Stansberry Research

Doc Eifrig's COVID-19 Briefing No. 14

July 2, 2020

Editor's note: You can find a full transcript of Doc and Matt's briefing, complete with slides, below the video. If you'd like to view a pdf of the slides, click here.

Dr. David Eifrig: Hello, everybody, and welcome to COVID conversation No. 14. I'm Dr. David Eifrig. With me is Matt Weinschenk. I've actually made my way down to the Baltimore office. So although I'm closer to Matt, we're still socially distant. Matt, welcome. How was your weekend?

Matt Weinschenk: Hello, Doc. Oh, yeah, it was good. We actually took the family to the beach over the weekend, which was interesting. We went to a nice sort of secluded state park beach, I guess. And it was, it was interesting. It was pretty crowded, but it was easy to stay, you know, six or more feet apart from everybody. But it's one of those things. I don't know if you've seen this online where you can take a picture of the beach this way and it looks crowded, but actually people aren't too close. So it was an interesting trip to say at least.

Doc: Well, great. I flew today, and I gotta tell you, I'm more worried about the chemicals that they're spraying on the seats of the plane. And in between everything there's like a gooey film everywhere and I kind of joked with the flight attendants and two of them are together when I boarded. And they all been implied that a couple of them feel like it's kind of making them feel a little sick or kind of weird because they're touching it around them all the time. I don't know. I'm gonna have to dig on that one to find out.

Matt: Yes, well, it's been at least a 14-week saga now and it keeps developing.

Doc: And I guess this is an important day because it's week 14 and I'm not in my pajamas anymore.

Alright, let's dive in…

As usual questions – rem@stansberryresearch.com. Health & Wealth Bulletin – Thank you for supporting that and sharing it. Got lots of feedback this week. I don't know how much of those you also saw Matt. I tried to pass them on, but several folks have been sending them off to five, eight, 10, 20 of their friends, sharing the link. Please do. Love it if you would.

Matt: Yeah, a lot. A lot of "thank yous" came in this week. I'm not sure what triggered that, but we're always glad to see them and keeps us going.

Alright, so let's go to our usual our usual charts.

I mean, you know, the second wave whatever you want to call it is here, you know, everybody sort of knows this now. Everybody knows these case counts are going crazy.

There's lots of things to talk about within that. But they're, they're on their way up. They're gonna go up for quite a while because any sort of turnaround would take quite a bit of time. So buckle up, it's gonna keep going.

Again, the national numbers not all that useful because it hides what's happening locally, but you know, a lot of a lot of states left. The declining group we're down to just the corner here. My mouse is small this week. We're down to just a corner here. And even you know, Maryland looks flat, but California Texas, Florida, Arizona, seeing an upturn, Pennsylvania, Illinois, you know, the usual sort of suspects. But, you know, the local outbreaks continue apace.

And looking at the hotspots, this is by county, you know, these geographic heat maps of the U.S. are always a little bit misleading because the population density is so different. You know, there's almost no one in in these wide areas of the Midwest where it's very dense over in the northeast and stuff. But it does look, you know, pretty concentrated. So even if you take a state like Texas, which is in a lot of trouble, it's really in only in some of those big cities there. California looks like the north is much worse than the south.

Florida's in trouble. Then Arizona, I think I read that's Phoenix. Everything's really around there and not anywhere else. So again, it's you really got to dig down to a local level to see what's happening. And so far, well, we can't really say for sure, because the U.S. added some back dated deaths in there.

So now it's a little hard to say on a national number, if deaths are following this rise, but you know, when you dig in they are not so far Arizona just posted, oh, I think 88 deaths, which is up from in the 10s or 20s. Before that, so that's one day of a bad number. So we'll have to see, you know, if deaths start to follow.

I think, you know, going back to that first chart at 40,000 cases a day and Fauci says we're headed to 100,000. Either way, it's going up. I mean, even with lower mortality than we thought that deaths are going to turn up. Are they going to get back to 1,000 to 1,500 a day? I don't know. But I mean, there's going to be a rise there and that is going to cause some you know, panic, some further lockdowns or shutdowns. I think it's hard to keep track. I think Texas is shutting some things down. Florida saying they're not. Arizona was closing bars. It's I mean, so we're going to see a nice experiment here, what works and what doesn't work.

Doc: Yeah. And I just want to remind people, it's really well stratified. I think the data is fairly clear that younger people getting this, it's not that dangerous. Older people over the age of 80, it's quite dangerous. And if you're in a nursing home and that age, quite dangerous.

So if we do start to see death, I mean, we'll see increase in death just because there's so many new numbers, but my guess is older folks. And we know now that we should be protecting them not doing what Cuomo was doing in New York City, which is sending people with COVID-19, to nursing homes. I'm more optimistic about this number, the death number. But that's just because I think we, like we showed last week, there are a whole bunch of folks in a younger age group that were getting, and having testing for positive tested for positive. So, yeah.

Matt: And this, someone actually asked this, this is some research that just came out.

This is a statistic, you know, a lot of numbers there, that this is a statistical analysis using several different models, which is the way you want to do it, of how many years of life are lost per death. And the number is around 11. You know, you can see the range for men and women here. So that's, you know, sort of what we're talking about, again, it reflects the ages and the comorbidities of some of these people. So, you know, you can judge whether 11 is a lot or a little we're not going to decide that for you. But that's what the number appears to be.

Doc: I mean, I'm going to say this, I'm going to say that, and I'd have to look on the life expectancy table. But you're pretty old when you just have 11 years left. So on average, it's really older people that are dying from this and that this confirms that in my mind. I think I think the median age in the world is 81. So half the people older, and half the people are younger. And I read somewhere, I'm not sure, I have not verified it, but that there are more people have died over the age of 100 than have died under the age of 28. I don't know if you've heard that. Have you seen that stat? Not that particular one. No. Yeah. No, it's definitely older.

Matt: And you know, just to go back. The hospitalization numbers are following those new cases. So it's not some necessarily an artifact of testing or something like that.

And it depends on where you look. There are some places that are getting within worrying distance of ICU and hospital capacity. I think Houston, I think is in is in trouble. They're converting the Children's Hospital to accept patients. But other places still have plenty of room to go. And if you remember from the beginning, this was the whole flattening the curve. You know, if people are going to get it a certain percentage, you're going to be hospitalized. I mean, this is something like, again, it depends by age 10 or 15%, something like that. So you still don't want to end up in the hospital with this thing.

But there are some of the hotspot areas are starting to worry about hospital capacity. And when that happens, again, looking at this from the economic analysts', from the financial analysts' standpoint, that's when the panic will set in. That's when the shutdowns well, or the stay at home orders will come back.

So hospitalizations are really the number to watch here. And moving on to some of the trouble states…

You know, Arizona just off the charts. Test positive rate is 25% up here. So not enough testing. There's a lot of undiagnosed cases out there is what that would tell you.

Florida doesn't report hospitalization rates, but daily tests are up. Positives are up, test positive rate is too high. So yeah, there's some definitely some issues in those states. And it's going to continue.

Doc: Yeah, it's interesting in the Arizona I might, we may have Amanda look this up for us. But there is some benefit for revenue by declaring somebody who might be there for something else hospitalized, to be COVID. And so I know they're hospitals all over the place that are making sure they test people to see if they have it. And part of that is a financial incentive as well, right? If you can get a couple hundred bucks a day extra than you would for someone who came in with a cardiovascular disease or a heart attack or liver problem or what have you. Not that these are explained away by that, but there have been a fair number. I think you sent the research maybe Amanda did earlier this week on people that have held off on going in to get treatments and therapies for other diseases. So anyway, I just it's an interesting thing.

Also, you know, I'd want to see what the average age is of these who are currently being hospitalized. That would be an interesting question. We, as you know, well, as you might imagine, Arizona, especially Phoenix is a retirement center and lots of folks there have gone to live, retire, and die.

The generation that used to go to the hospital to die is still alive and well there. And that's changing the medical care as we say, we're not going to spend all this money in the last months and years of life. But that's not different in I would say in Arizona and Florida yet, where you want to go and maybe do hospice at home and that sort of thing. So I want to be I want to be respectful. The hospitalization makes me nervous and worried, but let's move on.

Matt: Yeah, and I'm gonna post a bet here, Doc… I think that within three months, there's gonna be a major expose that Florida has been cooking its numbers downward. I'll put that out there right now. And we'll see. We'll see which way it goes.

Doc: Oh, wait, wait, let me go straight. You're gonna bet the government is cooking the numbers on the books. Wow.

Matt: Yep. There you go. It's a guaranteed win. Okay, so let's go back. Let's think about the economy, the reopening what people are doing and what that's ended up doing.

So this is some research from JP Morgan. And they have found that if you track credit card spending, the places where people were spending in restaurants more are the places that now have more cases. Okay? So it's just a small bit of simple proof reopening and going out to restaurants looks like it's part of this spread. Okay. Not a huge insight, but it's nice to see some proof of it.

 

This is traffic data from TomTom and they are tracking the congestion in every city. So let's say New York has been doing well, right? Lately, they're a place where the disease is not spreading. So their current congestion, which is the red line is well below the typical congestion, which is the dotted blue line. It's a little faint there.

If you look at a trouble area like Jacksonville, it's less but it's not that different, right? The red line is pretty close to the dotted blue line. So, you know, an area where can traffic is down is doing better. An area where traffic is similar to usual levels, that's having some trouble with the spread of the virus, okay. People are out there moving too much.

Again, masks work. This is a simple, you know, one variable analysis. States that don't require mass cases are up 85% and states that mandate masks, they're down 25%.

Doc: So I have a question right here. Do you want to see this disease spread quickly? Or do you want to see it spread slowly?

Matt: Again, so I'm not making a policy judgment here. I'm saying if the virus is spreading and people are afraid, that threatens our investments. That's all I'm trying to judge. We can talk about what to do and what to not do forever. But I will give you my opinion on that. No, I mean, I think that what we've learned, and we've seen from other countries is that you don't need a full shelter in place. You need some social distancing, you wear your masks and you get this thing. You get the spread rate below one and it goes away and you can go back to close to now.

Now you can't go back to normal right away and I think that was the problem with the reopening and I think that's a problem with the media and the nuance. We're able to explain to people it was okay shelter at home and then it was okay, go out when, you know, we shouldn't have told people go out it's business as usual.

We should, you know, the proper message was hey, we're in a pandemic years, you know, you're gonna have to take some smart risks, you know. Maybe something like you know, if it's your birthday or anniversary, okay, you can go out to a restaurant but don't just go out to a crowded bar because it's a Tuesday and you want to. That's sort of the way I think about it. And I don't want to tell anybody, you know what they should be doing?

But yeah, I would like to see this stop being spread. And I don't think the cost has to be that great following some simple rules. And I think there will be a vaccine down the line. Now there's questions maybe a vaccine doesn't work. Maybe immunity doesn't last. And we don't know those things yet, but I think the goal would be to choke it off like other countries have done. Probably has spread too much to even do that now, I would think.

So that could be the whole thing. That could be the whole talk this month right there. I've pretty much said everything I've got. And so Doc, are you are you just on the herd immunity? Go full –

Doc: So it's interesting. I've got Amanda myself researching herd immunity. Do you know where the concept and idea and reason for studying it began?

Matt: Smallpox?

Doc: Yeah, yeah. Yeah, keep going.

Matt: Well, I know you know, vaccines started with smallpox. They would you would take a pustule, and give it to a small amount to kids, but I don't… Did that grow to herd immunity?

Doc: So, insurance companies that were selling left and right annuities. And then when people would die early from smallpox, they got that pocket that money and not have to pay out their annuities. Realize that if someone did actually figure out how to cure the smallpox by having herd immunity or vaccination, da da da… They'd go belly up. They'd have to be paying out their insurance annuities as people lived.

Matt: Wow.

Doc: That's, that's where it began a guy.

Matt: Yeah

Doc: His name, you probably know from your econometrics stuff, Bernoulli. And I tried to model it, and that's where it began. And since then, it's been a controversy of what actually is herd immunity and how it actually happens. And it's not clear whether it's the virus itself mutates and changes and becomes more spreadable but less deadly. And that allows it to sort of drift away and go away or if it's actually a certain percentage and what percentage that is that actually makes it go away once they get it.

So this stuff is it's… I just love it you know, there's this myth, soon as we get to herd immunity flatten the curve we get to herd immunity. It's like, wait a second where's the science on herd immunity? So maybe next week certainly for a Retirement Millionaire issue we'll have it. So, fun stuff.

Matt: And I know you love German data, Doc. So this is what… maybe we won't get into this one. This is Jena, Germany, which was a city it was very early to put masks in the place and this is kind of a complicated statistical study because they had to do some tricks here but basically, they were estimating that adding masks cut cumulative cases by 30% after 20, 23% after 20 days. You can see the no mask synthetic control. So it gets a little complicated compared to the actual mask one. So just another piece of evidence there.

Matt: I think people should be out there wearing masks. But so we got a lot of bad news on the virus. I wanted to add one piece of good, fun science, something good. This is from a study that was in Nature. And these are a group of guys that have worked on using far UVC light. So it's a type of ultraviolet light. And they've proven that it works to kill flu virus in the air and they've updated it now, testing it with Coronaviruses. And this is essentially you can put a special light in a room that emits this far UVC light and it will kill the virus in the air. So let me see here, based on the results, blah blah blah…

UVC exposure and occupied public locations at the current regulatory exposure limit, so at a safe level, would result 90% viral activation in eight minutes and 99.9% in 16 minutes. So you can picture you ever go to outdoor dining, and they have the gas heater things with the head over you. So maybe we're just going to put a bunch of these indoors.

Doc: And or I don't know, let people go outdoors and parks in the sunshine in California.

Matt: Of course.

Doc: Imagine that. I think we've been talking about that for two months. Anyway.

Matt: So but that's just my thought on this, this isn't going to happen in a year. But if a vaccine doesn't work, and if natural immunity doesn't work, and this is going to keep coming back and it's going to have, you know, send people to hospital every three months or something like that. Maybe this will be a solution down the line.

Matt: All right, so on to the economy. We showed this before. Previously, we were sort of arguing between U-shaped and swoosh-shaped. I think you know now some of the numbers you'll see coming up, it's pushing us towards W-shaped.

We don't know if we'll get there yet. We don't know what the reaction to these new cases are going to be. But there's at least, you know, that's where we're tilting. We're between those two now.

Doc: Yeah, and just, you can go on to the next slide. But I am starting to hear stories of…

 

Doc: Businesses doing now planned, intentional furloughs and layoffs, voluntary separation offers. I'm starting to hear that amongst you know, sort of on the street. I'm hearing that somebody in our office, their sibling, was just offered that, you know, where they know they're just not gonna… they don't have enough business now. They don't think they're gonna enough business in September, October. And so they're laying people off. So.

Matt: Yeah, there's people being laid off for a second time. The unemployment numbers still don't look good. The benefits are going to run out. There's a lot, there's a lot coming up pretty briskly here.

So, if you look at consumer credit card spending, these are tracked by JP Morgan Chase. You know, we were seeing a recovery. Now the question is -

Doc: What's happening there?

Matt: Is this trouble, right? Is that noise? You know, we saw down here, we saw down here, is that noise or is that a W shape?

 

Matt: Well, here's an economic index that combines public transit, traffic congestion, flight activity, foot traffic, unemployment, web traffic, all, you know, restaurant bookings. Again, recovery. And now some flat is that, is that rolling over? I don't know, I mean it but it's certainly not powering ahead like we'd wish for it to see.

And we saw that OpenTable data last week where people in these trouble areas, even though the restaurants are still open, they stopped going so there is the there's the government reaction, and there's the personal reaction. So if these cases keep going, it's worrisome.

Matt: This just shows in general how companies have been responding. And they've been raising cash through any way possible. So, you know, the stock market and the bond markets are really strong and you have all this uncertainty. You have companies, not they don't know what their earnings are going to be next year. So they've been issuing equity. They've been issuing loans and debt and getting as much cash stocked up as they can, you can see we're at a couple of the highest months, monthly proceeds $1.5 trillion to corporations. So they are strengthening their balance sheet so… Well, they're getting cash on their balance sheets for now, maybe at the expense of debt down the road, but at a low interest rate.

 

Matt: And while they do that, they pay banks a lot of money to raise those bonds. JP Morgan Chase brought in four and a half billion dollars, global investment banking fees in the first half of the year. That's a recommendation, Retirement Millionaire. So there are going to be winners from that.

 

Matt: But overall, you know, I mean, I think probably talked about this a bit. This the stock market has slowed, but it has not really responded with a panic to this second wave, you know. There'll be a down day and then the next day is, is some data on a vaccine trial and then it goes back up twice what it lost, you know?

Doc: Right.

Matt: There's not a lot of fear in the markets, you know.

Matt: The volatility index is 30, which, you know, over the last five years, that sounds like a high level, but you know, previous to that, you know, 30 is not really a particularly worrisome level, not a lot of fear in the markets.

 

Matt: High-yield spreads take…

Doc: Just to go back to the VIX thing.

Doc: You know, I cut my teeth on it in the high eight teens and early 20s, or high eighteens, low 20s. So 30 up, there is still a great opportunity for using options and selling options against things. So I'm happy it's staying up there. They have incredible opportunities for us. Easier to create winners, I think, so.

Matt: Yeah, it absolutely does.

Matt: And in the high-yield spreads, you know, elevated, but not crisis levels ticking back up, you know, a little more than you might have expected given the health of the bond market, but that's probably the most reaction we've seen to this second wave is in these high-yield spreads. And oftentimes, it's been you know, it's said that the bond markets are smarter than the stock markets and maybe they're a little bit ahead of the game, but not a lot of fear there yet.

Matt: And what we're seeing, you know, we talked last week about how the Federal Reserve's activity was paring off, you know, their balance sheet growth wasn't picking up so much. And if you just look at this year, and you look at the assets of the Federal Reserve Bank and the S&P 500, you can see that this recent bout of a sort of flat market pairs pretty well with the flat balance sheet of the Fed. So, yeah, I mean, there's, it's not a surprise, but this is a huge part of what's keeping markets afloat, for better or for worse.

But maybe that fuel has run out a bit. They're not as aggressive, and Congress doesn't seem, or at least a week ago, they didn't seem as aggressively prepared to do fiscal stimulus, although, again, with the second wave, maybe they'll pick up on that.

I don't know. I mean, what do you think about the Fed's activity here and you know, they just started buying individual corporate bonds, but I will get to that on the next slide. But the markets seem really healthy.

Doc: I mean, seems like it's being supported by government intervention, which I'm never really a big fan of but if it prevents us from going to food lines like the Great Depression, I'll be happy. But this makes me nervous. If you look at it overall… chart the size of it is just, it's crazy. It's wild, like the amount of money that's… The feds putting out there so, yeah.

Matt: Yeah.

Matt: And here this is, you know, so those floating black lines at the top are the limits that the Fed put on their different programs, you know, the PPE liquidity and Main Street lending. And the red is where the red dots are what they've actually loaned out, so they've got tons of room to still keep pumping money into the markets. They have not gotten anywhere near what their max could be. And so this reflects, you know, the corporate credit… The Fed came out and said, Hey, we're going to buy corporate bonds, and the market was just fixed, right? They shot right back up, the spreads came back in. And then by the time they were ready to do it, the market was fine. And they've bought, I wish I knew the number, they've bought hundreds of millions of dollars worth of the corporate bonds through the exchange-traded funds, and they've just started going and buying specific actual bonds, but it's, it's the actual effect of their purchases is basically zero on the market. It's the announcement. It's the promise, it's so backwards…

Doc: It's the perception.

Matt: Which is just an amazing amount of power. But also, should things get worse, should things degrade, should there need to be a rescue, you know, the authorization is already there. So that's a little bit calming from a financial market perspective. You know, assuming that these things are not a mistake for further down the road.

Doc: Right.

Matt: And you know, so what kind of stocks did you want to be holding or not holding? We've talked a little bit about factor investing lately and quality stocks.

And this shows you know, the success is all in in large cap growth and momentum stocks. This is year-to-date, total returns, the thing and next up is quality down a little bit over the year, but doing pretty well all things considered where you don't want to be or didn't want to be is small cap value, mid cap value, small cap and large cap value is pretty far down there. So value has gotten killed, growth is just in momentum or just riding the trend.

We like quality in the middle. I think you're gonna get the best of both worlds there. But it's just been, it's just been a wild market, but some things have done well, and it's hard to go against those large cap growth stocks right now. Amazon, Microsoft, I know they're, they're priced richly. They're a crowded trade. But they… there's reasons that they're doing so well it's because those businesses are going to be around after all this is done.

So I don't know, Doc. What would be your hunting ground these days? Do you think it's time to get into value now while it's out of favor?

Doc: Yeah, I mean, I do only because it's been out of favor for so long. And I've been putting my own personal money, you know, the 401(k) we have here you can put slowly into stuff like this, a little bit here and there, and I'm now starting to do a little dollar-cost averaging into the small cap, small cap value sector and funds and it's not been a great place to be. We've talked about value. I think we presented something a couple years ago at the… as an undervalued underpriced place. But I mean, at some point, you've got to imagine, you know, people will want, what? It's just so undervalued, I guess.

What was I looking at the other day? I don't want to give it away because it's small enough. But let's just say, it's starting to remind me of Graham and Dodd stuff where they've got cash, they've got assets, trading less than book. Like that's starting to happen. And it's a small company in a small industry that I'm familiar with. So it's very interesting. It's kind of… Yeah, so I see opportunity there. We probably should start diving into that ourselves.

Matt: Yeah.

Doc: You think that's a place to start hunting now?

Matt: Well, you know I like to I like to spread your best, I think you should have a few value plays, but I am betting on quality now again would be my favorite place. I don't think it's time for value yet, I think you want to do value closer to the bottom of the market cycle and I don't think we're there yet.

Doc: Mmm-hmm.

Matt: So, but if you find if you find me the right value company, I'm you know, you should always be open to it.

Doc: Yeah, yeah.

Matt: So that's all I've got…

 

Matt: For this week. All right. Anything else to add?

Doc: Nope. All right. Fantastic. REM@Stansberryresearch.com if you have questions. Have an enjoyable Fourth of July weekend. And remember if you're older and have comorbidities, there's a lot of young folks that now have COVID and are spreading it. So be careful. But, you know, you got to live life right? So get out there and enjoy a weekend however you can and if you're doing it, be out in the sunshine, where we know it will protect and kill virus particles. All right.

Matt: All right. Have a good one.

Doc: Until next time.