It's been several weeks since my last post, but no, I haven't been sick with Covid nor has anyone in my extended family. I've just been enjoying the market's buoyancy while also tracking the economy's recovery. The economy seems to be doing pretty well, but it's still got to climb out of a very deep hole before we'll all breathe easy. Meanwhile, the market is doing a decent job of looking across the valley of despair, as it often does, and ignoring all the hype surrounding a supposed second Covid wave. BLM protests looked quite threatening for awhile, but are now fizzling out—and leaving a legacy of lawlessness and chaos which I hope will sharpen minds come election time.
New Covid cases are surging in some areas, but to date there is almost no evidence of an increase in new deaths. In fact, the Covid outlook continues to improve.
Dr. John Ioannidis (an early sage who correctly cautioned against Covid shutdown) has reviewed some 50 international studies and argues that some 150 million to 300 million people around the world have already had the virus, far more than the 10 million recorded cases. “For people younger than 45, the infection fatality rate is almost 0%. For 45 to 70, it is probably about 0.05%-0.3%. For those above 70, it escalates substantially.”
Believe it or not, "Despite the recent spike in COVID-19 cases, deaths have continued to decline and may soon reach a level where the coronavirus will no longer qualify as an epidemic under CDC guidelines." (
source)
Meanwhile, vaccine solutions are on the horizon, and a recent hydroxychloroquine
study showed a 50% reduction in hospital mortality rates. Remember, you first heard about HCQ here in
late March.
As Chart #1 shows, there has been a definite increase in the number of new cases in the U.S. This has prompted the MSM to warn of a deadly second wave. But this is no reason to panic, and no reason to worry about another shutdown. It's very important to remember that this virus is not going to disappear anytime soon. So far, recorded cases total less than 1% of the population (though according to Ioannidis it could be much more—but still a relatively small number). Before this is all over, at least half the population could end up infected, but the good news is that at least 99% or more will survive. Much of the recent increase in cases comes from younger people, many of whom were asymptomatic but were required, for various reasons, to be tested. And of course there has been a tremendous increase in the number of tests administered, so that alone could account for much of the rise. The nationwide wave of BLM protests and riots, most of which occurred between May 26th and June 6th, surely contributed as well to the increased number of cases.
Chart #2
As Chart #2 shows, the number of new daily deaths in the U.S. has been declining for more than two months, and there is as yet no evidence that the recent increase in cases has led to an increase in deaths. Deaths were expected to decline simply due to the warmer and sunnier weather, which typically results in fewer deaths from flu. It may also be possible that the virus has evolved into a less lethal version (which in turn enables it to more widely propagate, since its hosts live longer). Moreover, people have changed their habits—being more cautious now. HCQ may also be a factor in reducing deaths. Whatever the case, fewer deaths alongside rising cases cannot be a bad thing at all.
Chart #3
Chart #3 shows a huge increase in the ISM Service Sector Business Activity Index for the month of June. This signifies a significant improvement in what is the lion's share of our economy. It doesn't get more V-shaped than this!
Chart #4
The overall ISM service sector index, shown in Chart #4, increased by almost as much as the business activity index. And it's encouraging that conditions in the Eurozone service sector have also improved dramatically.
Chart #5
As Chart #5 shows, airline passenger traffic at US airports has risen almost seven-fold since the April low. Although the rate of growth has slowed of late, passenger traffic nevertheless increased over 20% in the past two weeks.
Chart #6
Global equity markets are recovering nicely. As Chart #6 shows, Chinese equities have surged of late, and the yuan has strengthened. Remember: what's good for China is good for the world.
Chart #7
As Chart #7 shows, Eurozone equities are still struggling, having severely underperformed US equities in recent years. Europe is still suffering from "Eurosclerosis."
Chart #8
Chart #8 continues to be most intriguing. That the prices of gold and 5-yr TIPS—two utterly distinct assets—should track each other so well and for so long is amazing. The only way to understand this is to think of each asset as a "safe haven" asset. Investors these days are willing to pay a steep price for the perceived safety of both gold and inflation-protected bonds. That must mean that the world is still in the grips of fear, uncertainty and doubt (FUD).
Chart #9
Chart #9 updates my long-time favorite chart. Here we see that with fear declining, equity prices are slowly returning to where they were before the virus hit. The recent spike in the Vix index coincided with a brief "second-wave" scare that is now being digested.
Kling presents a model—a way of thinking—to better understand what is unique about the recent plunge in economic activity. In his model "sustainable patterns of specialization and trade" were disrupted by the Covid virus and the subsequent shutdown of the economy. New patterns now need to be found. This will take time, and the traditional policy tools of monetary and fiscal stimulus are of little help. The government should thus focus its efforts on increasing the incentives to work (e.g., a payroll tax holiday), rather than handing out subsidies in an attempt to stimulate demand. Trying to stimulate demand only increases the risk of inflation, by creating shortages of essential and new products and services.
I would argue that one thing he misses is the demand for money and money equivalents, which in normal times is quite low. In a crisis, demand for money goes way up and the Fed has to accommodate this, as I have argued here for many years. But at some point the Fed has to reverse, and that is difficult (the Fed needs to get the timing, quantity, and level of rates just right to avoid problems). Other than that minor quibble, I think he gives us some valuable insights into the problems the economy and policymakers face today.
UPDATE (7/8/20): Check out this chart of Sweden's daily new deaths. Despite eschewing egregious restrictions, the country seems to be acquiring enough herd immunity to virtually stop the virus in its tracks. This is the Holy Grail of the fight against Covid:
Here's the chart of daily new deaths:
