Panic Journal 6 – After the “Hammer”

At the time of writing, it seems that the worst is over at least for the developing world. Numbers of newly infected persons are shrinking and in the Epicenter, Wuhan, life slowly seems to open up again. Yes, the number of deaths is still rising but this is to be expected as there is at least a 10-14 day delay in deaths compared to new infections.

All in all, it looks that “the hammer” including lock downs seems to have worked for the time being. For me time to think about two areas:

  1. What did I learn in the last few weeks ?
  2. What should I focus on going forward ?

What did I learn ?

  1. A few weeks ago, I did know next to nothing about “Herd immunity”, “asymptotic virus carriers”, PCR tests, antibody tests, number of ventilators per country etc. I think now with the rest of the world I had a basic training in virology. It reminds me a little bit on the GFC which forced a lot of people to learn about how banks can create money and why buying bonds by central banks doesn’t automatically create hyper inflation.
  2. One thing that still sticks out is how inadequate data gathering and statistics still are. I do guess this is also one of the reasons why the future with regard to Covid-19 is still uncertain and it is extremely difficult for the responsible people to make fully informed decisions
  3. Still no one knows how many people have actually been infected and what the true fatality/mortality rate is.
  4. Some facts are slowly emerging, for instance a comprehensive study has been done in the area of Heinsberg, one of the first big outbreaks in Germany. It looks like that the “true mortality rate” in that specific case “only” ~0,37% based on all persons that had actually been infected. But this is only based on a 1000 inhabitant village with no hospitals or nursing homes nearby.
  5. Also no one knows how exactly the virus is transmitted and what measures actually have which effect on slowing the transmission. Are 1.5 meters distance enough or do you need 10 meters distance for jogging ? Is the virus on cash bills ? If yes, how long and in what concentration ?
  6. No one knows if there is effective treatment and of course if and when a vaccine will be widely available
  7. On a practical level I learned that Wednesday morning is a good day to actually see (and be able to buy) toilet paper in the shelves of my local drugstore
  8. Overall it looks like that Asian countries have been much better prepared to handle the threat, most likely due to the previous SARS pandemic. Therefore it makes a lot of sense to look to Asia and learn (Face masks !!!)
  9. Another learning is that this time the stock market (and all the brilliant analysts) missed the impact of this event big time. Therefore one should not put much faith into the stock market as “leading indicator” in this crisis
  10. This time, Central bankers and Governments acted much much faster than during the GFC.
  11. For a couple of sectors that were in distress (Automobile, physical retail etc.) this will most likely be “Only” a speeding up of the necessary capacity reduction
  12. From a portfolio perspective I have learned (again) that in a crisis there is almost no place to hide. Correlations among stocks tend to increase in crashes significantly
  13. Looking back I have also learned that some selling decisions that looked stupid in between (Cars.com, Expedia, Metro) now look like pure genius
  14. Moving into a few higher risk positions (Metro Bank, listed Venture Capital) doesn’t look so smart now.

Future Scenarios: The Dance

The big question is: How and when will life move on and go back to “Normal” in a few weeks time ? As I mentioned above, I do not think that it is a good idea to look to stock markets as a leading indicator. So although we currently see something like the beginning of a V-shaped stock market recovery, I would personally assume only a small probability  this scenario for the “real” economy.

Currently there seem to be 2 major streams of opinion:

  • Let’s re-open fast for the low risks groups and separate (Lock up) high risk groups before the economy is damaged even further. Many people still imply that the lock down was not necessary and Covid-19 is not so bad at all, including for instance “Big short” Michael Burry
  • or continue with relatively wide lock downs until we can test, track and trace everyone

I think what is clear to everyone that sooner or later some restrictions have to be lifted.

However I find it super difficult to figure out if there will be a “V” shaped recovery, or an “U” or a “W” or whatever. I don’t think that I can create an edge in predicting the next 6-18 months better than “the market”.

Of course the virus will come back once restrictions are lifted, but no one has a clue how fast and where.

Therefore I think it makes much more sense to think  longer term and concentrate on what I would call “second order effects”.

First order effects vs. second order effects

Typical negative first order effects would be the loss of income for restaurants and Airlines, positive effects would be the increase in online meal deliveries or only pharmacy orders. Trying to predict if and when these effects reverse is pretty tricky, as we yet no so little about the virus and timing will be really difficult and nerve wrecking.

However I think it is somehow more value creating to think what kind of other longer term and indirect effects will result.

As an example, in Germany so far it was very difficult to get electronic prescription and send them to a online pharmacy. Due to the lobbying power of the pharmacists, you still had to go to the doctor physically in order to get your paper prescription and then walk to the pharmacy to get the drugs. Especially for drugs that are required on a regular basis this is absolutely unnecessary. It looked like that there would be a long transition period. Now suddenly the German health minister put a law in place that makes electronic prescriptions mandatory already in 2022. Personally, I think this is only one example of a big push to digitize in the German health care system. On top of that I think, that at least for the next few years, expenses for health care and hospitals in particular will be seen very differently to the past. We all have learned that some extra capacity is really essential to be able to fight the next pandemic (or the return of the current one.

Other secondary effects in my opinion could be a reversal of big open plan offices with cramped desks,  a even faster move to general automation as well as the re-emergence of 3D printing to manage the risk of supply chain disruption. Existing trends like sourcing food more locally could get a big boost. Property markets could factor in access to health care as well as the opportunity for “low infection” commutes etc. etc.

Finally one should not ignore that inflation indeed might make a comeback. Personally; i do not think that the “money printing” will be the culprit but significant capacity reductions due to social distancing might lead to an increase in overall price levels for consumers.

All this of course depends on how long the current situation (fear of infection) will persist. A super-effective treatment or a vaccine could change all this. On the other hand. the risk of re-infection could make things a lot worse.

Summary:

So I think yes, the economy will come back at some point in time, but there is a decent chance that some sectors/companies will come back stronger and others might not come back at all. 

As a consequence, one needs to avoid these that won’t come back (at least in their current legal form) and try to concentrate on those who come back or come back even stronger.

This is clearly only a first shot a second order effects, I will need to put much more thought into this. In the meantime, I will of course look for some other opportunities and monitor my existing companies in order to understand what is going on.

However I will try to spend a lot less time on topics like “Uh, that specific stock looks so cheap now compared to a year ago”.

Stay safe and healthy !!!

 

 

 

 

 

 

16 comments

  • GNP-GlobalNosePicking

    …this wordpress drives me nuts… Appgs.

  • GNP-GlobalNosePicking

    If the above was done for sovereign debt, then the german (& co) taxpayers would be paying for the misspending of the crony governments in the PIGS…

  • The diligent investor

    This is crisis is far from over. I pity all of the people that bought “at the bottom” (~23.03). The backlash is only starting now and FED/white house will not be able to print their exit way out … my opinion. However after this crisis (e.g. S&P600 at around 2100 points) there is a fairly decent entry point on quality stocks. Hope you are all staying safe and healthy.

    • If helicopter money is in place so that normal people can keep consuming, effectively means devaluation of the worth of the accumulated wealth of the rich people.

      Price of basic commodities (food) will not go up: demand will stay at pre-crisis (rich people will not eat double), and people out of work but with helicopter money will eat same as before and will be able to afford numerically as much as before. In the end, more money in the system and value of the accumulated wealth will decrease. Maybe price of luxury things, where demand is flexible will increase?

  • Is there an option that the car industrie will have a stronger comeback then expected, because car driving is more social distancing then commuting with public transport ?

    • Not sure. I think you have a negative effect that many people who are eithr on “Kurzarbeit” or other public assistance programs will postpone car purchasing plans for some time. Plus, as in every past crisis, car manufacturers will be bailed out by Governments which will not solve the over capacity problems.

  • Epidemiologists are expecting a second wave to hit Europe in the fall, think the market is pricing this in? Personally it’s looking to me like the market is becoming bullish (or maybe less bearish) because this initial wave looks less destructive than initially predicted (for now) but is forgetting the larger picture of potentially persistent economic damage and/or future waves.

    If inflation does get excessive how would you expect governments/central banks to react? The classic response of raising interest rates seems like it would be a nightmare considering the ever higher mountain of debt everyone is under now.

    • The biggest issue is that we still do not know enough about the virus. As seen for example from the WHO message today that at least some people might not be immune even after recovery. That could create new issues and potentially even limit the usefulness of a vaccine. I doubt however that this is a large number of patients, otherwise China would probably not have been able to diminish the number of cases significantly enough to reopen Wuhan.

      So while there are risks remaining that we identify some more bad characteristics about the virus I am optimistic about “The Dance”. Most countries have been totally unprepared for this pandemic. Going forward, we will be prepared. And we do not need to get to 0 infections, we just need to get where South Korea and Taiwan have been from the very beginning. As very well prepared countries, they are managing extremely well, did never shutdown the economy or disrupt life in any other major way (of course with exception of the clusters of infected and directly related people).

      I fully agree that this will be a game changer for Digital Health! Driven by physicians that are requesting urgently access to digital tools to reduce the number of direct interactions with patients and increase their efficiency to cope with the number of patients. And driven by patients that will wonder why they have ever been going to a GP to sit hours in a waiting room with other sick people instead of just do a quick telemedicine chat – at least for the things where this is possible. And there are more than we think.
      The BioNext Lab in Luxembourg has created the last years an “Uber for blood draw”: You book a nurse to come to your home or office within a 30 minute time window to get a blood draw. The nurses are not employed by BioNext. During the COVID crisis the lab has closed all their blood collection centers and only offers the scheduled home blood draws. And is questioning if they ever open again the brick and mortar centers – which are less profitable anyhow than the Uber-Nurses.

      So imagine, you don’t feel well, order a nurse to get a blood draw, the results come in a few hours later on your smartphone, you consult via Telehealth with your physician and Amazon will bring the drug with 1-hour delivery.
      This is the future, and it is closer than we think!

      • Thanks for the insight !!!

      • GNP-GlobalNosePicking

        If you don’t feel well, you will get your phone connect to a user friendly app that will walk you thru a questionnaire, after which they will drone-ship you a test (lab-on-a-chip) to make at home. The device will be wireless capable (rf-powered) and will commmunicate the results to the app who will diagnose you. + prescribe best course of action (drone-ship the meds if required). When the diagnosed solution does not follow the expected pattern, app may involve human intervention (who will also be assisted by AI). 10 or 15y down the road ? Starting with china as they will need low-cost healthcare sooner than anyone else.

      • I feel like all the optimism about ~digital health~ always skips over the simple observation that most healthcare demand comes from seniors who are generally incapable/reluctant to use online services.

        • Well, I would not 100% agree.Clearly, digital health offereings must be easy to use but as we see in other sectors (Facebook etc.) Seniors are maybe more capable than you think.

    • If inflation flares up, central banks can reverse QE (sell stuff on their balance sheet for cash to be “shredded”). Lot of firing power here before they need to use the interest rate lever.

      • GNP-GlobalNosePicking

        Cig: Theory is good, but of course in practice things are different. If central banks need to “sell stuff”, first they need to find a buyer (maybe they can find one in Mars). Should they manage to find a buyer (in Earth or Mars), these should buy “the stuff” at the price convenient to the central banks (hahaha, what a joke!). Any buyer would merely agree to buy at half price, which ultimately means the taxpayer would absorb the costs of the recapitalisation (ie. the downside), while the management and shareholders would enjoy the upside.b Your suggestion is crony capitalism!!

      • GNP-GlobalNosePicking

        If the above was done for sovereign debt, then the german (& co) taxpayers would be paying for the misspending of the crony governments in the PIGS…

      • GNP-GlobalNosePicking

        If the above was done for sovereign debt, the german (& co) taxpayers would be then paying for the misspending of the crony governments in the PIGS……

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