How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 46: January 16, 2021.
Updated: Sep 20
Third U.S. death wave continues tragic march upwards; Crystal ball: U.S. infections continue to surge to record highs (again); World round up: South Korea regains some control, as the majority of Europe stumbles and U.K. is manhandled by mutant strain; “More spread, more cases, more deaths”: CDC predicts highly contagious U.K. variant will be dominant strain in U.S. by March; New South American mutation may be worse than U.K. variant (and may even re-infect those who’ve already had the disease); State Roundup: Exhausted medical staff and over-stretched hospital systems continue to be "Pushed to the limits"; Georgia’s bellwether economic recovery: A mixed bag; Unemployment ominously surges the most since March; Dismal December retail report deemed “absolute disaster” for consumer spending; Financial cliff: 3rd stimulus put on the table; Convalescent plasma therapy flunks early tests as an effective Covid-19 treatment; Update on my portfolio strategy.
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This week there was a flood of new information on virus spread, economic impact, investment repercussions, the financial cliff, and two faster-spreading mutations.
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 U.S. death wave continues tragic march upwards
For the 36th 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 402,319 (versus 381,497 last Saturday morning). Here's a quick summary of what's happened so far:
1. 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.
2. 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.
3. 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 is a bad graph. After what turned out to be a temporary reprieve over the new year, deaths resumed climbing. And they set new records this week for both the third wave and 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 new mutated strains, 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: U.S. infections continue to surge to record highs (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?
There was a tiny drop in the U.S.’s new infections at the end of the week. But despite this, they still rose considerably from last week. And this shattered all previous records for both the third wave and the whole pandemic.
The third 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 multiple vaccines with which to fight the disease. But, the rollout for these has been going much slower than expected (see January 9th issue). And there’s also now new mutated strains, which spread more easily than previous strains (see section below). So we’ll watch to see how these conflicting factors play out over the next couple of months.
World round up: South Korea regains some control, as majority of Europe stumbles and U.K. is manhandled by mutant strain
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 for the second week in a row, South Korea’s deaths plateaued. And at the end of the week, they even dropped a bit. This is an encouraging sign and suggests that they may be turning the corner on their third wave. Let’s hope this continues for them next week. 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 (and will look at them in three more weeks).
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?
This was a disappointing week for Spain, as deaths climbed. This also broke a previous streak of two months of consecutive declines, during which Spain appeared to have things under control. Meanwhile, new infections hit a record high in Spain on Wednesday, at 38,869. This suggests rough waters may be arriving in the next several weeks.
Madrid’s health chief, Enrique Ruiz Escudero, pointed out that this worrying development is at least partly due to factors outside of Spain’s direct control. When asked whether the highly contagious “U.K. variant” might have been a possible factor, he said:
“Clearly, it has played a role in the increase in infection.”
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?
Belgium had a better week, compared to the week prior. And after appearing to plateau slightly, they resumed their downward trend.
On the other hand, Netherlands and France had bad weeks and moved in the wrong direction.
And the U.K. did the worst, and is actually accelerating upwards. If this continues, it will mean they have now lost control of this wave. Many experts believe this is due to a new and highly contagious mutated coronavirus strain, which is now the dominant strain in the country. Known as B.1.1.7, this new mutation contains modifications to the spike protein, which the virus uses to invade its victims. And these changes are believed to be why it spreads 50%+ easier. Most worryingly, B.1.1.7 has also able to spread in spite of partial lockdown methods that had effectively contained the original. And so, many fear that the only way to avoid hospital overload may be to enact economically crippling full shutdowns.
“More spread, more cases, more deaths”: CDC predicts highly contagious U.K. variant will be dominant strain in U.S. by March
As of Saturday morning, scientists reported that the U.K. variant has now been found in 54 countries (up from 47 last week). And it has now been detected in every major continent across the globe. Second stage activity (person-to-person transmission inside a country) has been detected across Europe, North America and parts of South America:
Meanwhile, the CDC put out a sobering report this week, concluding that the new strain may become the dominant one in the U.S. as quickly as two months from now.
As mentioned above, the U.S. is currently spiking and losing control of its third wave even without this new complication. And this has already caused hospitals in some areas to overload and deny care (which has caused a spike in deaths). So, the CDC’s infographic made the threat posed by this new strain crystal clear:
“MORE SPREAD — MORE CASES — MORE DEATHS”
New South American mutation may be worse than U.K. variant (and may even re-infect those who’ve already had the disease)
Meanwhile, some health experts are warning that those preparing for a fight against only one mutation may be bringing a knife to a gunfight.
As mentioned earlier, an independent mutation that occurred in South Africa also appears to be more contagious.
And in recent weeks, scientists have discovered another variant in Manaus, Brazil. And some fear that it could be even more problematic than the U.K. strain.
We discussed the sad situation of Manaus back in September.
The city never imposed a lockdown, nor required social distancing, nor the wearing of masks. Additionally, Brazil’s leaders expressed skepticism about the severity of the virus, and mocked virus control measures. And in a matter of months, this unintentional experiment in “herd-immunity” caused a horrific number of deaths. With frightening speed, a staggering 1 in every 500 people were killed (which would be equivalent to 650,000 deaths in the United States). Hospitals overflowed, along with morgues. And photos documented tragic scenes of mass graves and assembly-line funerals that were put in place to deal with the almost unimaginable death toll:
Several months after this carnage, however, something interesting happened. Infections and deaths started to fall, and then dropped to almost nothing.
Many scientists thought that perhaps Manaus had hit “herd immunity”. This is the point at which so many people have previously been infected and become immune that the disease can no longer effectively spread. Later, a study was published in Science magazine by researchers from Imperial College London and the University of Oxford, suggesting that 75% of the population had been infected by the disease. And this seemed to confirm the “herd immunity” hypothesis for many. But either way, most assumed that the worst was over. Unfortunately, beleaguered Manaus is now under siege once again.
Alarm bells started to ring in December, when scientists noticed infections rising again. Then hospitalizations and deaths rose, too.
Nuno Faria, who was one of the co-authors of the Science paper, was stunned:
“It was hard to reconcile these two things.”
So he and his team began looking around for clues on what might be happening.
Meanwhile, the crisis accelerated as Manaus hospitals were once again stretched past their breaking point. And this week, Brazilian Health Minister Eduardo Pazuello described the healthcare system as being in "collapse."
Multiple doctors and nurses have taken to social media to plead for oxygen supplies (which have run out across the city).
For example, one nurse made an emotional report, saying:
“Oxygen has simply run out across the whole unit today. There are so many people dying. We're in an awful state. If anyone has any oxygen, please bring it to the clinic.”
Jessem Orellana, from the Fiocruz-Amazonia Scientific Investigation Institute, confirmed this is happening across the city, and said:
“This is an unprecedented calamity. Some hospitals in Manaus have run out of oxygen and are becoming a type of suffocation chamber for patients. In the coming hours, Manaus is going to be the protagonist of one of the saddest chapters of the Covid-19 epidemic in the world.”
As the crisis escalated, Nuno Faria continued to investigate. And on Tuesday, he posted some startling conclusions on the website www.virological.org. To examine the mystery, Faria had first gathered samples. And studying these showed that 13 of the 31 samples collected contained a completely new viral lineage which he called P.1. This new mutation appears to be driving Manaus’ new wave.
And while more research is needed, there is obviously a reasonable possibility that P.1. may be able to circumvent the defenses that the human body erects after fighting off the original coronavirus (defenses that normally make a person immune to a second infection). And if so, it would be able to reinfect the population all over again and essentially start a second pandemic. So Faria and other researchers are continuing to move as quickly as possible.
Two days later (this Thursday), the World Health Organization (WHO) convened an emergency committee to discuss the new variants and what kind of travel restrictions they might recommend. However, it may already be late too late to contain P.1. As Faria was putting the finishing touches on his Science article, the variant had already been detected in a traveler who had flown from Brazil to Japan. So, due to our interconnected modern world, the virus may have already flown the coop.
Other researchers pointed out that perhaps the P.1 variant is just much more transmissible than the original, and therefore similar to the U.K. variant.
Either way, Georgetown University virologist Angela Rasmussen pointed out that the U.S. appears poised to be caught yet again unprepared for what could be a new onslaught. This week, she said:
“I’m puzzled why [this] isn’t a bigger part of the conversation. The U.S. hospital system is at capacity in many places and further increases in transmission can tip us over the edge where the system collapses. Then we’ll start seeing potentially huge increases in mortality.”
State Roundup: Exhausted medical staff and over-stretched hospital systems continue to be "Pushed to the limits"
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:
1. 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.
2. 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?
These graphs aren’t great news for Arkansas, as infections, deaths and hospitalizations all increased from last week. And all have set new pandemic highs. On the positive side, there was a slight tapering at the end of the week. But it’s too soon to tell if this is a real trend downward or just noise. The Chief Clinical Officer at the University of Arkansas for Medical Sciences (UAMS), Dr. Rawle SeuPaul, said
“We are pretty much, on a daily basis, at capacity. I’m nervous for the weeks to come because we have several more weeks of increasing volumes of COVID-19 patients. And my concern is that, it's not just UAMS, it's all the hospitals across our state that are really pushing their limits in terms of capacity."
Let’s take a look at North Carolina:
North Carolina’s graphs are almost a carbon copy of Arkansas’s. These are three bad graphs with new infections, hospitalizations and deaths all climbing. And all set pandemic records. And at the same time, there was a slight tapering at the end of the week. So let’s hope this might be a sign of a change to come (rather than just noise).
Meanwhile though, hospitals and their staff are exhausted and continuing to struggle. Tatyana Kelly is Vice President of Planning, Strategy and Member Services at the North Carolina Healthcare Association, which is an organization with roughly 130 member hospitals. And this week, she said:
“Hospitals are under a lot of strain. It’s not just the increase in cases, it’s also a lack of staff availability.”
And Greensboro-based Cone Health (a hospital provider) currently estimates that all their facilities will overflow 100% capacity on January 22:
Sherri McGovern is a retired nurse in North Carolina, who was brought back in to help beleaguered front-line workers. This week, she said:
"You can see that the teams are tired. It has been very scary to see the numbers rise, especially here in Mecklenburg County... seeing so many of our community members in our ICUs and seeing ventilator rates go up. They're waiting for that turn, that turnaround."
So we will continue monitoring these states (and others) to see what happens.
Georgia’s bellwether economic recovery: A mixed bag
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 to this point, the Georgia experiment has failed to achieve its goal of a V-shaped recovery. And this is why I called a halt to the weekly monitoring of the state and am only now checking in monthly. And this week it’s that time again. So let’s take a closer look at the following Covid-19 sensitive industries: dining, retail, hotels and fitness:
Out of all of them, apparel is doing the best at just a -3.01% footfall versus this week last year. While this might be disappointing in normal times, this is actually a very good performance compared to what we’ve seen at other times during the pandemic.
Hotels are looking more painful at -6.29%. Still, things could be worse.
On the other hand, the low-profit-margin dining is hanging by a thread at -16.69%.
And, fitness is looking practically comatose at a horrifying -35.3%.
So, on one hand, some of these industries appear to have improved. Others however, are still languishing badly. So it’s a little bit of a mixed bag.
We’ll take a look at these again next month and see how things are going.
Unemployment ominously surges the most since March
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 965,000 people were newly unemployed. And this shocked many forecasters who were expecting a drop from last week’s 787,000 (rather than an increase):
Instead, 178,000 more people lost jobs this week than last week, as the jobs recovery backed up into reverse. And this was the biggest surge in unemployment since early in the pandemic, in late March.
So at this stage, we are nine months into the pandemic, and still getting weekly job losses that are more than three times the pre-pandemic level (216,000 in February of 2020). Back in June, few expected the continuing damage would ever 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 24 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 climbed, by 199,000, to 5.27 million. So that wasn’t too encouraging, either.
Dismal December retail report deemed “absolute disaster” for consumer spending
Meanwhile, the U.S. economy is driven primarily by the U.S. consumer. This is why many people watch the monthly retail report very closely, to see what consumers are doing.
On Friday, the U.S. Commerce Department put out the latest numbers for what’s normally the busiest season of the year: the December holidays. And the results were painful to view:
Total retail receipts fell -0.7% from November, after November itself was revised to a worse-than-originally-reported -1.4%. The disappointing results came from weaker sales at department stores, online merchants and restaurants.
Retail sales excluding automobiles declined at -1.4%, which was the most since April. And the metric some consider to be most reflective of underlying consumer demand (“control group sales” which exclude food services, car dealers, building material stores and gasoline stations) plummeted even more, at -1.9%. This drop was the steepest in eight months.
The chief economist at Amherst Pierpont Securities, Stephen Stanley, said:
“The December retail results were an absolute disaster. Clearly, consumer spending slowed down sharply in November and December as the virus gained ground and forced closures of stores and restaurants in many key states.”
Later in the week, the University of Michigan put out its monthly consumer confidence poll.
It showed that U.S. consumer confidence cooled in January, dropping from an already depressed 80.7 rating to a 79.2.
Financial cliff: 3rd stimulus put on the table
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:
1. Impending collapse of crucial safety nets: This spring, 10-12 million people who lost jobs due to the crisis are scheduled to lose critical benefits they're currently depending on. These were provided by two government programs (the CARES Act in mid 2020 and extended by the second stimulus passed at the end of 2020). The first safety net 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 24-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. Both of these programs expire in March 14, 2021. If that happens and these workers don't get any additional help, then the damage to the economy would be severe, immediate and potentially long-lasting.
2. Foreclosure and rental eviction tsunami: on January 31st 2021, moratoriums on evictions and foreclosures are scheduled to expire. If this happens, 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 totalling $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.
3. 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 lifted. So this 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 2019), 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.
So this was welcome news. But there were some notable issues with this.
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. Surprisingly, 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 abandoned. Some analysts calculate this will "leave 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 or late fees, which are significantly more. It also doesn't cover any of 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.”
Not enough funding for crucial transit industry: As Transportation for America's Jenna Fortunati pointed out: “This $14 billion is less than half of what the transit industry needs to avoid devastating service cuts and layoffs.”
$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 as being too skimpy to be effective.
Covid-19 has caused budget shortfalls in majority of U.S. states: The layoffs and business bankruptcies have collapsed the tax bases in many states. As a result, many are suffering huge budget shortfalls. And at the same time, they are being asked to do more for public health including distributing key vaccines as well as tracking and managing the difficult pandemic itself. And there was no aid in the second stimulus law for states.
So there has been a push for more pandemic aid and stimulus.
And this week, the President-elect put forward a $1.9 trillion proposal that included more direct household assistance, jobless benefits, state aid, and additional money for vaccine distributions, schools and childcare.
How likely is this to pass?
As mentioned last week, the President-elect's party (which we’ll the "large stimulus party") controls a majority in the House. So political analysts don’t expect any problems with the proposal there. On the other hand, the large stimulus party holds only a very slim effective-majority in the Senate over the opposite party (which we’ll call the "small stimulus party"). Technically, it's not a true majority, but a 50-50 tie. The Vice President-Elect would be the tiebreaker, and she belongs to the large stimulus party. So this gives the latter an effective majority. Thus, the Senate is the main obstacle for this new proposal.
Normally, 60 votes are required to bypass a filibuster. And, it's unknown whether the opposing party would cooperate with some or even any of these proposals. So, this kind of cooperation is not expected to be helpful in passing the proposal.
If the 60 vote threshold fails, then the next step would be to pass the law via the budget reconciliation process. This is a very special process that can only be used on laws that are limited to federal revenue, spending and deficits. And the important thing is that this process allows approval with just 50 votes plus the Vice President.
However, a possible challenge for the large stimulus party, is that the loss of even a single vote in their block would cause the bill to fail. And as mentioned last week, Senator Joe Manchin, a West Virginia moderate from the large stimulus party, said he opposes sending out new stimulus checks. So this is a potential stumbling block.
However, a few members of the "small stimulus" party have counterintuitively signaled that they might support these checks. Originally, most opposed it, but the outgoing President put his weight behind a larger stimulus, which caused many to change their position. So now, many political analysts believe that some sort of stimulus check is likely.
Some items of the proposal are believed likely to be passed by the Senate in a united 50-vote "large stimulus" block. These include extension and expansion of employment benefits, expansion of tax credits for pandemic-related aid, and money allocated to vaccines, virus testing, state and local aid, schools and childcare.
On the other hand, some other items in the proposal are considered unlikely to survive. Those include a mandate that employers must provide paid leave for sick employees, and the creation of a new Covid-19 protection standard for frontline workers.
However, since the margin between victory and defeat is currently so narrow, no one really knows for sure what will happen.
So we will continue to monitor and see.
Convalescent plasma therapy flunks early tests as an effective Covid-19 treatment
As we discussed in previous months, many health experts thought that convalescent plasma would be an effective treatment in fighting Covid-19.
And this week, early results were released from an eagerly anticipated study. This was a large, randomized trial done in the United Kingdom with 10,400 patients.
Researchers reported that 18% of patients who took convalescent plasma died within 28 days. Unfortunately, that's the same chance of dying that those who didn't receive the plasma also had. And this means that taking convalescent plasma doesn’t make any difference at all.
So this was extremely disappointing to many.
Still there is a slim hope that there might be some specific subgroups where convalescent plasma may still end up being effective. So the study will continue until that is fully explored.
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.