Panic Journal 9 – “End of Season 1”
Roughly 4 months have passed since my first post that I called the “Panic Journal” series in order to document my thought process during the “corona crisis”. Time to look back and reflect. These were the posts so far:
March 15th Part 2 – Fear & Bullet proof your portfolio
March 18th Part 3 – Expert Virologists and statistics
March 23rd Part 4 – Consolidation
March 29th Part 5 – Everyone has a plan
April 13th Part 6 – After the Hammer
May 7th Part 7 – Where is my bail out
June 7th Part 8 – Easy Dancing
Major missjudgements made: Covid-19 winners and time available
I guess one of my biggest miss-judgements was the following from part 2 on March 15th:
Strategy 3: Try to directly profit from the Corona crisis
Some publications now recommend to invest into companies that profit from the current trend to stay at home like, Slack, Netflix, toilet paper manufacturers etc.. As I have mentioned before, I don’t think that this is a good idea as you are most likely to late for that party.
Now it is pretty obvious that investors, maybe supported by low interest rates and government stimulus, are still pushing the Covid-19 “winners” into very expensive territory. I mentioned Zoom as one example but basically all large Tech companies look extremely expensive. Looking back, on March 15th the party just started.
Another implicit miss-judgement was that there would be ample time to study bevavior change and adjust the portfolio. I think the capital market distinguished really fast between winners and losers and for the time being I don’t see easily exploitable miss- pricing anymore.
Where do we stand now ?
The bad news is that Covid-19 as such has clearly not been beaten yet. Although most European and Asian countries are doing well these days, especially the US, Brazil and India, as well as a lot of other Emerging Countries record an increasing amount of cases.
On the plus side, mortality seems to have become lower. No one really knows why, but it looks like that certain additional treatments (for instance preventive medication against blood clotting) seems to help some of the more severe cases.
Capital markets are in aggregate pretty much back where they were before of course with a different weighting after the rally in digital stocks (and Tesla of course…).
My personal expectation would have been that markets would show weakness with US cases ever increasing and ugly Q2 numbers rolling in but so far it doesn’t look like that.
My current explanation is as follows: “The market” does not believe that there will be a significant second lock down. The reason ? Either there will be a vaccine or …people just don’t care anymore and the especially the US government will just let it run.
Kuppy from AdverturesInCapitalism lines out in his post what I guess more and more investors in the US are thinking:
- Covid-19 is only a bit worse than the flu and there were pandemics all the time in history
- Only modern (social media) has been pumping this up to something extraordinary
- There is no cure or vaccine (without further proof)
- As the Chinese failed to contain this early on, the only way is to let it run and achieve herd immunity
I think it is time for everyone globally to finally admit that COVID-19 is here, that we are powerless to stop its spread and that most of us are going to get it. The focus should be on protecting those who are elderly or compromised from a health standpoint.
So he and maybe many others in the US think that the “dance” is unnecessary and that saving his favorite neighborhood restaurants is at least equally important.
Personally, I do disagree with most of his arguments, such as:
- I do not know why he claims that there will be no vaccine. I think it is now pretty clear that there will be several vaccines pretty soon. No one is sure if they will be 100% safe or how long they last but this part of the argument is clearly wrong
- as mentioned above, although there is no wonder cure, BUT the understanding of the illness progressed significantly and the risk to die now seems to lower than just a few months ago (again, see for instance blood clotting etc.).
- it also looks like that death is maybe not the only real bad outcome but that also some patients develop neurological damages from Covid-19 which at least for me makes it quite more dangerous than a “bad cold”.
- and finally how do you protect the elderly or “compromised”
However I do have to agree that if Governments would just let Covid-19 progress, the direct damage to the economy would clearly be lower which then is of course good for stocks as well.
I think in the “first World” especially the US would make this sacrifice. As one can see with gun ownership and gun violence, America is prepared to make human sacrifices in exchange for personal rights and economic progress.
So summing up I do think that “the market” assumes the following:
Covid-19 is not such a big problem because either we find a vaccine or we will just move on with a few more old (and poor) people dying than usual.
From that perspective, current US stock market valuations make a certain of sense as the main risk of future lock downs is pretty remote overall and the lower interest rates boost values for growth stocks.
Obviously, in Europe things are different and therefore European stocks have not recovered as much, as the risk for future lock downs and bad economic outcomes is clearly higher.
In my opinion however Kuppy and some like minded pundits underestimate a fundamental risk to their thesis:
How quickly would the economy go back to 100% when all the restrictions would be lifted and we would just allow herd immunity ? At least for Europe I would argue not much would change. Yes, young people would go back to the nightclubs no matter what, but especially older people with a higher risk will be more careful, i.e. travel less, eat out less frequent for some time, do less shopping trips etc etc. and therefore the way back to 100% could take a lot time (older people are those with the most money to spend..)
In my opinion, the herd immunity scenario at the current stage would mean only a slightly better economic recovery with a much higher death toll (and potential many more people with neurological damages) than the “dance” plus a vaccine by the end of 2020 or beginning of 2021.
With these thoughts I will close “Season 1” of the “Panic Journal” series. We will see if and when a season 2 will be required, but for the time being I assume that markets are pretty much back to “Normal” whatever this means in these times.
value and opportunity 
I don’t think that Kuppy is saying that there will not be a vaccine. I think he is saying there will not be a vaccine in time. Herd immunity is way more likely than a vaccine.
Well, I am not a native speaker but this is what he is saying:
“Whether you like it or not, the world is going for “herd immunity.” Unfortunately, there is no other viable option; there will be no vaccine, there will be no miracle cure and besides, the virus isn’t even all that dangerous if you are young and healthy. ”
“There will be no vaccine” sounds like that he thinks there will be no vaccine, ever.
Re: US investors. Americans seem to have adopted this quite bizarre fatalistic attitude (especially right wingers). Guess that’s one way to psychologically justify ignoring lockdowns and having a criminally incompetent government lol.
As always, my unique timing skill hit home again: Just after I published this post, California went into “lock down 2.0”:
https://www.latimes.com/opinion/story/2020-07-13/no-god-no-tattoos-no-pilates-its-lockdown-2-0-california-sty
However I am pretty sure there will be no lock down in the “red states”.
Your timing skill is biblical !!
I am currently setting up a System that trades against me, myself and i.
Lol
however the US market is of course UP on this. What else ?
With a vaccine, I would also consider its efficiency and effectiveness.
https://en.wikipedia.org/wiki/Influenza_vaccine#Effectiveness
Yes, absolutely. That is one of the open questions.
Influenza is notoriously hard to vaccinate against because it is insanely eager to mutate, coronaviruses are more stable. The somewhat weak immune system response to mild rona infections suggests we might need multiple rounds of vaccinating to build up proper immunity but that’s not unheard of for vaccines. The recent news about antibody levels dropping off quickly after infection isn’t great but as long as the memory cells for the viral antigen remain you will retain some level of immunity.
As per some leading specialists, the virus has evolved in the last weeks towards less aggressive variants. Either induced my body changing somehow the RNA of the virus, OR the virus itself changing also as a result of receptors that developed immunity (flue virus also evolves year over year). Higher temperatures seems also may have helped together better treatments employed now (& better protective m, better know-how & higher awareness). Battle is far from over though, and 6-12months may be the timeline for a cure.
Stocks going up is basically a result of no other option, and razor-thin interest rates. Seeing the kind of idiots that make it to politics (immediately see the PIGS), would you lend them any cent? Can they create any value now or future?
If Switzerland lends at -0.75%, that means that by giving your money to CH you will lose less in the long term than giving it to isPain and getting back 1% nominally.
Of course, now we know why. And that’s because when lending to isPAIN you eventually end up paying for all the prostitutes of spanish head of state (a.k.a. padrino of spanish mafia&elites) and all the vices of the spanish regime.
Good look to those in the EU. I will keep looking from outside!
From what I have read, the “Newer” variants are more infectious and at the moment considered not worse that the “original” strain.
Higher temperature has definitely not helped as we can see in the southern US states where despite high temperatures, the virus is just doing fine.
https://www.sciencedaily.com/releases/2020/07/200702144054.htm
RobV mentioned you in his Post !
It still seems possible that there will be neither a vaccine nor a herd immunity, because there is no immunity to the virus at all?
Yes, that’s clearly a probability. However what is pretty clear is that the most promising vaccines do stimulate the immune system and antibodies are created. The question as above is clearly who effective the vaccine is. Let’s assume it only protetcs 50% of the recipients, it would still be better than anything else. However no one knows at this stage.
I think the scenario will be something what the Economics says…90% economy. You can see the real damage in actual reports. For example Pepsico had 3.1% lower revenue but 18% lower EPS in Q2. I think this is going to be pretty normal for the coming quarters and aggregate demand will decrease due to more unemployed and change in process (less people in factories with social distancing) and extra processes to maintain hygene.
I am in a view that most of the markets are reaching irrational level.
great post. agree with everything but still think people are underestimating the perils of a second wave where most countries will “just let it run”. not to mention high unemployment rates and the new “consumption normal” for 2020-21. nevertheless, even if you don’t ascertain a high probability to it coming to pass, how does the risk/reward for your stocks at 13.7.2020 look like?
To be honest, I don’t do such an assessment on a daily basis. I do believe after the changes made, that the portfolio should do well over the next 3-5 years. In between, anything could happen.