We are growing increasingly bearish on America’s prospect to arrest the spread of COVID-19 due to growing restlessness over the shelter-in-place rules leading to quarantine fatigue, weak political leadership, and lack of uniform measures to mitigate the spread across, and within, all fifty states.
This increases the probability that only herd immunity, 60-70 percent of the U.S. population being infected, will arrest the coronavirus
That would put COVID deaths north of 600k, which is a very generous and optimistic estimate
There is no hope of an economic recovery anytime soon in that kind of scenario and puts the timeframe of the COVID crisis at just about two outs in the bottom-of-the-first inning in a nine-inning battle
This almost ensures a prolonged depression
This could change if America, which is currently acting like a failed state, could find a way to unify and bolster its will to fight the virus
THOUSANDS of people in California flocked to the beach Friday as the state endured a heatwave — despite the state’s stay-at-home orders meant to prevent the spread of the coronavirus.
Amid the global pandemic that’s killed more than 1,600 people in the Golden State, an estimated 40,000 people hung out at Newport Beach and thousands of others spent time at Huntington Beach. – U.S. Sun
This is distressing. Our generation(s) are failing its big test, which almost ensures a prolonged economic depression.
Quarantine Fatigue
Researchers tracking smartphone data say they recently made a disturbing discovery: For the first time since states began implementing stay-at-home orders in mid-March to limit the spread of the novel coronavirus, Americans are staying home less.
The nationwide shift during the week of April 13 was relatively slight. However, any loss of momentum, particularly when stay-in-place orders remain in effect across most of the country, has some public health experts worried about “quarantine fatigue.” Any increase in travel, they say, is premature when staying home remains the most effective way to limit the spread of the virus until widespread testing and contact tracing become available. – Stanford Advocate
Newport & Huntington v Omaha Beach
Sacrificing the beach to sit at home on the couch and watch reruns of the Dodgers and Lakers is hardly a test. How long would we have lasted on the beaches of Normandy and the stress of the Great Depression? That beach in the above picture is hardly Omaha beach and those on the beach are not exactly patriots storming the beach, though we are empathetic to thier plight, even if LA is in the midst of a record-breaking heatwave and the Orange County beaches are open for business.
Our lack of discipline, some of which is the result of failed political leadership, is only going to prolong the health and economic crisis. A double-minded country is unstable in all her ways.
If sitting on the couch awhile longer to protect the last few of the Greatest Generation and America’s vulnerable is too big of a sacrifice then, “Houston, we have a [big freaking] problem.” COVID has exposed some very big cracks in American society.
If you want to go to the beach that’s fine as long as it doesn’t put others at risk. But it does, not only your immediate family but entire communities and the country.
Please watch the video again to see how just one bozo’s day at the beach can infect an entire communi
GMM’s Libertarian Roots
We are, at heart, libertarians, believe in limited government, and that the private sector is what creates the nation’s wealth and increases its citizens’ standard of living. There is a role of government in our world, however, when markets fail, supporting public goods, and mitigating private behavior externalities, including providing a strong safety net for the most vulnerable.
Our perspective on most social issues is summed up in the following phrase, which has been oft attributed (we could not document) to Rosseau, John Stuart Mill, Oliver Wendall Holmes Jr, and Abraham Lincoln,
Each side takes the position of the man who was arrested for swinging his arms and hitting another in the nose, and asked the judge if he did not have a right to swing his arms in a free country. “Your right to swing your arms ends just where the other man’s nose begins. — Harvard Law Review, “Freedom of Speech in War Time,” June 1919
In today’s context, “your right to go to the beach ends where it increases the risk of killing your neighbor.” In economist speak, if your personal freedom results in negative externalities, which impose on my rights and liberties, the governing authorities should impose limits or attempt to mitigate the damage.
Herd Immunity
It looks like, with no vaccine in sight and no unified discipline across all 50 states, and woefully weak political leadership, herd immunity is going to be the end game. That is 60-70 percent of the population needs to be infected before the virus stops burning through America. Very sad.
We’ve put together some back of the envelope calculations in the following table based on simple assumptions that 5 percent of America’s population is currently infected, which drops the concurrent mortality rate down to 0.32 percent, very generous compared to the 2 percent estimate that holds with the conventional wisdom.
Using that mortality rate, assuming 60 percent of the American population is eventually infected, the death toll will rise to 641,000, which puts us in about two outs in the bottom of the first in a nine-inning baseball game.
If you think the economy can recover as the death toll marches toward 600k, well, you need to inject some bleach into your brain.
Don’t take our back-of-the-envelope estimates as a scientific epidemiology model.
According to the Tracking Project’s figures, nearly one in five people who get tested for the coronavirus in the United States is found to have it. In other words, the country has what is called a “test-positivity rate” of nearly 20 percent.
That is “very high,” Jason Andrews, an infectious-disease professor at Stanford, told us. Such a high test-positivity rate almost certainly means that the U.S. is not testing everyone who has been infected with the pathogen, because it implies that doctors are testing only people with a very high probability of having the infection. People with milder symptoms, to say nothing of those with none at all, are going undercounted. Countries that test broadly should encounter far more people who are not infected than people who are, so their test-positivity rate should be lower.
…“We just haven’t tested enough people yet,” he said. “If you were doing random screening of the whole population, we just don’t know what you’d see. We don’t know how many asymptomatic viral shedders are out there.” As such, he advised extreme caution in using the rate—but being cautious about data, he added, “is my job.” – The Altantic
Does Sheltering In Place Work?
Ab-so-freaking-loot-ly!
Take a look at the Bay Area’s curve compared to the rest of the country.
Those charts are similar to the studies of 1918 Flu, which, say, compared the death curves of St. Louis, who locked down almost immediately after the first cases showed up, to those of Philadelphia, who finally got the memo about three weeks later. See our post, Meet Me In St. Louis Not In The Streets Of Philadelphia.
Upshot
We own the future, folks. Either we follow the scientific and medical community’s advice and try and shut this virus down ASAP by every American doing their patriotic duty or we follow our own conspiracies, “Jesus is my vaccine” nutter, anti-Christian views, and let the political forces divide us. That almost guarantees a prolonged depression.
Though the polls show overwhelming support for strict shelter-in-place measures, overwhelming in not enough. We need almost 100 percent unanimous buy-in in from all the states. As the video above illustrates, a little yeast can permeate the whole batch of dough.
We have a good friend who was wearing a face-mask at the grocery market in a northern mid-west state the other day encountered the mockery of some of the local shoppers,
“You are such a libtard.”
In our book, it’s always better to be a healthy and alive “libtard” than a sick and dead…whatever. Death comes for libtards as well as the enlightened few and cannot be gaslighted.
We will share in a post soon about a conversation we had back in early February that confirmed to us the country was in deep shit.
“Capitalism as we know it will likely be changed forever.” Here are some of the “lasting implications” investor Leon Cooperman sees from the coronavirus crisis. https://t.co/JIUDFQ30FWpic.twitter.com/vdwgy3lYPn
Intel reported AH and is trading down over 5 percent on weaker than expected margin guidance, or whatever you want to assign to the price noise.
The outlook, at least to us, for the semis and the electronics industry, in general, is unclear,
the electronics segment has benefited from the outbreak because of a surge in buying by both consumers and businesses in electronics equipment
uncertainty about the pandemic, the recovery, and the sustainability of demand, it’s unclear if the outlook is for a continued boom or a delayed bust
as people around the globe were forced to self-isolate, consumers began buying up new electronics gear to support the shift to working from home, video conferencing, and to enhance their home entertainment experience
this demand is not sustainable and may be pulling in sales that may have occurred later in the year
with strong demand and concerns about potential supply disruptions from the outbreak, many companies throughout the electronics value chain have been over ordering or even double ordering
if the outbreak drives long-term changes in society, such as an increase in on-line education, telemedicine, and telecommuting, then the demand for electronics equipment will increasingly be considered core necessities
This dude is Churchillian. Prolific and strike right at the heart of the issue. Must view.
I sense big regulatory reforms coming for Wall Street when the next Administration comes to power. It will probably begin with capital gains tax moving back to marginal income tax rates.
“Buybacks are the primary example of a growing strain of incompetence amongst CEOs and amongst boards,” Social Capital CEO Chamath Palihapitiya says. “And it’s where we need to start thinking about how the rules need to change.” https://t.co/dIbizumtqGpic.twitter.com/rCqkiyMxY7
Kakistocracy is a system of government that is run by the worst, least qualified, and/or most unscrupulous citizens. The word was coined as early as the seventeenth century, but gained significant use in the first decades of the 20th century to criticize populist governments emerging in different democracies around the world. – Wiki
Jaw dropping, but my jaw has been hanging low for years.
The Trump campaign strategy now seems to be keep whiping up the base and try to even…wait for it…. gaslight death. Don’t think it is gonna work on both counts.
Policy By Impulse
Do you think last night’s impulse tweet on the immigration ban was well thought out?
In light of the attack from the Invisible Enemy, as well as the need to protect the jobs of our GREAT American Citizens, I will be signing an Executive Order to temporarily suspend immigration into the United States!
We are not Trump fanboys because we don’t think he or his administration has the right stuff and is doing significant long-term damage to the country.
We admit we are hard on Trump and we were tough on Obama. It’s not about politics, it is about competence.
Is David Tepper a racist for not resigning Cam Newton? Are the Knicks Sinophobic for letting Jeremy Lin move to Houston?
Was Walter Alston anti-Semitic when he hooked Sandy Koufax after giving up 5 runs in the first inning? See below for a great side story on Koufax.
No. Those dudes just were not getting the job done.
We call a shitshow a shitshow when we see one, especially if its doing long-term damage to the country. Come on, I have three young daughters.
Can We Make It?
I hope and pray we can get through this mess or at least limp into the next election. It feels so 2008 now.
Can’t imagine, given the country’s current leadership and the divided body politic as is, that this America could have gotten through the Great Depression and World War II.
Nevertheless, we are so thankful for those stepping up on the frontlines, from the doctors and nurses to the grocery clerks. Bravo!
That is the furthest thing from real Christianity as you can get. Ignore the doctors and put your grandparents at risk? That is the epitome of selfishness and not loving your neighbor, even if done out of total ignorance.
Whatever mistakes you have made in life, if you didn’t end up driving a truck with ‘Jesus is my vaccine’ painted on the side while flying a ‘Trump as Rambo’ flag, you’re a winner in my book. https://t.co/M00gVviglV
A house divided against itself cannot stand.” I believe this country cannot endure, permanently half science, one-quarter superstition and one-quater anti-expert.
Reopening The Economy
Yes, we get it, the country has to get back to work.
Not so simple, however. We are faced with a false choice.
Dr. Anthony Fauci on Georgia's plans to reopen: "That could be setting us back. It certainly isn't going to be helpful." https://t.co/ZqzB5vp5Pe
Imagine the disaster when the COVID cases begin to spike in Georgia? That, among many worse things, would clip 20 percent off the S&P in one day.
Will the barbershops and massage parlors on Peachtree Street in Atlanta still have customers when the new cases begin to tick up even though their open signs are out?
We have to get this right, folks. Listen to the scientists and F the politics.
Another False Choice
In my senior year of high school, I broke my hand, which had to be put in a cast. It sidelined me for the first part of the baseball season.
I wanted to play so bad, I soaked the cast in water and cut it off without my parents’ knowledge nor my doctor’s permission and went back to baseball practice. Hit the ball pretty darn good in batting practice that day but felt a slight tear in the left thumb. Painful but bearable.
My coach had his suspicions of how I made such a miraculous and fast recovery and approached me after practice demanding to see a doctor’s release. He unloaded and told me not to come back without documents.
My perceived false choice, to sit with a cast for four weeks or get back on the field the next day was a false one.
In fact, that tear was an avulsion fracture and put me back into the cast for an extra three weeks, almost double the original time of my bench sitting.
Yes, I took dumb-dumb pills in high school. Still do on occasion.
Appendix
Sandy Koufax was the greatest left-handed pitcher of all-time and Jewish. During the 1965 World Series, Sandy refused to pitch on Yom Kippur.
Koufax was a secular Jew, but he had been raised in the Jewish neighborhood of Bensonhurst, in Brooklyn. He no doubt understood that for him as the marquee star to pitch the first game of the World Series on Yom Kippur would be a blow to his people, a very public repudiation of their traditions. More would be lost—even if he won the game—than gained.
It helped, of course, that he had a very competent replacement in future Hall of Famer Don Drysdale, who had won 23 games that season and two previous World Series starts.
His Dodgers teammates had not pressured Koufax either way, and one told SI recently that they had not considered it a big deal even after Drysdale lost Game 1.
When manager Walt Alston came out to remove Drysdale in the third inning with the Dodgers trailing 7–1, the pitcher is said to have quipped, “I bet you wish I were Jewish, too.” – Sports Illustrated
Buyers bidding for crude in Texas are offering as little as $2 a barrel for some oil streams. The slumping value of physical barrels is raising the possibility that Texas producers may soon have to pay customers to take crude off their hands. https://t.co/dRQgNWCFuh
After the Fed effectively fully nationalized the financial markets by bailing out junk bonds on April 9th, turning Wall Street into a Soviet Sausage Factory, almost any type of analysis, which was on its way out anyway, was rendered completely meaningless.
The new rocket scientists on Wall Street are the market Kremlinologists, who try to guess the new ranges where the Politburo will set yields and how many notes and bonds the Kommissar of Free Money is going to buy in order to monetize a $4 trillion-plus deficit and help rollover existing maturities. All good until it isn’t
The monetary authorities had little choice but to try and keep the ship afloat to fight another day, but junk bonds? With the funky action going on in crude, the markets could use a few less drillers, ergo less supply, but that is less likely as their junk debt is now backstopped. Here’s to hoping there is an adjustment to policy after the panic subsides.
Stock Picking
That doesn’t mean you can’t make money picking and being in the right stocks. We crossed swords this weekend with a very savvy ex-Morgan Stanley stock picker (she knows exactly who she is) and we had to concede she has been right on many companies.
The market does appear to be looking forward to the other side. The new world looks like one with a few high tech giants in a less mobile (physical), work from home world. Maybe.
Not sure if that is good, sustainable or the body politic will stand for it.
Nevertheless, that micro stock picking world is foreign to us as our background is top-down global macro but it’s good to have someone with her caliber on the team.
Our favorite (and Warren Buffet’s) valuation metric, is, unbelievably, and would be even without a COVID crisis, trading at its 94th valuation percentile while unemployment heads to the worst levels of the Great Depression, more than half of the Los Angeles workforce is unemployed, and uncertainty still reigns. Even more unbelievable the valuation metric sits just 5 points below its dot.com high in Q1 2000.
Of course, there will be some snapback when the economy reopens but there are 2nd, 3rd,……………….nth order effects markets will still have to deal with.
Warren Buffet is apparently having nothing to do with this market,
“I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes. We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing ‘oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses]” — Charlie Munger
This also assumes the markets and economy were structurally sound pre-COVID, which, they were not, in our opinion, and we’re in multiple asset bubbles and weakened from the trade wars.
How about a trade, Callum? Four Generals: 2 Four-Stars, General Electric, and General Dynamics for Jacinda? Deal?
The chart is stunning enough but check out the data table.
As of the Friday close, the big five alone make up 17.97% of the value of almost all publicly traded stocks in the United States as measured by the Wilshire 5000. Stunning.
There are an estimated 3500 publicly companies traded and on U.S. exchanges and the pool of public companies is getting smaller even while the population and economy have expanded.
This makes our stock market cap-to-GDP chart above a bit distorted and at current levels even more relatively overvalued than past levels. The following WSJ tidbit is a bit dated but still rings true,
In 1996 there were 7,322 domestic companies listed on U.S. stock exchanges. Today there are only 3,671 – WSJ, Nov’17
Unless we are on the road to runaway inflation, not a zero probability with all the monetization that is coming, this bounce is an incredible gift to rebalance, take some risk off, go to the virtual beach and wait this thing out.
We talked to a lot of traders over the weekend still trying to time the market and trade the noise. Hard to get out even with your stops with 10 percent daily trapdoor moves, fellas (both feminine and masculine). I would rather surf elevator shafts.
The twenty- somethings in designer Nikes and physics degrees just haven’t learned or have enough context to understand monetary policy is now more placebo than economics or that there is a tipping point when the printing presses run too hot.
Moreover, the waters are too rough for us to fish, which we learned as an undergrad working on the swordfish boats out of Newport during the summers. Walking the plank with the harpoon, those were the daze! Unless, the waters in the Catalina channel was too choppy.
Waiting For The Shorts To Capitulate
The info we are conveying here is, no doubt, something you already know. It is the record short interest that is now driving and holding this market up here, in our opinion.
Short sellers have revived their wagers against the stock market in recent weeks, taking their most aggressive positions in years.
Bets against the SPDR S&P 500 Trust, the biggest exchange-traded fund tracking the broad index, rose to $68.1 billion last week, the highest level in data going back to January 2016, according to financial analytics company S3 Partners. That was up from $41.7 billion at the beginning of 2020 and $41.2 billion a year ago. – WSJ
If the central banks were all-powerful, by the way, the Nikkei stock index would be at 200,000 instead of around 50 percent below its Dec 1989 high of around 40,000. Over the past 20 years, the Bank of Japan has bought up just about everything and bailed out everyone, probably including all the country’s sperm banks, yet Japan still has a big demographic problem! Go figure.
When the placebo effect on stocks goes? Yikes!
Upshot
We like to buy low, sell high. Most prices are way too high. It is preservation of capital time until we get to the value zone, folks. Patience, young grasshopper.
Still sitting on the couch with cash and gold. We will let you trade the noise.
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