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: Welcome everybody, I'm Dr. David Eifrig. Matt Weinschenk and I are socially distant, different cities, different states. Welcome again, Matt.
Matt Weinschenk: Hello, Doc. Good to talk to you.
Doc: Yeah, well, let's dive into the most important part which is if you haven't signed up –
Matt: Yup. There ya go.
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Matt: Yeah, long as we're in the house, we'll keep going.
And this week we'll also –
Doc: Wait! Okay…
Matt: We'll be doing this Week 52, probably… Also this week, Doc you're going to talk about Porter's Digest that went out earlier this week. It was very – I don't know, what's the word? Very brazen? Very opinionated?
Matt: A lot of people.
Doc: It was Friday Digest, yeah, so we'll come back to that and might even sprinkle some thoughts in, so stay tuned.
Matt: Alright great. So we will check back in on the virus. Our standard charts: Daily confirmed, new confirmed deaths…
Definitely a big drop there, which is wonderful news. Still 2,000 people a day, not good, but definitely headed in the right direction.
New confirmed cases, not as much decline there, flat.
A lot of this again is confounded by testing, are we testing enough people, we'll talk about that in a little bit. But there's not a lot of… New case growth is flat, right?
Matt: We've still got 30,000 new cases a day, but it's flat.
Doc: And let me… let me point out again the sharp increase is because the United States didn't have many test kits around. They've got lots of test kits, plenty of test kits now going around, and so you're seeing this kind of steady level of testing happening. So this is testing and new cases confirmed, it looks like the percentage… Or because the total cases is staying about the same, that to me again is a good sign and it's down from the peak.
So… All good.
Matt: Yup and here is the curves. I don't know why our source for this chart removed the days. It's a little bit different now, but you can see it is flattening out, which is basically what we want to see, getting a lot flatter. So that's really good, a really good sign there.
Doc: And Matt, actually could you go back to the slide before…
Just some people have written in and said hey, this is unfair, it looks like the United States is worse than the UK, Spain, South Korea… It's just that we're a much larger country and we're doing that many more tests. This is not divided by population or anything like that, so this is not meant to imply that it's worse in the United States, in fact just that we're a larger country, so I hope they'll appreciate that.
Matt: Yeah if you wanted to judge oh, who's doing a worse job, you can divide it by population, but really what we want to see is – is the number of new cases growing, right? So it doesn't matter that there's more than a smaller country. What matters is – is that 30,000 going up or is it going down to 25 – that's what's important to see in growth, so.
What else do we have here? Okay, here's just an interesting chart I came across…
Doc: Oh, sorry, go back to the one that had the big red curve.
So I interrupted you on that. You were talking about the dates weren't there. What does this show to people?
Matt: Yes. This is again, we're probably getting over to a full three day doubling as opposed to two. We want – basically when this goes flat, this goes straight across, the growth is slowing, so starting to see some good progress there. And catching up to what we've seen in Spain and Italy where they've gotten things under control. So just another piece of good data right there.
Matt: Again, you know there's a lot of talk – here's what the big talk is now, is about reopening. Right, that's what people are trying to figure out, you know that we appear to be past the worst of it, at least if that, if that's the only peak, so when can we open things up, is there – there's still a lot of talk of is this just the flu, is this just the same. And so this is a chart of the percent of people who – the percent of mortality each week I think who are reported as dying from either pneumonia, influenza, or now COVID. So, in a normal year, that'd be about six or eight percent depending on when it is through the year – six or eight percent of the people who die in a week have died because of the flu. But now, this red line, for this year, is about 18%.
So it's clearly a very different phenomenon than just a normal seasonal flu. Again, the illness isn't… may not be that much worse than the flu, but it is a new illness and no one has any immunity to it. It does spread faster than the flu and it's got a bit higher mortality, which is still something being judged, but it is not the same thing because it is new.
Doc: Yeah, and let me give my little story or history or take on this slide. Down at the bottom it's got the weeks, and that's weeks of the year. And the MMWR is the Morbidity and Mortality Weekly Report. And for people that trained in the healthcare system, you know that many hospitals, certainly training centers, have a regular, often weekly, meeting that discusses the morbidity and mortality that's happened in the institution.
And the reason for that is you want to make sure that lessons can be learned from mistakes that are made, or if something unusual or bad is happening, this can alert you to it. So this is a database that gets analyzed is really taking of all the deaths that happened in this past week – what percent of them are from pneumonia, influenza, and COVID-19.
And you can see the seasonality of it – this is over a couple of year period and you can see where the red line popped early in the lower left above the normal seasonal variation of deaths, percentage of deaths from this. And that pop was because that was a really bad influenza year where we had I think 60, 62,000 deaths in the United States. And worldwide, hundreds of thousands of deaths.
And again, going on through '19, you can see kind of a normal variation. And this pop, when Matt put this slide in here and we were talking about it earlier, it scares the daylights out of you. You go, oh my goodness – this is crazy. The deaths from these diseases, respiratory diseases, pneumonia, influenza, COVID-19, has gone off the charts from a normal what you might expect 7, 8% this time of year, to 18%.
Doc: And you might panic, right? You could panic, but…
But, what's happened is deaths from all causes has plummeted. Why is that? Well, people aren't driving. People aren't in planes. People aren't in trains. People aren't doing the things they normally do. Falling off ladders, construction workers, all the things that cause deaths, all-cause deaths, has plummeted. So again, the title of this talk this week should be "Numerator Versus Denominator" so that previous slide is a case where the denominator collapsed, right? Other, all-cause deaths, and so this numerator pops up, making us panic.
Matt: Right, so this, so… 18 or 20% of all deaths being COVID is maybe a… that is definitely partially the denominator… I don't know if you were to equalize that out, it would still be a surge here. It would just not be a surge that high, right?
Matt: Alright, so.
Again we're talking about opening so here's one of the pieces of information that have been coming out this week. We're trying, now that there's enough… before we were approaching not having enough testing available, there's more tests available, we're trying to find out ways to see how many people have had COVID, what's the prevalence, right? And the prevalence is, if you could test everybody in society, and you get all your positives and all your negatives, and you say, okay, 10% of people had that. Like, what's the real number if you knew everything because… so the testing rate, the test-positive rate of people who have been tested in the U.S. is about 20%.
Right, so… But those people get tested for a reason. They're sick or they think they're sick or they've been around someone who's sick, so while that is 20%, that doesn't mean 20% of people in the country have it. So what is that real number, which is called the prevalence?
And there's been two studies. Check out... I'm already… serotology, is that how you say it, Doc? And these…
Doc: I think serology.
Matt: Serology, sorry. And these are tests of people's blood to see who have antibodies to coronavirus. And we can try and find out how many people have already had it. So how far along are we towards herd immunity and maybe what is the real mortality rate if we know how many people have actually had it?
So both of these studies are putting the numbers somewhere around 4%. Which is many multiples of the number of cases, so it's much more prevalent, which would mean the mortality rate isn't as bad as maybe we had been thinking, which is good. But also 4% means we need 10 or 15 times more people to get it before we get to herd immunity. Because for something like this I think we're talking 60% for a 2.5 R-naught (R0) I think is the number that I had seen.
Doc: Yeah, I think that we're living in a time of experiment with humans. This is the first time we've actually put everybody away – everybody – and said you know, lockdown versus putting away and locking down people that are… could be more easily harmed by it. And yeah, the question is, as you point out, what is the prevalence here? What – truly how many people have been exposed to the virus, how many people produced antibodies to the virus, and that gives us an idea of both the level of infectiousness as well as how deadly the disease is. Clearly, if half of the population were positive on these tests, we'll come to the actual test characteristics in a moment, that's a good sign. That means we've built up huge – or herd immunity and that protects everyone else and it stops spreading as fast. So this is interesting, this is preliminary.
When this came out I think I sent you a text a couple days ago that said, hey Matt look at this. It could mean there's hundreds to thousands more people that have this than we expected and we're seeing this in other parts of the world as well. I think something came out last night suggesting this in Sweden as well, that many many more people have this than we thought. But it still doesn't change the outlook and view we have on asking the question, how deadly is it? And let's err on the side of safety. You have a great slide coming up here or should we talk about the test characteristics first?
Matt: Yeah, let me talk about these studies real quick because – so these you know, and this is something you, you've been… I don't know if upset's the right word… there's a lot of papers coming out real fast, a lot of studies coming out real fast, maybe not up to the same standards as when people are taking their time. I know that's been a bug of yours. These studies make a lot of assumptions. And the data sets are larger than anything we've seen but they're still pretty small, so. Both of these really make two assumptions: One is about the false positive rate, so you test people for these antibodies and it says yes, you've had COVID and you have the antibodies in your blood.
But there's going to be an error rate there, and if there's a lot of false positives, that could completely blow – a small change in the false positive rate could completely blow these numbers to be something entirely different either way. And these type of tests tend to have a lot of false positives – we don't know what that actual number was. So these studies make a guess at that number and if they're wrong, you can throw everything else out. And they also use their samples and project them onto the wider population, which, you know, you see that in polls for elections and things like that. And that's just, it's – it makes sense to do, and they're trying to find the right number, but there's a lot of assumptions built in here, so take these as preliminary.
Doc: Yeah and one of the things that – one of my favorite classes in medical school was on testing characteristics. And you could imagine the ideal test – if a company, Bristol Myers, Gilead Science, you name it, LabCorp, if someone could create a test that everybody who really had the disease – and that's called a true positive – was truly tested and came back positive. That means the test is 100% accurate for true positives right? And then similarly, for everyone who didn't have the disease, never been exposed to it, didn't have antibodies, 100% of those would come back truly negative.
And it turns out, for a whole bunch of reasons, but you could imagine the coronavirus, maybe this coronavirus reacts with an old coronavirus that you had years ago, a common cold coronavirus you had, and the antibodies cross-react. And so you could take this test, conceivably have the coronavirus, and test negative or positive and so that's the problem with tests. Similarly, you might never have been exposed to corona, and because you have been exposed to the common cold, you might show up as positive but in this case, hoping to find out who truly has corona-19, COVID-19, you show up as a positive when in fact you're a negative.
And so the four sort of quadrants in a test are true positive, false positive, true negative, and false negative. And these testing characteristics are one of the main reasons you know, Governor Cuomo is saying "test, test, test, test." People are saying test, test, test. Tests don't matter if the tests aren't good. Tests don't matter if they haven't been validated. And that's the problem with science and human existence is nothing's perfect, nothing's 100% accurate and true.
And the point I want to make about this and the reason I sent this one study to Matt is there's no doubt in my mind, and there's no doubt in Porter's mind, that many many many more people than we expect have been exposed to this, have had no reaction to it, and will probably test positive when we get really good tests. Right now, the people that want it to be worse than it is are saying, hey these tests might be giving us false positives.
My suspicions are, several of these tests are good enough to show us that is has been out there longer than we expected and the exposure has gone further and faster. I know that amidst the lockdown the first week, students still were getting together and partying and playing. And I don't know how many students they've tested in these, but if you don't go get the student population again, say University of Southern California, if all the students have dispersed, it could be that the weekends they hung out together 100, 80, 90, 60 percent of them all have been exposed, had no symptoms because young folks don't get symptoms in general, and so we might have built up herd immunity amongst that group.
And I think that's the idea, that's the hope, that's the belief I lean into now. So sorry to get off the track.
Matt: No, it's great.
Doc: I just wanted to make that point.
Oh yeah so this is just another study that came out – I found this very interesting. So this was a specific case study of a restaurant in China. And this was done by our CDC. And A1 there, the guy in yellow, let me move my cursor, A1 had COVID and went to dinner. And I think it was, I think it was there were 83 people in the restaurant and 11 ended up getting infected. And they were infected you know, they can test the genome and it came from this guy. So these 11 circles were infected, one, two, three, four, five, six, seven, eight, nine, ten, yup. They were infected, 73 people were not.
And here was another interesting thing, Doc, I don't think I even told you this, those 73 all in the restaurant, were then all notified and locked down and tracked, which is something we know… it just shows how much further their lockdown system is than ours, because we don't do that here.
Doc: I'm sorry, did you say how further it is or how much more convoluted it is?
Matt: How much more… I'm trying not to use good or bad here, but how much more extreme it is. So, but what they found, so all the other people in the restaurant were not infected. Clearly these people were close, but what they think it was was this air conditioner system. The air was coming through and blowing this way and that's why these were the 11 who got infected.
And at first I just thought this was, I'd never seen a study like this and I thought it was pretty interesting. But there's two takeaways I think from it: One is this is why we're not going to restaurants, right, if you have one person go in and 11 come out you know, that is going to blow up weeks of other peoples' effort to stay, to stay isolated. And that's how it can spread. And two is this points to what's called large droplet spread as opposed to aerosol spread.
So it is an airborne virus, but it's not, it doesn't float in the mist of the air, right? You need a droplet, a cough, to go and land and hit somebody. And there's, I don't remember the cut off, if it's 10 microns or whatever, where you go from aerosol to large droplet, but this pattern suggests large droplet, which also suggests that even using a – tying a t-shirt around your face or using some sort of poor, low-quality mask is good for large drops. It doesn't work so well for aerosol, but it does work for large droplets, so that suggests that wearing masks would be helpful, especially to prevent spreading it to other people.
Doc: Yeah, so, stay on that one for a second because I know how much you enjoy this and like this. I want to throw out a couple other hypothesis about this.
Doc: One is in a restaurant, we know that the wait staff, let's say that… and I don't know, you put this in there and we talked a little bit about it before this, but this was your discovery and I love it. But I wonder if section E and section F or table E and F, if they had a different server. And A, B, and C was served maybe by the same wait staff and wait group. And we know that humans 20, 30, 50 times an hour touch their mouths and so you wonder if the wait staff and these people clearing plates, moving stuff around, and then the eaters, if it was shared that way. Now I know it's more likely that it was shared through the air and I like the air conditioner, but it doesn't explain the fact like, how did C1 and 2 get it if the air was blowing from that direction, you're suggesting it circulates back.
The other thing I find fascinating and I'm going to research this tonight, but look at table B – there's a person who didn't get it. Look at the four people at A and the five people at C that didn't get it. That to me is fascinating, right? I mean, so, does that mean those people are going back to the test characteristics, are those people – did they really get exposed to it? I have to assume they did. They're at the same tables the others did. So are they a, upon testing, a false negative that as they come back they didn't have it. Were they asymptomatic and actual true positives? This is a fascinating study and points to all the things that you have to consider when you're wondering what's going on. But I love it, thanks for bringing this in.
Matt: I know, and so just one thing, I don't, you know so it could have certainly been spread by the servers. I know the study did specifically say no servers in the restaurant that night got – they were all locked down and none of them tested positive later. So, just a point of interest there.
Doc: Wow, right?!
Matt: Yeah, yeah. And the other thing this makes me think of is what… what things are going to change in the new world after this, right? Are our HVAC systems going to be done differently with better filters and arranged differently? You know I went to the grocery store the other day and I was still… you know you go through an automatic door but then you have to touch this thing and I mean you can imagine all that stuff is going to go touchless, right? We're not going to touch anything anymore. Elevator buttons, I've seen designs where you put your finger there and you don't touch but it makes a nice little reaction so you can tell that it worked.
So, there's going to be a lot of things that change and you know we used to have A. O. Smith in one of our portfolios, they make water heaters. And they did a lot of business in China. They also made water purifiers, right? So we have good water here, they do not have good water in China and we kind of imagine like they're going to be buying water purifiers. Now this is not a water-bourne disease, but something like that along those lines. And I know you've long been talking about how air pollution is an underlying cause of a lot of health issues and I just keep seeing more data on that coming out too.
Matt: Just a lot of things.
Doc: Inflammation. You know, I'm thinking live with you here. So, water, one of my pet peeves, and people know this, I say don't during the flu season, winter, don't share your silverware, fork, glasses, especially around holiday gatherings, friends, family, from people traveling around the world because you're going to pick up the – you're going to pick up a large dose of virus or spread it to them if you do that, right?
I wonder, and my pet peeve is this, when people pour water pitchers, you're not supposed to touch the water pitcher to the glass. I wonder here again did the water server, the busboy or girl serving A, B, and C, are these people whose water pitchers were touched. I… Like, right? And I know there's people, I've been at tables where they don't drink water at all when they eat. What if that's the cause? I mean, anyway, so much great, fun, interesting study. Love it.
And there's another study that came out. So we wrote in Income Intelligence, we just wrote a little story about wearing masks and when people started talking about masks they said, aw, they don't work, you know, unless you get the really good ones they don't work that well, so it's not worth it. And our kind of argument was even if they don't work well, even if they work a little bit, if everybody does it, it makes a huge difference. So here's just a study – let me get my cursor up here, so…
This side is the adherence of how many people wear masks. So 100% of people wear masks or 0%. And this side is the efficacy of the mask, so perfect mask, ok let's say a mask that works 100% and 100% of people wear it, you'd get up here which is blue zero, so the disease doesn't spread at all. And if no one wears any masks and the masks are… it doesn't matter how good or bad they are, then the spread is 2.4, that's the reproductive factor. And so the point here is, look, if everybody just goes and wears a half-good mask, we'll be down in the blue here, that means we're below one and this thing goes away.
Again, this is a model, this is maybe not how it… not necessarily how it works, but you don't need everybody to wear a super perfect mask. Tie a t-shirt around your face if you're going out. I think in Maryland, where I am, you have to wear a mask now if you're in, if you go to a store and you can't be socially distant, you have to wear a mask. I think in New York City, or maybe New York state, you have to wear a mask, but also, in general, it's illegal to go out wearing a mask, so you're breaking the law either way.
I don't know if you saw that information, Doc. So that's always fun to deal with. That's a vote for… I don't even know what that's a vote for. But, anyway, I think you should wear a mask if you got out because it's essentially a no-cost activity to help yourself and help the people around you. So.
Okay, so we're on to the economy now.
We generally go virus, economy, and markets on these things. This is… and what we're trying to do is find real time things, right, the economic data is going to come out, it's lagging, lags way too much in an environment like this. So we're trying to find real-time numbers we can look at. So here is, sort of from a few weeks ago, but you can get it real time, this is electricity usage and it's down about 8% from what you would normally expect. Electricity is definitely an indicator of the economy and if you want to see if this works, here's what happened in 2008. Electricity usage was down about 7%. Later on, when the GDP numbers came in, we can see that was about a 4% contraction. So we'll go back to now, we're down 8%, probably headed down more here. So that would suggest a deeper recession than 2008 if those relationships hold up.
So that was interesting and not too encouraging. So here is sort of our current outlook. In the best case, we can start opening things up – that is happening in some states, it's not really happening in the best states for that to happen, they still have some growth in Texas and Georgia, so it's a little confusing. But if things go great, we have no resurgence and we have the testing available to prevent resurgence, we're getting closer to that, I don't if we're there quite yet, but we're getting closer to having enough testing. But what's most likely going to happen in my view, we're past the first peak, that's great. But there is going to be a resurgence, as we try to open up, certain locations are going to have problems but other locations will do a bit better.
And economy-wise, we're going to recover but it's going to be… it's going to be a hard, long slog. Unemployment's going to be 15, 20%, you're going to have a lot of small business shutdowns, Congress is trying to fill the hole, but you know, they already blew through the first paycheck protection program, and it doesn't seem like enough people got what they needed to stay open, so there's going to be a lot of bankruptcies and small business failures and it's going to be hard to come back. And again, maybe this thing gets a lot worse, six, eight months before we can really open things up. Unemployment hits 30%, but I don't… I'm getting less worried about that worst-case scenario as we go on. Doc, how would you adjust these for your view?
Doc: Yeah, so I think from the health side, and we'll show, we're going to look at a couple sort of final economic things, just to sort of frost the cake… The health side of it to me, I'm less and less worried as each day goes on, I think the concern I have becomes more political and that's where Porter and I see a little bit closer together than most people might imagine and again we'll come to that at the very end. But the curve is tipped over and one of the big concerns and worries was that this disease when it first hit Wuhan and whatever the level of reporting that's questionable it looked like it was deadlier than we realized. So at a 4% death rate, and there were some press reported, looking for headlines, looking for clicks, you start to report on the 35-year-old doctor that dies in Wuhan, the kids that die in Wuhan, we're starting to see that that's not a reality. That is younger folks tend to not get that sick, deaths from children, same thing. So that's the good news on the health stuff.
And I think the common-sense view would say, listen if you're older and have other complex medical problems, you want to keep isolating yourself, keep washing your hands, you don't want to get this. But the truth is, that's true for everything during the influenza season. And so you want to be washing your hands more during that time of year. I would tell you for the population idea of locking everyone down when there's an infection, we know that will be disastrous because you need things. When you're a child, you need to roll around in the dirt to build your immunity. You need, that's what we have the immune system for, is to fight colds, to fight viruses, and to fight bacteria. Eventually when you get older, you don't do that.
I've said this before, but pneumonia used to be called the old man's friend. If you went into a nursing home or you were in your own home with your family surrounding you, pneumonia, influenzas, illnesses like this were what often killed you. Now, if we can prevent deaths with an antibiotic, if you can prevent a quality of life where you still want to live on, that's fantastic, if we can do it, but it's probably the older folks that should do that, not the younger, working age and people… And those people should be careful to not spread it to their parents, their grandparents, their grandmothers.
So, I'm optimistic about the disease not being as deadly as everyone first thought. But, I'm also super excited and hopeful – not even hopeful… It looks like we're past this hump on the surge and need for ventilators. And I think if politicians are telling people, "Oh no, there's going to be this huge resurgence," and that we're going to flood the ERs and ICUs again, I just don't see that happening. Most folks who are older and nervous about this – if you said, "Alright everyone, go back to work and go nuts," people who are of the age that this kills are going to be now much more careful and cautious about it. People are still going to get it, but it's not going to be this wildfire that suddenly picks up again.
So I think the idea of a second resurgence is absolute nonsense. So I lean, again still, best case, a little bit leaning into the baseline. But I'm super excited and happy for how this is looking. I'm not happy for anyone who has died from it. I'm not happy for anyone who has had family members unexpectedly die. My hearts goes out to those folks. And I don't want to even sound like I don't care about that for people. So I understand and appreciate it. I just don't think it's going to happen any faster if we let people loose.
Matt: Yep, okay. So we do have another economic chart here just to show that people are not as leverage – or they do not have as much debt via mortgages or credit cards – as they did going into the last crisis…
The reason we have this and some other things is we're trying to find the good things and we're trying to find the bad things. A lot of people like to come in bearish and they can find every chart to tell the bear case and throw out all the bull case ones. And we're trying to hit both sides.
The electricity thing was a little more bearish. This one is saying, "Hey, it might not be that bad. It might bounce back quicker."
They've been deleveraging since the financial crisis. So that's good for the household.
On to markets… I'm sure everybody has seen the oil headlines. Oil went to negative $40 a barrel. That is an artifact of the futures market. It doesn't really mean that oil is worthless or oil has negative value in the grand sense. It's really more in the $20-a-barrel range if you look at the other futures. But the futures market did sort of break down. This is a combination of Saudi Arabia and not enough oil storage and declining demand because of the lockdown. But just an odd – a really odd occurrence. I mean, you couldn't talk about things without talking about oil to negative $40. We'll see where it goes from here, but it's going to be low for awhile I would think.
Doc: I had a good laugh with my buddy – the Goldman guy I mentioned a couple of weeks ago – Steve Koomar, who has this great letter, Vigilante Investor. He and I were chuckling because the fund – there was a mutual fund or ETF called USO – and we both laughed and said, "Man, whoever is running that, they don't understand derivatives." Because the No. 1 rule – He and I started within seconds or minutes of each other on Goldman's desk in the futures and derivatives group. And the No. 1 rule in derivatives is if you're using them for hedges, that means you're not planning to take delivery. And so, in the last couple weeks, the fund saw this huge influx of money that they had to put to work. And the way they put it to work is having exposure to the oil market and that means buying futures. So for some bizarre, strange reason, these guys running that fund near futures, right? As opposed to getting the hedge and getting the exposure to the oil market by buying out in September, August, October, December, January of the fall next year, that gives you exposure to the oil market, they bought this front futures contract, which makes zero sense. And then suddenly, I'm sure they got a call from their brokerage that said, "Hey, do you guys know that in two days – since you're long these futures – you've got to back your ships up and you tanks up to take delivery of the oil?" And they went, "What? I thought these were futures." And they're like, "Yeah, the future is here, and the contract ends, and you take delivery."
West Texas Intermediate futures are real, true delivery. And so again, it's like somebody running a fun who doesn't know what they're doing. And so they had to sell very, very quickly to close out their contracts. And that this thing to – You know, who wants to buy that contract? No one wants to buy that contract. The guys that were short the fund contract made a fortune against these idiots that bought the front futures a week or two before.
You can't even make up stories like this… The stupidity of –
Matt: I know. And just think of how many rules here were broken. You know, if you short something, it can only go to zero. Well, not in this case. It can go to negative $40. Or if you were selling puts a $1 strike or something like that and you think, "Well, it can only go to zero, right? What's the worst?"
And now it can go to negative $40. So just a total… just a total wild occurrence in those markets.
And so checking back in on what we're looking for… So the virus news looks good. I think the economic news is going to be worse. So I still feel like the market is going to have to head back down. We had a big down day yesterday, which would be Tuesday. So we see a little bit of a tick up in the high-yield spread, which we're waiting for that.
That'll come down before the market can really look healthy. But seeing a little tick there, so we'll see.
Same thing on the Volatility Index (the "VIX)…
There's a tick back up there, so now you see the market coming back down here. How big of a pullback will we get on stocks here? I don't know. I don't know if it's going to hit these lows. But I still don't feel like it can head right back up to those highs. But we'll see.
We are slowly starting to step back into some high-quality stocks, and we'll see how that goes. But we're not jumping straight in. I don't think people should be jumping straight in anyway. That should not be the way your strategy works. But we'll see where it goes.
And then obviously market's earnings…
Now we're starting to see real earnings. We're starting to see what's happening with this market. This is really important. So there's been 73 –
Doc: And just so people understand this chart… This is a picture showing on the top what analysts are expecting in sales for the quarter, right? So this goes back over nine quarters.
Matt: Right, so there have been 73 companies in the S&P 500 that have reported. The average company has beaten expected sales by about 1%. Not that bad, right?
This is also expected sales. So these have already been lowered to account for the economic activity. Now usually they beat estimates by somewhere around 1%. Usually they beat earnings by, on average, somewhere around 5%. But even though earnings estimates have been reduced because of what's going on, they still came in about 9% below that. So that's a negative surprise.
So, the short answer is, now that earnings are coming in they're not looking good… Even for what we would have expected. The weirdest one was Netflix. Analysts expected 15 million new Netflix subscribers, which was pretty high because a lot of people are at home. And they only had about 8 million new subscribers. So they cut it in half.
Maybe that's a Netflix-specific number. Maybe that's, you know, if you lose your job, the first thing you do is try to find those little bills you can get rid of or lower your cable package or something like that. So maybe that's a wider consumer effect that's happening there. But that was just a really interesting number. And that's one of those disappointing ones here.
So earnings are going to start coming in. We're about a fifth of the way through earnings season, and that's going to give us a lot of things to think about. And so far, it's not doing the market any favors. But we'll see.
Now, today, Congress is working on a new $400-something billion second stimulus measure. So that whole is going to keep getting bigger and Congress is going to keep trying to fill it in. That's really the central question of what's going to happen with this market. And take it from there.
Here are our scenarios again…
We'll see how those play out.
Doc: Yeah, so if I can just go back to that for me to comment on the economic side of it now… I'm still, I think, probably leaning more toward between baseline and leaning now more toward worst case because of these dislocations.
Not that Wall Street analysts are particularly good at predicting anything. We know this. The fact that the earnings estimates are so far off, right? Go back one slide so people can see this…
Normally, Wall Street analysts under (sort of) guess partly because they have to do investment banking business with these companies. So they have to say, "Hey, we're expecting these companies to make this. Oh wow. Isn't it great? They made 3% or 4% more than they did."
And that's quarter after quarter after quarter, analysts miss it on the downside to create and keep optimism alive.
They totally missed this on the downside. No clue. And I think that's the problem… Wall Street – and I'm going to argue the government – doesn't understand how hard this has hit a lot of people. And so that's why – you can go to the next slide showing the three scenarios – that's why I'm much, much more nervous about it on the economic side still.
I feel bad that we're on week no. 5. This is our fifth one, doing this, is that right?
Doc: We talking about, in the first one, restaurants having three weeks of cash. I know restaurants near me… They're done. They're out. The owners. The chefs. They've lost it. They have no cash. They're going to have to declare bankruptcy.
And there's no government plan that's going to allow an individual to keep a restaurant going when there are no customers. That's the most absurd idea I've ever heard.
Now, I feel bad for these guys. And I don't want them to commit suicide. I don't want them to harm themselves. I want to support their next business venture. And we as a community, those who have money, need to start loaning money out… taking risks in your local community to help people like this. But government is not going to be the solution. It's got to be more local. It's got to be more direct between people you know, people you trust, and your community. And if any good will come out of this economically, it will be me personally believing in this idea. Not counting on government to protect us from anything. Disease – they'll always fail. The vaccines… We can go on and on about this. But anyway…
Doc: Where do you come down? Where do you think we are economically?
Matt: I'm more pessimistic about that because it's just… Again, you can talk about responsibility, you can talk about having a buffer in your business and making sure you have enough cash on hand. No one has ever said – no one has ever conceived of months of revenue down to 0%. If you're a dentist you're down to 0%. And if you wanted to be a dentist you would have said that one great thing about being a dentist is people are always going to go get their teeth cleaned.
To expect these people to have that kind of cash on hand for these businesses for something that has never happened before and will never happen again is just… You know, this is completely unexpected. And I think the number of people and the number of small businesses that are going to be able to keep anybody on their payroll is just dropping week-by-week. It's going to be really, really scary.
Now, market wise, this is a huge opportunity for big business. The bailouts are helping big business. Big business has capital on hand. You could be Royal Caribbean and you can go to the bond market and raise money, which, I mean, that's just insane to me. If there was one company that should not be able to raise money it would be a cruise company at this point. So they're going to be able to step in and take these things over.
If you're Target or Wal-Mart, you're essential now. You have a grocery thing and people need to go buy groceries. But they can still sell TVs and clothes, whereas the little electronics shop (not that there are many of those anymore) or the little clothing shop… they're not open.
Maybe these large stocks are going to do just fine. And what you've seen is that the bigger the stock lately, the small ones have been doing terrible and the large ones have been doing much better.
I'm pessimistic about the economy, but maybe that doesn't follow on to the markets directly. Although I am –
Doc: What's interesting – and this is me self-promoting my wines – there's a dentist friend who is an Alliance member and he likes my wine. He's not a big drinker of wine necessarily, but he asked could I do anything. Like a corona discount. And I did. I gave him – he bought four bottles of my wine. This is the point where it comes across – eifrigcellars.com. Yeah, he bought four bottles and I threw in a couple extra for him. Again, he's been a regular buyer. But he's hurting and he's like… In fact, he's gone to a different state to a warmer climate, and just kind of in his bolthole.
So I can appreciate that. He's a dentist!
My younger brother who is a retina doctor in Orange County, Southern California, he's down to 70% and 80% of his weekly visits. His staff are doing the social distancing to not spread it. I try to explain to him that, "Hey listen, your young staff might already have it in Southern California. And you need to be really careful. You wearing a mask and your staff wearing masks so that your older people coming in with eye problems don't get it. And they need to have masks on.
But it's affected his business. And I assume he can ramp it up quickly, but if two-thirds of his business is older folks, how fast are they going to come back out and risk themselves being exposed to this.
Matt: And what kind of – On some of those things, there's no catch up, right? There's no, "I skipped my eye appointment and now I'll do two next year." So some businesses do have that, but a lot of them don't. You just skip it, right? You can get more hair – I'm needing a haircut now, but you can't get more haircuts.
Doc: I'm not going to get a hair cut today and next week and next week and next week.
Matt: Right, and make up…
Doc: … Make up for the barber.
Matt: Yeah, so.
Doc: Speaking of barbers, shout out to Gabriel. Gabriel, I need help, man.
Matt: Yeah, me too.
This was just a quote from Howard Marks. He's a real smart guy who runs Oaktree Capital distressed investor.
This just kind of put my thoughts into… This is how I feel, so I just added it in here.
That's kind of where I feel… where a lot of bearish people feel. The only counter to this is if a stock or a business is worth the present value of its future cash flows and if you just take away the first year, but next year it's back and business goes on as usual. That's not really a big hit, right?
So maybe the next year of cash flows is only worth 10 or 15% depending on discount rates and all that stuff. Basically what I'm saying is, with the market being down 15% to me that says they're looking at 2020 earnings and saying, "Okay, they're going to be bad. But 2021 and so on we're going to be right back to normal." Maybe 2022. That's sort of what the market is pricing in.
The market is being very optimistic about how fast we're going to bounce back from this. And that's the game we're playing. I don't think it's going to happen that way. I think 2021 might be pretty bad too. But that's what the market is pricing in and that's what we're trying to figure out is going to happen.
I don't know. What do you think, Doc? Are we more than 15% screwed up?
Doc: I think we're more than 15% screwed up. I'm sorry to say. But I'm also an optimist, so I'm 50% screwed up and 50% not. So that makes me the glass is half full kind of guy.
Matt: A lot of metaphors mixed in there.
Well, we have gone longer than we have before. But we did make a little promise here. So maybe we talk about that. Here, I'll set you up –
Doc: How many minutes are we at right now?
Matt: We're at 50 minutes and we usually do about 40. We'll still be under an hour. Okay so let me set you up and you can do your response.
Porter Stansberry, founder of Stansberry Research of course, wrote a Digest on April 17 I think it was. It was Friday. There was a big counterpoint. He thinks that the virus scares has been overwrought. He thinks we should be opening back up and if you're an at-risk person, you can make your own choice as to whether or not you want to go out. But he thinks the government should not be telling us to stay at home. He thinks… well, let's leave it at that.
He's not scared about the virus and he doesn't think anyone should be in. It's all been overwrought.
What do you think, Doc? Should people be going out? Should we not be staying home on the government's orders? What do you think?
Doc: Let me be clear… I came to Stansberry Research because I love working with Porter Stansberry. I find Porter stimulating. I find him thought-provoking. He's one of the most well-read guys I know. He knows history sideways to Sunday. He studies history. Reads history.
I talked to him last night before doing this and to give him props for last Friday's Digest, which I loved. I thought he was a little bit over-the-top with the alluding to the end of the world, communism, and all this kind of stuff.
But, in terms of personal liberty and protecting ourselves from the state, I believe in this fundamentally. I have not liked authority for a long time. Having said that, I would tell you that the things he suggests and the points he makes, I accused him of hacking into our talks and watching it and seeing our data because he didn't spend the last five weeks talking about it.
Initially, you've got to be careful. Everyone has to be cautious. This thing could be deadly. I hope it's not. I, from the beginning, have not thought it was going to be, or I was very expectant, that it was not going to be much worse than the normal 0.5% mortality rate.
But you start to see data that suggested maybe it's not here and there. But when we see cases like the ship, we see cases like the Navy ship, we see cases like specific pockets of places, you realize a lot more people have been exposed. Half of the population doesn't even show any signs or symptoms. It's probably similar to other influenza viruses and coronaviruses. Imagine that. You have to put your bet on the deadliness of it, it's going to be similar to those past viruses that have affected humanity.
One of the arguments about it is the 1918 stuff. And let's be real, folks. In 1918, the reason Philadelphia was a mess and everyone died at a super high rate and the West Coast didn't is because the ships from World War I, which were filled with sailors, had to go in to the East Coast before they made their way west.
So by the time it was hitting the west, people were like, "I don't want to be around that sick person and sick people." So people social distanced. But the cities on the East Coast got hit. Had they flown into Denver, flown into L.A., flown into San Fran and these individual pockets in the west, my guess is that the populations out there would have been as quickly killed as the East Coast.
This is not the same thing here. We shut down stuff. We're monitoring it. If we can be assured about the testing, we're going to be okay. The think we have to be worried about is government officials telling you crazy things like you can't be outdoors. You can't be on the water surfing. You can't be walking around the block. Walking around the block with a mask on.
I just saw this morning that Tom Brady was working out in a park alone. Who stops somebody working out in a park alone? The science on that is zero, zero, zero.
The other thing I'd point out is that we've never done something like this where we've taken the whole population and locked it down without evidence. What we have done is say let's isolate the people who are vulnerable – the old and the sickly – and prevent them from getting exposed to this thing. And then we have a supply of ICU beds and ventilators should we need them.
So in that way, I'm gracious, grateful that we did that in places like New York City and other large populations where we know this thing spread quickly and we know it will kill the old and infirm. We've done that. We're through that phase now. Let's loosen this thing up. Let's loosen it up quickly.
But Porter, like I said, I just adore him. And I adore that he pushes the envelope, wants us to think about stuff, but I'm not as extreme as he is. I don't think, and have never thought, the end of the world is coming, and that Governor Cuomo wants to lock me up and throw me in jail and get rid of habeas corpus. But we need to make sure that we don't allow them to do that because history has been filled with people that want to do that and try to do that.
Long rant. What have you got for me, Matt? What do you think?
Matt: I disagree more than you do, I would say. I think that the reason the deaths have not gotten so bad is because of the lockdown. And I think he had a number – I think he said 50,000 to 100,000 is how many people would die and that's the same that it would be had we had no lockdown. Again, I'm picking apart the things that I don't like. But I think that number is way too low if we did no lockdown.
If you take the cruise ship numbers and extrapolate them out, that would be 400,000 deaths. Those numbers are too low. And the only reason you can be optimistic today is because of what has already been done.
Now, it turns out it was not as deadly as maybe it had seemed. But we didn't have that information and I think probably the right things were done. He does call this sort of "The Big Lie." This was all done in bad faith and things like that. I do not think that's true. I do think it's time to talk about opening up. I think that if we have the testing we can open up. But I don't want to tell people, "Hey, it's your right, you should go outside if you're not afraid of it."
And I don't agree that… You know, he sort of has this individualistic bent of there is no "us all in this together," is what he says. You should go and do what you want to do, and everybody should worry about themselves. And I don't know that that's the case in my view.
But I will say this, I often don't agree with Porter on political stuff. But if there is one person who makes me think about the other side, it's him. So I'll say, okay if Porter is saying something political, I already know I don't agree with him. And then I'll go through it and go "okay, you're really making it hard for me to keep disagreeing with you here."
It's interesting. And the good thing is people don't like to hear the other side. People don't like to change their mind. I just like that we can hopefully talk about it and at least hear it out and still disagree or agree.
So I would just say, don't go running outside because you feel like it's your right. That would be my opinion. I think we should work together. I think if you're an extreme Libertarian, the one case I would bring to you beforehand is, Well hey look… Don't you want some government to bring about coordinated action in something like a pandemic?" This is kind of the scenario where you would want to help people work together on a higher level.
No, I don't want this to be a window into fascism where they can lock everybody down. I understand that that happens at times. And I don't want that to happen. And I hope that our society is stronger than to let that happen. But yeah, it's all thought-provoking. And I'm glad that it's not as deadly as we once thought, would kind of be the bottom line.
Doc: And I appreciate your perspective.
And this is the thing I want to say… What Porter has brought to my life, things that I didn't realize and understand beforehand. One of the things I'm doing here in the lockdown is diving into some of the historical examples where the risk that Porter thinks is much more real than it sounds like you believe – and I would guess I'm in between you and he on this. But I'm watching Ken Burns' story of Vietnam. I'm watching some stuff on World War II; it's a colorized version of this… some of the great battles.
What's clear to me at least in these documentaries – I'm not naïve to imagine that they don't have their own story – is in the story of history, it's filled over and over and over with lying government officials. It's filled with government officials wanting something different and not being straightforward with other government heads of state. And it's filled with people reporting stuff up the chain of command that those people think the chain of command wants to hear, especially when it's counter to what the chain of command has been talking about.
And so, students of history… I mean, the story of Vietnam is filled with examples of this. And Burns – if no one has seen this, it's heartbreaking. And then also, a book Neil Sheehan, a reporter is in there. He's a young guy. There's pictures of him live in Vietnam. And he wrote a booked called A Bright Shining Lie where he discusses the stuff that I'm referring to.
But in World War II it existed. There was a time where, I guess, Germany was bordering Belgium and spotters saw this line of German tanks lined up for one of the next attacks. Again, my history is not that great. And the supervisors – the officers above them – didn't believe them. And this could have been a chance to bomb and destroy, my understanding of it is, half of the mechanized Panzer division. It probably would have changed everything. And the people above them didn't believe it because they were pitching the story. They were saying this.
So that's the risk to me is when I listen to Cuomo and other people up there is that people are feeding them stuff when in fact we have other data that's showing and likely that it is safe, that it is okay. And because of this sense of power and control… Imagine the attention.
I mean, Trump is being televised every single day and his group and his team. Imagine the puffery and the feathers that come up. To do that you have to want to be on stage, want to be at the head of the class and the action. Woah man.
So that's my counter. Just, we have to be careful with that.
This has gone on way to long.
Matt: Oh, I know. We're cutting all that stuff out. It's all getting cut. No, no edits. But anyway, it was good talking to you, Doc. And I guess good news overall this week. We'll keep watching the markets. We've got another round of monthly publications coming out for readers where we'll be working on our next investment opportunities.
Doc: Can you go to the next slide?
Matt: Oh, do we have one more slide? Here you go. Sorry about that. Oh yeah, here we go.
Doc: No, that's it. Thanks, Matt. And again, comments and questions… We love it. Love to hear from you. Health & Wealth Bulletin – that's our free letter that goes out daily and talks about some of the stuff we do in our paid pubs. Thanks. Sorry we went way over. Sorry, folks.
Matt: Some people like it. Some want it to be 10 minutes, but some want three hours.
Doc: We did change the functionality of it so you can go fast and slow.
Matt: Oh, did we? And we also should have –
Doc: Although at this point, if you haven't figured that out –
Matt: It's too late now. Alright. Thanks, Doc. I'll talk to you soon.
Doc: Thanks, Matt. Bye.