COVID-19 Diary Number 6 (May 30, 2020)

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I started these “COVID-19 Diary” posts on April 1, shortly after the quarantines and lockdowns began.  Much has happened since then, including five posts trying to explain events as they occurred.  Now that those strictures are beginning to lift, it seems appropriate that this sixth post remind readers why things unfolded as they did.

At the time of my first entry, infection and death rates in this country were close to their peak.  Of course, no one at the time could say with any certainty they would not rise higher –– speculation in the media and even within the scientific community in early April was all over the map.  It wasn’t difficult to believe that the United States and the world were on the brink of something like the Black Death, which destroyed a third of Europe’s population in the middle of the fourteenth century.  Leading up to my April 1 post, financial markets, if they were not anticipating the Black Death, certainly feared something pretty awful.  From their highs on February 20 to their lows on March 23, stock prices, as measured by the popular S&P 500 Index, fell a steep 33.7 percent, giving up all the ground gained in the previous two years.

Even in early April, when U.S. deaths and hospital admissions reached their highs, there were hints that the pandemic here, even if it worsened, would not do so at its previous pace.  These were only straws in the wind, but they were enough to convince some investors to reconsider, if only partially, their earlier decision to anticipate the worst –– not necessarily to become optimistic, but to reassess their earlier degree of pessimism.  With that, stock prices began to lift off their lows.  By mid-April they had regained almost half the ground they had lost in February and March.  Yet it was about then that evidence emerged showing how economically devastating the lockdowns and quarantines were becoming.  Initial claims for unemployment insurance, for instance, were running at over 3 million a week, more than ten times anything anyone had ever witnessed.

The juxtaposition of stock market gains with such difficult economic news sparked media speculation.  Some stories claimed mystification by what they termed the “decoupling” of financial markets from economic reality.  Some headlines, in a style reminiscent of conspiracy theories, suggested that, somehow, Wall Street was benefitting at the expense of the rest of the country.

In retrospect, none of the market’s actions seem strange at all, and for readers of these blog posts they should not have seemed strange even as they were happening.  Markets, after all, had priced in bad news long before any bad news was available.  By the time that anticipated bad news had arrived, many investors had begun to look beyond the economic pain of the emergency.

Now, early in June, the course of the disease and the steps to reopen the economy seem to have validated the market’s April reconsideration of its earlier pessimism.  But the future still holds considerable uncertainty.  Infections will doubtless rise with the economic re-opening.  And if they rise to levels that require a reintroduction of quarantines and lockdowns, then markets will have lost the basis for their optimism, and they will retreat accordingly.  Even if the level of infections remains manageable and there is no re-imposition of severe anti-virus strictures, the economic recovery might still disappoint.  Though politicians paint a pretty picture, many restaurants, retail facilities, and other firms may never reopen, thus denying the economy those facilities and jobs for their former employees.  Recovery then will demand more than just a resumption of former activities; it will demand rebuilding, a much slower and more arduous process. I do not doubt that the economy will eventually recover, but the speed of the recovery remains very much in question, and market prospects hinge on that consideration.

Stock and bond prices, then, remain vulnerable, both to bad news on new infections (especially if they require a relapse into quarantines and lockdowns), and to the pace of recovery.  The inevitably uneven flow of information will, unavoidably, create moments of fear in the investment community and these will drag down stock prices.  But because the economy will eventually recover, these moments should present long-term buying opportunities.  But I remind readers of this blog that those opportunities belong only to those who can invest over a longer time horizon.

COVID-19 Diary Number 4 (May 5, 2020)

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The president and several governors have begun considering, and in some cases beginning to end, the worst of the lockdowns and quarantines in the effort to reopen the economy.  It is none too soon.  As readers of this site know, the strictures to “flatten the curve” of infections and hospitalizations threaten economic collapse.  Dr. Anthony Fauci has described these strictures as “inconvenient.”  No doubt he means to sound sympathetic, but the lockdowns and quarantines are far worse than inconvenient.  These rules have attacked the essence of people’s lives, perhaps not as medical people and epidemiologists understand it, but surely as most people do.  It is a step far beyond inconvenience when some 30 million Americans have to apply for unemployment insurance in the space of five weeks!  That is almost 20 percent of the country’s workforce, a proportion that will only increase the longer today’s lockdowns and quarantines stay in place.

California has led in outlining the move back to work and it has identified specifics that would allow it.  That huge state is not alone.  President Trump and other states – governors in the Northeast acting in concert – have also indicated a path to economic reopening, as have various think tanks and advisory bodies.  These suggestions vary in detail, but each effectively foresees a three-stage process through which public health developments  — what the White House calls “gating criteria” — will allow a relaxation of today’s constraints and hopefully begin a return to former levels of prosperity.

Presently we are in the first phase and have been since mid-March. Here are its salient features:

  • People have been pressed to stay at home regardless of their vulnerability or symptoms.
  • Businesses have been shuttered, except those designated “essential.”
  • All states have banned large gatherings.

Without easy widespread testing, these and other aspects of this strict phase were the only way to guard against random infections and run the risk of overwhelming existing healthcare facilities.  Though the lockdowns and quarantines have been necessary, they have thrown millions of Americans out of work, most especially in the retail and hospitality industries, but also in manufacturing and professional services.

Current plans call for a continuation of this phase until at least mid-May.  Easing can occur, the authorities say, only when a state or region can see specific changes, the most significant of which are:

  • An ebb in new cases and a drop in hospitalizations. The redoubtable Dr. Fauci has characterized this easing as a concerted drop in new cases and hospitalizations over a 14-day period (the time over which an infected person will develop symptoms).  That hopeful sign, he and others have said, has begun to be in evidence, though no one is making any promises.
  • A transition would also depend on the ability to do widespread, same-day, point-of-care testing, even of the asymptomatic, in order for authorities to isolate only those who are sick. One researcher said an ability to do 750,000 tests a week would be a reasonable number.
  • Easing would also have to wait until healthcare facilities were considered adequate to handle a new spike in cases should it occur, and the necessary step of setting up contact tracing (as New York State has already begun) of those who have been infected.

Different states or regions will take such reopening moves at different times, and some states are coming up with their own interpretation of these steps—Georgia and New York being different examples; Georgia as of this writing opening up, while New York is still pretty much in lockdown.  Where they do open up, the authorities could still impose restrictions.  Some that have been proposed are:

  • Individuals identified as vulnerable would be urged to isolate, and there is some discussion of subjecting them to GPS tracking.
  • Rules would still forbid large gatherings
  • Restaurants would have to reconfigure to allow socially distanced (however defined) seating.
  • Staff at restaurants and other retail outlets would wear gloves and facemasks, and perhaps more protective gear.
  • Offices might reconfigure to make the by now famous six-foot separation distances easier to maintain.
  • Offices and factories might include temperature scanners as well as firm-wide testing for Covid-19 antibodies.
  • Airlines might forbid any passengers until six weeks after virus dissipation. Most major US airlines are already making passengers were masks during flight.
  • Sanitizer dispensers will become even more ubiquitous.
  • State parks and other facilities will reopen, but only to people who wear masks and arrive in groups of five or less (as Texas has already mandated).

The full reopening of economic activity — the final, third phase — would wait for a vaccine.  The authorities in California and elsewhere also include what they call “herd immunity” as a trigger for this phase.  (This is a slippery term that appears to mean that the population has had widespread exposure to the virus, that those who will succumb to the virus are no longer a concern, while, presumably, the majority of the population has developed immunity.)  Only then would the authorities allow us return to our former economic lives, and only then would the economy have the opportunity to recapture its pre-pandemic prosperity.  But forecasts on vaccines are by definition difficult.  Researchers are hopeful they can shorten the timeline, piggybacking on previous research on other viruses.  Estimates now say a vaccine for healthcare workers may be available by late this summer, or early fall, and by early next year for the general population – a long time to wait for full employment.

If this reopening proceeds in a promising way, it can only help financial markets build on their recent gains, most of which have come in anticipation of some progress on the virus and thus a good promise of economic relief.  There is the possibility, however, that given the way things go in the real world, some mishap (say, either a rise in cases or a miscalculation on easing restrictions) would create a period of market fear and accordingly a retreat.  As always in such events, good investors will keep their eyes on the longer term, and resist the temptation to give into fear.  Such a fearful moment might even present a buying opportunity, though, as my readers now should know well, I never advocate trying to time the market.

 

 

 

 

An Update: The Covid-19 Recession

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The U.S. economy – and the rest of the world – is at the gates of a severe recession.  The economic downturn is emerging neither from the COVID-19 virus nor from its threats of debility and death.  It is the quarantines, the lockdowns, and the supply constraints that have created a powerful recessionary thrust, because the longer those pressures last, the greater the possibility of more fundamental layoffs, shutdowns, and bankruptcies.  Efforts by the Federal Reserve (Fed) to ease monetary policy may blunt the recessionary dynamic, as will the fiscal stimulus measures, such as tax cuts, contemplated by the White House.  But what would really help is if Washington and the states focused on the specific drivers of today’s emergency and thus break the chain  dragging us into recession.

The situation today is very different from a typical recession.  Downturns usually grow out of shortages in demand.  Governments combat demand shortages by spending themselves and by offering people inducements to spend, for example through low interest rates or tax cuts.  The coronavirus emergency has instead imposed a shortage of supply.  Quarantines are keeping people from productive jobs, first in China and now globally.  Working from home cannot fill that gap, especially with factory work as well as many service industries.  The consequent shortfalls in production have denied other production operations the parts and materials they need to meet their output schedules.  Consumers who are otherwise eager to spend face a paucity of options as public health measures have closed restaurants, events, and retail facilities.  Though the demand for goods and services remains, it is supply constraints that are limiting economic activity.

A recession will arise because these stymied demands cannot last if the shutdowns and quarantines persist.  Businesses may keep idle workers on the payroll for a while, either in response to government mandates or from loyalty, but the businesses (which must also pay taxes, rent, and interest on their debts) cannot long meet these expenses in the face of shortfalls in revenues imposed by the closing of businesses and public spaces.  Companies are reaching that limit quickly and when they do they will have to turn to more permanent layoffs and staff reductions.  Many businesses––small firms especially––will face bankruptcy, leaving employees without income and many suppliers and landlords facing additional revenue squeezes. Other businesses in less difficult straits will nonetheless shelve expansion plans, leaving producers down the line facing a shortfall in demand for their products. The number of companies in this situation will grow the longer the present economic pause persists, and the greater that number gets, the deeper into recession the U.S. and the world will fall.

Monetary easing, such as the Federal Reserve (Fed) has recently implemented, and the kinds of fiscal measures being contemplated by the administration, could blunt such recessionary effects. But it is highly doubtful that such measures can fully counteract these recessionary forces once they gain momentum.  It would be better to take additional, if less common, measures to help stop the transition from today’s “pause” to the layoffs and other cutbacks that will bring on recession. Though not a complete list, here are five suggestions for what needs to be done:

  1. During this time of emergency, Washington should enable the Small Business Administration (SBA) to make low-interest or zero-interest loans to help small businesses sustain payrolls and stave off bankruptcy. Under the standard rules of disaster relief, the SBA has made provisions for loans of up to two million dollars, but this emergency requires larger amounts extended over a longer repayment period.
  2. States and cities could bolster such an effort with similar programs of their own, and the federal government could support them by changing the rules to allow states and cities to raise money by offering tax-free bonds for such targeted lending.
  3. Though large firms have the financial resources to hold out longer than small ones, these larger ones, too, cannot survive the current pressures indefinitely. They could get essential help if Washington were to offer them “special lending,” perhaps contingent on maintaining payrolls.  Such loans could come from the federal government directly or they could be organized between the Fed and the banking community.  While the Fed has never made such arrangements for commercial and industrial endeavors, it certainly has done so for banks and other financial firms.
  4. Washington and the states might prepay (in effect, pay ahead) existing contracts for one or two years enabling those firms to use the immediate cash flow to cover expenses during this emergency.
  5. The nation’s retailers might obtain similar help from arrangements that allow consumers to prepay future purchases at a local shop or favorite restaurant, with the inducement, perhaps, of a discount. Many firms already offer such “gift cards,” but today’s greater need might involve help from local chambers of commerce or even city governments.

More imaginative people could add to this list.  Normally such admittedly unusual arrangements would not be necessary, but these are hardly normal times.

 

 

 

 

 

 

 

 

 

Market Panic Over the Coronavirus

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As of this writing, markets have fallen more than 10 percent from their highs, almost entirely in a panic over the coronavirus.  It seems the American public has also shown signs of panic. Emergency food packs have disappeared from store shelves and some towns have objected to sick people getting treatment locally.  While some investors are concerned that the virus will spread across the U.S., most of the market panic thus far centers on the economic ramifications of the virus. There are three concerns:

  1. First is that economies, China’s in particular, will suffer because of widespread sickness in the country and drag down the global economy, even if countries like the United States can contain the spread of the disease.
  2. Second is that interruptions in supply chains, again notably from China, will hamstring business around the world and set economies back, even those that can contain the coronavirus.
  3. Third is that business managers will hoard inventories, either of supplies or finished goods, which would create shortages in supply chains, even when there is no real shortage of the goods in question. (For this insight, I would like to thank a wise reader who asked about that possibility.)

This is not the first time markets have suffered in the face of — and fear of — pandemics.  The spread of SARS between 2002 and 2004 created notable market retreats within what was otherwise a bull market.  In 2009 an influenza pandemic took the lives of over 200,000 worldwide and caused momentary panic in a market that was already struggling to recover from the 2008-09 financial crisis.  In 2012 the MERS pandemic produced market setbacks for brief periods.  These experiences, and the current market reaction to the coronavirus, offer investors a lesson in how to respond.

The first thing to understand is that it is impossible to predict the extent or duration of events like these.  Many commentators will try, and experts will offer estimates. While the experts’ guesses are better than those offered by the man on the barstool next to you, they are guesses nonetheless.  Keeping this in mind, there are three scenarios about how things will work out, each with its own investment implications:

  1. The disease sweeps across the world, causing widespread death and disruption. This is the basis of the public fears that are presently gaining momentum.  In this case, the investment implications are straightforward:  You — everyone — have more to worry about in such a situation than wondering about your portfolio.  Sell out, if you think that cash or treasury securities are safer in such a world than stocks or bonds.  (Though they probably are safer, they are far from safe in that environment.) Whatever you do with your money, see to your health and that of your loved ones. The money is secondary.
  2. The disease runs its course, as did SARS, which was a far more ruthless killer than today’s coronavirus. In this scenario, the abatement of the health emergency will prompt a market rebound and an economic recovery as global supply chains quickly reboot. The present coronavirus, beginning as it did in China, may hasten the shifting of supply chains away from that economy, something that was already under way in response to the U.S-China trade war.  (That is an interesting question and perhaps food for another blog post, but it is a separate matter from today’s panic.) Whether from China or Vietnam or elsewhere, the supply pipelines, literal and metaphorical, will quickly resume once this disease ebbs.  If this is the case, the current market retreat presents a buying opportunity. Of course, purchases made in anticipation of such a rebound run the risk of suffering further declines should the virus’s worst effects linger.  Therefore it might be prudent to make purchases gradually, in increments over time.  This way you will be in position to enjoy the rebound should things change quickly, but will also have funds to buy at still lower prices should the disease take longer to run its course.
  3. The disease neither runs its course nor sweeps across the world. The virus becomes a fact of life, much like HIV did over a long period from the 1970s, when it first made its appearance.  Should things unfold this way, the market would not offer the sudden rebound described above.  It would instead recover more gradually as investors come to terms with this disease as an ongoing risk in life, like cancer or HIV or heart disease, or a long list of horrors that people are aware of and simply accept.  To an extent, this scenario, too, would offer a buying opportunity, though it would not present a sudden market rebound described above.

The odds presently suggest that the market, as well as the economic responses, will mostly resemble the second scenario. This was the case with SARS, MERS, and the influenza pandemic of 2009.  But because the behavior of viruses is so difficult to predict — impossible, in fact — any such response would come with considerable risk and should not involve a large part of any investor’s assets.

As this event continues to develop, I will update as necessary.