Things are looking up

The Covid-19 crisis is not over yet, but the light at the end of the tunnel is getting much brighter. Key financial indicators are moving in a healthy direction, and most countries are seeing clear signs that the viral outbreak is under control.

Here are some chart updates, followed by my impressions of the key things we have learned so far about the coronavirus:

Chart #1

As Chart #1 shows, the Fed has responded rapidly and decisively to the Covid-19 crisis by almost doubling the supply of excess bank reserves in the span of about 6 weeks. This was accomplished by massive purchases of notes and bonds. As with other periods of Quantitative Easing, this most recent move was not massive money printing: it was simply the transmogrification of notes and bonds into bank reserves, which are effectively T-bill substitutes. The economic shutdowns that were sparked by the novel virus caused a sudden and dramatic increase in the world's demand for safe assets, and it looks more and more like the Fed and other central banks have done their job and accommodated the increased money demand with an increased supply of risk-free liquidity. Central bank actions effectively short-circuited what could have been another threatened collapse of financial markets. Bravo!

Chart #2

Chart #2 shows the 3-mo annualized growth in bank savings and demand deposits. This is another way of demonstrating how strong the demand for money has become (off the charts strong) given the uncertainties of the virus and the economic shutdowns. 

Chart #3

The Fed's huge injection of bank reserves facilitated a surge of lending to small and medium-sized business, as Chart #3 shows. This in turn backstops businesses that must survive a period of zero revenues as a result of being forced to close their doors for a month or so.

Chart #4

Chart #4 shows the TED spread—the difference between 3-mo Treasury bill yields and 3-mo LIBOR. This spread is a barometer of the market's confidence in banking systems (tighter spreads = more confidence, and vice versa). Spreads are still elevated, but have come well off their initial surge, and they are nowhere near as wide as they were during most of the 2008-9 financial crisis. The main area of concern for credit markets remains the energy sector, since oil prices have tumbled.

Chart #5

The huge decline in oil prices can be traced to global economic shutdowns. In the US we saw an almost immediate 50% drop in automobile traffic, and that shows up in Chart #5, which shows the plunge in motor gasoline supplied (in thousands of barrels per day terms). Recently there are signs that drivers are beginning to return to the highways, and this will only increase as more and more states lift their lockdowns. That in turn will ease the strain on bulging gasoline inventories and sooner or later allow oil prices to move back in the direction of pre-crisis levels.

Chart #6

Chart #6 compares the level of the S&P 500 index with the Vix index, a measure of the market's fear, uncertainty and doubt. Fears have declined significantly from their peak of about a month ago, but the Vix is still quite elevated. Equities have recovered just over half of what they lost, which is not too bad, given the magnitude of the economic slowdowns that have occurred all over the world. Arguably, the Fed gets a good deal of the credit for limiting the equity market's panic. How? By supplying plenty of liquidity. Presumably, this minimizes the hurdles that economies will have to clear in order to successfully reopen. At this point, all that stands in the way of a reopening are the signatures of the nation's governors lifting their lockdowns.

Chart #7

US equity markets have fared much better than their Eurozone counterparts, as Chart #7 shows. 

Chart #8

Chart #8 shows my calculation of the burden of our federal debt (debt owed to the public, which now stands at $18.8 trillion). I've estimated total interest costs for the debt for the period April through June, and I've guessed that nominal GDP will decline by about 15% in the first half of this year. Repeat: these are my estimates and they are very likely to be wrong to some degree since it is extremely difficult at this point to judge how badly GDP will be affected by economic shutdowns. Regardless, I think the magnitude of the debt burden is very unlikely be much higher than what I estimate, and even then it will still be much lower than it was for most of the 1980s and early 90s. In short, we are not facing imminent financial disaster as a nation.

Chart #9

I used ourworldindata.org to produce Chart #12. I selected 5 countries and compared them on the basis of total covid-19 deaths per million of population. The dotted red line is the US. Note that all 5 countries (indeed almost ALL countries) have seen a pronounced slowdown in the rate of growth of covid-19 deaths. This shows up as a flattening of the curve, which uses a semi-log scale for the y-axis. In short, the growth of deaths has slowed dramatically, which proves that the virus is no longer spreading at dangerous geometric rates. Note also that the experience of Sweden, which has not resorted to the use of mandatory lockdowns, is substantially similar to that of other European countries and to the US. The virus is running its course, with or without government shutdown help.

What follows is my summary and impressions of the emerging facts surrounding the covid-19 crisis:

More and more analysts are finding that shutdowns haven’t resulted in better results than non-shutdowns. Sweden is the perfect example.

As more and more testing is conducted (especially antibody testing), the denominator of the covid-19 fatality rate (i.e., the total number of people infected) is growing rapidly, and the overall fatality rate is falling. Current estimates place it as low as 0.02% and as high as 0.2%. (The fatality rate of the common flu is 0.1%.)

As the number of those infected and with covid-19 antibodies soars, we are seeing that the vast majority of those who become infected either never experience symptoms or have only mild symptoms.

For anyone who is healthy and under the age of 65, the risk of death by covid is negligible. Thus it is foolish to quarantine everyone, especially those of school age. Isolating children only delays the buildup of herd immunity and raises the risk of a second wave when the flu season starts in October (children have almost a zero chance of dying from covid-19).

The virus is highly contagious but rarely deadly, except for those who are 65 and older and have a pre-existing health condition. 

Sunshine is the best disinfectant. Being indoors or in any confined space with others for a sustained period of time is unwise and risky, especially for those in the high-risk categories. Thus the mandate to “shelter at home”, and to close parks, beaches and trails was exactly the wrong course of action.

The number of daily new cases is growing by a much slower rate each day or declining in almost all countries and states. Thus, we have almost certainly seen the peak of the pandemic.

The number of days it takes for covid deaths to double (a bullet-proof indicator of how fast the virus is spreading) is increasing dramatically almost everywhere. Thus, we can be almost certain that the virus is no longer spreading geometrically. One factor driving this is seasonality, as temperatures warm up and people are exposed to more sun. The other factor is growing herd immunity. Better medical attention helps as well (including therapeutics such as HCQ). In the early days of the pandemic, days-to-double began at 2; in the US it’s now 23, in the world 18, in the world ex-China 15, in New York 14, In Italy 43, in France 33, in Sweden 30, and in S. Korea 67. Note that Sweden (with no shutdown) is on par with France and better than Italy, both of which instituted dramatic shutdowns.

21 states now meet the federal “reopening” criterion of a 14-day downward trajectory of daily new cases. 22 states meet the criterion of a 14-day downward trajectory in the percentage of tests with positive results. California already meets the second, but not the first. New York (yes, NY!) meets both.

The initial predictions of deaths and hospital over-crowding were so far off the mark (i.e., way too high) as to be almost criminal. The biggest problem most hospitals face today is bankruptcy because so many beds are empty. The mandate that hospitals should accept only covid patients was also criminal. Furthermore, the projected shortage of ventilators—a major factor driving the decision to shut down the economy in order to “flatten the curve”—was a criminal distraction, because it is now clear that curves have flattened everywhere and ventilators are only marginally helpful in preventing deaths. New York is now giving away tens of thousands of ventilators that were never used.

It is now painfully obvious that "The shutdown of the US economy will prove to be the most expensive self-inflicted injury in the history of mankind.™"

It should also be painfully obvious that we should reopen economies asap.

UPDATE: For more information about the risks of being outdoors, indoors, and of a certain age, see Heather Mac Donald’s recent excellent article here. It’s high time we cease wearing masks while walking outdoors or driving our cars.

UPDATE: Highly recommend watching the latest interview (April 28) with Prof Knut Wittkowski here. 

The intolerable shut-down must end

Chart #1

Chart #1 shows what I estimate the total loss of private sector jobs has been since most of the country went into lockdown. It's just about the worst economic catastrophe imaginable: over 26 million people have been sent home and forced to apply for unemployment insurance. To date I am unaware of how many public sector employees have been affected, but I'd bet it's very few. Eric Garcetti (Mayor of Los Angeles) announced last Sunday that thousands of city workers will be "furloughed" beginning this July, but that only translates into a 10% drop in their incomes, not their jobs. 

The disparity between the massive suffering imposed on private sector workers and the extremely limited impact on public sector workers can only exacerbate the feelings of frustration that are building across the country. I think people are beginning to realize that we consented to the shut-down strategy in the belief that doing otherwise would result in millions of deaths. A shut-down was necessary to "flatten the curve," and that has been achieved throughout most of the US. It is pointless to continue the shut-down, since the virus can only be contained by immunity, which in turn is achieved by infection or by vaccination, and the latter is still far in the future.

So why not begin the reopening? Hospitals throughout the country are so empty (having forbidden elective surgeries and having received far fewer covid-19 patients than originally projected) that many are teetering on the verge of bankruptcy. The 14-day moving average of daily new cases (an official criterion for reopening) is now falling significantly in at least 20 states (most impressively in New York), and it has flattened in at least 14 other states. New studies reveal that many millions have already been infected, yet only a few have been sick enough to seek treatment or a test. It's becoming crystal clear that the vast majority of deaths occur only among people who were already suffering from a co-morbidity; for healthy people under the age of 65, the risk of dying from covid-19 is negligible, according to Stanford Professor Ioaniddis.

Yet we are still under the thumb of bureaucrats and politicians who were quick to impose draconian shutdown measures but are now very slow to embrace any reopening. Tens of millions are going stir-crazy, millions fear the loss of their business and/or their livelihoods, millions are standing in breadlines and virtually all students are studying at home while staring at computer screens (yet these are the ones with almost no chance of suffering serious consequences from a Covid-19 infection). But the ones calling the shots are still getting paid (and many handsomely) and still fully-employed. There is a precedent for this, and it portends more social unrest in the days and weeks to come. A good friend of mine, H. Cademartori, penned this cartoon with these thoughts in mind:

If there's a silver lining to this massive unemployment cloud, it's that Congress decided—in a paroxysm of generosity—to add $600/week to each unemployment check through the end of July. Unfortunately, the Law of Unintended Consequences promptly kicked in, as many workers suddenly discovered they would be earning far more while unemployed than they were previously making while working. This will make it much more difficult for employers to restart their businesses, especially in the restaurant industry. "Call me August 1st" will be the answer that many employers receive when asking their workforce to come back.

Recovery from this shutdown will likely be painfully slow for awhile, but it will happen, and at some point—probably on or about August 1st—it should begin in earnest. I'm still planning to take the family to Maui in August.

UPDATE (April 24): I highly recommend this article by Scott Atlas. It is a succinct and compelling summary of what we know so far about the coronavirus and why it is time to end the shutdown: "Strictly protect the known vulnerable, self-isolate the mildly sick and open most workplaces and small businesses with some prudent large-group precautions."

UPDATE (April 25): I also highly recommend this article by George Gilder. “... since the virus has already spread widely in the general population, efforts to stop further spread are both futile and destructive. So let’s stop pretending that our policies have been rational and need to be phased out, as if they once had a purpose. They should be reversed summarily and acknowledged to be a mistake, perpetrated by statisticians with erroneous computer models.” HT W. Smith

Oil prices actually have not collapsed

If you've been alarmed by the headline "Oil plunges below $10/bbl," don't be.

Chart #1

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It's only a temporary phenomenon, brought on by the sudden collapse of oil demand (see Chart #4 in my previous post for more info). As Chart #1 shows, it's only the front-month oil contract (yellow) that has plunged. The December '20 contract (white) has actually been rallying since its March 18 low. The problem is a lack of storage, which has forced those were long the front contract to get out of their position (i.e., sell) since they have nowhere to store the oil that will be delivered to them per the terms of the about-to-expire contract. The price of oil per future contracts has remained relatively stable, averaging about $30.

The bottom portion of Chart#1 reflects the spread between the front-month contract and the December '20 contract. That spread is by far the largest that has ever occurred in decades, which is befitting the fact that the plunge in oil demand has never been so severe and so sudden.