How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 5: March 29th Update
Updated: 2 days ago
Beaten and bruised Italy finally turns the corner; Spain in rough waters; New York hospitals may be close to the breaking point; dramatic shift in U.S. public attitude toward shelter-in-place; second wave Covid cities (Detroit, Louisiana, Philadelphia, Boston); the unemployment tsunami; the dramatic stock market surge; a gargantuan stimulus bill; and a groundbreaking study on hospital overload.
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As usual, a lot has happened over the last week. Before jumping in, here's a quick summary of the series so far:
Battered Italy finally turns the corner
On Friday, March 27, Italy had its worst day yet, reporting a new record high of 919 deaths in one day. Its total of 10,000 deaths is now the highest in the world. Hospitals in some areas continue to be overloaded, with doctors forced to ration healthcare. This means they must prioritize healthier patients who are more likely to survive, and have no choice but to deny treatment to some treatable patients (generally more at-risk, older-aged/suffering health conditions) leaving them to die from suffocation, pneumonia, etc. At the same time, a silver lining exists on this dark cloud of human suffering. And it continues to get brighter. As discussed last week, Italy seemed to be showing signs of turning a corner. Their exponential doubling rate (the time needed for deaths to double) seemed to drop from 2 days to 4 days. The good news is that this trend has been confirmed, and it accelerated this week. And doubling time is now unmistakably lower, at 7 days:
And yesterday, Sunday, March 29, Italy showed glimmers of a potentially huge turning point. Since the beginning of the crisis, fatalities have gone up every day. But Saturday marked the first day their number of fatalities actually fell -- to 889. That trend continued Sunday, when it dropped to 756. Hopefully, they have hit their peak. And if so, then there's light at the end of the tunnel (though people caught in the middle may not see it right away). Italy enacted its strictest virus control measures on March 21 (9 days ago). Since it takes time for the virus to produce symptoms in an infected person (about 5 days typically) and longer to eventually kill them, control measures must be in place for 14 days before results become fully visible in the mortality statistics. So it seems reasonable to hope that even more positive news may develop in the coming weeks.
Spain's Very Bad Week
Meanwhile, Spain experienced its worst day yet, with 838 deaths bringing their total to 6528. As in Italy, Spanish hospitals and ICUs are overloaded, forcing doctors to ration care and leave certain treatable patients to die. However, similar to Italy a week ago, Spain is also showing signs of reaching a similar inflection point. Spain implemented a virus control travel lockdown on March 16. The results from this appear to be finally showing up, as Spain's exponential growth rate dropped slightly from every 2 days to 3 days (see above graph). This is only one day's worth of data, but if Monday and Tuesday continue this trend, then they're in the same place today that Italy was, one week ago. Hopefully, they will continue to bend the curve down. In the meantime, Spain (along with Italy, France and 6 other EU countries) asked the EU to issue "Coronabonds": collective debt instruments to help finance pandemic responses, treatments and economic support. But Germany, Austria and the Netherlands have so far rejected the idea. Without a large EU-wide stimulus, the euro zone may be in for a long and slow economic recovery once the immediate health crisis is over. In contrast, the U.S. is responding with aggressive stimulus acts in the hopes of facilitating a faster recovery. (See later in this article).
New York hospitals near breaking point. US death rate not improving.
Meanwhile, U.S. total deaths reached a new high of 2,100 yesterday. The virus has now spread to every U.S. state and territory, and evidence of community spread (i.e., spread that officials can't account for from known infected sources) appears to be high in many areas. This suggests that the actual infected are far higher than official statistics show. Fortunately, Covid deaths are a little more obvious and less likely to be skewed than Covid infections. So this article will focus on that statistic, instead. Right now, New York City is Ground Zero (a term they probably hoped never to hear again) for Covid-19 in the U.S., and getting hammered the hardest. So far, 1,100 people have died and the state says many hospitals are stretched to capacity. New York now believes a peak in cases will hit them earlier than expected, so hospitals will have less time to prepare for the overflow. And the state doesn't have enough medical personnel, critical supplies to protect them (i.e., PPE, or Personal Protective Equipment, including facemasks, garments, sanitizers, etc.) and ventilators to deal with the emergency. Retired medical workers from surrounding states have flooded in to help. After a photo of nurses having to wear garbage bags as protective gear when viral, thousands of at-home volunteers began hurriedly sewing homemade surgical masks. (A health worker died from Covid-19 in the same hospital due to lack of adequate protection.)
And a Naval Hospital ship will be docking in New York Harbor on March 30 to provide much-needed additional beds. One encouraging sign: the flip-side of nearing the peak of infections is a slowdown in deaths. New York City's death doubling rate has dropped dramatically from what it was last week to now just once every 6 days. New York also enacted a statewide stay-at-home policy on March 20 (9 days ago). So the numbers should continue to improve over the next week. At a national level, however, the overly speedy death doubling rate remains unchanged at every 3 days. This is the same as it was a week ago, giving many the impression that the U.S. is squandering precious time. Cities that appear likely to take the brunt of the second U.S. wave include: New Orleans, Detroit, Philadelphia and Boston. A number of prominent public health experts are advising that a nationwide lockdown is needed. But, unlike in Italy and China, it's unclear if the power of the U.S.'s national government over its states includes the legal authority to overrule them on local public health policies. The national government could use the "bully-pulpit" to effectively achieve its goals, but it currently appears to have no appetite to do this. So, currently, each state is on its own, and predictably the responses have been all over the map. Currently, 21 of the 50 states have implemented some sort of shelter-in-place lockdown. And these themselves are all different, ranging from lenient to strict. Meanwhile, the attitudes of individual Americans appear to be changing rapidly. Just a week ago, only a slim majority (55%) of Americans said they were practicing social distancing. This week, a small poll suggests that's increased to an overwhelming 91% who said they are "staying home as much as possible". Self-reporting polls can be skewed by people who are embarrassed to admit that they're not doing the "right" thing, and so lie. But still, at least this shows that the overwhelming majority now knows what they *should* be doing (which was not the case last week). This change in behavior might be expected to show up in the official statistics after about 14 days or so (around April 10).
Economists and analysts warned us that virus control measures would cause a tsunami of jobless claims. But the sheer number and the speed still surprised some when an explosion of 3.28 million claims followed. This was 3 times higher than the worst month in any of the last 6 recessions (August 1982, 671,000), and the worst since records were kept in 1967 .
Many state unemployment offices reported that they could not keep up with the immense volume of people who were filing. So the actual number of unemployed is probably significantly higher. Unfortunately, there's no evidence in sight of the peak (much less the end) of the large volume of jobless claims. Per Bloomberg economists, "[t]he volume of applications overwhelming state administrative offices suggests additional million-plus weeks for initial claims may lay ahead."
Gargantuan Economic stimulus
To offset the enormous economic damage to both individuals and businesses, both houses of Congress passed a $2.2 trillion coronavirus stimulus bill. This was signed by the president and became law this week. Desperate times call for big actions. And the stimulus is the largest spending package in the history of the U.S. It's more than twice as large as the Great Recession package ($831 billion), and will cost a breathtaking 10% of GDP. To put it another way, it's more than half of all the money the U.S. is expected to bring in via taxes this year (57% of $3.5 trillion). It's made up of several parts: 1) Individuals ($290 billion): Most individuals will get $1200 checks (phased out for those making over $75,000 single/$150,000 married). Parents with children under 17 will receive a $500 check for each child. The IRS plans to send the majority out by direct deposit "within 3 weeks". 1b) Unemployment insurance ($260 billion): Laid-off workers will receive an additional $600 per week on top of the state unemployment benefits (which range from $200 to $550 per week). Normally, unemployment is only available for traditional workers, but the law extends benefits to independent contractors, self-employed and gig economy workers. Those looking for immediate help may not get it so soon. Distribution of the entire package is expected to take "several weeks at least", depending on where the individual lives. 2) Small businesses loans ($350 billion): Small businesses (with less than 500 employees) employ 52% of private-sector Americans. And this package gives them loans from the Small Business Association under very favorable terms. If the company uses them to pay wages, utility costs, rent, mortgages (and doesn't lay off any workers) then the company doesn't have to pay them back. In other words, they become a grant (free money), rather than a loan. Some have expressed the concern that there doesn't appear to be enough money in this pot to cover all the small businesses. So if you think you might benefit from this, you will want to file as quickly as possible. These business loans typically take months to acquire, but this law eliminates the normal requirements for collateral and personal guarantees. This should speed up the processing time. But as of this date, many SBA lenders say they have not gotten full guidance on how the process will work. And some have expressed concern that the existing loan application system may not be able to handle the expected load. If this happens, companies may end up receiving needed relief later than expected. 3) Big businesses ($504 billion) grants and loans: $25 billion in grants for airlines, $17 billion for companies critical to national security (written to primarily benefit Boeing) and $425 billion for other businesses. The business loans are allocated through a funding mechanism set up by the Federal Reserve. Firms who receive bailout money can't increase executive salary or issue stock buybacks for a certain amount of time. 4) Other: the spending package includes numerous other things, such as business tax cuts and deferrals, payroll tax delays and increases in interest deductions. Another $100 billion was also allocated to hospitals and providers to be used for protective gear, testing supplies, emergency operations centers and other necessities. And $180 billion was allocated for emergency aid for state and local governments. https://www.washingtonpost.com/business/2020/03/26/senate-stimulus-bill-coronavirus-2-trillion-list-what-is-in-it/
Will it be enough?
The idea of the stimulus package is to tide businesses and people over until virus control measures are finished. If that happens, then the hope is that the recovery will be rapidly upwards and "V-shaped". However, some lawmakers, state leaders, health experts, and consumer advocates warn that even this record-breaking package may not be enough to do that. Many state unemployment funds may be pushed to insolvency by the expected incoming rush. And many state budgets were already squeezed by falling revenues before this crisis, and will have trouble continuing to run without another injection of cash. The states are saying that they will need a lot more. Many health companies are saying that the unanticipated costs, of the PPE (personal protective equipment) and other items, required to contain the virus, will not be met by the current package. So they, too, argue that much more assistance is needed. For individuals, a one-time $1200 check plus unemployment does not provide a living wage in many areas of the country. If the shutdown lasts more than a month or so, these people will also be needing more assistance. And as mentioned earlier, the existing pot for small businesses may end up being too small to help all the businesses that ought to qualify. As a result, some lawmakers are already working on a second stimulus bill.
Stock market rebound
Early in the week, the Federal Reserve announced it would support the economy by purchasing hundreds of billions of dollars in government debt and extending loans. Then, the above-mentioned stimulus bill made its way through Congress and became more and more inevitable. This one-two punch helped power the Dow to its best weekly performance since June 1938 (12.8%). The Dow still has a long way to go before it recovers to its former highs (currently at -22%). But, for investors who withstood 2 weeks of steady losses, this week was a very welcome change of pace.
Groundbreaking analysis of US hospital overload
As mentioned in part 1, a pandemic's greatest danger lies in its exponential growth and ability to overload hospital systems. When overload happens, patients have to be denied care and many who would've survived are left to die. This can cause the mortality rate to soar dramatically. To analyze this risk, the University of Washington has created what I believe is the first state-by-state analysis of hospital overload. They've taken a lot of steps to provide the most accurate information possible in a very difficult-to-pinpoint situation (discussed next). If accurate, the results are either fascinating, relieving or chilling (depending on which part of the country you're looking at). Update 3/31/2020: White House coronavirus task force adviser Dr. Deborah Birx has now officially mentioned these U of W projections, and suggested "the model is close to how government experts see the situation". Before getting to the results, here's how they created it. They compiled detailed information on the number of beds, ICU occupancy and other statistics on every state. And then they combined these with the existing U.S. mortality rates in each state, along with the virus control measures in each, to come up with projections for when the peak can be expected and how high it will be. They deliberately ignored the claimed U.S. infection rate (since we know that the U.S. is only testing a small percent of the infected and the numbers are skewed). And they warned that they had to guess as to how much each control measure affects outcomes. They assumed a 25% effect for implementing each of the 4 measures done in Wuhan, but acknowledge it's possible that all of them may be required together to get the maximum effect, which would throw off the projections (in a negative way). So, with those caveats, let's look at the data. If accurate, different states can expect to see very different outcomes. For example, here's Florida.
Florida enacted control measures earlier than most, and before there was significant spread. It's also a warmer state and there are some suggestions that this may slow the spread of the virus. If so, that's also reflected in this model because it uses the existing mortality data. Most importantly, Florida hospitals have a very large amount of beds available.
Florida's death peak is pushed out a lot further than other states' peaks, until the middle of May. This is the goal of "flattening the curve". The idea is to spread out the load over time so that the healthcare system can handle it. In this case it looks like Florida would handle it pretty well. Under the most probable scenario it will have enough hospital beds and ICU beds to handle every patient without going into hospital overload. (Note that they didn't analyze the ventilator overload aspect of hospital overload because of some difficulties getting accurate data from each state. So they simply say it's expected to need 451, and Florida would need at least that, to avoid problems there). Like all good projections in an uncertain situation, they don't give a single "magic number" but a range of possible outcomes. What's good for Florida is that even in the worst scenario, it still doesn't exceed its hospital bed capacity (although it does slightly exceed ICU beds). All in all, this is about as good an outcome as one might hope for at this point. On the other hand, the picture isn't as pretty in some other states. Here's Michigan (home of Detroit, which is expected to be one of the hotspots of the second U.S. Covid wave):
If the model is accurate, the peak in Michigan will come a lot sooner than in Florida: middle of April. And the results are very unpleasant. Michigan is projected to experience a brutal double hospital-overload: not enough hospital beds (10,563 short) and not enough ICU beds (2,564 short). If some way can't be found to dramatically increase capacity, the Michigan mortality rate would be expected to skyrocket (versus Florida). Other states projected to have similar problems are Louisiana, Massachusetts, New York and Vermont. You may want to check your own state, to see what the projections are. The authors note that at this early stage of epidemic, data is scarce. So even a couple extra days of mortality statistics could change things significantly. As a result, they will be updating the model every few days. I'll definitely be checking back in from time to time, and you might want to do so, also. This report also predicts total deaths. Note that they did not try to estimate how mortality will be affected by hospital overload, as that depends on variables that are impossible to know in advance (how shall doctors decide who will and will not receive care, etc.). So these death projections do not include deaths resulting from hospital overload. If they did, then the number of deaths would be significantly higher.
FDA authorizes new Covid tests
Adequate testing will be vital in getting the virus under control and rebooting the economy faster. This week, the FDA granted emergency approval to several new tests.
A new testing device from Abott can tell patients if they have the Covid virus and doesn't require a lab. It produces the results in 5 - 15 minutes. The former FDA commissioner, Scott Gottlieb, called this a "game changer". The company believes it will begin production next week, with the goal of creating 50,000 tests a day and 5 million by April.
Multiple manufacturers of antibody blood tests. Unlike RNA tests (that can only tell if the patient is currently infected), these can tell if the patient was ever infected by Covid. Such people are likely to be immune to the virus for at least some period of time and would be free to leave their homes and be invaluable in rebooting the economy. Some produce results in just 15 minutes. However, the FDA has not yet reviewed the tests for accuracy which may ultimately limit usefulness.
See the April 5th update on the following: Pummeled Italy crawls out of the abyss and plans for what's next; Other countries show how to "bend the curve"; U.S. fails to lower mortality rate and U.S. Surgeon General warns of "hardest and saddest week" since Pearl Harbor; U.S. lock-downs update; Unemployment claims shatter the previous staggering record; The promise (and controversy) of South Korean "contact tracing"; Promising drug trials and new tests