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:
- What did I learn in the last few weeks ?
- What should I focus on going forward ?
What did I learn ?
- 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.
- 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
- Still no one knows how many people have actually been infected and what the true fatality/mortality rate is.
- 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.
- 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 ?
- No one knows if there is effective treatment and of course if and when a vaccine will be widely available
- 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
- 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 !!!)
- 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
- This time, Central bankers and Governments acted much much faster than during the GFC.
- 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
- 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
- Looking back I have also learned that some selling decisions that looked stupid in between (Cars.com, Expedia, Metro) now look like pure genius
- 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.
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 !!!