might successfully contain it. However as mentioned above, 47 countries have now reported the virus. So this effort appears to have failed.
Additionally, many of the cases appear to have no known connection to U.K. travel. So this suggests that the new variation is already spreading in the community (and it’s too late to be contained). And it’s also possible that the mutation did not even originate in the U.K. (and rather, they just happened to see it first because they are able to test their population the best).
Meanwhile, some experts say the U.S. has dropped the ball on effectively dealing with this potential escalation of the crisis. Dr. James Lu, co-founder and president of the genomics firm, Helix, said:
"The U.S. is not really looking hard. Currently, [it's] doing less sequencing than many other countries. GISAID [a genomics database] estimated that the U.S. is sequencing 0.3% of positive cases versus the U.K., that's at about 7%."
That comes out to be 23x less sequencing genetic sequencing coverage in this country versus the U.K. And it’s widely agreed that this is causing the U.S. to “fly blind”.
Despite this, reports of the new variant still popped up left and right this week. On Thursday, Connecticut said they found two cases from a patient who had traveled to Ireland and another to New York.
Texas reported finding the variant in an adult man who had no history of travel. Dr. John Hellerstedt, DSHS commissioner, said:
“The fact that this person had no travel history suggests this variant is alreadycirculating in Texas.”
Florida also reported the variant in a man who had no history of travel.
Two people in Colorado (also with no history of travel) were found to have the variant, as well as another person in California.
And Pennsylvania, New York and Georgia have also announced the variant exists in their states.
An infectious-disease epidemiologist at Johns Hopkins Bloomberg School of Public Health, Mary Kathryn Grabowski, said:
“The data are really concerning. All signs right now are pointing to the fact that this is something we should be worried about.
Even a seemingly modest increase in transmissibility can mean huge, huge numbers of cases.”
And an epidemiologist with the Johns Hopkins Center for Health Security, Jennifer Nuzzo, emphasized the importance of swift action. She said:
“We are in a race against time. We need to increase our speed in which we act so that we don’t allow this virus to spread further and allow this variant to become the dominant one in circulation. The clock is ticking.”
But many scientists have criticized the U.S. response, saying it's been caught flat-footed. A virologist at the University of Massachusetts Medical School, Jeremy Luban, bluntly said this week:
“The lack of virus sequencing and case tracking in the USA is a scandal.”
And Columbia University epidemiologist Jeffrey Shaman explained how the new variant has the potential to cause significantly negative health and economic effects:
"The spread of the variant could potentially compel public officials to impose new restrictions or delay scheduled reopenings. If [the variant] starts to take over because it is more aggressive, the measures that we’ve had in place that aren’t working that great to begin with are going to be less effective in controlling the virus."
U.S. vaccination effort comes under intense criticism after falling well short of goals
As we discussed in past articles, the U.S. government created a program called Operation Warp Speed to fund the dual goal of developing vaccines/treatments for Covid-19 and to effectively distribute them.
And, while there’s been some minor criticism on the first goal (specifically that it didn’t purchase enough quantities of the Pfizer vaccine), most agree that overall it’s been very successful. Without huge amounts of Warp Speed funding, the Moderna vaccine (which is currently one of only two known effective vaccines against the virus) would probably never have been developed. So this has been an impressive feat.
However, so far, the program is falling well short of its goals on distribution. Initially, the goal was to distribute 20 million vaccine doses by the end of 2020. This would cover initial doses for the estimated 15 million health workers. And it would leave additional 5 million for those most at risk (such as the elderly in nursing homes, first responders and frontline workers).
However, as of January 7, only 5.46 million doses had been administered. This is an immense shortfall of about 68%. And both the federal and state governments have come under criticism for this.
Operation Warp Speed claims they did their job and delivered the doses. And the rest is up to the states to handle.
On the other hand, states claimed that they were told they would receive many more doses than they ultimately did. And when cuts happened, they also received limited or no notice on when doses would arrive. And this caused unnecessary problems.
As an example, in mid-December, several U.S. states including New Jersey, California, Oregon, Nevada, and Washington state claimed the federal government cut their expected allotments of the Pfizer vaccine for the following week by about 40% without explanation.
After Nevada's allocation was slashed almost 50%, Nevada Governor Steve Sisolak said:
“To slash allocations for states -- without any explanation whatsoever -- is disruptive and baffling.”
California Gov. Newsom said:
“We talked to Pfizer ourselves directly. They claim they have more vaccines but are not getting the authorization from the federal government for the distribution, so that’s been a point of frustration -- friction, to be candid with you. It’s been expressed by many, many governors all across the country, regardless of even political party.”
Additionally, the states claimed that the federal government has dropped the ball by not having any uniform messaging or education of the public to encourage vaccination. And this appears to be causing significant problems. Surveys have found that many healthcare workers find the quick speed of the development process of the vaccines to be problematic and many are refusing to be vaccinated. As one example, a surprising 56% of Southeast Georgia Health System’s 2,629 eligible workers opted out of vaccination.
José Romero, chair of the CDC’s Advisory on Immunization Practices Committee and Secretary of Health in Arkansas, said:
“I did not expect to see as much as we’re seeing, at least in my state."
An infectious disease doctor at the Medical University of South Carolina, Krutika Kuppalli, said:
"We spent $10 billion months ago to develop vaccines. Why were we not spending money to introduce the public to the vaccines?
The federal government should have invested more money and started educating the public earlier."
Many analysts claim the lack of federal coordination has also caused unnecessary problems. Due to the absence of standardized rules, every state and county has created their own. And for health systems that span multiple counties and states, this has made it almost impossible to create workable and uniform strategies.
For example, Providence Health System runs 51 hospitals and doctors offices across seven states. But with both counties and states issuing different and conflicting rules, Chief Clinical Officer Amy Compton-Phillips claims the situation is almost unmanageable:
“We can’t keep straight that this vial is supposed to be used for these people and this vial is supposed to be used for those people. We get in trouble because we’re not using it fast enough or we’re giving it to the wrong people.”
Some providers also say the confusion has left them in the dark. The Chief Executive Officer of OneWorld Community Health Centers (in Omaha, Nebraska), Andrea Skolkin, claims she has not received reliable word on when she will receive shots:
“Someone is in charge, but it’s not clear who is."
And the lack of coordination is causing unnecessary waste. One day, the center received some vials of Pfizer’s vaccine from a nearby hospital. These were properly kept cold during the 10 minute drive, but were not transported in the original packaging. As a result, they had to be used immediately.
Skolkin claims OneWorld was only notified at 7:30 AM on Monday morning that the vials would need to be used by 9 AM. Ultimately, the Health Center was still able to vaccinate 130 people in an hour. But they were forced to discard the remaining doses. In a situation where more than 2,000 people are dying every day due to lack of a vaccine, the system appears to be inefficient and difficult to justify.
U.S. Health and Human Services Secretary Alex Azar blamed the problems on choosing to rollout the vaccines during a holiday. And he claimed that the speed will accelerate soon.
And many healthcare workers agreed that the holidays were one issue. But they said that the end of the holidays would not solve the other problems.
On Wednesday, the American Hospital Association urged Secretary Azar to improve the coordination between states, answer questions better and more quickly, clarify expectations and remove multiple barriers that are currently preventing the effective rollout of the vaccines.
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've made some changes but my overall strategy is essentially the same as last week.
Treatment: Back in May many health experts said we wouldn't get a vaccine for at least two years. But, after I saw unprecedented amounts of resources being thrown against the virus week after week (and their successes), I felt this was overly pessimistic. And on May 21st, I said I thought the chances were good that we would have one vaccine by winter (and with luck we might get two). It turns out the world has been very lucky and we ended up with two right before the end of the year. Unfortunately, as I also predicted in late May: these can't be manufactured and distributed in large enough quantities to immediately treat everyone. Most in the U.S. will have to wait well into 2021). So this 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 and the rest will be a long, tough slog. I believe Q4 brought 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 well short of a true V-shaped recovery). And thankfully we have now gotten more stimulus and some brief extensions on eviction/foreclosure moratoriums. So I am not as afraid of immediate double-dip recession as I was just a couple weeks ago. On the other hand, the stimulus itself falls short in many important areas such as restaurants and bars, rental assistance, transit, student loans etc.. And I'm very concerned about the mutated variation making the partial lockdowns we have now ineffective and causing significant economic damage. So, without further stimulus (and a little bit of luck), I'm still concerned we could still have 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. And now we have a faster spreading mutation that could cause significant economic harm. So unfortunately, I still 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 (including by the mutated strain). Unfortunately, this is looking more and more likely. My slim hope is that the 3rd wave can be controlled and kept small. If this happens... and if the US government also passes additional 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. Effective vaccines will eventually trigger the third stage and an accelerated recovery. But this most likely won't be a straight-V recovery, because it will 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. And there are obstacles to this that could slow it down more including bungles with distribution, reluctance of people to take the vaccine, no evidence so far that the approved vaccines will actually stop spread to others ("sterilizing immunity") etc. But, we also could get a little lucky (for example, if we get a successful vaccine treatment that is a newer type that can be scaled up more quickly or is proven to works bette). If so, then the third-stage boost would be faster.
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) could come under heavy stress. Some 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.
In the meantime, that's the review for this week. And I hope you and your loved ones are staying safe and healthy.