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: Hi everybody and welcome back to COVID conversation number seven.
Matt Weinschenk is with us. I'm Dr. David Eifrig And we are socially distanced.
Matt, how was your week?
Matt Weinschenk: Same as the other ones. Just hanging around and playing with the kids and trying to get outside.
Doc: Where I am, they're talking about snow this coming weekend.
Matt: Oh no.
Doc: Let's move on.
Matt: Yeah, let's move on.
Doc: Oh and don't forget… People, if you're interested in sharing this, tell your friends, family, and pass on any of the information we give you here.
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Matt, start her up.
Matt: Let's go right into our usual spiel here… We'll go virus, markets, economy. I feel like we'll do mostly virus talk because that seems to fill up our days. Here's the deaths chart we look at each week…
It's definitely taken a big dip for the U.S. there. So that is a really good number.
Doc: I want to make a comment. Again, this is a three-day rolling average. So it smooths out the ups and downs a little bit. I also want to point out that we recognize that this makes us look worse than other countries. We don't mean to imply that. And we know that there's a population, that is that there's a denominator under there. But this gives us an idea. We can show several countries and the United States and show shapes of death being diagnosed.
Matt: Yeah, there's a use for like a per capita chart, which might show how well you country has responded or something that. But if you're tracking growth, if you want to see if it's spreading, then you wouldn't want to divide it by population. You would use just a number chart like this. All charts have some uses.
So on to cases…
This isn't as encouraging, necessarily, as the death chart. We do have this drop here, but if you look, you know, we've been locked up for six, seven weeks. But really, we're just in a plateau zone around 25,000 new cases per day. Some of that is testing, right? More testing means we'll find more cases. These guys, obviously their numbers are lower because they're smaller. But you can see Spain has really come down. Obviously South Korea is a great success story. If you put Germany on there… Some of these countries are coming down. We're sort of stuck in a plateau if you just kind of squint your eyes and look at it.
The other thing we've been talking about is that pandemics are local and not every place is experiencing the same spread. They're not experiencing the same peak. And they're not necessarily declining.
The reason we bring this us is because this has apparently not been a Federal issue, it's been a states deciding issue. So now states are deciding to reopen and most states still have increasing case counts. Again, data is tough to read. It might be more testing on some of them. But for the most case, really just… I don't even know what state that is. Someone is going to be mad at me. Is that Missouri down there?
Doc: Nope, Missouri is up above there, I believe. I think that's Arkansas.
Matt: Yeah, that's Arkansas. So New York and Arkansas are the only ones really declining. And obviously those are very different states. So they're probably declining for different reasons. But for most places, it's still on the increase. Reopening states… maybe not the ideal time.
These are some of the states that have reopened. Real quick: Texas, Georgia, Colorado, Tennessee, Alabama, and Missouri. Most of these do not look to be over a peak. They're at a plateau at best. I think Idaho, Montana, and Maine are also working on reopening. They look okay. They look pretty good. They're all obviously pretty sparsely populated states. But they are coming down the peak. So it may make sense in their case. But my – we'll do one more thing before we get into that…
New York is a big state – tons of population and it had tons of cases. Very dense. The hospital system almost collapsed, but they appear to have gotten through it. New York has absolutely started to come down. It's started to see this case decrease that we want to see. But if you take the whole country and you cut out metro area New York, we are – the whole decline is in New York, is what I should say. The whole plateau is in New York. Everywhere else, aggregated, we're still growing. So that scares me.
Doc: I just want to ease your worry about it and suggest that these are number of cases. We're rolling out a lot more testing. I want to remind people – and remind you, Matt – for the majority of people, this is not that problematic. Yes, cases are rising. Yes, we're rolling out a lot more testing all over the place.
I have a sister in Minnesota that just talk me they're starting to do drive ups – 100 a day – at her clinic. There's more tests, so there's going to be more positive cases.
Matt: Absolutely. There are so many ways to approach this problem. There is the case of we'll we've been locked up and so the cases are plateauing and so it's safe to reopen. Then we say well, what is safe? Do you think we've beaten this? Do you think it's not that deadly, so people can get it? Do you it's just too costly to have the economy closed? There's so many different dimensions to look at this. That's why it's so hard for people to come to any sort of agreement.
The one thing that really bothers me is that we've paused. We've had a lockdown, we've reached a plateau and now we're going to reopen. So we're just going to go back up, right? We've limited to a bar zero of one, so we have an even case count. But if we reopen it's going to go right back up. And we haven't used this time to develop a testing and tracing program that other countries have used to great effect. So now we haven't built any tools or solutions. We have some more testing, but we don't have a centralized program. And we don't know what happens if you test positive if there's not sort of quarantine system. So we wasted our lockdown basically. And I think we've done huge damage to the economy and now we're just going to flip back over. I'm more pessimistic now than I had been. We'll get into
Doc: Fair enough. I think that people will, even as you open it up… For example, different states have different ways of looking at this, but what's an essential worker? Let's say you have a house, and the back of it you're doing remodeling. Can the carpenter, can the plumber now come in and work alone in the back half of the house? I say yes.
There are states right now that are locking them down and saying they can't. I think that's crazy. And then to pay the plumber to be unemployed and to give him an extra bonus when there's work that could be done – and done in a safe manner for their health and the safety and health of others.
I know you and I differ a little bit about the deadliness of this perhaps. But we'll get to this where I'm a little more optimistic than you are about this. So it will get teased out, folks, as we go on.
Matt: Yes, of course. So let's see where we're at.
As far as deadliness goes, one of the… So obviously there's an age component, right? We know it's much more deadly for older people. And there's this talk of comorbidities. If you have other conditions – hypertension, heart disease, obesity – these raise your chances of having a bad reaction if you get this virus. If you take… I think the number on this study is, I think there's 15 comorbidities, what percentage of the population has one of more of those comorbidities. So how many people really are at risk. If you take the whole U.S., 45% of people have one of these comorbidities. So when you have this wide net, a fair number of people have them.
You can also see on this breakdown by age. So for 30 year olds, 26% of them will have one or more of these conditions. If you get up to 80 year olds, 80% of them have these conditions.
It is not deadly for everybody. It's relatively safe for young, healthy people. But there aren't that many young, healthy people necessarily in the country.
Doc: Yeah, but I want to make the case that when you start talking about 15 comorbidities, really there's only about, as far as I know, five or six that are associated with increased risk. At least that have been measured and shown to make a difference in disease outcomes – your so-called odds ratio or hazards ratio.
So I'm less worried about the extra 10 that are in this study. But it makes the point that 45% of Americans are considered to have a medical comorbidity and that you can see in older folks 80%. So the 80/20 rule applies there. And most of those have these more serious ones. So that's why old folks are in trouble.
But this gives you idea across the years that even a – look at the line that's say a 30 year old that 26 or 27% of them had one of these 15. But I would say it's much lower than that for the ones that are important to COVID. Which, again, is why not many people aged 30 are –
Matt: Right, so this 15 comorbidity is kind of too wide a net. You can cut some of those off if you were to look at them a little more closely. Fair enough.
And this is interesting. You know how I like sharing interesting charts that maybe you don't know what to take away from them sometimes…
Doc: Can you imagine they heyday Porter would have with you on this chart?
Matt: He loves a simple chart and I –
Doc: He does not like the spaghetti charts. He doesn't like spaghetti and pearls of different sizes. This looks like a natural pearl, broke necklace here. I love it. Alright, sorry.
Matt: Okay, so… This chart takes all the Italian victims over 50 and who lost lives to see how many years of lives are lost. Because there's this argument, which is fair, we're spending a lot… We're not spending a lot of money necessarily, but we're losing a lot of wealth to save people's lives if they're older in years, they have all thee conditions. Maybe we didn't save that many years of their life. How many did we really do?
So let's see what's happening here… If you were 90 and you had 10 comorbidities, actuarially – I'm glad I got that word out right – actuarially you died from COVID but you probably didn't lose many years, right? You lost zero years. If you were 90 and healthy, you lost five years.
Now the size of these dots show how many of the people who died fit into these categories. So for instance, 4% of the people who died were 50-60, had one comorbidity, so relatively healthy. They lost call it 32 years of life. So certainly something we'd like to avoid.
You can just sort of see how… It puts those numbers together. It puts the age and the number of comorbidities together to see. So you know this is a big, this is maybe a 10% chunk. This is maybe an 8% chunk of 60 year olds who lost maybe almost 25 years… lost 20 years here.
Doc: I want to caution, again folks, to… The circle you just showed, Matt, that's the percentage within that 60 to 69 year old group, right? Because we know that the majority of people in Italy were older. We know the average age is older. To me this chart is a great example of showing how in these different age groups, you can see that if you have more comorbidities – if you go to the right on the chart – your years lost are less and less.
It makes sense, right? If you have five comorbidities, the chance of you living more than let's say six or seven years are slim. Whereas if you're that same age and you old have one, you've got 24 years of life left.
It shows you that the more comorbidities, the more likely you are to die from anything and everything, including COVID, including influenza, including other coronaviruses, other viruses that are respiratory like. I just want to caution people, and you in a way maybe, that yes it's true that some 50 to 50 year olds can die, but it's only 4%. That whole string is only 4% of the total COVID deaths.
Matt: And just to also be clear because the way people first interpret this… This doesn't if you're 50 and you have one comorbidity that you have a 4% chance. That's just an easy way that I think people would think about it. That's not what it is. The hundred people who died – which, it was more – 4% of them fit this category. Just to be clear on that.
So what you would say is, yes this is tough. We don't want anybody to die. But this is… you know those people didn't have much to expect left. These big dots here are something we could maybe, ideally, hope to help. But we'll have to see.
Doc: I also want to tell people, Matt, it's not that we're cold and calculated. People might or might not remember you're an econometrician by training and think very deeply about numbers and math and probability and all that. We're not cold people. I know you're a very loving, kind person.
I know that we want to think about when you're weighing this and going after stopping the virus versus the economic issues of shutting down worlds, creating hunger, creating poverty, creating suicides. Medicine has tried to move towards measuring life years, quality of life years. This is one way of showing that. In the last couple of weeks, we've talked about sharing a graph like this, so thanks for sharing that.
Matt: I would also like to say we got a lot of feedback this week of people who were appreciative that we were kind of down the middle and we try not to have a political agenda or anything like this. One of the things that's really frustrating about the current politicized debates is that you have one who takes it to one extreme and they say, "People need to die for the economy." And the other side says, "You can't talk like that. You're a monster. You can't do that."
And what people really need to do… There is a cost and the value isn't infinite and you have to be able to talk about it without letting your emotions get in the way or being dogmatic about it. That's all we're trying to do. And we're trying to present both sides. And if you ask the economist in me, I think the settled on number is that a life is worth $3 million. That's sort of where all the actuarial stuff plays out. They come to $3 million. That's just sort of a tidbit.
We're just trying to look at both sides and we certainly try to be compassionate, but –
Doc: I've heard a couple million bucks, so I'm hoping you're not trying to vie for a pay raise this year.
Matt: Well, not this year. I'm not even going to work. So maybe we'll wait until next year.
Doc: There you go.
Matt: One more pessimistic thing before we move on. So this is, I think it's the IHME model. It's one of the more popular models. Sort of been one of the early ones.
This was previously saying about – projecting that by August we'd have 60,000 or 70,000 deaths in the U.S. They recently upped that to 135,000. So that's a big jump. And the scary thing here is this model assumes social distancing. So with states opening up, this number will be too low according to this model. Scary. I don't like these numbers. I think the news in the short term is getting worse. That is my interpretation of the virus, but that is not the only one.
Doc: The folks that you got that data from – that projection from – are they the ones that also early on had the 2 to 6 million deaths expected? Is that the same group?
Matt: I do not think that's the same group, but I'll have to check. The trouble with all these models is you could make one… You have to assume opening or closing or testing rates. So those are the things that matter. I mean, it's not where you put the RO at 2.2 or 2.3. And there's all those things that go into the model. But how do you guess what the decisions people are going to make are going to be? So you can come up with anything you want. But this is just one of the more basic ones. But I don't think this was the 2 million. I think that was the, was that the UK study?
Doc: Yes. For some reason I thought it was –
So this a ranking based on 76 criteria. Looks pretty exhaustive to me. But this is if you were in a country right now and you wanted to avoid COVID, where would you want to be? Where would you not want to be? The safest countries are Israel and Germany and South Korea. We know those have been doing well. Australia has – I mean they have an extreme lockdown, but they have basically no cases at this point.
Where would you not want to be? Obviously, Italy was a disaster. And Untied States is second worst. Not very encouraging for the greatest country in the world, but hopefully we can turn it around.
We also talked last week about how you can't force a reopening. States are talking about reopening. But does that necessarily save the economy? Last week, we showed some poll numbers that people were scared. They wouldn't be going back out to restaurants right away because even if it's open, it's still scary, right? People don't want to get this thing.
Georgia and South Carolina have reopened. People were working 100% of their hours before the shutdown. We see the shutdown. Now, over here states have reopened, but the hours have not comeback. Obviously, it's only a short time, but didn't really reopen even though they're allowed to.
These are cities in those states… You look at the peak traffic load in those cities and they were around 40-60% depending on where you were looking. We see the shutdown. We see the reopen. Traffic hasn't come back up. Again, only a week or two there, but reopening does not necessarily mean the economy will reopen.
Last week, Doc, you were sharing how you were pessimistic about the vaccine time frames that were being given out. I think everyone saying 18 months, 18 months, but –
Doc: Yeah, yeah. And here's in the simplest way, I want to echo I think about Fauci and others in science who work for the NIH and government, the follow the money. So wherever they can get money from the government, that's where they're going to go. So these groups of folks go like lemmings and schools of fish, and follow the money to do research.
Now, we've been studying influenza for decades. For decades. We haven't really studied coronaviruses that much for the last 15 years. But if you think about influenza and the annual flu shot, we can't even get that right most of the time, most of the years. So this idea, this notion that a vaccine is going to save us in 12 or 18 months from this evil giant of corona is absurd.
And this chart just shows you on the basic what the past has shown of how hard it is to do good clinical trials. We're now going to rush it. And so steps are going to be skipped… Data is going to be reported that's going to probably be retracted. I'm very cynical and skeptical of this. And if ever there was a time to be wary of vaccine and the dangers, in my mind would be now.
Again, why they suddenly think and everyone believes that they're going to come up with a cure for coronavirus that is still mutating as we speak, I'll get to that a little bit later. Folks, this is a… We have decisions to make as a society and people. And letting government or letting government lifelong officials run this stuff versus big pharma… just have to be calm, careful. And here's why. And go ahead and keep it going through this with your arrow –
Doc: – and show folks when you start with 100% success rate starting a clinical trial, you have failures along the way.
Matt: Right. So you start 100% start clinical trials. And I believe this is the European data, but the U.S. is about the same. When you get through Phase I, you have a 20 to 30% failure rate, right? When you get through Phase II, you lose another 40 to 50%. As you get what gets approved, somewhere in the 20 to 40% range of vaccines get approved.
Certainly not that high, right? We're going to lose a lot of them along the way.
Doc: And by the way, people are talking about combining Phase II and Phase III together, which again, is a huge risk because 1) you lose out on the safety trials and dosing becomes worrisome because Phase III is large get it out there and get everyone and then monitor it. You're sort of skipping that's that we've decided are safe ways to do things. Man, oh man.
And again, we're talking about a disease, folks, that doesn't really harm the majority of the population. And in Italy, it looks like it took people who were in nursing homes and moved them from nursing homes into intensive care where they died and overwhelmed those systems. My guess is someone smart, someone who will take the time, a good reporter, win a Pulitzer Prize will look at this in New York City and discover similar kinds of things happened where in nursing homes, people with lots of comorbidities got this disease, were rushed to the hospitals, overwhelmed them, and died there.
And so… any way, go ahead.
Matt: But just back to vaccines…
Doc: Yeah, sure.
Matt: Only 20% or 30% get through.
Well the approach then, you want to have a lot of shots on goal. So these are vaccine trials under way. I think I counted 14 on here. Now the interesting thing to think of is normally 20% get through. Well this isn't normally. These are rushed, right. So maybe that 20% goes down a little bit. But we've got 14 in approach. The other thing to note is these blue ones are using RNA and DNA vaccines, which is sort of the standard approach. These light blue ones are using different approaches, which are probably even less likely to work.
That's just a status report on where we are with vaccines and how long it may take. I hope it's 18 months. But we'll see.
Now this, this is probably my political science background coming out. But, you know, like I said we don't have a test and trace, which is what I would have wanted to see during this shutdown. That would be what would keep us from having a second surge. But there are so many questions when you build something like that. If someone tests positive, what happens to them? Are the locked down in a cell? Are they paid for their time to get off work? Are they asked politely to please stay home and stay away from their family? Do we have a nice facility for them? Who's running this testing?
These are all decisions that haven't been made. I haven't seen the answers for them. But they need to be made. And we're sort of working on this perspective here of who's taking each role here. Is the government taking the role? Is the market taking the role? Or is the civil society taking the role.
So, social distancing, right? You know, U.S. – I guess we have a lockdown – but this is largely voluntary, right? You know, you can't go to a bar, but most places you can go out. It's different state to state.
Virus testing is sort of in between… It's partially markets. It's partially the government pushing it along. In Australia, they hired the Qantas workers that were laid off as government contractors. So the government is stepping in there. Here, we have a reallocation of labor in the U.S. Amazon was hiring 100,000 workers because they needed more to fulfill.
There are all of the decisions that are happening. And these are going to affect how things look after this is all done because… I don't want to call it a power grab. I feel like people are trying to push the power away from themselves in a lot of places. But in authoritarian countries, they're trying to grab more. They're using this to pull more control towards the government.
Here, you know, is… are Apple and Google going to be the contact tracers and have all our data? Are we going to push things towards private business? So this is the axes on which we need to be making decisions and see which way it goes. And I just don't feel like we have made those decisions yet.
Doc: I certainly feel like, and again back to the political chart from last week, they're loaded questions. If Republicans lean towards thinking it's just time for everyone to go free, into the wild, wild West, and Democrats, or less conservative, or…I don't… whatever labels you want to put on people… but in that case it was Democrats say "oh, no, no, no, no stay in, shut it down, and oh by the way, keep paying us that extra $600 a week to not work."
I heard a story from a general contractor friend of mine where he can't get the plumber, the air conditioning guys to go and work because they're at home making an extra $600. Even though where they are, work is allowed by single people again, they're choosing to not go. And so, it becomes this – it's political.
It's political. And political means have discussions and have civil discussions. I saw – and just to sort of add two sides to this – I saw a cop in New York beating on a guy that wasn't wearing a mask in a park. And folks listening to this, you might come down on one side versus the other, but the cop, we have to admit and agree, wasn't social distancing. And what risk and harm is there in one individual in a park, okay, two individuals, right? There's a continuum. This needs to be an open discussion of what makes sense and turn away from political, in my mind, and turn it more and turn it back to science.
And so, this is one of those things where, should you be in the ocean in California surfing where the likelihood of that virus infecting folks seems to me to be minimal? These are decisions that – where the control moves to becomes, in my opinion, a discussion to have in the United States amongst people. And not turn it into violence or not turn it into good science or scientific theory.
You know there's an old phrase, it's something like… when you talk about modeling this, and the frustration – even I felt it about models being wrong. What do they say? All models are wrong, just some are useful. And so, this is kind of what we have to apply to how we're making decisions, but to me this authoritarian – the places that are becoming really authoritarian, I get worried some because the science is really not that clear in my mind and the… and I know that because I'm arguing with people who I respect who I think are really smart including you an earlier this week a little bit.
So, anyway, I think it's political, I love this chart, how you show these three elements of the commercial side, markets, market incentives, government and then civil society. So, any, any further thoughts on this?
Matt: No. One thing I have been thinking about is, you know, this is a big change and things are not going to go back to normal. And I'm not saying that there's going to be viruses all the time, I'm not saying we're never, we're going to be wearing masks. I'm saying that the decisions we make along these axes are going to stick with us. Similar to a way, you know September 11th happened and then it was over, but everything changed after that. Our whole political system changed. A lot of stuff on the government side, our whole international status in the world changed because of what happened and because of those decisions that were made after that.
You know government surveillance, all sort of things like that changed, and I think we're going to have, you know I think this is going to be a similar change 20 years later where… you know, things are going to be different. And it's not going to be washing hands. There's going to be a restructuring of society and I'm not saying huge unrest, I'm not saying a revolution, I'm just saying 10 years down the road, people are going to be writing you know, studies, and they're going to say, "well, actually, if you really look back, it was policies that were changed after the coronavirus that led to these unintended consequences down the road. And it's these decisions that are going to be doing those.
So. I don't know what's going to happen, I'm just… I'm sort of running… running away with it a little bit here. But this is…
Doc: Yeah I mean, but I would throw in there that the Hong Kong flu, which hit around the time of Woodstock and everyone over what, 50, would have been around… The Hong Kong flu then, H3N2. That flu, that virus, caused I want to say around 600,000 worldwide deaths and it still exists. It's still there. It still shows up when scientific labs are researching and saying, "ok, how many of the 10 or 12 viruses that we can easily measure are showing up in the sample" and there was one from in January in Italy, I think 7%, 6%, something like that the H3N2 virus existed in that population amongst other viruses.
There are multiple Hong Kong… multiple coronaviruses rather, that exist and have existed for a long, long, long time. Thousands, tens of thousands, hundreds of thousands. So I get worried when I hear you starting to say well, policies will change and we're going to… maybe more lockdown or da da da… I'm like, whoa, whoa, whoa, wait a second! This virus – we're not going to eliminate the life of viruses because we've got Trump or Fauci or anybody especially given… we just we don't have that.
I mean, maybe it'll be a Star Trek kind of world where they'll do a scanner, they'll inject something that quickly competes with the virus that's mutating and block it or something and now it's out of society again. But man, we're decades…
Doc: Centuries away from that kind of thing. And anyway.
So, you may tell that I'm pessimistic. I'm expecting a second resurgence. I think we're opening too early, we don't have the stuff in place. I think, you know, we've done all this work to be flat, but we don't have anything to get it further down. So I am more pessimistic. I put my changes in red. I changed the resurgence to large resurgence.
Doc: For the virus, for the health stuff. So how about, what do you think of the economy and the markets and investing? Where are you, where do you go now on that?
Matt: So I feel… I haven't changed my view on the damage to the economy. That's still what it's going to be. But I think we're going to see a lot more uncertainty in markets, I think as… if this resurgence happens, that's going to be… You know, once that happens, you're going to go… the market's going to say, "well wait a second, are we going to be shut down for two more months again? Are we going to shut down – that didn't work last time, we shut down for two months, are we going to do four, six?" Like what's going to be, what's the solution going to come from? Are we waiting for a vaccine? Are we waiting for herd immunity? And the path forward's not going to be clear. And I think… so that worries me about the markets.
Now I think if the Fed is taking care of the extreme liquidity problems, so we're not, I don't know if we're going to see a full-on panic sell, get rid of everything, like we saw in February. But I do think we're going to see a downturn. I do think we're going to see those, the multiples on stocks come down because of less confidence in them. So that's what I'm expecting. It's my baseline. But we do… Doc doesn't necessarily agree. You've got some victims here…
Doc: So, yeah, I think I've turned the corner and I'm more optimistic. Because, show this, show this next… the next chart.
So what we've done here. There's two studies I want to share with you. One is from the University of Michigan and one is from Norway. And these are four different coronaviruses that get measured scientifically. And it shows you in one season – it shows you the seasonality of them, right? And if people can't tell this, that two of them peak in January. And the two on the top peak in February, rather, and the two on the bottom peak in January. So this is a very common kind of flu pattern. And…
Matt: And just…
Doc: You can see that. And then this other study…
Doc: Similarly looked at the seasonality of these same coronaviruses over… well, going back to 2007 through 2015. And I hope folks can see the incredible seasonality of that. And when I saw these charts and I can't remember if it's this paper or the other one, but this one's in press, it was actually going to the proofers and I stumbled across it. This is, to me, super exciting and suggests that it won't be what you're thinking Matt, where there's going to be this resurgence certainly through the summer and the fall.
But then again, it suggests this one… go back. This does suggest that in the next winter these viruses… so for example, the top one. You can see the gray, year after year, and the first one – 07, 08, 09 – it's getting smaller and smaller. 10 in gray gets a little bigger, and then all of the sudden there's more of coronaviruses and red is the specific genotype. But there's more coronaviruses as a percent of that season and more red there, right there, that's 2013. And then the last one, 15.
Doc: This particular OC43 – you can see! It's still around, it still exists. And it's changing from year to year and season to season. So my bet is we're going to get a reprieve and if you're going to say oh, we're going to get a resurgence in the next flu season – is that what you're saying?
Matt: No. I mean, I think it's going to come back –
Doc: You think it's just going to come from opening up society?
Matt: But can I just point out two things to people.
Matt: I think most people know this, but coronavirus is a family of viruses that have been around for a long time and they generally cause something like a cold, right? Or maybe closer to a flu, but… and so that's what this study is looking at. The past family. Right, that's why we can say in 2017 now, the new virus is new, so we don't know what that's going to be, but this is looking at the other coronaviruses. I think most people know that but I wanted to be sure.
And then there's been a lot of talk, there's been some other studies in some other ways that say warm weather is going to choke this thing off. So that's where the seasonality would come from mostly. Whether it's the virus doesn't survive in warm weather or when people are outside more they just don't get it more. There's all sorts of things that may play into that.
But there's been other evidence of this too and even if you look at states – Florida hasn't been that bad considering how light their lockdown has been so there's some – there's definitely some evidence to say that's the case. And I think… you know, I only like to say things I'm very certain of, I think it's… It seems to be absolutely true that warmer weather will hamper the virus. I'm pretty confident that that's going to be the case. It's just a matter of if it's going to be enough, right?
Doc: Yeah, yeah. No… I mean, that's the million-dollar question. And like I said, I'm, after another week of diving into this thing and trying to sort of decide how I feel about traveling again, how I feel – I'll say if I feel… I'm much more relieved certainly for the next four months, five months, and when we get into the winter, I'm going to be… My head's going to snap around like Carrie and if I hear someone sneeze nearby or on a plane, I'm going to have my parachute and I'm going to go out the door. Because I would worry about it. But the fact is, I don't have the comorbidities, other than being older, I'm still going to be just as worried as I am about getting these viruses.
And we've gone back and forth. Maybe next week we can talk about how deadly do we really think the virus is, take it from a couple different angles, you and I have spent some time on it. I think… you think it's more deadly than I do. And anyway, so yeah I think there's seasonality and let's hope that opening stuff up allows folks who are more active, who have less comorbidities, get out and create herd immunity in the summer.
And this is… well, I'm not going to dive too deep into this because we're kind of going over time.
Matt: Yeah, we've said…
Matt: Economics. So we've done virus and I told you we'd do a lot on virus today. Ok so, we'll go through these. We're coming up on our target time even though we can go as long as we want. Consumer spending. So this is through the end of March. Right. This is down 7.5%. Huge, huge, huge decline. April's not going to be better. It's going to be… yeah, it's definitely not going to be better. So…
Doc: I think April's actually going to be worse than this and it's going to be a surprise for people. I think people want to imagine this has bottomed and I don't think it has.
Matt: Oh, so you think it's going to be a negative surprise for how bad April comes out?
Matt: Energy is a great way to track the economy and just to put this in perspective, this is the projection from the IEA, so it's a projection. But financial crisis, a little decline in energy use. So these are, these are the actual numbers and then this is the projection. Back in the 80s a little bit. So we're talking a decline on the order of more than anything since a decline in World War II. So that is a drop of 7 or 8% there. Very big decline in energy. So that's one look at how bad this could be for the economy.
Doc: Can I ask you a question? Because you were in my mind sort of a little bit devious. You took away the wow factor. I'm teasing in a way.
Doc: It shows you that we are heading towards the last time it was this bad was World War II, which you can imagine the energy disruption and demand and stuff plummeted. The same thing – Depression – down 10% and the Spanish flu. But if you just looked at this chart from say 1970 til now, this thing looks like it's collapsed, right?
Doc: You've shown us a longer period where we see the big collapse and I know that's your point, but from where we've been, and the sort of stability of society in the last 40, 50 years – this is a huge move down. And it's one of the simple explanations of why oil and energy industry is being disrupted. Seriously. So.
Matt: Yeah. It's unprecedented. And I didn't put a chart of it but there's a chart out there of use of unprecedented in news articles – the word unprecedented – and it's the same thing just... Anyway, but it is unprecedented, there's not another word for it.
Matt: So moving on to markets. So this is the, the yellow line here is the plain old S&P 500. And the blue line is the S&P next 12 months earnings, right? So.
Doc: Now it's showing up – it might be blue for you but it's –
Matt: It might be black?
Doc: Black for me, yeah.
Matt: It's a very dark blue/black. So in the '87 crash, stocks got down to 10 times earnings. In the financial crisis, you know at the worst of it there, 10 times earnings. So today with using Bank of America's earnings forecast – again a forecast – but forward earnings have just gone, they're not here – they've popped all the way up here. We're up here at 25 times earnings, which we're talking dotcom level you know, pre-financial crisis was not that high. We're talking dotcom level valuations on those forward earnings. So that's just really intimidating. So either earnings have to be a lot better than we expect or stocks just can't be priced this rich.
Another way to look at it. This is, this chart will take some explanation, but I think it's worth it. So we have forward price-to-earnings on the stock market, right? So stocks are cheap.
Doc: So can we go back to that chart once.
Doc: Just to kind of review it simply. So, in the yellow in the top, is actual S&P 500. Right?
Doc: And that's on a log scale.
Doc: And then the black is the forward P/E. So really the point that strikes me and made me lead to answer the question which I think you solve with the next chart, but the question I ask is "holy mackerel, we have popped up where that black circle is on the right – incredibly high forward, whoa! Wow. How could that be, Matt?" I mean, look, look at the last two collapses, I mean we haven't even really recovered from those and now we're having one of the greatest collapses of all and suddenly the P/E ratio forward looking is way up. And so when you said to me just now, you said the solution is earnings have to sort of increase and come up and catch up. I'm like ehhhhhhh…
Matt: Well, our stocks are…
Doc: And then we have to as, thinking about it from a finance point of view, we have to ask ourselves the question is, interest rates, which play a role in how you value future earnings streams of any company, right? And so I ask the question, what about interest rates and then you've got this great chart which says how interest rates really affect where the P/E ratio fits.
Matt: So. All these dots are a different year of interest rates. Along the bottom, interest rates are at 0, 5% here, 10% here. And the valuation on stocks, here's the P/E on stocks so you can have – stocks are cheap down here, stocks are expensive up here. So you can see it's got this weird sort of peaking relationship. And what's happening there is, you can sort of divide these into two sort of times.
Let's look at this time first. Let's say this is normal times, okay? In normal times, if interest rates go up, you'd rather be in bonds than stocks. If you can earn 15% in 10-year bonds, why would you own stocks. So in that, stocks would be really cheap then because you'd rather be… people would take all their money out of stocks, put them into bonds. So higher interest rates –
Doc: So price would drop and so the P/E ratio would be – yeah.
Matt: Right, exactly.
Doc: Even in good times, economy's clicking along, you have an alternative investment.
Matt: Exactly. So now when interest rates are really low, consider these like crisis times, right? So if interest rates are cut to 0, that's because the Fed knows people are scared, they're trying to juice up the economy, so that's why, so yeah, higher interest rates mean cheaper stocks, but here, lower interest rates mean cheaper stocks because people are really scared. So that's why you have this weird relationship, but it does hold pretty well.
Now, where are we today is just this crazy, off the charts expensive stocks, extremely low interest rates. So if we're here, either we need to see interest rates go up to 5% which seems really unlikely, that would happen if the economy was doing really well and the Fed cranked up rates, doesn't seem likely. Or we have to see the multiple come down on stocks. And that's either going to come down because earnings go way up or because their price drops. So this is a – you know, we're way out, way out there. Just, again, unprecedented.
Doc: So both of these charts, to me the message is – earnings have to catch up really, really fast and quickly to keep these sort of outline levels and then the probability of that seems… Man…
Doc: You know.
Matt: You know, you would call it priced for perfection. If everything doesn't go perfect, this stock price is not right. It's one way to put it.
But I mean, let's… I, you know, I have to admit I've thought this the whole time. I've thought this virus was going to be worse and that the market was going to come back down and it hasn't, so. Maybe I'm just continuing to be wrong. But I'm not going to say I've been right for this ride of stocks, but maybe it's going to come back down. So, we'll check in on our other indicators.
Credit spreads are a measure of fear in markets. We said they have to come off their peak before stocks can rally. And they came off at the same time that stocks rallied, so that's a little different than history, but we do see this little peak up a little bit here, along with a few down days here in the stock market.
VIX, measure of volatility, another measure of fear in the market. Has been coming down – 33 is still pretty rich if you can take advantage of a high VIX by selling options or things like that, there's still money to be made. But it has come down. We're not in crazy crisis land. We're just in – you know, people are still a good deal worried land. So that's another, basically encouraging sign, if you want to put it that way.
So, I'm more bearish on the market, I would not be adding to positions here unless they're really high-quality positions. We'll see how that plays out, you know. People think they either need to be all-in the market or all-out and that's really not the case. You want to have a smart allocation. You want some things you'll hold through stuff like this, you can always have some speculations that you think are going to do well in a good market. So you know, there's no need to panic. I don't think, we're probably not going to take out this low again if I had to make a prediction. But I do think we're going to come down from here.
And then you know people talk about is the market going up, is the market going down? I think after this sorts out, there's a real good argument for a sideways market for a year or two. I mean, we're already at rich valuations, there's a lot of uncertainty out there. I mean, things could just tread water and disappoint people, which is great for option sellers, if that's what you want to do.
So, I don't know, that's my overall take. I think sometimes people – we go back and forth so much on these things, people want maybe a little bit more of an explicit wrap-up, so that's what I was thinking.
Doc: Yeah and without saying buy or sell, I'm going to kind of go along with you. I'm actually a little bit surprised of how bearish I feel, like you are today for virus, and bearish for the market. I'm actually a little, I would say, more positive about the virus than I've been, and part of that will be teased out and come out in this next week's issue of Retirement Millionaire, where, I'm going to talk about a couple different things, but one is the challenge and the problem with the labeling of deaths of, suddenly all these deaths of COVID-19. And there I'm going to show you, I'm going to dive into the CDC put guidelines about what could and couldn't be called COVID-19. I'm going to give you some insight into a medical doctor filling out a certificate of death on that. And I think it'll change a little bit of the rate. But I'm also coming into the camp that I believe the COVID families and this particular one have been around much longer than we realize and that suddenly we imagined some day in December in China that this virus just popped up. And it would be very unusual, in my experience.
And again, I'm not a virology expert, but I've been studying it for the last couple weeks. And it seems to me to be very unusual for a virus just to suddenly appear that hasn't been mutating around and then also not affect, that does not have symptoms and signs for 70, 80% of the population. So I'm, I'm… we're going to tease this out in the issue.
So I'm more positive on that. And I think that we're going to find, we're going to have a break in that, so I'm positive on the virus. I'm… I don't want to say I'm scared to death about the stock market because it may be right we just sort of glide along as earnings come back over time. But I think there's been this huge dislocation where smaller businesses and smaller people are being overshadowed by large groups.
And if I had to guess, even though it hasn't changed for the last 15 years, dozen years at least, I think it's going to happen because people who've been sheltering at home, sheltering with family, more local, are going to… I feel like it's going to change the dynamics of the value of these larger businesses that are holding up the S&P 500. You and I kind of alluded to that when we talked earlier.
Doc: So, but I'm really worried about the economy, because, you think about a restaurant, really doesn't matter if the restaurant could open this summer. It's the question of are people going to, if they start to hear about this virus coming back in a seasonal way, get worried, and then decide not to go out to eat to restaurants again. So I, like, holy mackerel, are we going to have to be living through this world of take-out the rest of my life or groceries delivered for the rest – I mean, man, it's strange times. And I feel, I hope we get back to a little more normal. But you alluded to this change that might be happening in that political science triangle diagram. Going to be interesting. I'm… So maybe I'm more optimistic on the health and the virus and maybe more pessimistic now on the economy and markets? So that's all I've got.
Folks, questions, comments: firstname.lastname@example.org. We read them all.
Matt: And we got some wonderful, wonderful feedback this week. Just people, I don't know what it was about week 6, but we got a lot of thanks and that's great to see. You know, doing this every week, we're glad to see it's helping people. That was really nice, some of the thanks people wrote in.
Doc: Yeah, and similarly, Health & Wealth Bulletin is our free content that we take our paid content and try and entice folks to sign up – that's how we get paid, by having paid subscriptions, that's where really a lot of the juice and meat of our content gets produced, from paying people. We don't do advertising. And that's all I got. Thanks very much and again, hope to see you next week. Matt, how about you?
Matt: Sure will. Looking forward to it.
Matt: Have a good one, Doc.
Doc: See ya, Matt. Bye.