How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 56: June 5th, 2021
U.S. continues to win the battle against third wave; Brazil and India turn the corner, while the U.K. plateaus; Pain from new unemployment continues to lessen, while new jobs report disappoints for second month in a row; The change of focus for this article series: The race against time (humanity’s vaccines vs. the evolving virus); Comprehensive Mutant Watch List; Major update on my portfolio strategy.
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This article is part of a multi-article series that's been published regularly 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). Then in February 2021 it moved to bi-weekly updates and in May 2020 it changed to once every month. You can see the links to every article in the series here.
U.S. continues to win the battle against third wave
For the 70th 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 612,203 (versus 590,987 on Saturday morning, 4 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.
The third death wave began on October 9th, 2020. It was initially led by rural areas and later spread across the entire country. This made it more difficult to contain and fight than earlier waves. By late October 2020, it had caused acute shortages of critical drugs and key medical personnel needed to fight the disease and limit deaths. Then in November 2020, 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) resulting in higher deaths than necessary. This wave peaked in late January of 2021 and began to subside in mid-February 2021.
How did things look this last month?
Although there've been some bumps in the road, this is overall a very positive graph. And deaths have continued to drop. Since the peak in January, this has been the longest and most sustained drop of the pandemic. And in the last week, they have fallen even lower than the trough of the first wave.
This is especially significant since there was a lot of concern that first and second wave mutations might cause a new wave (like they did in Europe, South Africa and South America). However, so far, this has failed to materialize. And most health experts credit the U.S. vaccination rollout. As of June 2, 40.9% of the population is now fully vaccinated (and 50.8% has received at least one shot).
However, the pace of vaccinations has also dropped substantially since its peak in early April:
While no one knows the exact percentage required to achieve "herd community" and end the pandemic, many experts are estimating 70% as a reasonable number. So the current U.S. administration has set a goal of July 4th for getting at least one shot into 70% of adults (but not children, since most are not yet approved for the vaccine). And to motivate fence sitters, the administration has partnered with private sector companies to give incentives to taking the jab. These range from chances to win free tickets to the Super Bowl and Major league Baseball games to a year of free flights from United. And Anheuser-Busch has promised free beer to all adults on Independence Day, if the nation meets the goal.
The incentives may be working on some of the holdouts. And as of Wednesday, 63% of American adults have received at least one shot. However, even at this pace, the nation is still projected to come up just shy of the target (at approximately 68%).
Dr. Vivek Murthy, the U.S. Surgeon General, said :
“We knew it was going to get harder. If Americans do everything that we have laid out today, the nation could absolutely achieve the goal. But nothing is guaranteed.”
This week the CDC said that lack of child care is a major barrier to vaccination. And this has lowered the vaccination coverage in adults in lower socioeconomic counties and those with higher percentages of households with single parents.
So Kinder Care, Learning Care Group, the YMCA and Bright Horizons will be offering free childcare for those getting the shots.
Meanwhile, a study from the CDC showed that the hospitalization rate of U.S. adolescents increased in March and April (even while it stabilized for those 65 and older who presumably are vaccinated).
The study also found that, contrary to popular belief, teenagers were not automatically immune to getting serious cases of the disease. One third of the teenagers hospitalized required intensive care. And five percent had to be placed on invasive mechanical ventilators. The study focused exclusively on short-term outcomes and did not examine additional, longer-term effects (i.e., Long Covid). CDC director Rochelle Walensky said:
“I am deeply concerned by the numbers of hospitalized adolescents and saddened to see the numbers of adolescents who required treatment in intensive care units or mechanical ventilation. Much of this suffering can be prevented.”
But take-up has been snail-like compared to adults. A survey last week showed only about 24% had received at least one shot (and with significant variations in different areas of the country).
Pfizer is currently doing further tests on children age 2 through 11. And it’s currently projecting requesting authorization in September.
Brazil and India turn the corner, while the U.K. plateaus
Meanwhile, former hotspots India and Brazil turned the corner on their death rates and have made significant progress.
On the other hand, the U.K. appears to have plateaued and may even be starting to head upward again.
The country made an early policy decision to focus on giving maximum coverage to the population with the first dose (rather than the double dose focus of the U.S.). And as I’ll mention later, in the “mutation watch” section, scientists have since discovered that even the Pfizer vaccine (which is highly effective against many mutants) is ineffective against the more dangerous UK variant with just a single dose.
So the country has been racing to catch up. As of this week, 41% of the population has had two doses (and 60% has had at least one).
However, the rate of vaccinations has been falling over the last couple of weeks.
So some health officials are concerned.
We’ll continue to monitor how they’re doing.
Pain from new unemployment continues to lessen, while new jobs report disappoints for second month in a row
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 in most articles.
And unfortunately, the economy has been hammered week after week, and for over a year, by massive levels of new unemployment.
But starting in April, the damage started to steadily decrease. And on Thursday, the latest jobless claims report showed that the five week streak has continued. And this week, new jobless claims fell to a pandemic low of 385,000.
So this was welcome. At the same time, this is still about one third more new unemployment than experienced before the pandemic.
Then on Friday, the much-anticipated U.S. jobs report came out from the Labor Department.
The results were mixed.
On one hand, new payrolls increased to 559,000 in the previous month (versus 278,000 in April). So half a million new jobs was welcome news. On the other hand, this was again a disappointment, because the consensus had estimated 675,000. And this was after expectations had already been greatly lowered after last month's job report’s enormous whiff (278,000 actual jobs versus the over 1 million expected by most forecasters).
The headline unemployment rate dropped slightly to 5.8% (from 6.1% last month):
So, positive progress was good but snail-like. And unemployment remains significantly above pre-pandemic levels. So at the current pace, the deficit of lost jobs won’t be erased until July 2022.
Additionally, as we discussed in detail in previous articles, the U-6 unemployment rate more accurately counts all of the unemployed in the unique situation of the current pandemic. Here, the rate dropped from 10.4% to 10.2%:
Again, positive progress was good. And at the same time, the speed was glacial. About one in ten Americans are still unemployed.
Michelle Meyer, head of U.S. economics at Bank of America Corp., said.
“On the surface, yes, the jobs numbers were strong, a half million jobs is obviously a good thing, but given where we are in the economy, all else equal it could have been stronger.”
She went on to theorize:
“ The fact that it wasn’t is likely due in large part to supply constraints and labor shortages.”
The data did indeed show that a growing number of open positions are unfilled.
This is an unusual thing to see during a recovery. And so it’s also the subject of a lot of debate among economists. Theories range from lack of child care options, federal jobless benefits that are too generous, people who are unable to move to where the jobs are, and/or a lack of workers that have needed minimum skills.
Unlike most economic arguments, this one is getting a real world test. One political party has embraced the theory that the cause is overly generous jobless benefits. So 25 states (with governors belonging to that political party) have announced cutting or halting those benefits. And this begins this month. So we should be able to see the result of this economic experiment shortly.
The change of focus for this article series: The race against time (humanity’s vaccines vs. the evolving virus)
Most people in the U.S. believe the pandemic is essentially over. They think the country is coasting along the home stretch of vaccinations. And soon, an inevitable return to the pre-covid good times of 2019 are right around the corner.
And this could happen. But a growing number of health experts, economic experts and policymakers are also warning that this is an oversimplified point of view.
And we’ve actually started a new and potentially critical phase: a race against time. And it’s not just a fight being waged by the U.S., but by the entire world. And while everyone hopes that humanity will be the winner, it's not yet guaranteed, and there are many unknowns.
What is the race against time?
On one hand, vaccinations are moving forward, holding the promise of establishing "herd immunity" and ending the pandemic.
This happens when a virus can no longer find enough susceptible people to infect, and then it peters out. Scientists don't yet know the "magic percentage" of people that would need to be vaccinated (or previously infected) to do this for Covid-19. But the current consensus is that it’s probably somewhere in the 60 to 80% range.
On the other hand, almost a third of the U.S. population currently says they will not take the vaccine. So unless this changes dramatically, this refusal alone may make herd immunity impossible.
And even if this issue can be overcome, there’s a still larger challenge. The longer the virus is only “half-crushed” in the world, the more evolutionary pressure we put on it to evolve more dangerous mutations. And if a mutation evolves that’s resistant to vaccines (called “achieving escape velocity”), then the country and world will be in for a new round of hurt. And many economists, policy experts and regulators say that the new damage could mount for months (or even years).
Throughout 2020, a broad consensus of health experts and pundits claimed that harmful mutations were highly unlikely. As we covered in past articles, most claimed that the coronavirus’s genetic code was too fragile to remain viable after a mutation. So mutations would weaken the virus rather than strengthen it.
Unfortunately, 2021 came along and defied the predictions. And the new year brought not just one but several mutations. All of them developed independently and many use different strategies. But all are either more contagious, more deadly and/or more resistant to antibodies and vaccines than the original. (See “mutation watch” in later sections).
Thankfully humans are currently doing well in the race because most vaccines continue to be effective. But there are some problems looming ahead on the race track as well.
First, the rollout of vaccines is slow and only partial. For example, even in the U.S. (which leads the world), children aren’t currently expected to be vaccinated until September 2021. And poorer countries are expected to fare worse. Due to numerous challenges, world-wide vaccine coverage is not currently expected to occur for years (as late as 2028). (Although this is based on current vaccination rates and production is expected to increase dramatically at the end of the year).
And on top of this, large percentages of people are either refusing to follow health recommendations to control the virus or have gotten tired of doing so.
So, all of these factors are putting pressure on the virus to mutate, and/or giving mutations more opportunities to spread. And those things increase the chance of the virus achieving “escape velocity.”
If this happens, many health experts believe we could be battling the virus’s mutations for months or years longer. And most economists and policy experts believe the negative economic effects of this would be crippling. So, this series will now shift its focus to mostly:
The latest scientific news on mutations and vaccines.
The spread of mutations (and what’s working and what isn’t).
Public opinion polls on vaccines
Comprehensive Mutant Watch List
Here is the updated list. New information from this update is in purple. First generation mutations (winter of 2020- spring of 2021)
1) U.K. variant (B.1.1.7): studies found it is 50 to 70% more contagious than the original strain, and has a 30% higher chance of killing its victims. It has also been linked to a higher infection rate in children in the U.K., Italy and Israel. A study also found that two doses of the AstraZeneca Oxford Covid-19 vaccine were ineffective in preventing mild to moderate infections of this variant. Another fund that a single dose of the Pfizer vaccine also provided insufficient protection in another study. But an Israeli study found that two Pfizer shots were highly effective (97%).
This week, a new study in the New England Journal of Medicine confirmed and found that the Pfizer vaccine was 90% effective at blocking these infections. https://www.washingtonpost.com/health/2021/05/05/pfizer-vaccine-virus-variants/
2) South African variant (B.1.351): studies found it’s 50% more contagious than the original, can re-infect people who recovered from the original, and reduces the effectiveness of current vaccines "by a small but significant margin." A study found that the AstraZeneca vaccine was “not effective” for prevention of mild to moderate Covid-19 against this variant. This week an encouraging study found that two shots of the Pfizer vaccine were 75% effective in blocking infections by the variant. https://www.washingtonpost.com/health/2021/05/05/pfizer-vaccine-virus-variants/
3) Brazil variant (P.1.): studies found it’s more contagious than the original strain. Also, it’s documented as capable of reinfecting people who recovered from the original (who thought they had immunity). A study released in late April concluded that P.1. is likely “more transmissible and more likely to evade protective immunity elicited by previous infection with non-P.1” lineages.
4) California variant (L452R): studies found it’s 20% more contagious and showed “moderate but significant resistance to antibodies generated by vaccines and previous coronavirus infection (reducing their effectiveness by about 50%).”
5) New York City variant (B.1.526): contains the “EEK” mutation (E484K), which (when studied in other variants) was highly resistant to the Regeneron monoclonal antibody treatment (rendering its effectiveness "either impaired or abolished"). The "EEK" mutation has also been found to lower vaccine effectiveness 3.4x. Researchers concluded that most likely the New York City mutation shares similar characteristics.
6) French variant: has evolved the ability to evade detection by “gold-standard” PCR coronavirus tests. As a result, the World Health Organization has labeled this a variant of concern, which they’re tracking closely.
7) Angola variant (A.VOI.V2): this week, a team of researchers published a study that has not yet been peer-reviewed. This variant was discovered in the samples of three people who flew to Angola from Tanzania. If the report is accurate, it bristles with more mutations (34) than any other strain previously identified. That includes 14 in the spike protein, and others that are believed to help escape immune response as well. Researchers are studying it further.
Second-generation mutations (spring of 2021)
1) Philippines variant (called “P.3” or “B.188.8.131.52”): As mentioned above, geneticists say it’s an example of a global “mutation of a mutation,” having started with a Brazillian mutation and evolved from there. And while it shares many of the common spike protein mutations in the infamous Brazilian P.1 variant (which is more resistant to antibodies and vaccines than the original), it goes several steps further. The Philippine Department of Health believes these additional mutations may increase “transmission, virulence” and the chance of “immune escape.” Further studies are already underway.
2) Indian variant (B.1.617): India’s Health Ministry calls this variant the "double mutant." It’s the first variant to combine two problematic mutations, E484K (from Brazil and South Africa variants) and L452R (from California and India), into one package. And they believe this “confers immune escape and increased infectivity."
For months, health experts have been asking for increased official surveillance of this mutation. But prior to this week, the World Health Organization had not recognized it with the official title of "mutation of concern" (which is a trigger for increased response in many organizations). This changed last week, when the WHO officially granted that title to the variant. https://www.washingtonpost.com/nation/2021/05/12/coronavirus-covid-live-updates-us/. A study this week found that two doses of the AstraZeneca vaccine were moderately effective against the variant (60%). More encouragingly, two doses of the Pfizer vaccines were 88% effective against it. https://www.bloomberg.com/news/articles/2021-05-22/covid-vaccines-effective-against-variant-from-india-study-finds?sref=WRJrJ8H7
3) Vietnamese variant: This week, Vietnam's Health Minister, Nguyen Thanh Long, announced:
"Vietnam has uncovered a new COVID-19 variant combining characteristics of the two existing variants first found in India and the U.K. That the new one is an Indian variant with mutations that originally belong to the U.K. variant is very dangerous."
"We discovered the Y144 deletion on spike protein S of the B.1.617.2 variant. This mutation is similar to the one found on the B.1.1.7 variant."
Vietnam is a poor country and has only vaccinated about 1 million of its 96 million citizens. So health experts are concerned that this latest variant could be difficult to contain and may also have plenty of head-room to mutate further.
On Thursday, the World Health Organization said that the new variant doesn't have enough mutations from the Indian variant to meet its definition as a "hybrid variant." “For now,” they say, it will receive the lower designation as a "delta variant” with “additional mutations," which means “no new alerts” from the WHO. Meanwhile, Ho Chi Minh City announced a two week lockdown to fight the spread.
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. And this week I'm making my first major change since the pandemic began (more than a year ago).
The great news: By pure luck, the mRNA vaccine technology (which took decades to develop) matured just in the nick of time to be used. And unlike traditional vaccines, it turned out to be remarkably effective against even first and second generation mutations. This (along with a rapid U.S. vaccine rollout) has allowed the U.S. to avoid the 2021 lockdowns that happened in other countries. So many areas of the economy are recovering well. And the U.S. has catapulted from one of the least-enviable positions in the world to one of the most. Additionally, very generous stimulus cushioned what would've otherwise been catastrophic damage for tens of millions.
The not-so-great news: Still there's been lots of long-term structural and collateral damage. At the current rate the unemployment deficit won't be made up until summer of 2022. And U.S. debt levels have skyrocketed to the highest since World War II. But, considering how much punishment the economy took, this is about as good as could've been hoped for.
How it could still go off the rails: At the same time, more problematic variants are evolving and spreading across the world. And the snail-like global vaccination progress will give the virus months to years of time to evolve and jump the vaccine firewall (achieve "escape velocity"). If this happens, it could floor the economy again.
So here's my new strategy:
Previously I had put all new real estate investments on hold (along with any correlated to the business cycle). With the improving economy, I'm now comfortable investing in these again.
However, since downside risks still remain, I'm hedging my bets and not pushing the accelerator all the way to the floor. The deals need to be exceptional (and have strong downside protection).
In past downturns, many good distressed opportunities weren't immediately obvious at the moment of recovery and took a year or two to materialize. So I'm continuing to hold cash for these and keep my eyes open.
My opinions and strategy will change if we get some better or worse new In the meantime, that's the review for this week. And I hope you and your loved ones are staying safe and healthy.