Issue 65
March 15, 2020
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As of this writing, COVID-19 (the coronavirus) has spread to 118 countries. Approximately 165,000 people have been infected, ~6,300 have died and another ~5,600 are in serious condition (~76,000 have recovered).

In the United States, there are ~3,100 confirmed cases of coronavirus, 62 patients have died and eight have recovered. Unfortunately, the number of cases in the US (and possibly other nations) may be grossly understated as we are in the early stages of this pandemic. In part, this is a result of early inaction and complacence. Earlier this week an expert with the Harvard Global Health Institute, Ashish Jha, asserted that the United States government’s response to the coronavirus outbreak has been "much, much worse than almost any other country that's been affected…I still don't understand why we don't have extensive testing. Vietnam! Vietnam has tested more people than America has…Without testing, you have no idea how extensive the infection is…we have to shut schools, events, and everything down, because that's the only tool available to us until we get testing back up. It's been stunning to me how bad the federal response has been..."

Renowned virologist, HIV/AIDS expert and Director of the National Institute for Allergy and Infectious Diseases, Anthony Fauci made the following statement to lawmakers this past week: “The system is not really geared to what we need right now - what you’re asking for - that is a failing…It is a failing. Let’s admit it.”

He makes a valid point. As the human tragedy unfolded at the epicenter of the coronavirus outbreak in Wuhan, China in late 2019, government officials around the world were given a head start to prepare for and implement practical measures to help contain the spread of the virus. South Korea was exemplary. Given its proximately to China, COVID-19 quickly permeated its borders. However, South Korean authorities learned from China’s experience and took quick, decisive action. They moved swiftly and tested tens of thousands of people, isolated infected patients and aggressively disinfected public places around the country. They curtailed travel, shut public gathering places, closed schools and limited the number of people who could loiter together. The result: Data suggests the epidemic has already peaked there with ~8,200 cases, 75 confirmed deaths (a mortality rate of ~.01%) and 834 recovered.

In contrast, our government’s initial “response” was unconscionable. One of the basic functions of a government is to take all reasonable measures to keep its citizens safe. The US government fell well short of that responsibility. We had a 6-week head start to prepare (longer than South Korea) but instead took a lackadaisical approach. The fact that there aren’t even enough testing kits to go around after witnessing the outbreaks overseas is a gross abdication of responsibility to American citizens. Now Americans find themselves in a defensive, reactive stance.

No Slacking

Using back of the envelope math, if ~165,000 people are officially infected and 6,300 have died, that equates to an average mortality rate of ~4%. In nations whose demographics lean older and developing countries, many of which have underfunded and or rudimentary healthcare systems, the death rate might be higher. In many westernized nations, the mortality rate will probably be lower; but only if their respective healthcare systems are not overrun.

The United States has an excellent healthcare system, but very little spare capacity. And because we are playing catchup, the math tells a particularly disheartening story. Consider the following: there are ~950,000 hospital beds throughout the nation, 2/3rds of which are typically occupied at any one time. This leaves just ~300,000 beds available to be utilized. Measures can be enacted to help free up space including canceling all non-essential and elective surgeries. But the stark reality is that we have very little buffer to absorb an acute influx of patients. Furthermore, because of the infectious and highly contagious nature of this disease, coronavirus patients require a tremendous amount of medical resources. They must be isolated, many will require round the clock monitoring, ventilation machines and other medical gear, many of which are in short supply. Doctors, nurses and other healthcare professionals must take extra precaution to ensure they themselves are not infected (The hero doctor who rang the alarm bell in China was infected and subsequently succumbed to the virus).

Worth noting is that ~80% of coronavirus cases are mild and generally do not require medical attention, ~10% are moderate and sometimes require medical attention, and 10% are severe and require hospitalization. The population of the United States is ~325,000,000. If just 1% of the country is infected with COVID-19, out of ~3.25 million cases, ~325,000 would, in theory, require a hospital bed. One need not own a PhD in mathematics to understand and appreciate that if the number of infected people rises even slightly > 1%, the small amount of spare capacity would quickly be absorbed and the healthcare system would become overburdened.

After initially downplaying the disease, Chinese officials reversed course and acted swiftly. Policymakers ordered the quarantine not only of Wuhan, home to 11 million people, but to the entire province of Hubei. To understand and appreciate the magnitude of this order, imagine the population of France - ~60 million people - on lock down. Moreover, authorities ordered field hospitals to be erected in Wuhan in just 10 days. The largest forced quarantine of humankind seems to have been effective. Infection rates are slowing materially in China (and South Korea). Indeed, like South Korea, the worst of China’s epidemic seems to be in its rear-view mirror. In contrast, Italy waited too long to act. When they finally did, the government initially failed to enforce the measures they enacted meant to slow the spread of the disease. The result, despite a population of just ~60million people, they have the 2nd most (after China) documented cases (~25,000) of COVID-19. Their healthcare system is on the brink of collapse. Doctors are having to ration care, or to put it more bluntly, decide who lives, and who dies.

In the United States, we owe it to our fellow citizens to be proactive. We are currently at an inflection point. We must take every precaution to mitigate the real possibly that our healthcare system is overtaxed to the point of being unable to provide care for everybody who needs it.

Guidance From Angela Merkel

Typically, we do not pay serious heed to politicians that make aggressive statements. Overstatement and hyperbole are many politicians defining characteristics. Angela Merkel is different, she is a scientist first, a politician second. Merkel studied physics at Karl Marx University in Germany. While there, she won a prize in mathematics. Later she worked and studied at the Central Institute for Physical Chemistry in Berlin and earned a PhD in quantum chemistry. Put simply, Angela Merkel is not a pessimist or glass ½ empty type of person, nor an optimist or a glass ½ full type of person. She is a pragmatist, a glass is twice as large as it has to be type of person.

Armed with a science background, she is especially circumspect with making predictions. So, when Ms. Merkel said at a news conference earlier in the week that "You have to understand that if the virus is there, and the population has no immunity yet to this virus, there are no vaccines and no therapy so far, a high percentage – experts say 60 to 70% -- of the population will be infected," we listened. Merkel followed up by stressing how paramount is was to slow the spread of the disease: "so all the measures we are taking are of the greatest significance because they are giving us time – it does matter what we do, it is not in vain."

Our hope is that Angela Merkel made a bold statement with the objective to get people’s attention; to educate them, to persuade them to change their behavior. So that the very behavioral changes they enact will be the driver(s) that curb the spread of the disease, reducing the number of cases, and ultimately, fatalities.

Going Viral, Inciting Fear & Changing Behavior

News stories on the coronavirus have clearly – excuse the horrid pun – gone viral. To be sure, it can be extremely anxiety producing to read story upon story citing infection and death rates. But if there is a silver lining, it is that behaviors have clearly changed, triggered in part by fear inducing press coverage. As of this week:

• People are practicing “social distancing” to help break the chain of transmission.
• Many non-essential employees are working from home.
• Colleges & universities have are operating online formats only.
• Museums, Broadway theaters and galleries across the nation have shut.
• The National Basketball Association suspended its season.
• The National Hockey League suspended its season
• Major League Baseball suspended all operations.
• Disney closed its theme parks.
• Apple closed its stores.

What Can Be Done / Drug Treatment

Currently, there are no approved drugs to treat the COVID-19. Many pharmaceutical, biotechnology and vaccine specialist are working on remedies. At the moment, the best hope rests on a drug compounded by Gilead Sciences, called Remdisvir, that was initially used to treat the Ebola virus. The drug has been administered to a handful of coronavirus patients. Most of these patients recovered. However, we must be mindful of the fact that most COVID-19 sufferers recover regardless. Hence, we cannot conclude that Remdisvir was effective or not. Currently, there is a double-blind placebo study (the gold standard) taking place in China. It will finish in April. Preliminary data might be released in a matter of days. We are certainly hopeful the data shows that the drug is efficacious.

Thus far, the genetic underpinning of COVID-19 is stable. This is important because it makes discovering and commercializing a vaccine easier (in short, when a virus mutates, it complicates things). Virologists and related experts are cautiously optimistic that a vaccine will be ready in 12-18 months.

Market Reaction

Since the official start of the outbreak of January 1st, global bourses have been hit hard. Notwithstanding a ~9% surge on Friday the 13th, The S&P 500, the broadest index of stocks in America, is still down ~17%. The tech heavy Nasdaq is lower by 12%. Crude oil, whose price collapse was exacerbated by OPEC & Russia’s inability to reach a consensus around production cuts, is down by ~50%. Copper an industrial metal that many market professionals use to take the temperature of the global economy has retreated ~10%. The share prices of airlines and cruise line operators have been battered. Delta & Jet Blue are down ~35% and ~40% respectively. In a stunning collapse, the stock price of Norwegian Cruise Lines has plunged ~81%. And Royal Caribbean Cruise Lines has sunk by 85%. Treasury bonds have surged (price moves inversely to yield) as investors have sought the safety of U.S. government backed debt. In short, people are anxious and markets have quickly priced in slower economic growth or even an outright contraction.

After The Storm

This too shall pass. Of course, those words offer no solace to the families of loved ones who have perished; those words do little to calm the anxiety and fear that has suddenly griped our entire nation, and the world. First and foremost, the coronavirus outbreak is a human tragedy. And every person whose life will be adversely affected, is one person too many. At TQC, we recognize, understand and appreciate this. We empathize with those who have been directly or indirectly affected, and with those who might be in the near future.

But let us be clear, while the coronavirus outbreak will get worse before it gets better; together we will get through it. And while it might seem premature to discuss the aftermath of this tragedy while it is still unfolding, we wanted to conclude this piece by offering some positive thoughts about what the future might bring.

During a slowdown in economic activity, businesses stay productive by utilizing the inevitable down time to identify inefficiencies and streamline their business processes. These fixes enable many companies to cut fat and increase productivity. When things normalize – and sooner or later they will – the most nimble firms will find themselves in good position to reap the benefits. Companies will hire more staff and increase capital spending, the benefits of which will permeate many sectors of the economy.

Interest rates are now extremely low. Simply put, the cost of money – the ultimate commodity – is cheap. This should buoy the market for home sales, mortgage refinancing, and home equity lines of credit. Some of these monies will be saved. But some funds will be spent on the likes of home improvement and other discretionary items.

As we previously wrote, the price of crude oil has collapsed. Though there is a time lag, gasoline prices, jet fuel and bunker fuel (for tankers) should drop precipitously. The energy sector will consolidate, but lower gas prices will serve as tax cut to consumers. Cheaper jet fuel will support airlines. Lower petroleum prices will also help the battered cruise line sector, truckers, and anybody else who uses oil as an input. This is all economic stimuli.

We hope our government will learn from their ill preparedness for the coronavirus outbreak. When the next pandemic occurs – and at some point, one will – hopefully they will be ready, and can be proactive instead of reactive. Until then, let’s all do our part.

Our next article will appear Sunday, March 29th. Stay safe, be prudent, and remain calm.