Stansberry Research

Doc Eifrig's COVID-19 Briefing No. 21

October 29, 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.


Jessica Stone: Welcome back, everybody. Good to have you here. I hope you had a nice lunchbreak, and also, maybe even joined Doc Eifrig for some coffee and chat. He is back here bringing us an interview and a conversation with an editor's chat with Matt Weinschenk. You may know Dr. David Eifrig, also fondly known as "Doc" around here. He is the editor of Retirement Millionaire, a monthly advisory which shows readers how to live a millionaire lifestyle on less money than you would imagine possible. He is also the editor of Retirement Trader and of Income Intelligence.

Before joining Stansberry Research in 2008, Dr. Eifrig worked in arbitrage and trading groups which major Wall Street firms, including Goldman Sachs, Chase Manhattan, and Yamaichi in Japan. In 1995, he went to medical school and became an ophthalmologist. Now, in his latest retirement, I don't know if this really qualifies, Doc, he joined Stansberry Research full time to share his experience.

And somebody who works closely with him is Matt Weinschenk. He's going to join us via Zoom. He is the senior analyst for Doc's suite of advisories and has over a decade of experience as an equity analyst, particularly in finding ideas to help everyday investors earn better and safer returns. He also focuses on evidence-based and quantitative approaches. He has an undergrad in economics and poly sci and a master's in applied economics.

So if you don't feel like you know them well enough now after their extensive biographies, let me welcome them both here to have their editors' chat. Go ahead, fellas.

Dr. David Eifrig: Thank you for the introduction, Jessica. Matt, welcome. Nice to see you.

Matt Weinschenk: Hello, Doc. Good to see you.

Doc: Yeah. So folks, this is probably our, what, 23rd, 22nd one of these COVID conversations we started doing weekly and this is sort of a takeoff of it and a final not really review, but we're gonna go through essentially we talk about the COVID virus. We talk about economics and the state of affairs around the world. And then we'll give you a pick and a couple of ideas for investing at the very end.

This really is a conversation. Matt and I kind of talk about it. We sometimes disagree. We try not to disagree too much, but let's begin. I hope that you've seen this. This comes from a guy, Hans Rosling, who wrote a book called Factfulness, and I sent this book to my team in the middle of April or May. Everyone got a copy of it because he's passed away now, but it's a really interesting book on how you think about facts and think about fear.

So let's dive in and let's just realize that flu is seasonal. This is a list of multiple years and you can see it's hospitalization by flu season over multiple seasons. So just remember, there's a shape. It goes up, it goes down, it goes away. The human immune system works.

Matt, Jessica has introduced you as an expert. What people don't know is you're really what I would describe as an econometrician and love looking at numbers, love looking at data, and analyzing the stuff. So I made fun of this early on, this widespread of experts' thoughts on the death rate, but hop on in, please.

Matt: Yeah, sure. So this chart on expert opinions was really kind of why we started doing these talks, and you talk about the fear quote at the beginning, and this is just a complex situation and there's a lot of predictions going out there and it's a nuanced problem. And so people were latching on to simple answers when things weren't so simple. And this is one of the things that was coming up. There were all these models predicting different levels of disease and different levels of death, and they were all over the place. So we kind of looked at this chart and you can see there's a range on this chart from I call it 10,000 to six million deaths. And you go, wow, that's quite a range.

But really, the guy who said six million is the one you should trust. He's the one who's given you the big range and including the unknowns and including we didn't know how people would act. We didn't know what kind of lockdowns there were gonna be. There's a ton of biology, especially when these predictions were made, but still that we don't know.

So one of the themes I think you'll see as we go through this is there's a lot of unknowns. We think it's very helpful to discuss I don't want to call it both sides, but the reasons behind different predictions and that we still don't know a lot just yet. But we're going to try and figure out what to expect for the rest of this pandemic.

Doc: Great. So the next slide shows you this idea, and for those of you, the print's kind of small, but each mountain vertically is a year, and it goes from 2007 to 2015. This is a study in Norway of four different coronaviruses. Coronaviruses have been with humans. They come and go seasonally. And you can see if you look at one year, for example, the first column on the left, that year, that particular genetic variation of coronavirus, affected humans. That's in the orange mountain. The other three, really no infections.

Whereas you look later and you can see that right in the middle, there's one where it's orange, mostly blue. There's nothing of the green and very little of the orange. Similar, year after year, come and go. There's no connection between how much the year before, how much the year after. This stuff has been with us. Again, for me, the theme is the human immune system is very, very powerful.

Case counts. We always talk about this. Matt, go ahead. Your comments on case count.

Matt: Yes, so we always would start with the charts and the data each week, and right now, this is where the U.S. case count stands. You can see we had the first wave. We had what you could call a second wave. We don't want to argue whether that's the right term or not. And then we had a good decline. Now there appears to be an uptick. I would say that we're coming up on a challenging point. There are more things reopening and the seasonality is really gonna put a challenge to not see a third wave there. So I'm a little trepidatious going into these next few months.

Doc: Except deaths are down.

Matt: Exactly. If you look at the deaths, they are trending downward, so there's a few things happening here. New York early was overwhelmed. We also have a lot more testing. We're getting a better sense of the actual death rate.

And the biggest thing is we just have better treatment for people who are being infected. So this looks really good here. People who have gone to the ICU, the percentage of them who die has gone from 45 to 20. But I think even just in the last few weeks, we've seen a lot of advances in therapeutics, and that's gonna really drive it down a lot more.

So worry about the case count if you want to worry about that, but deaths are looking better. Still, 700 a day is nothing to be happy about, but it's better than what we thought, what the media thought, and what was sort of being explained to people at the start of the pandemic.

Doc: Right, and one of the things that people might not realize is, for example, if you take Germany, and Europe has been studying these in a group, so they call them influenza-like illnesses. The U.S., as well, but just looking at Germany, you can see this is broken down by age groups. So the color bands are age group. And 70-plus-year-olds are in that darker green. And so this is pneumonia deaths. So it's nothing new. The coronavirus, if anything, I would argue, is actually a little safer. It doesn't kill young people like these other viruses do, but it's very similar to it in that it will kill older folks.

And part of that is just the nature of living. We do die. Nobody wants to die, but that really is the ultimate experience. And I throw this up there because, well, you go ahead and point out to me that if you're 55 years old.

Matt: Sure. So we know it's rough on old people, 80-plus, 70, and things like that, but even if you're 50, the chance of being hospitalized. Death rates are certainly much lower there, but being hospitalized for a few days and having a huge hospital bill is no great outcome, either. So there's still reasons to be concerned. There's still reasons to want to control this thing even if it's not as threatening as it had been made out to be at the beginning.

Doc: Yeah.

Matt: And when you look into the numbers, so when this was first hitting in China and Italy, it looked like death rates were somewhere in the 5% range or something like that, and there's this argument, oh, it's just the flu or it's not just the flu. And one theme that we see through this is that's an unhelpful framing. There's a lot of unhelpful questions, lockdown or no lockdown. These things are unique and they have their nuance. So the infection fatality rate measures how many people who get it, even if we don't know, actually die.

So that's a harder number to get to, but as the months have gone on, science has progressed toward a pretty good number here, and it looks like it's about six times as deadly as the flu, again, skewed to older people. And that number is probably gonna come down as the therapeutics get better. But so it's not the flu. It's its own thing and we have to treat it like it is.

Doc: Yeah, and just to point out why that number comes down, the numerator and denominator, so deaths versus how many people get infected. This is a story from the New York City metro area where you can see on the left, on April 1st, there were 54,000 or so cases reported. Now we go back and look at blood drawn from around that time, we see that it was actually 12 times higher, that there have been 642,000 people infected. And so that lowers the denominator in that lower left corner and makes – sorry, raises the denominator, and makes that infection fatality rate go even lower. And I think it will end up as low as influenza.

Our next slide just we want to remind you that there is this natural history of the coronavirus, like we've seen of pneumonias and we've seen of the coronas that were studied in Norway. And early on in the red is the Northeast, and then the other lines show later openings. And Matt, I know you had some comments on that 'cause we talked about this a couple of times maybe in our 10th or 11th corona conversation.

Matt: Yeah, so this is sort of making the argument for herd immunity where it's gonna get out there. The virus is gonna get out there, and it's gonna shoot up, and there's a point where it just naturally gets through the population. And that's what these charts show. When you break down the U.S. by geography, it has been following that path.

Now so we go back, if we just think about a slide before when we were talking about SEER prevalence, how many people have had it, in New York, we're talking something like 20%. So that, on its own, is not enough for herd immunity. Herd immunity would be 40, 50, 60 percent, something like that. But there's a few other people you could add. Doc, I'll let you talk about T cells here, and then we'll come back.

Doc: Yeah, so one of the things that was also interesting as they looked back at 2019 blood and 2020 blood before being exposed to COVID, at least so we thought, and T cells, which are part of the immune system but very expensive to measure, antibodies, which are cheaper, and you've heard about this in the news, testing for antibodies. It turns out there actually are more activated T cells and activated toward COVID, probably from cross-reactivity to the other coronavirus strains, already exist 20%, 18% level in the 2019 blood and in the 2020 blood. And you can see as you get exposed to corona, there's exposed, mild, and severe, your antibody production increases, as well as these T cells.

And Matt, I don't know if you saw a guy we had on a couple of days ago, last name, Slavin, who talks about this. And he reported it's not been peer-reviewed yet, but there's a study coming out of Italy that's fascinating where they show that in the 2019 water and water, they've found COVID and they're reporting on this. So COVID's been around, this particular strain has been around for maybe longer than anyone truly realized and knows. Again, I want to emphasize don't be fearful. Let's talk about facts and the power of the human immune system.

Matt: So let's say we're working on that herd immunity theory and you say 20% of people have it, another 10% had the T cells. So maybe we're making some progress there. And you look at the charts and the virus and it makes sense. But let's look at the other side. Spain was the perfect case. They had 20% SEER prevalence. Madrid got hit really hard. And then they had a huge second wave that they're undergoing now. Maybe it's turned down a little bit. Israel has essentially had three waves, a big one recently was from reopening schools.

So if you are on the herd immunity train, this is evidence against it, not proof against it. We're still learning a lot of things. But the next chart shows – there's a lot going on here, but along the bottom, if you're further to the right, you've had a big COVID outbreak. You've had a lot of cumulative cases. So if you're over on the right, theoretically, you're close to herd immunity and you should be having fewer cases now.

Doc: Just to be clear, this chart is cumulative cases per million people, so it's adjusted to population size.

Matt: Exactly.

Doc: It's not total cases.

Matt: And the higher up you are, the more cases you have right now. So if herd immunity was taking place in these countries, you'd expect this chart to slope the other way. Instead, it's going this way. And I'm probably reversed here. I don't know if my fingers are matching up, but it doesn't help the herd immunity case. So that leaves concerns that this thing is gonna go on longer maybe than we wanted it to go on.

Doc: So one of the things that we have commented on is how many vaccines are in the work and what stages they're at. Because the idea with vaccine is you give enough people herd immunity. That's how we eradicated smallpox, measles, and so on, is by having enough people so it won't spread in the population. I still think we're a ways away. I know some things just got slowed down this week because of side effects. Do you have any thoughts on the vaccine process, Matt?

Matt: My opinion changes every day. I think that the biggest issue is gonna be distribution. During the presidential debate, we're not taking any sides here, but Trump said they were preparing to deliver 200,000 doses per day. So that sounds like a lot and that's a debate, oh, so don't put a lot of faith in it from anybody. But that still would be 73 million doses year, so it would take three years to inoculate everybody. It's gonna be a big challenge. They said 12 to 18 months at the start and everybody wrote that on their calendar, but I wouldn't get completely locked into that.

But there has been good news, too. It's just gonna be a coin flip whether something works or not in the end, and hopefully, it's one of the earlier tests that work.

Doc: So this next slide, I titled this Policy or Immunity, because it's such an extreme between the United States, and again, this is confirmed deaths or recorded  confirmed deaths, and we could argue about death certificates. We've talked about it. Go back and see some of our conversations that we've had about this, whether there was bias because Medicare paid more if you had that death. It's clear that United States and South America are way, way up there, and Europe, world, and Asia are way down below that. So it makes me wonder is this these other groups have had exposure longer to it and that's why they're closer to a herd immunity, or is policy really that important?

And these are all things that we talk about, and debate, and things that you should be aware of, and think about. And just so you might imagine that we have been talking about this for a long time, they've been talking about this for at least 102 years. So back then, 1918, they were looking at masks.

Here we've got a slide now that shows us. We label this Times of Certain Uncertainty. Matt, take it away.

Matt: Once we started this crisis, we were what happens when there's something bad happening, but you know it's going to end and how badly does the market react? Now none of these were the same as COVID, but earlier pandemics, growth declined, or maybe turned a little negative. September 11th, we had a pretty good V-shaped recovery, which was, again, something where it happened, and you knew it was over, and then you had to figure out what was gonna happen next.

But if you reveal the COVID economy, so far, we're down 9%. That's not really news to anybody, but it certainly stands in contrast to the other cases. So looking forward, trying to see how long this recovery is gonna last, the big thing here is strong start and we just can't get back up to those earlier levels. It's really grinding out. This is an overall activity index. The U.S. is there in white and you can see a strong start, but we can't really get past that 60% of normal activity. So an economy down 40% is not doing well.

Doc: Restaurant levels are struggling to still get back up, and you can see the climb and then back down, again. And the airport…

I mean this is a shocking number when you look at this and compare it to last year, how far we are below. And so restaurants and airlines have incredibly fixed costs that they're so far away from break even that those are troublesome businesses to contemplate. The other problem here people know about is unemployment.

Matt: Unemployment. So the orange line here is headline unemployment, and you can see it got really bad and now it's been getting better, and that's what you see on the news. But core unemployment, which adjusts for the temporary unemployment, is actually ticking up. So the headline numbers are showing people who are laid off for shutdowns and now they're coming back, and that's obviously the case. But the extended layoffs, the airlines are talking about laying off, Disneyland laying, what was it, 28,000, those are really starting to tick up. And if those aren't cut off, if that situations isn't fixed, this is gonna turn into a long and painful recession, as opposed to a short term hiccup.

And there's a lot of talk about the next stimulus package. You can see in the next chart here that disposable income, thanks to the previous stimulus package, was actually up during this crisis, and then started to ease off as those have worn out. But again, that's easing off. So if you saw a good recovery and now you see struggling to get higher, you need a stimulus package to solve that, setting aside the long-term wisdom of stimulus. That's a whole different debate. But right now, we do need it if we don't want this to turn into a real deep recession.

Doc: One of the things, the problems we've seen is a gross domestic business investment is plummeting and to keep people, their heads above water, you've had to take on debt, and U.S. corporate debt has exploded.

And this is, to me, very, very worrisome, especially since you see these companies, so-called zombie companies, that can't even pay their interest on their bonds.

And we keep kicking the can down the road partly because interest rates are low, but really partly because risk is off and the government, by making up money and spending money, is sort of de-risking everything. It's happening with the grape business where people that didn't have crop insurance are gonna get crop insurance this year. I mean it's crazy. Risk is all off, free money. You want to roll your junk bonds down, go ahead and do it.

This next slide, I know you like this one, so I'll let you run off with.

Matt: Well, this one, it's a lot going on right here, but what you have to see is the U.S. is an outlier and it's an outlier because this shows, one, it started in a poor fiscal position, and two, it had a much larger response to the crisis, so it got even worse than anybody else. So it started worse than anyone else and it made a bigger move worse than anybody else. So this chart sort of exemplifies what we're talking about here is extremes. Everybody kind of knows that the market and the economy are not heading in the same direction recently, but it's not like they're a little bit off. They are at extremes.

So the next thing we can talk about is how valuations are extremely high. They're not a little high. They're extremely high. The forward PE ration is now at 26. And the U.S., on the next chart, compared to the rest of the world, has just had incredible performance, essentially off the charts.

You can use that term here without any hyperbole. And value investors have been struggling specifically. So people have been talking about how value investing has struggled. It's all been growth for years and then it got so much worse than anyone could even figure. So what's gonna happen in the next year or two, very hard to figure.

Doc, we've been talking about these things for even preparing just for this, and even since then, I've kind of gotten more bullish on the next year, I think, with it looks like we might have a unified government coming in and if they can come in and produce the stimulus we need in the short term, I think there might not be much to worry about in the short term, and I'll let you address that. Well, I don't know. Let's talk about that and then we'll go to the next slide and get the bigger picture.

Doc: I think one of the things that is striking, as you know, I've personally talked with you about value investing for six, seven, eight months, and this slide shows you that it's gone the wrong way against me, personally, just in the discussions with you. But at some point, you have to be contemplating value investing here. And this afternoon, we'll have a panel that's entirely devoted to value investing. And what scares me is in equity land, we start to look at these metrics.

We pulled this together, and the historical percentiles where these levels are just it's frightening. I was telling the coffee group before this, we're gonna show this slide to them, and it's not really until you get down to the bottom where there's a yield gap versus the ten-year treasury that's on the low side. It's a 26 percentile. And then we do the median here at 87, but free cash flow yield. That's still right at the median, 50%.

What's your take on this when you see this? If you're coming in and I'm convincing you to be an equity buyer, is this where you want to put your money?

Matt: Yeah, so essentially what that chart says is the only reason to buy stocks is because interest rates are so low. That's one way to interpret it. Interest rates are a big factor, but like I said, I'm a little bullish on the next year, but when you look at five or 10-year returns and you look at buying at these multiples, historically, it does not pan out well. So I think my base case is just 2% or 3% a year in stocks for the next decade unless something big changes.

But the disparity between growth and value and the weighting in the S&P where it's these mega companies are the only ones doing well, that gives me reason to think that paying attention to the market and paying attention to which businesses you're owning as opposed to an index is probably gonna be an opportunity. There's probably gonna be more dispersion, would be the technical term, and it's gonna be I don't want to say gold nature stock pickers, but that's one way that this could pan out, and I think that's certainly what we're gonna be trying to do.

Doc: Right. And I backed up to this slide just because I want people to realize that if you're thinking about value investing now and then you look at this slide on U.S. assets, you have to say conclude international value. This is, by my estimation of math, we're looking at two and half, three standard deviations. That's just what things in biology do you see and how often do you see that amount of standard deviation?

All right, so let's go on to our pick for this year. We like Cerner, partly because that space and this company is involved in electronic medical records. And although not the leader in it, they're second, and then the small splinter groups like Allscript, which anyone who uses Allscript hates it, and then EPIC, which is a privately-held business, has the larger market share. And people that I know that use EPIC complain all the time about all the upgrading, and updating, and learning. So we love Cerner. Do you have any thoughts and ideas here?

Matt: Yeah, so Cerner is hospital records, and they get a whole hospital system, and people buy it, and they spend billions to get – well, tens of millions to get on it, and it's very hard to leave. They have all these recurring revenues. But specifically, the data collection in this pandemic has been terrible and there's going to be a move to fix that and Cerner's going to be at the forefront of that.

Second, hospitals have long been optimized to have the exact right number of beds, never a room to waste, and then we find out, well, maybe that's not the way we want everything to do. So there's gonna be some reorganizing there. And all those changes are gonna have to go through their management systems and it's gonna have to go through Cerner.

They also have huge VA contracts. We think government spending's gonna be rising, and it's a reasonably priced stock in an unreasonably priced market. It's not a value stock, per se, but it's got good growth in an industry that's maturing to a point where it's getting worthy of a retirement investor. So it's a really good pick, I think, for the next few years.

Doc: Yep, great. And then allocations, as always, we like having gold, anywhere from a couple percent to say 10%. Cash will come into handy here if opportunities pop up again like they did in March, and I assure you, they will again. I think probably the information age is compressing even the cyclicality of huge drops like that. I think it's one every three, four years now, and probably will go to every couple of years. And then we just pointed out, international business, international dividends.

So we only have a couple of minutes left. Final closing thoughts, Matt, if you have any, or I don't know do we have the ability to take questions from anybody, if anybody has questions?

Matt: While you're searching for questions, I'll just say international dividends, we just added on Richemont and SalMar is a Norwegian salmon farming company. Just great returns on capital for both those businesses. LVMH is now there's rumors they're gonna turn to Richemont if their Tiffany deal falls through, so get that while you can. Just an area ripe with fair valuations and quality businesses, if you're willing to step outside the dollar.

Doc: The reason Matt is there and not here with me, why we're socially distanced, may I say why?

Matt: Yeah, of course.

Doc: So his daughter's teacher tested positive for COVID and Matt had a little tickle and sneeze in his throat a couple of days ago and asked what I thought about it.

Matt: And he said, "Don't come anywhere near me." That's what you said.

Doc: And I said what I've always said, "Stay at home if you're sick." I don't understand this, why people come to work when they're sick. You just spread it around, and annoy everybody else, and everyone else get sick. Why not try to keep viral loads down? So you can read it to me and I'll repeat it.

Jessica: How is COVID infection and our clinical reaction related to blood type?

Doc: How is our COVID infection and reaction related to blood type? It's not. I think we're publishing something tomorrow. There's a question someone wrote in, but it's not. There's a couple of papers that have come out and suggested it, but people have done a hard look at this. I called a hematologist friend of mine and they said, nope, not likely. As the sciences dives down, maybe, but certainly nothing that would warrant you getting treated differently or any certain specific way.

Jessica: One more question. Regarding your understanding of the COVID-19 data on cases and fatalities, are you aware that the format CSO and VP, allergy and respiratory research, Pfizer Global R&D has put forth a detailed technical explanation of why these are grossly overinflated by 90%.

Doc: Boy, that was a really tough question talking about Pfizer's put something out about overinflated by 90%. I have not seen it, so I can't comment on it, other than when Matt and I first started butting heads a little bit on the case fatality rate and the infection fatality rate, I would say I put words in Matt's mouth. He probably didn't believe me that it was going to come and get closer to the influenza numbers. But so I don't know what they're even referring to, but we'll dig into it. I'll figure out what that is.

Jessica: Yeah, we can get you that question and get back to this person.

Doc: Great.

Jessica: Somebody asked what the recommendation name and symbol was. They had a hard time hearing you.

Doc: Oh, the recommendation should be on your screen right now, Cerner, C-E-R-N, Charlie Echo Ranger Nancy, CERN. I see a double-zero there. That means we're holding somebody else up from joy, so Matt, thank you very much.