COVID-19 Defies Hyperbole

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The economic effects from COVID-19 will be devastating. Stock and asset prices will fall dramatically and will take years to recover. U.S. Treasury yields will turn negative. Sell “risk-on” assets, increase cash, and buy Treasury bonds.

The U.S., if not the world’s economy was primed for a serious recession coming into 2020. I argued in an article published on January 13 that, based on economic indicators, a U.S. recession would begin sometime before the end of 2020 and likely by March. In this context, COVID-19 was just the catalyst (albeit, a transcendent one) that tipped the world into it. Pandemic or not, the world was oversupplied and due to flush-out bad debt, weak companies and inequality. It only needed a push. China hadn’t had a recession in 42 years (since modern records have been kept in 1978), Australia in 28 years, and the U.S. in 10 years. Creative destruction had been waiting a long time.

And what a push it was. Just 10 days later (on January 23), I wrote an e-mail to my clients with an article from The Washington Post about emerging issues in Wuhan saying, “I get the sense that this is a bigger story than we are aware of.” In the ensuing months, COVID-19 has become everything.

The health side of the story is bad enough, but the economic one is worse. The combined economic effects of the global simultaneous lock-down, nine or more months of social distancing/rolling lock-down until a potential vaccine/treatment is available (the “90% Economy” as The Economist has termed it), as well as the normal deleveraging side of the business cycle (the “knock-on” effects or mentality change that usually is the recession) make for an economic contraction that will be deep (severe), wide (pervasive), and long (time).

And yet, stock markets are pricing a quick return to normal. It won’t happen. We are still in the first (dare I say, “denial”) stage; something akin to the spring of 1930 when the stock market had rallied back to be down just 19% from the 09/03/1929 peak. I suspect there are many years and chapters of COVID-19 yet to come.

At the same time, it isn’t the end of the world. If one can appreciate how it works, there are investments that will do well; but just a few.

The virus is going to be here for a while

  • Many prominent people and publications are saying serious things about this virus’ severity and duration::
    • Bill Gates, “It is impossible to overstate the pain that people are feeling now and will continue to feel for years to come.” 4/23/2020
    • German Chancellor Angela Merkel, “We are not living in the final phase of the pandemic, but still at the beginning.” 4/23/2020
    • CDC Director Robert Redfield, “There’s a possibility that the assault of the virus on our nation next winter will actually be even more difficult than the one we just went through.” 4/21/2020
    • WHO Special Envoy David Nabarro, “We think it’s going to be a virus that stalks the human race for quite a long time to come until we can all have a vaccine to protect us…” 4/12/2020
    • Former CDC Director, Tom Frieden, “As bad as this has been so far, we’re just at the beginning.” 5/7/2020
    • New York Magazine, “The FDA has never approved a vaccine for humans that is effective against any member of the coronavirus family, which includes SARS, MERS, and several that cause the common cold.” 4/20/2020
  • A vaccine requires several steps past finding the right formula. Once a promising discovery is made, there is animal testing, human testing, dose finding, regulatory approval, large-scale production, distribution and the issue of who pays for it. You cannot inject all humans with something until there is relative certainty it is not going to have adverse effects. Experts seem to agree that this cannot be done faster than nine months. Under the best case scenario, the world will be forced into the “90% economy” until sometime in 2021.
  • COVID-19 is still mysterious to scientists. It has several phenomena that make it problematic:
    • Contagious without symptoms;
    • A relatively long incubation period;
    • Symptoms throughout the body (i.e., blood clotting, COVID toe, organ failure);
    • Unknown immunity duration after recovery; and
    • Uneven virulence across strains, the population, and within an infection.
  • COVID-19 hit the developed world first; presumably in places where there is greater international travel. And because of that, most developed nations are now seeing a plateau or decrease in new infections (in the first wave at least). But seemingly, many developing economies are just starting their first wave. Developing economies generate the lion’s share of global GDP (estimated to be 60-70%) and thus have a large impact on the developed world.