How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 52: March 13th
Updated: Sep 20
Micro-edition update; U.S. continues to make progress battling down third death wave; Crystal ball: Progress on third wave of infections ominously slows at dangerously high levels as threat of mutants loom; World round-up: Mutants cause South Korean progress to stall out and forces Italy back into lockdown amid fresh new wave; Poll finds disturbing numbers of Americans say they will not get vaccinated; Update on my portfolio strategy.
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This week is just a micro-version of the usual update, because I had a lot on my plate. So we will just look at the latest statistics on viral spread. Next update (in two weeks), we will do a full update containing the usual details on state-by-state spread, unemployment, the stimulus package, mutant watch, and latest news.
This article is part of a multi-article series that's been published weekly since the pandemic began, back in March 2020. After this week the series is moving from weekly to a bi-weekly schedule. So the next update will be in 2 weeks (rather than 1) 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.
U.S. continues to make progress battling down third death wave
For the 59th 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 546,567 (versus 523,092 on Saturday morning, two weeks ago).
Here's a quick summary of what's happened so far:
The first U.S. death wave started in early March 2020. It spread 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 2020. This ran predominantly through urban areas in the Sun Belt. It peaked on August 1st, before falling until October 8th 2020.
Then, the third death wave began on October 9th 2020 and, unlike earlier waves, was led by rural areas. Later though, it spread across the entire country and surged in all areas, which made it more difficult to contain and fight than earlier waves. In late October 2020, this caused acute shortages of critical drugs and key medical personnel needed to fight the disease and limit deaths. Then in November, it caused hospitals to overload in certain areas of the country. When overload 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. This wave peaked in late January of 2021 and began to subside in mid-February 2021.
How did things go this week?
This was a very encouraging graph and good to see. Deaths have continued to trend down since their peak in the third wave at the beginning of 2021. And while the numbers are still very high (and worse than anything in the second wave), they are continuing to move in a positive direction. Let's hope this continues.
Crystal ball: Progress on third wave of infections ominously slows at dangerously high levels as threat of mutants loom
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?
On one hand, new infections are still heading down. So the U.S. is staying in control of the third wave. On the other hand, the pace of improvement over the last week and a half appears to be slowing down significantly. It's too early to call this definitively a trend. But, if it continues, then the third wave’s recovery may be in jeopardy.
We'll continue to monitor and see.
Meanwhile, the specter of faster-spreading, more difficult-to-kill variants, continues to loom.
About a month ago, the CDC forecasted that the U.K. strain would become the dominant one by late February to early March. Due to poor genomic testing in the U.S., it's unclear if that ended up happening on schedule or not. But what is clear is that, so far, the expected deluge of cases, predicted to accompany it, has not occurred.
Some experts have begun wondering if this means we have managed to dodge a bullet. After all, vaccinations are now starting to move into higher gear.
Others have warned that with significant percentages of the population unwilling to take the vaccine, herd immunity may be difficult to achieve. And if so, then we may not be in a state of victory, but just temporary reprieve. This week, Kevin McCarthy, a microbiologist at the University of Pittsburgh’s Vaccine Research Center warned that the virus may not be as easy to defeat as some are expecting:
“We’ve been underestimating the capacity of the virus to evolve since the beginning of the pandemic.”
Yet despite this, many states have continued to relax restrictions.
Director of the US National Institutes of Health (NIH), Dr. Anthony Fauci warned such moves were premature:
"When you see a plateauing of anywhere between 50 and 65,000 cases a day, that is absolutely no time to declare victory. Because we know from previous surges that we had over the year, that when you see that leveling off at a high level there's always the risk of a surge back up. And in fact, unfortunately that is exactly what is happening in Europe right now. They had the same kind of decline. They always seem to be a few weeks ahead of us in the dynamic of the outbreak. Then they plateaued. Because they pulled back a bit and thought they were home free. And they weren't. And now they're seeing an increase up. We have to avoid that. To pull back now, prematurely would be ill advised."
Poll finds disturbing numbers of Americans say they will not get vaccinated
Meanwhile, a PBS poll found that 49% of US men who identify themselves as belonging to one major political party, say they have no plans to get the coronavirus vaccine. The poll surveyed 1,227 adults from March 3 to March 8. And it found that overall 30% of Americans say they do not want to be vaccinated.
Leana Wen, a professor at George Washington University and an emergency physician, said after viewing current statistics:
"This may not be enough to reach herd immunity."
World round-up: Mutants cause South Korean progress to stall out and forces Italy back into lockdown amid fresh new wave
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 -3.5% hit to GDP).
However, in late 2020, South Korea experienced a third death wave that was more difficult to control. And while this wave was minuscule compared to other countries’, South Korean officials were still very concerned and have announced stricter lockdowns. Then in early 2021 the country also discovered the presence of the new mutated strain of the virus (which spreads more quickly and is more difficult to contain).
How are things going now? This week, South Korea looked like this:
This week was mixed. While South Korea is still maintaining control of the third wave, progress appears to have plateaued. And it’s currently at higher death rates than the peak of the second wave.
This wasn't a great week for South Korea. Deaths dropped and then rose, to end up higher than they started. Still, it's too early to say that progress has definitely stopped or the trend has changed, based on just one week. So we'll continue to monitor them.
Meanwhile, how’s 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’ve reversed 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 switched to a two-month schedule, and will look at them in detail in four more weeks.
Meanwhile, the other nations in Europe were hit by a brutal second wave of deaths starting in August 2020. After enacting a variety of new lockdowns many started to get it under control by December 2020. But then new, mutant strains hit in January 2021 which are much more contagious than the original version, and more difficult to stop. As hospitals overloaded, this forced many of them to enact economically crippling, full lockdowns. then in early February 2021 these finally began to take effect and improve things.
So how did things go this week? First, let’s look at Portugal and Spain. Both are popular travel destinations and were among the first to get hit by the second wave:
Both countries had a good week with deaths falling. And both appeared to remain in control of their second wave. Let’s hope this continues.
How is Europe looking?
On one hand, deaths in the U.K. are clearly falling, and the country remains in control of their third wave.
On the other hand, France's recovery appears to be petering out. The Netherlands worryingly flatlined this week. And Italy clearly moved into reverse with deaths increasing. If this continues, this may mean their control of the second wave may have ended and they may be beginning a third.
What might be coming down the road? Let's take a look at new infections to see:
This is a very concerning graph on infections. The United Kingdom’s progress on the second wave ominously plateaued. France did worse, moved in the wrong direction, and increased. Belgium and the Netherlands did even more poorly and cases went up even more. And Italy appears to be the most problematic and clearly is suffering a new third wave.
In Italy, the health ministry said that the more contagious UK variant (B.1.1.7) is now the most prevalent one in the country. And there are some small pockets of the Brazilian variant as well (which may be 2.2 times more transmissible and evade immunity on up to 61% of previous infections).
And this week, Prime Minister Mario Draghi announced half of the country's 20 regions will be entering Easter lockdowns. Areas affected will include Rome, Milan and Venice. In those deemed “red zones,” people will be unable to leave their homes except for work and health reasons. Additionally, all nonessential shops will be closed. Other “orange zones” will only ban people from leaving their town/region (except for health or work reasons). And bars and restaurants may remain open but only for delivery and take-out. Draghi explained:
"[Easter lockdowns] are necessary because we are unfortunately facing a new wave of new infections."
"I am aware that today's measures will have consequences on children's education, on the economy and also on the psychological state of us all.”
Update on My Investment Strategy
Since this is an incomplete week, I am not updating this section like I normally would. One significant occurrence this week is that the President signed a $1.9 trillion stimulus bill, which is expected to substantially address many of the issues in the financial cliff. And the vaccine rollout is accelerating a bit quicker than originally expected.
At the same time, the spread of the variants and the continued resistance of sizable percentages of the public to taking the vaccine, remain troubling X-factors that could allow the virus to evolve and jump the vaccine firewall.
But for now, here is a rehash of my portfolio update from two weeks ago.
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 minor changes and 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. And in early 2021 more are potentially set to come online. 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 well short. For Q4, it looked to me like easy gains were gone and the rest would be a long, tough slog. So I predicated it would be up modestly but it would 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). Ultimately both were correct (Q4 was up 4% but year to date was -3.5% and the worst yearly performance since 1946) What about 2021 Q1? 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 faster spreading mutations 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 mutated strains). 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. [2/7/2021 update: That is exactly what happened:]
If we get a second (or third) lockdown, then this step (2) will become W-shaped and more painful. So it's a race between vaccines vs. new mutant strains. 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.