If you have ever taken a whitewater rafting trip, you may have ridden a gush of water that the dam operator releases for recreation and to control the water level. Too little water, and you are dragging your raft over the rocks; too much water, and you risk being caught in a hydraulic that holds even tree trunks under waterfalls. River guides call the release of dam water a “bubble,” and they plan their trips to ride the bubble.
Similarly, our economy rides a bubble of money. When we have access to money, we buy things, fix our houses, travel, and invest. Increasingly, we have invested in the stock market, which is risky, but offers better returns than CD rates. Too little money, and life is hard — we drag our lives across the rocks; too much money, and we drown in inflation.
River managers save and release dam water, but their lives are complicated by flood and drought. In Georgia, Lake Lanier is overflowing. In Nevada, Lake Mead is half empty and, scientists say, will probably never fill again.
Politicians and economists manage the money flow by tweaking interest rates, buying financial assets, cutting taxes, allowing international companies to repatriate money at special tax rates, and investing in infrastructure. The growth of the money supply tends to track GDP growth as shown in this chart.
With the exception of infrastructure spending, our government has already pulled every lever to stimulate the money supply. Now we face a possible natural disaster called the Coronavirus or Covid-19.
Suddenly, the movement of money is at risk. When the Coronavirus reduced Chinese driving and purchasing, Chinese transport declined and world oil prices plunged. Here in the U.S., we are paying less at the pump and less for heating oil. We are also shutting down flights to China and Italy and canceling conferences for fear of the virus. Now we risk a ripple effect of lost jobs, less income, and lower returns, that, no matter how big the money bubble, could blow a hole in our boat.
In the week ending February 28, the U.S. stock market experienced its biggest weekly point drop ever: the S&P 500 dropped by 1024 points, an 11.5 percent drop. This was disconcerting but hardly the biggest shock ever: on October 19, 1987, the market fell 22.6 percent in a single day — without any single threatening factor.
To some degree, the recent decline could be interpreted as an excuse for a correction. Only three weeks ago, I watched happily as my favorite stock, Nvidia (NVDA), rose $18, $8, and $16 per day. Fear-of-missing-out was the theme. Nvidia reached $314 on February 19; eight days later, it had sunk 20 percent to $252. Nvidia is a company that actually makes money, beats earning estimates, grows sales, and changes the world. This is not a taxi app (UBER) that loses a billion dollars a quarter.
Covid-19 could also be an existential threat to our way of life. On January 31, The Lancet, a medical journal, wrote, “On the present trajectory, 2019-nCoV could be about to become a global epidemic in the absence of mitigation … substantial, even draconian measures that limit population mobility should be seriously and immediately considered.” Two weeks later media outlet Cheddar reported that “Research Suggests Coronavirus Could Infect 60% of Global Population.”
Financial advisors everywhere advised their clients to do nothing. “We’re in this for the long term” is always the mantra and is most often the best advice. Having lived through the collapse of 2007-’09 in which markets lost 50 percent of their value, I took some profits so that I could invest if the market collapsed again.
Some very smart people have pointed to structural problems that could cause a precipitous decline. Chamath Palihapitiya, the CEO of Social Capital, a venture capital company, commented on CNBC that hedge funds are leveraged five to eight times. When the market declines, these funds are forced to sell their highly leveraged positions — throwing more fuel on the fire that has burned billions of dollars in value.
Ray Dalio, founder of the world’s largest hedge fund, published an article in November, 2019, called “The World Has Gone Mad and the System Is Broken.” Dalio noted that money is free, pension and healthcare liabilities are unfunded, deficits cannot be paid, trickle-down economics do not work, and that he believes “the world is approaching a big paradigm shift.”
Could Covid-19 be the catalyst for Dalio’s “big paradigm shift”? Can we expect another crash like 2000 or 2008?
Facts have been hard to get, but this is what we know about Covid-19:
• This is not another flu; this is a coronavirus.
• We have no medicine for this virus, and are unlikely to develop a vaccine for at least a year, which is regarded as an aggressive timetable.
• Covid-19 is likely to spread to 40 to 70 percent of the global population.
• Our only defense is our own immune systems, so we should stop smoking, lose weight, take a multivitamin, get plenty of sleep, exercise, and develop habits that will build up our immune systems.
• People can get some diseases like strep more than once. We do not know if the body develops any immunity to Covid-19, but anecdotal evidence suggests that people who are infected more than once are more likely to die.
• Even the progression of the disease is sketchy. The CDC notes, “The complete clinical picture with regard to COVID-19 is not fully known. Reported illnesses have ranged from very mild (including some with no reported symptoms) to severe, including illness resulting in death.”
• CDC Summary of the Outbreak: www.cdc.gov/coronavirus/2019-nCoV/summary.html
• CDC’s recommendations for prevention: https://www.cdc.gov/coronavirus/2019-ncov/about/prevention-treatment.html
Uncertainty causes rumor and panic, but also creates opportunity. Generally, one is rewarded according to one’s ability to handle uncertainty. Let’s see what we can learn from a limited fact set.
A key missing number is the mortality rate, which has been quoted at about 2 percent. If 60 percent of the U.S. population is infected and 2 percent die, about 4 million people will die. Two percent of the U.S. population died in the Civil War. That would be a severe shock to our way of life and to the world economy.
Underlying the mortality rate is the missing denominator: we have no idea how many people have been infected because we have no tests. I laughed out loud when Vice President Mike Pence announced last weekend that the government would release 15,000 tests —enough for about 18 percent of the city of Trenton. Days later, Pence said that 1 million people could be tested in the next week, but only because more states will be authorized to do their own testing.
Tests are given only to those who show symptoms or have traveled from affected areas or both. CDC guidelines for testing are signs of cough, shortness of breath, and a history of travel during the past 14 days to China, Japan, South Korea, Italy, or Iran. Since many people show minor or no symptoms, we have no idea of the true mortality rate.
As of this writing, the numbers are puny and not statistically helpful: the U.S. has documented 539 infections and 22 deaths. By comparison, the CDC estimates that this flu season has seen 34 million infected with 20,000 flu-related deaths.
In areas with wider testing, the mortality rate is lower. South Korea has recorded 6,593 cases and 42 deaths or 0.64 percent. Japan, with 1,100 cases, including 700 from a cruise ship docked in Yokohama, had 14 deaths or 1.27 percent.
Cruise ships are particularly interesting because they are closed systems. Of the Grand Princess guests and crew of 3,533, 21 people tested positive while 24 people were negative and one was inconclusive. One has died. VP Pence said 46 tests were conducted so far on the ship, which seems bizarrely low or indicative of a shortage of testing kits. Why not test everyone on this floating laboratory to get an idea of how the disease might spread?
Colleen S. Kraft, the associate chief medical officer at Emory University Hospital, notes that “1,700 health care workers in China have been infected and six have died” – 0.35 percent. Dr. Tom Frieden, the former director of the CDC writes, “The proportion could be as low as less than 1 in 1,000 – 30 times lower – and is unlikely to be more than 1 in 100.”
The Chinese Centre for Disease Control and Prevention says the virus most seriously affects older people with preexisting health problems. The Chinese CDC reports mortality rates of 0.2 percent up to 39 years old, 0.4 percent to 49, 1.3 percent to 59, 3.6 percent to 69, 8 percent to 79, and 14.8 percent over 80.
By comparison, seasonal flu strains kill about 0.1 percent of people who become infected. If Covid-19 becomes a pandemic with a similarly low or modest mortality rate, we may look at this panic as a buying opportunity. I am not saying, “Buy the dip,” which could be prolonged, but consider buying good companies that are oversold or are participating in major themes.
For instance, Cactus, Inc. (WHD) is focused on designing, manufacturing, selling, and renting wellheads and pressure control equipment. In 2019 WHD earned $156 million on sales of $628 million. It has $203 million in cash and pays a 2.3 percent dividend. Because of the melt-down in the oil market, the stock has fallen from $35 in January to $15. We still need energy. The Saudis and Russians will want the price to go up. I think WHD will be more valuable in the future.
I bought Clorox (CLX) January 22 Call Options, which are a bet that the price will be more valuable by January, 2022. CLX has long been a great company that pays a dividend. It might also benefit from the rush to clean the world during the Coronavirus panic, so it’s a twofer. As I write this, the market is cratering, but the CLX calls are up 9 percent today and 33 percent in the last week.
Uber is also getting its due — not because it incinerates value — but because, “Who wants to ride in a stranger’s car?” A friend in New York who shared a car recently said that she demanded the driver let her out when the other passenger started coughing. The Uber Puts (a bet that UBER will decline) that I recommended in this column are finally in the money.
One small company could make a difference to the world economy. Inovio (INO) is a vaccine designer in Plymouth Meeting, Pennsylvania. Drug design has become more like software: instead of working with bread mold and throwing compounds at the wall, scientists are looking at biological code to define drugs and vaccines.
Medicine has the potential to get much faster and more effective, so when I heard the CEO of Inovio say that they had designed a Coronavirus vaccine in three hours after receiving the genetic map from China, I bought the stock as a hedge against a pandemic. I have never owned anything that went up that fast: I bought INO on Valentine’s Day at $4.39; it opened today at $18.50. When Congress passed an $8.5 billion bill to fight the Coronavirus, it became clear that the government will do everything possible to fast-track and manufacture vaccines.
As I write this on Monday, March 9, 105 cases of the virus have been reported in New York. The major stock indices are down 5 percent today. Gold is down, too. As in 2008, panic is sending people into cash. The river of money is drying up.
The river will flow again, though. People hate to do nothing. If Covid-19 is not the economic and mortal torpedo that we fear, those who prepare now will have an exciting, profitable ride. If Covid-19 is a Civil War-class event, we will suffer through it and find new ways of working. As in 2009, the government will release more money into the river to get the boats moving again.
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