How will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 7: April 11th
Updated: 3 days ago
U.S. Gets Hammered But Finally Bends the Death Curve; The U.S.S. (Limited) Comfort; Another Unemployment Gut-punch; Problems with the Gargantuan Stimulus Package (CARES law); The Fed Looks Outside-the-Box and Discovers a $2.3 Trillion Bazooka; Smoking may Increase Risk of Coronavirus Infection; Coronavirus may Spread through Simple Breathing (and Further than 6 feet); Consensus Growing on Quarantine Exit Strategy.
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As usual, so much has happened over the last week. Before jumping in, here's a quick summary of the series so far:
U.S. Gets Hammered But Finally Bends the Death Curve
As expected, the number killed by Covid-19 grew exponentially this week. The U.S. shattered previous records with its 20,500th death and won the unwanted designation of "country with the most virus fatalities in the world." In just a week, it quickly overtook the formerly far-ahead leaders: Italy (formerly #1) and Spain (formerly #2). Both Italy and Spain have continued to successfully turn things around by hammering down their virus death curve / doubling rate (the rate at which the number of people killed doubles) even further. This week, Italy dropped from once every 12 days to once every 3 weeks (21 days). And Spain is following about a week behind and reduced it from 7 to 12 days.
But until this week, the U.S. was stuck at an unsustainable death doubling rate of every 3 days. And at that rate, the U.S. would quickly overload virtually every hospital in the country in a very short time. It's been shown that virus control measures will reliably reduce the curve. But it takes weeks to see the results. Additionally, the U.S. has taken longer to implement virus control measures and done it less consistently than other countries. So it was an open question on when they would finally produce results and how much of a difference would be seen. Thankfully, a huge milestone occurred this week. The U.S. finally bent its death curve. On Tuesday, April 7 the death doubling rate dropped from 3 days to 4 days.
That may not sound like much. But after Italy, Spain and numerous other countries hit that inflection point, they soon saw stabilization. And then in the weeks following, they experienced much-needed drops. So this was a huge moment. Then, a few days later, more good news came along. On Thursday, the doubling rate dropped again to just 5 days.
Due to the delay factor, the deaths have continued to climb. But, this change has still had a dramatic and immediate ripple-through effect on everything else. By yesterday, the medical lead on the White House coronavirus task force (Dr. Anthony Fauci) had reduced the U.S. death projections from "100,000-200,000" on Sunday to a fraction of that (just "60,000"). New York City remains the epicenter of the virus in the country and reported a painful 783 deaths yesterday (out of 8,627 total). Faced with a large shortage of ventilators, the state received significant help via donations from Oregon (140), Washington (400) and California (500). It also bought 1,000 ventilators from China and got another 1,000 from a donation by Tesla. Even so, on Wednesday, doctors at Mount Sinai reported that they were reduced to MacGyvering ventilators out of machinery intended for sleep apnea using "scotch tape and baling wire". Still, the city has also been very successful in squashing its curve. And encouragingly, its death doubling rate is currently down to 5 days as well.
This has had some dramatic impacts on the city. While New York's hospitals are at over-capacity, their system hasn't fully collapsed as once feared. And on Friday, the number of hospital beds needed actually declined for the first time since the crisis began (down to 4,908). So things are improving. The White House coronavirus response coordinator (Dr. Deborah Birx), congratulated the "citizens of New York and New Jersey and across Connecticut and now Rhode Island" for embracing shelter-at-home policies and "dramatically changing the impact" and "course of this pandemic". Many other states have been doing the same and are now at 5 days as well. (See image above).
The U.S.S. (Limited) Comfort
Last week, hundreds of concerned NYC residents cheered when the 1000 bed Navy hospital ship U.S.S. Comfort docked in the harbor. Many thought that it would be a welcome relief to overcrowded hospitals. But things didn't work out as planned. Navy protocols and bureaucratic civilian procedures initially stopped the ship from accepting any Covid patients. So as a workaround, the ship was designated for non-virus patients only. But the ship eventually realized that due to isolation rules, there were far fewer people to treat due to far fewer injuries from car accidents, gunshots, construction accidents and the other sources of the typical emergency room visits. As a result, by Tuesday, April 7, there were only 20 patients on the 1,000 bed ship. This drew heavy criticism from the head of New York's largest hospital system, Michael Dowling. "We're in crisis here, we're in a battle-field" he said, and called the end-result "a joke".
In response, the Navy explained: the Comfort was "not configured to provide treatment for infectious diseases". Then in an about-face on April 8, the Navy announced it would allocate 500 of its 1,000 beds to COVID-19 patients.
As the health crisis plateaus and eventually subsides in New York City, many are asking "Which areas of the country will be next?"
The good news is that some of the previous "leaders" in deaths have been successful in virus control and are looking much better today than they were a week ago. For example, Louisiana is now down to a 6 day doubling rate (see previous image). Some believe the next hot spots might be Georgia, Florida and/or Mississippi, all of which took longer than many other areas of the country to implement tight control measures. And all are currently reporting larger increases in reported cases than others. Florida could theoretically be particularly vulnerable because of the large number of elderly in the state. The University of Washington model we talked about last week has updated its forecasts using the latest data from Italy and Spain. It now forecasts the peak for Florida, Georgia and Mississippi to be April 26, April 26 and April 17 respectively.
Another Unemployment Gut-punch
On Thursday, the U.S. Labor Department reported that another breath-taking 6.61 million people filed jobless claims the week before.
Additionally, the 5.5 million jobless claims from last week were adjusted upwards to 6.87 million after new data came in. This brought the total over the last 3 weeks to a staggering 16.8 million people. Bloomberg economists Carl Riccadonna and Eliza Winger estimated that this is probably equivalent to a 15% unemployment rate. This would be far higher than the 10% unemployment recorded at the height of the Great Recession in 2009. Thankfully, that would still be less than the Great Depression which experienced 24.9% unemployment in 1933 (so far, at least). Unfortunately, the bad claims numbers are expected to continue to come in. And, the numbers we already have are almost certainly undercounted. Thousands of people continued to report problems with making their claims (or getting paid) due to antiquated and overloaded computer and phone systems. More than half of states rely on decades-old mainframe systems based on the 1959 COBOL language, and Connecticut says it will take 6 weeks to reprogram theirs to handle the overwhelming volume. Additionally, understaffed bureaucracies have been unable to handle the load. Many states are transferring workers from other departments aggressively to try to keep up. But, answering services have been overwhelmed. And in some states like Florida, processes are so broken that people have been forced to wait hours simply to get a paper form. As a result, one woman reported calling her state unemployment office "300 times a day" and claims she still wasn't able to get through. A freelance worker from Texas said: "You can’t get through on the phone lines no matter what time you call," he said. "It’s complete gridlock." And the two most populated states (Florida and Texas) had an unusually large number of reported problems. Due to all of this, the current employment numbers are believed to significantly under-represent the severity of the current situation.
Problems with the Gargantuan Stimulus Package (CARES law)
With so much economic damage, the key to a quick "v-shaped" recovery lies in quickly and efficiently supporting both the businesses that have been shut down as well as their unemployed workers. If they can be tided over, the economic damage is likely to be temporary and the recovery swift. On the other hand, if many of them fall through safety net, the damage is likely to be longer-term. If that happens, the recovery will most likely be slower and more painful. A "u-shaped" recovery like that would be extremely difficult for many participants -- and investments -- to tolerate. Unfortunately, the early signs here are not the most promising. On one hand, the government moved with remarkable speed to enact a jaw-droppingly large $2 trillion stimulus package that in theory would go a long way toward assisting the affected. (See article Part 5 from this series, from 2 weeks ago, for more details.) But for the last 2 weeks, report after unhappy report has come out from frustrated and stymied business owners and workers. Many say they're at the end of their ropes and still unable to get promised assistance due to antiquated systems, bureaucratic snafus, bungles, unintended consequences and finger-pointing.
1) Stimulus checks.
Even before Covid-19 came along, many Americans lacked solid finances. In fact, 40% had insufficient savings to handle even an unexpected $400 expense, let alone the prospect of reduced hours or total elimination of their job. So, the new CARES law gives the majority of Americans (those making under $75,000/year single or under $150,000 per year married) a $1200 cash payment. Parents that have at least one child under 17 get an additional $500 for each one. The idea was to distribute this instantly -- as soon as possible -- and provide a much-needed cushion to the unemployed. And those that are still employed could use the money to stimulate the economy and prop it up further. All of this depended on quickly moving the money to as many people as possible. But on Thursday, a memo from the House Ways and Means committee revealed that relief may come surprisingly slowly. Even before Covid, watchdog ProPublic had reported that the IRS was already running understaffed, underfunded and with archaic equipment. The CARES act requires them to undertake an unprecedented, mammoth logistical effort in a tiny amount of time. And on top of the typical bureaucratic red tape, the IRS has been further delayed by social distancing requirements to keep employees healthy. As a result, they say they won't start sending out the first direct deposits until this upcoming week of April 13-17. This is already 3-4 weeks after CARES was passed into law (on March 27) and arguably too late for some. Unfortunately, the problems don't stop there. The IRS has direct deposit information only for the 60 million American households that used it for recent refunds (or only about 40% of 150 million American taxpaying households). So, some portion of this minority will "likely" receive checks quickly, this upcoming week. And those within this 40% who are initially left out of the first round of distributions will presumably see their checks the following week (4-5 weeks after CARES). All remaining citizens will have a much longer wait for a paper check. Due to logistical issues, the IRS can't even begin to send these out until next month (May 4) at the earliest. And even then, there will be a huge hitch. The above-mentioned memo stated that the IRS expects to have limited capacity and will only be able to mail 5 million checks a week (a paltry 1.5% of Americans). So this process is expected to take a stunning 20 weeks to finish (May 4 - October 7). That means the final recipients will not receive their money until more than 6 months after CARES passed. Obviously, this is will be far too late for many. But, there's still more. There are millions of American citizens who are not required to file tax returns. This includes many of the most vulnerable to a downturn, including the 8 million Americans who receive Supplemental Security Income (a program for low-income elderly, blind and disabled). Since the IRS doesn't have their information, these people will be required to file a tax return in order to get their stimulus checks. Whether these people have the knowledge, means and ability to do that is an open question. And presumably, those that do will have to wait for a tax return check (from a system that is already quite overloaded). This situation is extremely worrisome, especially for people not within any charity's radar, and given that charitable foundations also are being stretched past their capacity to help. Overall, this program appears like it will be helpful and timely to some. But it's also likely that many will not receive the stimulus quickly enough.
2) The Paycheck Protection Program (PPP) for small businesses.
Almost half of Americans (48%) work for small businesses. And, JPMorgan Chase found that most of these businesses don't have much of a financial cushion. Half of small businesses would be forced to shut down permanently if they went 27 days with no revenue. And already Covid has caused over 50,000 retail stores to close along with many more restaurants and other customer-facing businesses. So, getting effective and timely help to these businesses is essential for a "V-shaped" recovery. And that's what Congress designed the PPP to do. In it, $349 billion was set aside to give these businesses low interest loans, which would be completely free/forgiven when used to pay employees, rent and certain other expenses. The loans were deliberately set to dramatically streamline the application process, requiring no collateral and presenting few restrictions. Unfortunately, many desperate and frustrated business owners have angrily reported that they've been unable to get aid the law was designed to provide. Predictably, both the banks and the Small Business Association are facing difficulties in ramping up antiquated, bureaucratic and slow-moving systems so quickly for the unprecedented demand. Unfortunately for the PPP, this was only the beginning of the problems. As some feared, the pot of money is turning out to be way too small to meet the need. As an example, Wells Fargo was only able to lend a maximum of $10 billion at first, but received $22.2 billion worth of requests in applications on just the first day. So they had to turn away many applicants. And many other banks have experienced similar. Many needful business owners have reported that they can't find a bank to even take their application. There have also been showstopping problems due to unintended consequences. Congress designed the PPP to be fast, but so far the Treasury Department has not exempted the banks from slow antiterrorist/KYC (know your customer) laws. These require the banks to do strict verification of all new customers and this can sometimes take up to a month to do. And if they don't do them perfectly correctly, then the bank is liable for any problems. To try to deal with the conflicting demands, some banks, like Bank of America, chose to prioritize existing loan customers first. The idea was that, since these had already gone through KYC, they could at least push them through quickly. While this makes logistical sense, this strategy actually turned out to be both a business and a PR nightmare and backfired spectacularly. Thousands of business owners who were turned away were furious for being excluded by criteria that was, in effect, directly in opposition to the intent of the PPP. The people angry about their back-burner status included some of the bank's most loyal, longtime customers, who had run their businesses well and had never previously needed loans. As a result, yesterday, a class-action lawsuit was filed against the bank. The situation was made worse by finger-pointing from Small Business Association of Nevada district director Joseph Amato. Perhaps he didn't fully understand the situation when he was recorded on a telecast saying, "Banks that had no problem taking billions of dollars of free money as bailout in 2008 are now the biggest banks that are resistant to helping small businesses". In reality, none of the parties are blameless and the SBA has had its own struggles as well. This includes being slow to provide crucial information to banks to allow them to process applications, presenting unclear and conflicting advice and providing a poorly made website that crashed and was down for hours on the crucial Monday after submissions began coming in. Congress is working on topping up the PPP fund with more money. One political party proposed $250 billion more. The other party agreed, but only if another $250 billion would be spent on hospitals (many of which are financially strapped due to the crisis), first responders and food assistance. Currently, that has resulted in a stalemate. But the dire economic consequences may force a compromise of some sort in the coming week.
3) Big Businesses ($504 billion) grants and loans:
Meanwhile larger businesses are also still in a waiting pattern, too. Federal Reserve Bank of Boston President Eric Rosengren said that program would not be ready until "next week" at the earliest.
Fed looks out-of-the-box and discovers a $2.3 trillion bazooka.
No one can accuse the Fed of going too small during this crisis. During the early weeks, they essentially unloaded every single strategy in their playbook at once (including interest rate drops, treasury bond purchases etc.). This "shock and awe" method didn't stop the markets' cratering, since this recession is primarily driven by a health crisis rather than a financial one. But it was still welcome because it will be helpful when the health crisis recedes. And when this happened, most people thought the Fed was done because it had used up all of its ammunition. Then, this week, the Fed surprised many with a brand-new announcement. It would spend an unheard-of $2.3 trillion on out-of-the-box strategies that are normally way beyond what the Fed would even consider. This includes purchasing "fallen angel" junk bonds (companies that were investment grade but failed and downgraded to junk status because of Covid), lending $500 billion to states (many of which have funding issues due to the virus) and lending $600 billion to small and midsize businesses (via the "Main Street Lending Program"). Additionally, it said it will provide a liquidity facility for banks providing PPP loans to grease the wheels of that system and make it easier for them to provide loans to businesses. The unorthodox moves were welcomed by many. This includes many who normally would have objected to the Fed interfering so deeply in free markets due to the risk of "moral hazard" (letting bad behavior off the hook with the bailout). In the current emergency, it's impractical to try to distinguish the good from the bad. However, once the immediate crisis passes, the Fed will probably have to think long and hard about how it intends to exit (and when).
Smoking may increase risk of coronavirus infection
A recent study in the European Respiratory Journal found a connection between smoking and increased risk of Covid 19 infection. It theorized that smoking elevates an enzyme called ACE-2 which allows the virus to gain easier access into lung cells. Smokers and people with chronic obstructive pulmonary disease may have elevated levels of the enzyme and thus be more at risk than previously understood.
Coranavirus may spread through simple breathing (and further than 6 feet).
Previously, scientists have believed that people only spread the virus by coughing and sneezing on those within relatively close range. However, recently, many people began to doubt this theory, when dozens of choir members contracted COVID-19 after a rehearsal. The members kept their distance from each other throughout the rehearsal and did not report any symptoms otherwise (all appeared healthy while together at the practice). Researchers from the U.S. National Academies of Science, Engineering and Medicine wrote in an April 1 report to the White House Office of Science and Technology Policy that "Currently available research supports the possibility that SARS-CoV-2 could be spread via bioaerosols generated directly by patients’ exhalation". In other words, Covid may spread simply through breathing. If true, this would also explain another potential mystery: how the virus appears to spread via asymptomatic people who don't have any symptoms (including coughs). The report goes on to say that it detected virus RNA from Covid-19 infected patients who were not coughing, and at distances beyond 6 feet. They also detected the virus at even further distances (completely outside their rooms). Unfortunately, they were not able to determine if the virus found at that distance was contagious or not. But, since 6 feet is the rule of thumb for social distancing, this may indicate that people who want to avoid the virus need to stay apart even further. Inevitably, more research will be done on all of these issues over time.
Consensus Growing on Quarantine Exit-Strategy
In the last several days, prominent policy-shapers (across the political spectrum), top health policy experts, and influential nonprofits have begun to agree on a quarantine exit strategy. The lockdowns are working to stop the virus but, if they needed to be left in place for months, would also cause unbearable economic damage. The idea for the next phase is to focus restrictions much more narrowly on just the infected and their contacts. This would leave the vast majority of the country free to exit lockdowns. The widest consensus is on a three-part process called test-trace-quarantine which is the bedrock of disease control. 1) Test: Ramp up what has so far been grossly inadequate testing to effectively identify people who are infected. 2) Trace: Find everyone with whom they've interacted and identify those who are most at risk of infection. 3) Quarantine: place only these people in quarantine, rather than the entire state or country. In last week's article, we talked about how South Korea has successfully reopened its economy using this model (with very aggressive contact tracing). Their success is even more extraordinary considering they were hit much earlier and faster than virtually every other country. But contact tracing is controversial in the West, because it potentially involves giving up data that many currently consider private to a central organization or government. So (as we discussed a couple of weeks ago), a group of European Union privacy experts came up with a decentralized method to handle this which maximizes user privacy. The idea is similar to the design of bitcoin (a decentralized currency that cannot be tracked). Private information about a user's location would remain predominantly on their own phone, and would use anonymous IDs (in case of theft of phone). Only if and when a person catches the disease, is their information then sent to a central organization, who would notify those who came in close contact with them. And rules about where and how long information is stored, would be enacted and enforced. This week, Apple and Google announced a rare partnership to advance that goal. And when they are done, this will potentially bring contact tracing to as much as one third of the world's population. They will be adding the technology in two phases. Step one allows third-party apps (like what is already being done in the European Union) to do contract tracing. The second step will allow doing it automatically without an app. This is expected to take several months.