wknd notes: Descending into the Fog

“The euro area faces an economic contraction of a magnitude and speed unprecedented in peacetime,” declared European Central Bank chief Christine Lagarde, not prepared to publicly admit we’re at war already. “Europe is experiencing an economic shock without precedent in modern times,” said European commissioner for the economy, Paolo Gentiloni, unwilling to draw a distinction between those things we experience and those we create. “This is why we need a recovery plan that is sufficiently large, targeted at the hardest-hit economies and sectors, and deployable in coming months -- if not now, when?” asked Gentiloni, an Italian, pleading to the Germans for money, just weeks after Rome’s desperate requests for ventilators went unanswered. War is clarity. It requires that we set aside our differences and make a choice. Which side? Some choose neither, but even they must then defend their neutrality. “This is really quite important,” said Dr. Fauci, under intensifying partisan pressure, as an angry, humiliated America stumbles through No Man’s land, straddled by disease and cure, both devastating. “Remdesivir demonstrated a clear-cut, significant, positive effect in diminishing the time to recovery,” said Fauci, aware as all doctors are that when fortified by science, hope is a powerful ally. “The National Guard and State Police are guarding our Covid-19 tests at an undisclosed location,” announced Maryland Governor Hogan. “Massachusetts Governor Baker told the story of his planeload of masks that was basically confiscated by the federal government,” added Hogan, defending his state from Washington DC. And across the country, restless anti-lockdown protesters rose up. California. New York. Michigan’s capitol building was overrun by far-right militiamen carrying assault rifles. The Commander in Chief urged its governor to negotiate with them. As the Five Eyes security alliance (US/UK/Can/Aus/NZ) leaked intelligence that China lied to the world about everything. And America raised the threat of Chinese reparations. As what had once been humanity’s first true opportunity to fight a common enemy descended into the fog.

Week-in-Review (expressed in YoY terms): Mon: Chinese industrial profits -35%, Japan lifts JGB bond-buying limits (unlimited QE), UK/Germany/France/Italy/Spain report lowest deaths in days, US small business loan process is overwhelmed, Fed expands eligibility criteria for municipal lending program, Tyson Foods warns of US supply chain breakdown and meat shortages, WTI oil plunges 25% (USO ETF announces it will liquidate June futures by month end), S&P +1.5%; Tue: New Zealand’s Ardern declares victory over Covid-19, Fitch cuts Italy rating to one notch above Junk, EU finalizes Free Trade Agreement with Mexico (USMCA agreement goes into force in July), Warren/AOC propose M&A ban during pandemic (to stop large companies from exploiting smaller ones), US infections hit 1mm confirmed cases, oil inventory increases less than expected, S&P -0.5%; Wed: Australia’s Morrison demands independent global inquiry into Chinese role in pandemic, Russia extends lockdown until at least mid-May (93k confirmed cases), France to ease lockdown May 11th, Airbus cuts production and plans 2nd round of layoffs, Fed leaves rates unch and cites “tremendous human and economic hardship,” US Q1 GDP -4.8%, Gilead indicates positive Remdesivir trial results (lifts global equities), Google earnings surprise higher, Trump announces Operation Warp Speed to develop vaccine by January, Trump orders meat processing plants to remain open, S&P +2.7%; Thur: Japan set to extend nationwide state of emergency to late-May or early-June (core CPI -0.5 to -0.1%), South Africa begins reopening economy after 5wk lockdown (5,647 cases and 103 confirmed dead), EU Q1 GDP -3.8%, ECB warns EU economy may shrink 5-12% in 2020, ECB holds rates at -0.5% (allows banks to borrow TLTRO money at -1.0% from June and introduces PELTRO loans to banks at -0.25%), ECB fully prepared to increase its E750bln PEPP program, Danske bank says impaired loans jump 10x (cuts 2020 profit forecast to 3bln krone from 8-10bln, France Q1 GDP -5.8%, Spain Q1 GDP -5.2%, Brazil new Covid-19 cases jump 6k (new record), US unemployment claims +3.8mm (6wk total exceeds 30mm), Trump claims to have seen strong evidence that Covid-19 came from Wuhan lab (threatens $1trln tariffs), Fed expands yet-to-launch Main Street Lending Program by lowering loan size and widening eligibility criteria, S&P -0.9% (S&P +13% in best month since 1987); Fri: Kim Jong Un reappears after long absence, India imposes requirement that workers use contract tracing app, FDA expedites Remdesivir approval, Biden denies sexual assault allegations, Dr. Fauci expresses concern over reopening too soon, AMZN warns that new hiring and employee protections could cause Q2 loss (shares -7%), AAPL withholds guidance (shares -1%), S&P -2.8%; Sat/Sun: Five Eyes intelligence report leaked and claims Chinese obscured/withheld/suppressed vital information on virus, George Bush urges American unity and decries partisan combatants.

Weekly Close: S&P 500 -0.2% and VIX +1.26 at +37.19. Nikkei +1.9%, Shanghai +1.8%, Euro Stoxx +2.4%, Bovespa +6.9%, MSCI World +0.9%, and MSCI Emerging +5.2%. USD rose +1.1% vs Russia, and +0.6% vs Turkey. USD fell -13.7% vs Bitcoin, -10.3% vs Ethereum, -3.4% vs Indonesia, -2.7% vs Chile, -1.9% vs Sweden, -1.8% vs Brazil, -1.8% vs India, -1.6% vs Mexico, -1.4% vs Euro, -1.2% vs South Africa, -1.1% vs Sterling, -0.7% vs Australia, -0.6% vs Yen, -0.3% vs China, and -0.1% vs Canada. Gold -2.0%, Silver -3.0%, Oil +14.6%, Copper -2.0%, Iron Ore +2.0%, Corn -1.7%. 5y5y inflation swaps (EU -1bp at 0.90%, US -8bps at 1.79%, JP flat at -0.23%, and UK +1bp at 3.44%). 2yr Notes -4bps at 0.19% and 10yr Notes +1bp at 0.61%.

April Monthly Close: S&P 500 +12.7% and VIX -19.39 at +34.15. Nikkei +6.7%, Shanghai +4.0%, Euro Stoxx +6.2%, Bovespa +10.3%, MSCI World +10.8%, and MSCI Emerging +9.0%. USD rose +5.6% vs Turkey, +5.4% vs Brazil, +3.9% vs South Africa, +2.1% vs Mexico, and +0.7% vs Euro. USD fell -36.4% vs Ethereum, -26.6% vs Bitcoin, -8.8% vs Indonesia, -5.9% vs Australia, -5.4% vs Russia, -2.1% vs Chile, -1.5% vs Sweden, -1.4% vs Sterling, -0.8% vs Canada, -0.7% vs India, -0.3% vs Yen, and -0.3% vs China. Gold +6.4%, Silver +6.2%, Oil -21.1%, Copper +5.6%, Iron Ore +0.2%, Corn -7.9%. 5y5y inflation swaps (EU -5bps at 0.91%, US +10bps at 1.81%, JP flat at -0.23%, and UK -8bps at 3.44%). 2yr Notes -5bps at 0.20% and 10yr Notes -3bps at 0.64%.

2020 YTD Equity Index Returns: Denmark -0.1% priced in US dollars (+1.8% priced in krone), NASDAQ priced in US dollars -4.1%, China -7.6% in dollars (-6.2% in renminbi), Taiwan -7.8% (-8.4%), Switzerland -9.1% (-9.3%), HK -12.1% (-12.6%), S&P 500 -12.4% (-12.4%), Israel -13.8% (-13%), Portugal -14.3% (-12%), Finland -14.5% (-12.3%), Sweden -15% (-10.9%), Japan -15.4% (-17.1%), Korea -15.4% (-11.4%), Saudi Arabia -15.5% (-15.2%), Malaysia -15.7% (-11.4%), UAE -16.7% (-16.7%), Venezuela -16.7% (+220.7%), Netherlands -17.4% (-15.2%), New Zealand -18.4% (-9.1%), Germany -20% (-18%), Canada -21.1% (-14.3%), Singapore -22.3% (-18.6%), India -23.3% (-19%), Chile -23.5% (-14.8%), Euro Stoxx 50 -23.5% (-21.8%), Belgium -23.7% (-21.7%), Thailand -24% (-17.6%), Ireland -24% (-22%), Russell -24.5% (-24.5%), Turkey -24.8% (-11.6%), France -25.5% (-23.5%), Philippines -26.6% (-27.1%), Italy -26.6% (-24.7%), Poland -27.2% (-20.3%), Russia -27.6% (-13%), Norway -27.9% (-15.8%), UK -27.9% (-23.6%), Australia -28.2% (-21.5%), Czech Republic -28.4% (-21.7%), Spain -29.4% (-27.5%), Argentina -29.6% (-21.4%), Hungary -30.3% (-23.7%), Indonesia -30.9% (-25.1%), South Africa -31% (-8.8%), Austria -31.8% (-30.1%), Greece -33.2% (-31.5%), Mexico -34.1% (-16.2%), Colombia -42.9% (-31.3%), and Brazil -48.7% (-30.4%).

Equations: Sometimes I hate math. But we finally have data. On May 2, Cuomo announced the nation’s largest antibody test (15,000 NY state residents). 19.9% of NYC has been infected. NY State is 12.3%. Areas outside the NYC commuter belt are roughly 3.2%. Let’s assume the tests are accurate. 8.77mm live in NYC and 18,491 died, so that’s an infection fatality rate of 1.07%. Let’s call it 1%. Multiply that by America’s 330mm population. You get 3.3mm dead if everyone gets it before a scalable treatment/vaccine arrives. But not everyone will get this.

Equations II: Merkel estimated 60-70% of Germans will get this and she’s the most credible world leader. Most scientists agree, although some say we need to infect 80-90% of a given population to achieve herd immunity. Let’s go with 70%. Multiply that by 3.3mm and you get 2.3mm dead in the US in the absence of a treatment/vaccine. That’s the number. Now, let’s guess the percentage of Americans already infected if New York state (excluding NYC and surrounding areas) is 3.2%. Let’s estimate roughly 5% of all Americans have been infected.

Equations III: So now take the 70% of Americans who will get this and subtract the 5% of the country already infected. That leaves 65% of Americans who must still get coronavirus to achieve herd immunity, at which point the nightmare is mostly over (excluding devastating health, economic, social, political, geopolitical consequences). If we take the 67k Americans that died so far and assume they reflect a 5% infection rate, that means getting to a 70% rate will kill 930k (less than half the 2.30mm dead using the first equation). So that’s the range: 0.93-2.30mm.

CO2: “We’re watching the TomTom traffic data all day for signs of a pulse,” said CO2, breathless. “Traffic congestion data is the tip of the spear, and so far there’s no sign of life,” he said. TomTom provides real-time GPS positioning data scraped from programs like Google Maps to measure traffic congestion. “Moovit provides the equivalent data for global mass transit usage, and it shows the same thing. Passenger traffic in cars and trains collapsed 60-80% and is bumping along the bottom,” said CO2, looking for the first signs of an economic inflection.

CO2 II: “We see China doing better, Taiwan, Hong Kong too. Everywhere else is dead. Mumbai shows nothing. It’s shocking,” said CO2. “Japan is stagnant, Singapore, Malaysia, lockdown.” France, Rome, Milan, London, dead. “Georgia is supposedly reopening, so we should see Atlanta congestion have an uptick.” Nothing. “Royal Dutch reported this week. Unlike BP, which was surprisingly upbeat, they slashed the dividend for the first time since WWII. They’re building cash.” They don’t see a V. “The next 2wks are super important, we better see a pulse.”

Calculus: “Some schools in Texas announced plans to reopen in Sept,” said the endowment advisor. “Northeast universities are leaning toward Jan.” Online teaching in Autumn, then bring students back in Jan. “Think about Ivy international students. You bring them back in Sept, people start getting sick in Oct/Nov as we head toward flu season, and then the school has to fly everyone home.” Start/stop costs are huge for these operations. “So increasingly they’re talking about a 2021 restart, but I’m not sure why the calculus is different until there’s a vaccine.”   

Anecdote: “One of the questions I get asked the most these days is when the world will be able to go back to the way things were in December before the coronavirus pandemic,” said Bill Gates. “My answer is always the same: when we have an almost perfect drug to treat COVID-19, or when almost every person on the planet has been vaccinated against coronavirus. The former is unlikely to happen anytime soon. We’d need a miracle treatment that was at least 95 percent effective to stop the outbreak. Most of the drug candidates right now are nowhere near that powerful. They could save a lot of lives, but they aren’t enough to get us back to normal,” continued Gates, his foundation having spent $10bln since 2010 on developing vaccines. There’s no one more important to listen to in these matters than Gates. “Humankind has never had a more urgent task than creating broad immunity for coronavirus. Realistically, if we’re going to return to normal, we need to develop a safe, effective vaccine. We need to make billions of doses, we need to get them out to every part of the world, and we need all of this to happen as quickly as possible. That sounds daunting, because it is,” he said. “Our foundation is the biggest funder of vaccines in the world, and this effort dwarfs anything we’ve ever worked on before. It’s going to require a global cooperative effort like the world has never seen. But I know it’ll get done. There’s simply no alternative,” said Gates, the global depression now in its 8th week. “Dr. Fauci has said he thinks it’ll take around eighteen months to develop a coronavirus vaccine. I agree with him, though it could be as little as nine months or as long as two years. Although eighteen months might sound like a long time, this would be the fastest scientists have created a new vaccine.”

Good luck out there,

Eric Peters

Chief Investment Officer

One River Asset Management

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