“Every glittering ounce of [good news] should be cherished and hoarded and worshipped and fondled like a priceless diamond.”– Hunter S. Thompson

Coronavirus Pandemic: Hope and Progress 

Today, we are going to take a break from all the noxious news and daunting data about the Corona Crisis to give you some hopeful facts.

Yes, we know that, with shutdowns in nearly every country in the world, economies are faltering. But to provide some immediate relief, governments have pledged to support citizens and businesses with subsidies, loans, suspensions of tax and rent, and other measures.

And all over America (and the rest of the world), businesses, large and small, are stepping up to combat the virus and provide commercial and economic relief.

Across the globe, thousands of doctors, scientists, and researchers are working to find a vaccine. But they are also working hard on treatments to reduce symptoms and improve outcomes. The SARS-CoV-2 pathogen is similar to coronaviruses scientists have studied before, including the SARS virus that struck in 2002. That has given them an advantage in terms of moving in the right direction. They already know, for example, how the virus enters cells.

These early discoveries are being shared through hundreds of medical and scientific journals.

And the pace of all this work and all these actions is amazing. Almost everything listed below has happened in the last 30 days.

 Treatments, Remedies & Vaccines 

* A team of Canadian scientists has isolated and grown copies of the coronavirus. And Australian scientists have figured out how the body’s immune system fights it.

* Scientists at Israel’s Institute for Biological Research said that they have made a “significant breakthrough” in understanding the biological mechanism of the virus, including the way antibodies are produced by those who already have it.

* A team of scientists at the University of Pittsburgh School of Medicine said that they are making “quick” progress in developing a potential COVID-19 vaccine.

* The first US clinical trials for a potential vaccine have begun in Seattle. Biotech company Moderna has fused a piece of the genetic code for the pathogen’s S protein – the part that’s present in other coronaviruses, like SARS – with fatty nanoparticles that can be injected into the body.

* Imperial College London is designing a similar vaccine using coronavirus RNA, its genetic code.

* Johnson & Johnson and French pharmaceutical giant Sanofi are working with the US Biomedical Advanced Research and Development Authority to develop vaccines. Sanofi’s approach is to mix coronavirus DNA with genetic material from a harmless virus. Johnson & Johnson’s approach is to attempt to deactivate SARS-CoV-2 and switch off its ability to cause illness.

* Recent reports suggest that some existing antiviral drugs, including remdesivir and the Japanese flu drug favipiravir, may have an effect on the new coronavirus. Zhang Xinmin, an official at China’s science and technology ministry, said favipiravir, developed by a subsidiary of Fujifilm, had produced encouraging outcomes in clinical trials in Wuhan and Shenzhen involving 340 patients. “It has a high degree of safety and is clearly effective in treatment,” Zhang told reporters.

* Doctors in India have reported success in treating infected patients with a mixture of drugs usually used to tackle HIV, swine flu, and malaria.

* In China and Japan, doctors have had promising results using blood plasma from people who have recovered from COVID-19 to treat newly infected patients. This well-established medical technique could even be used to boost the immunity of people who are at risk of catching the disease.

* On March 27, the Food and Drug Administration issued an emergency use authorization for a new test developed by Abbott Laboratories that can deliver coronavirus results in as little as five minutes. Metro Health Medical Center in Cleveland is already using the new test.

* The Centers for Disease Control and Prevention has started testing for antibodies to see if healthy people previously had the coronavirus. The tests could help the agency better understand the virus and its spread, indicating how prevalent the virus has been and whether a significant number of people have had it without actually getting sick.

* Preliminary studies in China report that the malaria drug hydroxychloroquine shows promise. “Cough, fever, and pneumonia went away faster, and the disease seemed less likely to turn severe in people who received hydroxychloroquine than in a comparison group not given the drug.”

* In hospitals in Boston, Alabama, Louisiana, Sweden, and Austria, researchers are conducting clinical trials to determine whether giving nitric oxide to patients with mild to moderate cases of COVID-19 can help them. The impetus for this was a report that showed good results from earlier trials in Italy that were themselves promising.

* A San Diego biotech company is developing a vaccine with Duke University and the National University of Singapore.

* A new drug, EIDD-2801, shows promise in reducing lung damage. Results of initial tests on mice were published April 6 in the journal Science Transnational Medicine. The tests showed that, when given as a treatment 12 or 24 hours after infection, EIDD-2801 could prevent severe lung injury in infected mice. “This new drug not only has high potential for treating COVID-19 patients, but also appears effective for the treatment of other serious coronavirus infections,” said senior author Baric. What is especially hopeful about EIDD-2801 is that it is a pill.

* Erasmus Medical Center has found an antibody that can fight against the coronavirus. While not a cure, it seems to be halting the infection temporarily and giving the patient time to recover.

Companies Helping Out

 * The sports world is raising money for stadium employees, Uber Eats is providing free delivery to help independent restaurants, professional soccer players are entertaining viewers with a FIFA tournament, restaurants are doling out free food to those in need.

* Formula 1 racing engineers at Mercedes have joined forces with University College London to develop a breathing device that can be used instead of putting patients on a ventilator in intensive care.

* Distilleries across the US are using high-proof alcohol to make hand sanitizer and are giving it away for free.

* Google is digging into its massive trove of data tracking the movements of people around the world to produce a series of reports designed to help policymakers and researchers in the fight against the coronavirus.

* Several major health insurers have promised to cover COVID-19 costs.

 * When the coronavirus outbreak spread through Microsoft’s home state of Washington, Bill Gates teamed up with Amazon, another Seattle-based tech giant, to provide at-home test kits to residents in the area.

* Bill Gates is also funding the construction of seven factories to manufacture vaccines rapidly when they are approved, instead of wasting time by waiting to find out which vaccines work… and then building the factories.

Economic Support 

* The US has passed legislation to give $1200 to most American adults and $500 to most children as part of a stimulus package that also includes loans to businesses and local and state governments, funds for hospitals, and more unemployment insurance.

 * Australia is paying AU$750 (around $445 or £380) to all lower-income citizens, and is offering loans to small and medium-sized businesses.

* Denmark is subsidizing 75% of workers’ salaries.

* France has promised that no company will be allowed to fail as a result of the pandemic. It is freezing tax and rent payments for small businesses and expanding the welfare system for workers.

* Germany has pledged at least 500 billion euros ($550 billion) in loan guarantees.

* Italy has promised help for families and one-off 500-euro payments to people who are self-employed.

* Spain has announced a 200-billion-euro rescue package in loans for small businesses, and is freezing mortgages and utility bills for individuals.

* Sweden is subsidizing 90% of workers’ salaries if they’re affected by coronavirus.

* The UK is guaranteeing 80% of workers’ salaries and providing limited sick pay to those who are self-employed.

 People Helping Out 

 * Many people have joined volunteer mutual aid groups to support the vulnerable in their own communities. When the UK government called for volunteers, more than a quarter of a million people signed up in a single day.

* People and businesses are creating online resources to help ease the tension and inconvenience of quarantine, many of them free or discounted.

* Kind gestures are everywhere, from thank-you signs for garbage collectors to asocially distanced “welcome home” parade for a young cancer patient.

* In the UK, people around the country simultaneously took to their windows, balconies, and gardens to cheer and applaud the health workers of the NHS.

* Apple, Facebook, and other companies are donating millions of face masks.

* Cuban doctors traveled to Italy to help deal with the spread of the disease.

* Celebrities are doing their bit, whether it’s James McAvoy donating £275,000 to health care workers, Amy Adams and Josh Gad reading stories for children, or John Krasinski starting a YouTube channel dedicated to good news.

A Growing Number of “Good News” Sources 

Thanks to the internet, it’s easy to keep up with the “good news” – and, thankfully, there’s plenty of it. I found the following online in less than 5 minutes:

 * “John Krasinski launches ‘good news’ network from quarantine”

* “The Good News Dashboard” LINK

 * “A look at some ‘good news’ across the US” LINK

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“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.”

– John Adams


Coronavirus Update: New Estimates and Answers 

Today, I’m going to cover some aspects of the pandemic that are not reported, are underreported, or are misunderstood.

The possibility that symptomology is correlated to amount of exposure

On top of my list are two questions about symptomology. Why is it that some young and healthy people have died from COVID-19 when we’ve been told that it wouldn’t happen? And how can we explain the fact that the symptoms range from nothing to mild to severe – even among young and healthy people?

These questions have been posed to Dr. Fauci several times in the past three weeks. He says he doesn’t know – that it’s a mystery.

I don’t understand why he says that, because there is a theory that makes sense to me. It’s been posited by at least two epidemiologists, and has studies behind it. The theory is that the severity of the disease is determined not only by the infected individual’s immune system but also by the amount of coronavirus he or she has been exposed to.

The amount of exposure depends on two things: the size of the molecules that infect you and the way you have been infected.

If someone sneezes directly into your face, you will likely get a large dose – not only of many molecules of the virus but of the larger ones that some scientists believe are more virulent. But if the same person sneezes at you from a greater distance, your chances of getting a large dose are proportionally less.

This is why we’ve been asked to keep a social distance of six feet. The larger molecules that would be emitted from a person speaking would not normally travel that far, but the expulsion from a sneeze is much stronger than that which comes from speaking.

So that could explain why some people get more severe symptoms. They’ve been infected by large doses of the large molecules of the virus.

But the size of the dose is only one factor that supports the theory. The other is that you can also receive a large dose in increments – by being exposed to small molecules of the virus multiple times.

If, for example, a young person spends an evening in a bar or restaurant with friends, one or several of whom are infected but asymptomatic. During the first 5 or 10 minutes, the amount of the virus he or she would be exposed to would be small. But after hours of that mild exposure, there is a compounding effect.

Those repeated exposures add up. The dose increases. Thus, when the infected person comes down with symptoms, they can be strong or even deadly.

This could explain why that doctor from China who “outed” the disease died from it.  It could also explain why some young and healthy people have experienced severe symptoms, and a few of them have even died.

If this is true, the takeaways are as follows:

* Six feet is a sufficient distance for conversation so long as you aren’t in the same closed space with an infected person for a length of time.

* If someone that is infected sneezes directly at you from a distance of six feet or less, you may be in trouble.

This may also mean that front-line workers (not just medical personnel, but also people working in restaurant kitchens and service windows, taxi drivers, delivery people, and anyone else working long hours in the proximity of several others) will likely develop more severe symptoms if and when they contract the virus.

How many will be infected? 

When Dr. Fauci announced new CDC estimates on how many Americans will get infected and how many will die, he was vague on the first and more specific on the second.

As to the death toll, the CDC estimates were 100,000 to 240,000. As for the number infected, Dr. Fauci said, “millions.”
I believe he was specifically vague not because there were not more accurate estimates available but because he didn’t want to alarm the public.

When you hear millions, you usually think of a number that is less than 10 million. But as I said in my March 30 essay, the arithmetic suggests that the range will be in the tens of millions.

This is likely because of the fact that some 80% of the people that are diagnosed as positive for COVID-19 have mild to medium symptoms. Which means, as the major media are finally figuring out, that the number of people that have the virus today is probably larger than the number of reported cases by a factor of 10.

But even 10 could be too low a multiple.

Michael Mina, Assistant Professor of Epidemiology at Harvard T.H. Chan School of Public Health, recently said, “This is an extraordinarily transmissible virus, and I think it’s more transmissible than we recognize. We really don’t know if we’ve been 10 times off or a hundred times off in terms of the cases. Personally, I lean more to 50 or a hundred times off.”

That means instead of more than a million cases in the world right now, there could be anywhere from 10 million to perhaps 100 million.

Those numbers are too scary to think about.

While waiting for more data, I’m sticking to my guess that the multiple will be 10 and that, after all is said and done, the number of Americans that become infected will be 20 million to 60 million.

If that turns out to be true, the death toll will likely be far more than 100,000. It will be in the range of 200,000 to 600,000.

I know it doesn’t seem possible at this point – with total cases at only 350,000 and deaths at only 10,000. But if you do the arithmetic based on the growth rate now, it’s quite possible.

More percentages 

And finally, some new data…

The tracking services I’ve been following are becoming more specific as the weeks go by. Now they are reporting not just numbers tested and the results of those tests but also number hospitalized, numbers on ventilators, and, of course deaths.

If you look at these numbers as percentages, you can arrive at some odds that are interesting:

* The percentage of people that test positive for COVID-19 has been running just under 25%.

* The percentage of people in the hospital that go into ICU is about 20%.

* The percentage of people in ICU that are on ventilators is 33%.

* A third of the world’s cases are now in the US. As things are going now, the US will have half the world’s cases by the end of the month.

* Right now, the US is not conducting any antibody tests. This is a crucially important test to understand how the virus spreads.

That’s it for today. Coming soon: we’ll take a look at what businesses are doing to stay alive during the pandemic.

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“Every step of life shows much caution is required.”

-Johann Wolfgang von Goethe


When I’m Going to Get Back Into Stocks 

The Dow has fallen.

A reader asks: Is it time to get back into stocks?

I’m not an investment advisor. I don’t feel comfortable telling others what to do with their money. I prefer to say what I’m doing and why, and then let my readers decide if it makes sense for them.

So: Am I getting back into stocks? Not now. I’ll tell you why.

We just went through one of the longest and largest bull markets in my lifetime. From March 9, 2009 to March 11, 2020, the Dow and S&P 500 rose 351% and 400%, respectively. That was a fun ride – and I’m glad I was on it. But it became clearer and clearer as time passed that the bull I was riding was getting old.

The day the World Health Organization declared the coronavirus a pandemic, the market tumbled 6%. It has fallen since then, and is currently down about 25% from its high. (Erasing more than $8 trillion of the US market capitalization.)

When deciding to buy a stock, there are two simple ways I judge its value. The first, which I’ve been doing forever, is the price-to-earnings ratio (P/E). That is determined by dividing the stock price by the earnings per share. (If the price of stock X is $50, and the earnings per share is 5, the P/E is 10.)

There are other ways to measure share value. A popular one is the price-to-sales ratio. It is determined by dividing a company’s market cap (the total value of outstanding shares) by its revenue. This is a good quick way to compare prices of companies within a given industry, but it doesn’t make sense to value stocks across the board. Another metric is the price-to-book ratio. A business’s book value is determined by subtracting its liabilities from its assets.  You take that book value and divide it by the number of outstanding shares, which gives you the book value per share. Then you divide the share price by the book value per share. I don’t use this method because it’s just too much work for my purposes.

What I like about the P/E is that it corresponds to the way I value private businesses. I wouldn’t be interested in buying a company based on sales. And I certainly wouldn’t value it that way. I’m interested in profits. Earnings are profits. The other thing I like about the P/E is that, because it values the shares on profits, it can be used to fairly value large, established businesses in most industries – from manufacturing to agriculture to communications to energy, and so on. In other words, it’s useful for valuing the sort of stocks I want to own: large-cap, dividend-giving, industry-dominating companies that have a long history of profitability and are likely to be here far into the future.

If I traded stocks or invested in growth stocks, I’m sure I’d be interested in getting more sophisticated with my value calculations. But my strategy for stocks is based on my confidence that I do not and will not ever have the interest in or patience for beating long-term market averages. I’m happy to get 8% to 12% on my money over the long haul.

Today, the average P/E for the Dow is 16.4. That’s down two points from a year ago, and it’s getting very close to the historical average of 16. P/E ratios are not reliable predictors of short-term market moves, but over 10 years or more, they work pretty well. Thus, buying stocks with P/E ratios of 15 or less would make sense. And many value investors use that as a buy-in signal.

As an investor in private businesses, I have never paid anywhere near 15 times earnings. For newer, growing businesses, I’ve paid up to 10 times earnings. But for larger, established businesses in my industry, the range is usually a 4 to 6 times multiple of the average earnings over the prior three years.

In other words, for a business that made profits of $80,000, $100,000, and $120,000 over the prior three years (an average of $100,000 per year), I’d be willing to pay up to $600,000.

You can’t do that with larger, stable public companies. Priced at the historic P/E of 16, I’d have to pay $1.5 million for the same company.

The reason for this is supply and demand. In the public sector, there are billions of dollars of buying demand every day. The larger, institutional buyers are happy to pay 16 times earnings for the sort of stocks I prefer to buy. And they usually will. So for me, I’m motivated to buy these stocks in the 12 to 14 P/E range.

Recently, I’ve added a second tool to my valuation kit. I’m not exactly sure how I will use it, but I’m looking at it because I think it makes sense.

It’s called the Dow-to-Gold ratio. I learned about it from Bill Bonner, the founder of Agora, and Tom Dyson, who helped me assemble the core holdings of the stock portfolio I have now.

Here’s how Tom described this tool:

It’s NOT a speculation in gold. It’s a long-term buy-and-hold stock market investment strategy… with a simple market-timing element that helps us buy low and sell high.

Most of the time, we hold the stock of the world’s best dividend-raising companies. We call these “dividend aristocrats” – companies like McDonald’s, Coca-Cola, Hershey’s, P&G, J&J ,and Phillip Morris. [Note: This is basically the same core group that I have in Legacy stocks. No surprise there, since Tom helped design the Legacy Portfolio.]

Some of the time – when these stocks get too overbought and expensive – we go to the sidelines in gold.

We never cash out. And we never hold anything except gold and dividend aristocrats. We just wait for the Dow-to-Gold ratio to reach extremes… and then we rotate between stocks and gold accordingly.

As such, the Dow-to-Gold ratio is the only number that matters to us.

For Bill and Tom, the Dow-to-Gold buy-in ratio is 5. When they can buy all the Dow stocks for five times the value of an ounce of gold, they will be all in.

Right now, the ratio is well above 5. But it’s moving down with stock prices down and gold moving up. It’s likely that gold will move up considerably more if the economy doesn’t drastically improve by mid-summer. If that’s the case, we will see the Dow-to-Gold ratio moving towards 5.

But I’m not going to wait that long. As I said, this is a new metric for me. It makes the most sense in the long view. As individual stocks that I favor move towards a P/E of 12 and the Dow-to-Gold ratio continues to drop, I’ll start buying.

But on an individual basis.

In the meantime, I’ll keep my money in cash and wait to see what happens.

PS: I may put a very small portion of that cash to speculate. If I do, I’ll let you know.

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“A scam is a scam. A fraud is a fraud.” – Emily Thornberry

Protect Yourself From Corona Scams (and All Scams, for That Matter) 

Those damn scammers.

On Wednesday, I listed some of the cyber scams out there aimed at people working from home. And the scammers don’t stop there. I’ve been getting government notices and reading newspaper articles about the measures we should be taking to protect ourselves from the many coronavirus-related scams that are burgeoning today.

Some give sensible advice – like this, from Medicare:

* Only share your Medicare Number with your primary and specialty care doctors, participating Medicare pharmacist, hospital, health insurer, or other trusted healthcare provider.

* Check your Medicare claims summary forms for errors.

Problem is, this applies only to Medicare scams. To defend yourself against every possible scam coming your way during the Corona Crisis, you’d need a list of do’s and don’ts a mile long. And even if you had such a list, you wouldn’t use it because the advice would be too specific – too difficult to remember.

Getting scammed sucks. I’ve probably been scammed dozens of times. I can’t say for sure, because I don’t like to carry grudges.

But there is one that I can’t forget…

His name was SS. He was recommended to me by a trusted colleague as a credit repair expert. We were creating a course on that subject, so we hired him to help us develop it. He worked for us remotely for a few months. Although I had only a few conversations with him, he seemed knowledgeable, agreeable, and friendly.

He told me that he had attended a three-day seminar I gave on entrepreneurship. He said he left early for some reason. Now I know why: He wasn’t interested in what I was teaching.

Some months into our relationship, he came to town to work with our editors. He stopped to visit me at my house one weekend morning. Within five minutes, I knew he was going to hit me up for something. I went inside to get us some coffee and told K, “This guy is going to ask me for money.”

“Don’t even think of giving it to him,” she warned.

“Don’t worry,” I said. “I know what he’s up to.”

A half-hour later, I agreed to lend him a hundred grand.

A week later, I wrote him a check. It was done as a formal loan through our legal office.

Almost immediately after we closed the deal, I felt queasy about it. I researched him on the internet. There were, as I would have expected, criticisms of his books and programs – but nothing about him and his business practices that concerned me.

I told myself not to worry, that I had a legally binding contract and collateral. But as the days passed, I couldn’t shake that uneasy feeling. Finally, I asked one of our research geniuses to do a deep search. Sure enough, he was a scammer. A charming, clever scammer.

He made his living by borrowing money from people he met through his business and welching on the loans. He would string out his creditors long enough to put a couple million in his pocket, and then he would declare bankruptcy. He had gone bankrupt something like seven times.

I remember this particular scam because (a) it was a lot of money, (b) I knew better, and worst of all (c) I had to admit my stupidity to K.

It was an immensely embarrassing mistake. And that’s why I’m still mad at myself. Ten years before it happened, when I started writing about wealth building, I had already thought and written about scams. I had ideas. I even had rules. Had I followed my own rules, I would not have made that “loan.”

Here are the rules – a simple five-part protocol for defending yourself against most scams – coronavirus scams, business scams, investment scams, telemarketing scams, whatever:

  1. Never invest in (or make a loan to) any business you don’t thoroughly understand. And by understand, I mean being able to look at a P&L and balance sheets to detect any irregularities.
  2. Never give money to someone or some business that you don’t have an existing, longstanding relationship with.
  3. Never invest in (or make a loan to) any opportunity that is “urgent” or has any sort of deadline.
  4. If you have any doubt whatsoever about the deal, say no.
  5. If you decide to violate any of these four rules, don’t write a check for more than you would care to lose. Because there is a chance – maybe even a good chance – that you will lose it.
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“Quick decisions are unsafe decisions.” – Sophocles

Tough Decisions 

Most of my coevals are retired. In the past several weeks, the e-chatting among them has increased. It’s clear that they, like so many unemployed Americans, are experiencing boredom, anxiety, and the need to be in a sympathetic social environment, even if it is a virtual one.

Since I’m not retired, my involvement in the businesses I own and work with has dramatically increased in the last six weeks. My partners and I have been putting in 12-hour days trying to do all the things you’ve got to do to in times like this.

This extra work has one certain benefit: I am not bored. Each day is a crush of phone calls, teleconferences, and email correspondence. Time is flying by. I am struggling to find time to write these essays and to exercise. It’s exhausting, but it’s also exhilarating. The work feels important. It is important.

With each passing day, I look at the numbers – the CDC numbers, the Dow, and the business sales reports – and I ask, “Will things ever get back to where they were?”

Cycle Theory: once the domain of nerds and technicians, and now a topic of concern for every sentient being 

Since the outbreak of the coronavirus made front-page news at the end of January, the mainstream and social media have been reporting on its growth and making projections by using charts and diagrams.

We’ve learned a good deal about the rise and fall of pandemics from these graphic simulations. We’ve learned that they can spread fast and wide. But we have also learned that, eventually, they flatten out and decline. Most importantly, perhaps, we’ve learned that there are things that we can do, individually and in common, to retard the spread and thus flatten the curve. Doing so can greatly reduce the damage.

When the virus became front-page news, I found myself looking each morning at charts that tracked its uptrend. After the market crash, I started checking the Dow. As business shutdowns were mandated and unemployment shot up, I started looking at the daily sales reports of the businesses I own and work with.

In each case, I’m doing the same thing: I’m trying to figure out the trend.

What can we do now? 

On Monday, we talked about how adaptive behaviors (washing hands, social distancing, etc.) can reduce both the infection rate and the death toll.

The same, to some extent, is true for business. There are things that can be done now to reduce the financial impact of the current crisis. One of the first things that comes to mind is reducing employment costs – i.e., firing people. In most businesses, labor is a significant cost – and in the US, a cost that can be cut quickly. From a numbers perspective, it’s the rational thing to do. But making good business decisions takes more than digital thinking. You’ve got to include your emotional intelligence, the deeper and wider intelligence that stores the lessons you have learned from a hundred thousand large and small experiences and shapes them into intuitions that can help you evaluate and sometimes reject the “definitive” numbers that make rational sense.

My business intuitions are mostly the result of my business experiences – but those experiences were partly shaped by movies I saw as a child. These movies made heroes of business owners that took care of their employees and customers at considerable personal cost.

So when faced with downward markets and declining sales, my instinct has always been to do whatever could be done to continue providing the same level of service to our customers and to keep our employees working. I’ve probably had a dozen discussions of this type in the past 40 years. I’m pretty sure I’ve been successful in getting my partners to side with me.

When the Corona Crisis became an undeniable business threat several weeks ago, I had those conversations again. I made my usual arguments, and we came to the same conclusion: Keep everyone employed and ride out the storm.

I believe that will work for a few of the companies… but not all of them.

Consider the rental real estate business 

I’m writing this on Tuesday, March 31. Tomorrow, rents come due on most of the rental properties I own. It’s obvious to my partners and me that it’s unlikely we will be collecting all of those rents. Some of our residential tenants will have lost their jobs. Virtually all of our commercial tenants will be dealing with collapsing sales. I am inclined to be lenient toward all of them, and initially took that position. But after looking at the spreadsheets, I realized that there is a limit to how much rental income we can forgo.

It’s simple math, really. Depending on the property, we have net profit margins of about 20%. That means we can afford to go without 20% of our rental income before we start losing money. Anything more than that would mean that we could not fully pay our taxes and utility bills. Nor could we fully pay our employees’ salaries. Since we retain most of our earnings (i.e., we don’t spend the profits as we get them), we have enough cash banked so that we can spend down to keep paying those bills and salaries. But there’s a limit.

And that limit is when we run out of money.

Maybe you are thinking: “Well, you’re loaded Mark. Take the extra money out of your savings!” Again, I’m emotionally and even theoretically inclined to agree with that. But there are two problems.

  1. I have partners in almost all of these properties that aren’t in the same financial position as I am. They depend on the monthly distributions to pay their bills. What I’ve done in those cases is tell them that I won’t take my distributions for now. And that will help them. But only if the rental income doesn’t drop by 50% or more… which is perfectly possible.
  2. Rental real estate is a significant part of my investment base. (It represents about 25% of my net worth, but 10% of my income.) And because of the general business shutdown, I’m expecting that my other businesses, too, will be suffering. Those businesses have millions of customers and thousands of employees that I have to consider. I have to think about all the businesses I own and all of the people they employ.

So what are we going to do? 

We’re going to do pretty much what everyone else in the rental real estate business is doing now.

First, we are going to do our best to keep revenues from dropping. That means having one-on-one conversations with our tenants, trying to identify those that are able to pay their rent, those that can pay, say, half of their rent, and those that can pay nothing at all.

We also have to prepare for the possibility of a rent moratorium. That would be zero income coming in. And that would mean no cash to pay the people that maintain those properties and no cash to pay the utilities, and so on.

What do we do as the rent roll shrinks? Do we stop paying for landscaping, let the grass grow, and put the landscapers out of work? And what about routine maintenance? Do we stop paying our maintenance guys that repair the AC units, windows and doors, plumbing, electric, etc? And what about utilities? Surely we have to keep the lights on and the water flowing?

We have to make some tough decisions. And we can’t wait till these businesses start losing money. We have to start making “adaptations” right now.

These are a few of the actions we are taking:

* We have temporarily put off all capital investments – i.e., new roofs, new AC units, painting, etc.

* For the several properties that have mortgages, we have asked (and received) permission to move to interest-only payments while this crisis lasts.

* We are speaking to all of our tenants individually, figuring out what they can do and making plans accordingly. We are asking them to help out by reducing their use of the common utilities.

* I am extending a line of credit to some of my partnerships to cover shortfalls that will keep the bills paid for several months.

* We will be reducing landscaping and other services, but not eliminating them altogether.

* If it becomes necessary, we will try to get reductions in our utility bills.

There is nothing on this list that is novel or clever. These are the low-hanging fruits of survival for rental real estate entrepreneurs. Every sector of every industry has one of its own.

If you are an entrepreneur or an executive, you might want to think about making your own list.

What you don’t want to do is proceed as if you believe our economy and your business will come “roaring back” in the summer or fall. The chances that that will happen are about the same as the chances that the virus will peak in the next few days or that we’ll have a vaccine for it in the next few weeks.

Make your survival list now, while you have the presence of mind to explore the options and plan the details. Prioritize it according to your business (and moral) intuitions- starting with easier decisions and moving to harder ones. Imagine yourself  making those tougher decisions (because you may have to).

Doing all this now, when your business may be running smoothly, may seem unpleasant and premature. I promise you: You’ll think differently once you do it.

Hope for the best. Plan for the worst.

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“The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown.” – H.P. Lovecraft

Like so many bloggers, I’ve been reading lots about the coronavirus, puzzling over numbers, looking at charts, double-checking facts. I don’t usually spend this much time studying secondary and tertiary sources. Since my beat is business and wealth building, I prefer to conjure up my ideas and advice from my personal experience.

But in this case, I have no choice. If I’m going to write about the virus, I’m going to have to study it. And that means relying on information I am not qualified to evaluate. Are the data accurate? Is the logic sound? Are there missing pieces? 

Reading the News Again: How Many Could Die? 

For 20 years, I’ve read what news I read in the evening. I never wanted to deplete my morning energy by focusing on problems that were beyond my control. But for the past month, I’ve been starting each day by checking two charts: one that tracks the stock market and another that tracks the coronavirus.

I have a detached curiosity about the stock numbers. But my interest in the coronavirus numbers is visceral and strong.

By next week, if not before, everyone in the United States will know someone who has been infected. I already know a half-dozen. The pandemic and its economic aftermath is going to have a psychological effect on Americans that will last for the next 50 years.

Since I began tracking the data, the number of diagnosed cases has gone up every day. So too, happily, the number of diagnoses. But the data point I find myself stuck on is the number of deaths.

It has gone up every single day – and in the past week, at an increasingly alarming rate. So every day, I wonder: How many will die?

Will it be millions? Will it be hundreds of thousands? Or will it be less than 100,000, putting the coronavirus pandemic in “bad flu” territory?

Thirty days ago, the numbers were small but the projections were big. Based on the “consensus” opinion then, the virus had an infectious rate of 3 (one person infects an average of three others) and a case fatality rate (CFR – the number of deaths compared to the number of cases diagnosed as positive) of 6 (6% of those diagnosed die).

Putting these numbers into probability calculations, the mathematical models I was looking at were projecting an infectious rate of nearly 100% of the population and a death rate of 6%.

That amounted to a projected US death toll of about 20 million people (6% of 330 million). And that wasn’t counting the many more that would die indirectly from heart attacks, strokes, and car accidents because access to hospital beds and ventilators would be so limited.

That was the direst study I found. Others projected the number infected would be 200 million, with a death toll of 12 million. The most optimistic projection as to number infected was 60 million, with a death toll of 3.6 million.

On March 16, the Imperial College of London issued a report based on slightly lower infectious and case fatality rates. This report projected that the US death toll would reach 2.2 million by the end of August. Again, that wasn’t counting the indirect deaths.

The most optimistic projection I saw at that time was a death count of 1.8 million (based on a CFR of 3 and 60 million cases).

All of these projections were being reported in front-page stories and on every TV news show. And hundreds more were being discussed online, along with heart-wrenching human-interest stories and all sorts of conspiracy theories.

I was spending four hours a day reading. And every day, I felt like I knew less than I did the day before.

And Then I Figured Something Out… 

What I didn’t know then was that most of those early death tolls were projections of what would happen if the virus continued to spread and kill at the speed and rate it had been spreading and killing up to that point.

What those early calculations didn’t take into account was what epidemiologists call adaptiveness – the ways a population changes its behavior as awareness of a significant danger spreads.

This includes all the things people are doing now to lessen the chance of catching the disease – washing hands, disinfecting surfaces, social distancing, and isolating.

These behaviors slow the rate of contagion. With social distancing, for example, the infectious (or reproductive) rate declines. Instead of each victim infecting three others, that rate might drop to 2.5, then to 2.0, and so on. Once it falls below 1.0, the number of people that get infected starts going down. So too does the number of deaths.

Another problem with those early mortality estimates was how they determined the lethality of the disease. The early numbers – first from Wuhan and then from Seattle – were very high: 6% and higher. The mainstream interpretation was that 6 or more of every 100 people that caught the virus would die from it.

But that was wrong for several reasons.

First, the deaths in the USA in the first two weeks were concentrated in nursing homes and cruise ships, where the average age of those infected was considerably higher than the norm. Since, as is the case with most viruses, this one is much more likely to kill older people and people with compromised immune system, one would expect those early fatality rates to be disproportionately high.

In the state of Washington, for example, the first cases were in nursing home residents. That produced a highly distorted CFR. (At one nursing home, 34 of 81 infected residents died. That is a CFR of 42%!)  This anomaly, along with the data coming from Wuhan, is the reason the early projections for the US were between 6% and 12%.

So that was the first problem: an overstated estimate of how infectious the virus is. The second problem was the way the early media coverage misunderstood the data the CDC (and other groups) were publishing about the lethality of the disease that coronavirus causes: COVID-19.

The lethality of COVID-19 was expressed in terms of the CFR, which, as I said, is a ratio that compares the number of deaths to the number of diagnosed cases.

It doesn’t take a degree in statistics to figure out what’s wrong with that:

* Since the symptoms, for most people, are similar to the flu, many people that get it wouldn’t go for testing and, thus, wouldn’t be diagnosed.

* Of those that would go for testing, any that didn’t have advanced symptoms and a connection to a carrier would be turned away because of the scarcity of testing kits.

I asked a doctor friend of mine about this. My hypothesis was that if you could know how many people were actually affected, and compared that to the number of deaths, you would have a real fatality rate that was lower than the 3% figure being talked about then.

He agreed. He said, “They call it the denominator problem.”

It works like this: When you underestimate the denominator, you overestimate the numerator. Thus, for the reasons cited above, the denominator (cases diagnosed) is likely to be a gross understatement of the meaningful statistic (the number of people that actually have the virus).

So why were they using this faulty ratio?

“Because,” my friend said, “you cannot measure what you don’t know.”

To make a scientific measurement, you must stick to the facts. In the case of measuring lethality, there are only two relevant facts: the number of cases diagnosed as positive and the number of deaths.

In the beginning of the outbreak, the CFR will give you a rate that is higher, even considerably higher, than the real death rate for the reasons pointed out above. But as the days and weeks go by and you get a larger percentage of the population tested, this distortion will diminish. And that’s what has happened since I’ve been looking at it. The CFR in the US has dropped from 6% to 3% to about 1.7% today.

Will that continue to drop? Definitely.

Up to now, we’ve had just a fraction of 1% of the US population tested. As tests ramp up quickly, so will the diagnosed cases. And as the ratio of diagnosed cases to deaths increases (as it will), the CFR will continue to go down.

To get to a realistic lethality rate, we have to take another guess: We have to guess how many Americans have the virus but have not yet been diagnosed with it. This is the denominator problem I mentioned above.

Considering that 80% of those that get COVID-19 have mild symptoms, and that we’ve been able to test so few, my guess has been that for every person diagnosed, there were 10 others that had it but had not been diagnosed. A recent report I read that summarized estimates from top epidemiologists concluded that the percentage of diagnosed cases versus actual cases is 9%.

Close enough. So let’s use my 10% guess to keep the arithmetic simple. What that means is that the number of Americans that have the disease right now (as I write this) is about 10 times larger than the diagnosed cases. Ten times the current diagnosed cases (139,061) is about 1.4 million.

So now we have an “adjusted” infected rate of 1.4 million and a death count of 2428. And to get a realistic fatality rate, all we have to do is divide 2428 by 1.4 million. Right?

But wait… there’s more

Alas, no.

There is another problem with the CFR: It doesn’t make sense to compare the number of deaths to date to the number of cases to date. That’s because people that die from COVID-19 don’t die overnight. Based on the numbers so far, it seems to take 10 days to two weeks.

Therefore, the correct ratio should be the number of deaths to date over the number of cases diagnosed 10 days to two weeks earlier.

This sounds like a problem that could be easily solved: Simply compare today’s death count against the number of cases diagnosed 10 to 14 days ago. But if you try that for several days in a row, you will see that the number you get keeps moving because you are working with two sets of numbers – death rates and diagnosed cases moving at the same time.

So, no, we can’t arrive at a precise number. But we can arrive at a range. The comparisons I did since the beginning of the month increased the CFR by a factor of 2.5 to 4. That would make the lethality rate somewhere between 0.85% (0.34% x 2.5) and 1.36% (0.34% x 4).

Okay, so that gives us a real fatality rate of as a range of 0.85% to 1.02%.

How many will be infected? 

Let’s move on to the other metric we need to estimate the death toll: the Ro or reproductive rate – i.e., the rate at which the virus will spread from one person to others in close contact. Like the case fatality rate, this one has been going up in the past month. Since I’ve been tracking it, it’s gone down from 3.0 to 2.3.

A reproductive rate of 2.3 means that each person that gets the virus will infect 2.3 more.

2.3 might not sound scary, but take a look at how fast it turns into 2.4 million:

  1. 3 x 2.3 = 5.29
  2. 59 (5.29 + 2.3) x 2.3 = 17.4
  3. 0 (17.4 + 7.6) x 2.3 = 57.6
  4. 6 x 2.3 = 189.9
  5. 6 (189.9 + 82.6) x2.3 = 626.9
  6. 5 (626.9 + 272.6) x 2.3 = 2068.9
  7. 2,968.4 (2068.9 + 899.5) x 2.3 = 6827.4
  8. 9,795.8 (6827.4 + 2968.4) x 2.3 = 22,530.3
  9. 32,326,1 (22,530.3 + 9795.8) x 2.3 = 74,350.0
  10. 106,676 (74,350.0 + 32,326.1) x 2.3 = 245,355.1
  11. 352,031.1 (245,355.1 +106,676) x 2.3 = 714,623.4
  12. 1,066,645 (714,623.4 + 352,031.1) x 2.3 = 2,453,304
  13. 3,519,949 (2,453,304 + 1,066,645) x 2.3 = 8,095,882

And that gets us to 11.6 million in just 14 exponential steps! That’s just 14 degrees of exponential growth to get from one infected person to more than 10 million.

In a crowded city the size of New York, that could happen in a few weeks. In a city as dense and populated as Wuhan, it could happen in just a few days.

That is the frightening part. With a Ro of 2.3, the coronavirus is a scarily fast moving bug. But that rate is not fixed. It’s dependent on its ability to move freely from one host to another. Without any barriers, it can grow at these rates. And that’s why some of the earlier articles on social media, the ones that were predicting that half to 100% of Americans would get COVID-19 were wrong.

The way Homo sapiens adjust to threat is through adaptive behavior. This has been true since paleolithic times.

In the case of the coronavirus, those adaptive behaviors include everything we’re being told to do: hand washing, social distancing, and isolation.

Only a week or 10 days ago, the projections for how many Americans will contract COVID-19 ranged between 20 million and 200 million. Today, after accounting for the adaptive behaviors that are taking place, the upper end has come down to 60 million.

The final calculations:

And this brings us to our final bit of arithmetic. We simply multiply our estimate of the range of true fatality rates (0.85% to 1.02%) against this estimate of the number of Americans that will be infected.

At 60 million and a 1.02% true fatality rate, we will have 612,000 deaths. At a fatality rate of 0.85%, the death rate would be 510,000.

At 30 million, the death toll would be half of that – as many as 306,000 to as little as 255,000.

At 20 million, the death toll would be as much as 204,000 or as little as 170,000.

At 10 million, the death toll would be as much as 102,000 or as little as 85,000.

That’s quite a range – high of 612,000 to a low of 85,000. Putting it in perspective:

* The Spanish flu of 1918 killed an estimated 50 million worldwide.

* The Asian flu of 1956 to 1958 killed an estimated 2 million.

* The Hong Kong flu of 1968 killed about a million.


Although assuming this estimated real fatality rate of 0.85% to 1.02% is correct and remains constant, how many Americans will die in 2020 depends on how many will be infected.

And that means that all these drastic measures to reduce the number of people that get infected make sense.

This is not the only possible strategy. Another idea, considered and abandoned in England, was to isolate only the most vulnerable and let the rest of the population get the virus since their chances of surviving it are very high – more than 99%. (Remember, the high true fatality rate of 1.02% included a good chunk of the population that is older and health compromised.)

The reason that was rejected was because it would overwhelm the health care system, since some portion (maybe 10% to 20%) of that younger and healthier population would still need medical attention.

Since we are implementing behavior adaptations and since the health, scientific, and business communities are working nearly 24/7 to provide the materials we now lack and come up with treatments and vaccines we need, I’m guessing that the death toll will be at the lower end of this range: somewhere between 85,000 and 205,000.

So what can you conclude from this? That you’ve wasted 20 minutes paying attention to the arithmetic of a self-admitted know-nothing?

That’s on you.

I did this because I wanted to answer my own questions, as best as I could, rather than relying on some reputable institution or someone with a title and a degree (that may also have an agenda).

My conclusion is that the response we are making – as drastic as it is – is the right decision if our goal is to avoid crashing our health care system and allowing hundreds of thousands of Americans to die that would otherwise not die.

I feel sure we will get through this, but there will be – and has already been – a price to pay.

The social shutdown we are living through will almost certainly change the hearts and minds of every person old enough to be aware of what is going on. As I said, we will all know someone that has been infected by – or has died from – COVID-19. But the impact of isolation and submitting to what amounts to police-state governance may be worse, leaving us with fears and trust issues that will not disappear soon.

Then there is the financial impact. Our economy has virtually collapsed. And it may well slip into a general depression that will last for many years. Millions have already lost their jobs. And hundreds of thousands of businesses that are shuttered now will never again open for business.

Our political system will change. I don’t know how. But you can see changes taking place already. Much of it will be bad as politicians from both sides try to take advantage of the situation to further their own political ideas and personal goals.

But it’s not all going to be bad. There will be many that begin to understand some simple truths about the world we live in. That we are all, in the end, responsible for taking care of ourselves and our families. And that responsibility is not just about loving and caring but also about providing the financial resources that we need. That it is foolish to trust anyone or anything to take care of these responsibilities for us. And, as I’ve said before, that our government is not, and cannot be, our savior. For despite its efforts to do so, it cannot guarantee us anything that nature will not guarantee. And nature guarantees us nothing.

One more thing… 

In case this piece is syndicated to a large audience, which is possible given what’s happened in the past, I have to say this: My knowledge of epidemiology is a month old and an inch deep. And my math skills are rudimentary.

I’ve shown you my calculations not to persuade you that they are right but to prompt you to do your own thinking. That’s why I’m spelling out the numbers. So you can review them, make your own calculations, and plan accordingly.

To assist you in that, following are links to a few of the many studies,  articles, and models I’ve found helpful in researching this piece.

* “The Doctor Who Helped Defeat Smallpox Explains What’s Coming” – Epidemiologist Larry Brilliant, who warned of pandemic in 2006, says we can beat the novel coronavirus… but first, we need lots more testing. Click here to read the article.

* “Will Coronavirus Ever Go Away? What a Top WHO Expert Thinks” – Click here to read the article.

 * Bill Gates has spent much of his recent life working on global health issues. He’s now focusing some of his attention on the coronavirus.  Here he answers some of the most common questions.

* Alex Tabarrok is an economist at George Mason University and blogger at Marginal Revolution. Click here to watch him speak on the official responses to past pandemics, which countries are doing things right, and how the government can get a better handle on stopping the spread of this disease.

* “The COVID Tracking Project – US Historical Data” – Here is the tracking service I’m using. [LINK 3/26]

* WorldoMeter is another data tracking service that’s following the pandemic. Click here.

* Here are some early estimates based on China’s early results.

* “Why coronavirus antibody testing in one town could provide a way forward” – click here to read the article.

* While most of the countries in the Western world are mandating shutdowns and isolation, Sweden is taking another approach. It will be interesting to see how they fare. Click here to read a NYT article about the way they’re handling it.

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 “O Gold! I still prefer thee unto paper,

which makes bank credit like a bark of vapour.” – Lord Byron

 What’s Going On With Gold Prices? 

When the stock market crashes, gold prices skyrocket. That, at least, is the common wisdom. And there is good reason to believe it. Fear of losses in “paper” assets sends many investors running towards tangible assets – precious metals, art, and real estate. Anything of value that you can touch and hold.

But when the Dow began to tank early this month, the value of gold went down. Within a few days (March 16), the price for an ounce of gold bullion had dropped by $160, or 9%, bringing it down a total of 11% over 30 days.

(The price of silver went down even more – by 34% over the same 30 days.)

Several readers wrote to ask: What does that mean?

As I try to say each time I speak about investing, I am not an analyst. And I don’t pretend to have any expertise in understanding the financial markets, other than the experience I’ve had in running and consulting with businesses. I’ve made my investment decisions based on the logic of business, combined with the advice of investment analysts and specialists that I know and trust.

In this case, I turned first to  Tom Dyson, my former partner at Legacy Publishing, who helped design my stock portfolio and whose current work centers on the ratio of gold to stock values.

Tom said he was initially as baffled as I was with the drop in gold prices. Especially so since he had spoken to several gold and bullion insiders. In a recent blog post, he highlighted some of those conversations:

From Kenneth Lewis, the CEO of Apmex, one of the major American gold bullion dealers:

 “We are having record-breaking sales and demand across all channels; Apmex, Wholesale, OneGold. Apmex/OneGold Sales and Customer Service both handled more than 1,400 calls Friday, as compared to a typical daily volume of 390, and Monday’s calls are even exceeding Friday’s volumes.”

The demand for silver, Lewis said, is even higher:

“We have not seen volumes like this in more than 10 years. You have to go back to 2008. These are crazy times in our world and I believe we will be in tight supply for several months.”

Tom checked with two or three other dealers and got the same report.

Tom calls it an “upside-down pyramid.” At the bottom is physical gold. At the top are futures, gold options, and other gold derivatives.

The market for physical bullion is “tiny” compared to the demand for all these stock plays, which Tom calls “notional” gold. The volume is a thousand times larger. “If this is true,” Tom reasoned, “then it’s the supply and demand in the notional gold market that sets the gold price… not supply and demand in the physical gold market.”

This could explain the anomaly, Tom said. But he expected bullion prices to go up eventually.

That was then. This is now. 

He was right. In the last week, gold prices spiked by 10%. In a single day, they rose by 5.6%, an historical record.

As Tom pointed out, this was caused primarily by a lack of liquidity in the bullion market. There was more demand for it than supply. The coronavirus caused some of that – bullion manufacturers shut down. But there are myriad possible reasons.

Goldman Sachs attributes the run-up to “inflationary concerns”:

“Combined with the fiscal nature of the current policy response to Covid-19, we believe physical inflationary concerns with the dollar starting near an all-time high will for once dominate financial asset inflation that was a feature of the past decade.”

Another analyst, Anita Soni, had this to say:

“Near zero interest rates, market uncertainty, and ongoing liquidity injections provides a bullish setup for gold and silver…. This has created an excellent opportunity to buy the dip across the sector.”

Brien Lundin, editor of Gold Newsletter, had a different perspective:

Gold’s big move on Tuesday “isn’t due to worries over a greater economic fallout from the coronavirus, but rather in anticipation of the flood of central bank stimulus that is all but guaranteed by the effects to date.”

When the price of gold bullion moves up, the price of equities based on gold usually moves up even faster. As I’m writing this, shares of Royal Gold (NASDAQ-RGLD) have risen almost 14%, while shares of Yamana Gold (NYSE-AUY) are up nearly 17%.

As you know if you’ve read any of what I’ve written on gold over the last 20 years, I’m not worried.

As I said in an essay published four years ago, I did not buy gold to double or triple my money when the stock market crashes. I bought it to insure myself against the possibility that the USA economy might one day collapse.

If things really went to hell in a hand basket, I explained (and all my brokers and bankers closed shop), I wanted to have a stash of gold coins – something of value to barter with, something tradable that I could use to get my family to a safe place and then support them.

I said that when I bought gold in 2004, I thought the market crashing back then was very remote. But “since the price of gold at the time was in the mid $400s, I figured the downside was very limited. In other words, I believed that the premium for insuring myself against a class-4 financial hurricane was quite cheap.”

Most analysts that write about gold don’t think about it like that. They usually describe it as a “chaos hedge.”

Now you may think that the difference between “chaos hedge” and “chaos insurance” is a matter of semantics. It’s not.

“When you buy a hedge,” I wrote, “you are making an investment to counterbalance another…. Corn farmers, for example, might buy futures contracts that will pay them handsomely if the price of corn will go down. The money they make from the futures contract offsets the money they would be losing on selling all their corn at a discount.”

In other words, a hedge is an investment meant to maintain your net investible worth. So if stocks tank due to some major political, economic, or (in the case of the coronavirus pandemic) social event, the gains you make in gold would offset those losses.

“In a financial collapse accompanied by hyperinflation,” I wrote, “the price of gold could easily quintuple. If 20% of your assets were in gold, you could maintain the same investible net worth even if the rest of your portfolio (in stocks, say) went down by 80%. I’m not attracted to that idea. And I’ll tell you why. If we really did have a financial collapse of Armageddon proportions, I would expect the entire financial world to fall apart, including all the major banks and brokerage houses.”

I then pointed out that if we have a collapse of that magnitude, it is quite possible that gold stocks (and derivatives and so on) could go down too. “I can’t reasonably imagine a situation where the rest of the stock market dives by 80% and gold stocks soar by the same amount,” I wrote. “In that sort of situation, I’m thinking every financial institution will close their doors – and even digital money will no longer work.”

I concluded that buying gold stocks as a chaos hedge was not for me. I wasn’t willing to have 20% of my net investible worth in assets that produced no income.

On the other hand, I liked the idea of buying gold coins as insurance against chaos. In the highly improbable event that the ATMs really do stop working, I said, I wanted quick and easy access to gold coins that I could trade for food and shelter and transportation and protection.

As for the price of gold bullion, I said, “I have no idea whether the price of gold [in such a scenario] will rise or fall or remain the same. I only know that if it drops all the way down to $450, I will still have the coverage I need.”

So I never liked buying gold stocks as a chaos hedge because I believed that if we had such a level of chaos there would be a good chance the entire stock market would be down and dysfunctional. And I didn’t like the idea of buying gold coins as a hedge because, “although I think it is probable that the price of bullion might increase in chaos, I can’t be sure.”

And that’s why the premium I paid for my gold coins was not 20% of my net investible wealth, but 2%. That was then, at $450 an ounce, enough to take care of my family for five years. Today, with gold trading at about $1,500, my family should be good until well after I’m no longer here.

But again, the insurance I have against financial disaster is not gold but my other income-producing assets, and especially the tangible ones like rental real estate. That income will certainly decrease while this current crisis continues, but it will not disappear.

If you have no gold but are thinking of buying some, I wouldn’t trade in Legacy stocks to buy it. Gold could double. But Legacy stocks will definitely come back.

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“Taxes are not paid on profits not made on sales of products never produced by workers not working, truckers not trucking, and buyers not buying. And we are just at the beginning.” – Bill Bonner

The Stock Market Collapse, and What We Can Learn About Economics

I have been thinking positively.

Maybe, when all of this is over, we will all have a better understanding of how economies work. Perhaps, after we get through all the naming and blaming, we will realize that the cause of the collapse was not the coronavirus but the overspending, the speculation and the accumulation of mountainous debt that which have been at the root of just about every economic collapse in history.

If, as is likely, the government’s current bail-out package doesn’t help, and all the follow-up bail-out bills don’t work either, perhaps we will realize that our government cannot solve financial problems, large or small, unless it can tap into the only source of wealth available: the profits of private enterprise.

We are on the verge of what could be a recession as great as that of the Great Depression. If the virus subsides quickly and businesses are allowed to reopen quickly, our economy may survive. Not in months, but perhaps in a year or two or five.

But if we continue to have our businesses shut down for months into the future, what we will likely see is a collapse of the economy followed by a collapse of the tax base followed by a collapse of the government’s ability to do much of anything.

Let’s hope not. Right now, governments all over the world are passing relief programs costing trillions of dollars.

Let’s hope things get back on track before we run out of money.

The ABCs of Economics 

The cause of the current financial crisis is the same as every financial crisis we’ve ever had. What’s different is this widespread government shutdown of businesses. This didn’t happen in any of the other virus outbreaks. It didn’t happen in 1987 or 2000-2002 or 2008. It didn’t even happen in 1929.

What happens when you have a widespread shutdown of private enterprise?

The answer is pretty obvious: You have a widespread shutdown of revenues and profits, which causes a domino effect that spreads throughout the economy with alarming speed. Just like a virus can.

A local restaurant shuts down. The owner can’t pay the bills and lets his staff go. All those companies that the owner is no longer paying – the cleaning company, the maintenance company, the suppliers of not just food and beverages but everything from paper towels to light bulbs – go without their revenues.

This is now happening with thousands of small private businesses all over America (and the rest of the world).

And many large businesses, too.

US unemployment rates a month ago were at all-time lows. Today, they are skyrocketing. It’s quite possible that they will soon be at 20%.

Yes, this is a real economic meltdown. And things are likely to get worse before they get better. But one day, things will get better and the economy will recover.  The question I’m asking is: Will we have learned anything from all of this? Will this help us understand the basic fundamentals about economics – i.e., how an economy works?

Government Intervention 

The current remedy in the USA – the $1.5 trillion bailout that is being argued about as I write this – will soon be passed. Will it help?

Certainly, government checks for $400, $800 ,and $1200 will give short-term relief to millions of unemployed tax payers. But unless the virus subsides very soon (possible, but not likely) and the economy revives quickly (unlikely), the future value of this relief to individuals will be naught.

One could argue that the proposed bailouts to businesses will have a longer-term positive effect. If these subsidies allow businesses to stay profitable during the duration – and if these companies use the aid to continue production and employment going –there would be a longer-term benefit.

But that won’t be the case with most companies that are bailed out. Many of them will use the relief to protect their shareholders. And many of them, even doing the right things, will fail.

But the bottom line is that our government – no government – can solve large and extended financial crises, because governments themselves do not create wealth. The wealth they acquire comes to them in the form of taxes. And tax revenues come from personal and corporate earnings. And all of those earnings are dependent on business profits.

This is Lesson One in the Economics of Business: All wealth ultimately comes from private enterprise – the profits generated by private businesses. Governments are not designed to create profits. They are designed to tax profits and distribute them to social enterprises like fighting wars and policing crimes and social welfare. Whenever governments have tried to run businesses, those industries have failed.

But when governments allow businesses to grow their profits, their economies expand and so does the tax base. With a growing tax base, governments can provide more of those services. This is what happened with the US and other Western economies in the Industrial Revolution, in the post-WWII expansion, in the Information Revolution in the late 1990s. And it is how Denmark and other Scandinavian countries were able to pay for their lauded social welfare nets.

But this can only happen if there is a tax base that is growing. When a tax base shrinks (as happens during recessions), the ability of a government to do its basic work shrinks too.

And if you have a situation where a large portion of an economy’s businesses become unprofitable – either because of the nationalization of industries or because of forced shutdowns like we are having now –  the government’s revenues dry up very quickly.

What options do governments have, then?

There are only two: They can borrow money (from their citizens or from businesses or from other countries) or – if they are not on a gold standard – they can print paper money and spend that. But the second rule of the ABCs of Economics is that every dollar of fake money decreases the value of the currency by the same one dollar. Quantitative easing and its economic siblings is just another form of borrowing – i.e., borrowing today that will be paid back later by inflation or recessions. But the debt will always be paid. And the payment must be made by real losses in the real income and real net worth of the entire population. Except those people and those businesses that refused to overspend and speculate and saved their profits for a rainy day.

The USA has more debt than any country in the world. The same is true for American consumers. Right now, the stock and bond markets are crashing, oil prices are falling, and even gold is moving down. (Though this will eventually reverse.)

You cannot increase your debt forever. Sooner or later, lenders will stop lending. The Chinese have been the USA’s largest lenders in recent decades. Will they come to our rescue? Can they?

As for the current bailout, it will, at best, be temporary relief. And temporary relief can work if the recession is temporary. But when businesses are not making profits for an extended period of time, the dominoes will start falling.

So if businesses can’t get back into profits in the next month or two, we will likely see a second bailout in weeks or months, and perhaps a third later on this year. But none of that will fix the real problem – that our credit system is collapsing on its foundation. Sooner or later, the twin towers of federal and consumer debt will collapse on themselves.

I’m hoping this doesn’t happen. I’m hoping the virus will soon slow down and our businesses will be allowed to operate again. Recovery won’t be immediate. It may take a year or five or 10. In the meantime, I’m hoping that the nature of this crisis – accelerated by the closing of so many thousands of businesses – will make it clear to every Americans this simple truth: All real wealth comes from the profits of private enterprise –  and without those profits, our government cannot be of any help.

This is such a simple fact that you’d think everyone with a high school education would understand it. (Ironically, it seems that the more education one gets, the less likely he is to comprehend.)

Another way to grasp this fundamental truth of economics is to understand that no government can forever provide what nature is not willing to guarantee. And nature guarantees nothing.

So that’s what I am hoping – that we will all come to understand this simple truth.

But I’m not holding my breath.

Most of my liberal friends have decided that the crisis we are living through is the fault of Donald Trump. And when they lose their jobs, they will blame that on him, too.

My conservative friends will point out that the delay in testing kits was the fault of regulation. That instead of using the kits that were available, the CDC decided we needed to use FDA-approved kits, so they tried and failed to create one of their own.

All of that is beside the point. The fact is that Black Swan events do happen. And when they create recessions, thousands of businesses go belly-up and millions of workers lose their jobs. The only survivors are those people and businesses that have not allowed themselves to overspend, speculate, and get into debt.

If we do move into a major and extended recession, I’m hoping that we will come out of it with the recognition that no government can guarantee its citizens anything that nature itself doesn’t guarantee. And nature guarantees nothing.

The silver lining would be a general recognition of the reality that we – each country, each company, and each person – are responsible for our own financial well being. And that to achieve financial security, we must work hard at jobs that create profits and save those profits for a rainy day.

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A Challenge That Every Business Owner in the World Is Facing Right Now 

JS has a dilemma.

“Right now,” she writes, “I strongly believe in self-isolation… which brings me to a question about the young woman who cleans my apartment. I want to tell her to stay home. And I want to tell her that I will pay her even if she doesn’t clean. But for how long? I don’t want her to think that this ‘offer’ (if I make it) is open-ended. What is the right thing to do? I don’t really know. What do you think?”

This is what I told her…

You are a caring employer. You have decided that she shouldn’t continue working for you because of the potential dangers. You are taking responsibility for that decision (which she may not agree with) by offering to continue to pay her salary – thus transferring the financial burden from her to you. But you cannot afford to gift her salary indefinitely.

Recognize this: Tens of millions of business owners, large and small, have to grapple with the same problem. Some have more in the treasury than others. Some can afford to hold out longer than others. But none can afford to do so forever.

The advantage you have is that this is not a business but a personal service. You aren’t risking ruining your business by giving away too much. If it were a business, it would likely be a much tougher question. You’d be faced with “firing” her, knowing that she can’t get another job. And knowing that any check she gets from the government isn’t going to help her for very long.

I’m in that same situation – both as a business owner, the principal donor of a charitable foundation, and as the employer of several dozen people that maintain my properties (that are not income-producing properties).

As a business owner, my partners and I are doing everything we can to keep our employees employed. How long we can do that depends on sales. If sales crash, we will be laying people off in a matter of months. If they continue at a reasonable pace, they will stay employed.

As a donor of a charitable foundation, I have a responsibility not only for the several dozen people that work for us, but for the thousand or so people we provide assistance to. I will continue to support that foundation as long as I possibly can. But that depends on the income I get from my businesses. If that dries up, all these people will be negatively affected.

The people that work on my non-income-producing properties are in the same situation that your house cleaner is in. My plan there is to keep paying them as long as I can.

In every case, I am willing to reduce my net worth to help these less fortunate people survive. But the limit to that is the responsibility I feel for my family and friends. So there is a limit there too.

For the moment, I don’t have to make the decision you have made, because I have the opinion (from everything I’ve read)  that social distancing is more effective than isolation.

Were I in your shoes, I would continue to provide that assistance for as long as you can… but let your cleaning lady know that your largesse may end at any time in the future and that she should do whatever she can to prepare for it.

What everyone is discovering these days – I hope – is that there is a limit to how much charity all of us are willing to provide out of our own pockets. This is a very important realization. In accepting the truth of that, we must also recognize that this is true for everyone else.

All those who feel virtuous for taking the position that other (wealthier) people and the government should take care of wealth and income inequality will hopefully see the hypocrisy in that position. And perhaps (although it may be doubtful) that all wealth and therefore all financial charity comes not from the government but from the profitable efforts of private enterprise.

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Pain is important: how we evade it, how we succumb to it, how we deal with it, how we transcend it.” – Audrey Lord

What I’m Telling My Business Partners 

Sitting on the front porch, looking at the many people walking on the beach, it’s hard to imagine that we are on the edge of what could become the greatest economic disaster since the Great Depression.

It doesn’t feel that way when I get in the office. I’m spending half of my day on the phone and emailing colleagues, trying to narrow down plans of action to deal with expected production and delivery bottlenecks and a possible collapse in sales.

I’m not terribly worried about my investments. (I wrote about that on Wednesday.) But I am worried about the dozen businesses I own and/or consult with. And their thousands of employees.

The enormity of the crisis most businesses are facing right now cannot be underestimated. This supply-chain problem the media is talking about is real. Most of my businesses are dependent on internet services, telecommunication services, delivery services, etc. And some are dependent on manufacturers all over the world, including China.

All have either sent their employees home or have given them the choice to work from home. All of the CEOs are drawing up contingency plans for three-, six-, and one-year scenarios. All of them are asking their CFOs for suggestions for cutting costs dramatically. All of them are worried about the unhappy possibility of large-scale layoffs.

Most of these companies are high-margin enterprises, with net revenues of more than 40% and net incomes of 15% to 25%. So you’d think that they wouldn’t be concerned about cash flow. But the nature of good businesses is to reinvest profits in growth. That may not be the best strategy for 2020.

So what does that mean for you and your business? The business you own, supply, consult for, or work at?

It means you must be making plans right now for the obvious contingencies. As a leader, you must demonstrate confidence and calm. But you don’t want to do that by ignoring the elephant. You have to keep the captains and their troops alert but not panicked. And you must ask them to work harder now than ever.

This is not a time for enjoying a quarantined vacation. If you’ve been accustomed to working 50 hours a week, you should plan on working 60 or 70. And you should expect your best people to do the same. If they aren’t willing – no, eager – to do that, you should reconsider whether they are, indeed, your best people.

And although you should plan on a significant drop in sales, you should not relax your expectations of what your sales and marketing teams can do. In crisis, good people become stronger and more creative. Encourage them to find ways to encourage your customers to stick with you as the economy declines.

I had a conversation with Number Two Son tonight about our rental real estate properties. We anticipate that some of our tenants will have trouble keeping up with the rent. We agreed that we should not forgive monthly rental obligations, because doing so could send the wrong message. What we will do is accept percentage payments on an as-needed basis, with the understanding  that what is not paid is not forgiven. Renters will sign contracts to that effect. What I’ve learned from living through a half-dozen stock market crashes and recessions is this: Free rent, even on a temporary basis, is like free anything in life. It’s a feel-good, bad-outcome bargain. We will be flexible, but we will not be foolish.

I am very much in favor of not being greedy in business. And that applies as much in bad times as in good. Where my businesses have accumulated profits, I have been arguing that we should prioritize needs. The first priority is not short-changing our customers.  We can ask for their patience in certain areas. But we cannot ask them to expect inferior products or services from us just because times are tough.

Next on the priority list are our employees – especially the hardworking and loyal employees that have for so long helped our businesses grow. We should try our best to keep all of them fully employed, and use our spare cash flow to do that. And if we have to make cuts, we should do it as generously and humanely as possible. Of the three actors in business – shareholders, employees, and customers – it is the shareholders that should take the brunt of the hit. Not the customers. Not the employees.

That said, we don’t want to deplete the treasury to the point where these businesses could fail. A bankrupt business, however kindly it has acted towards its customers and employees during a crisis, will do no one any good if it goes belly up.

I’m sure I’ve said nothing here that you haven’t thought of yourself for your business. Smart people faced with the same problems usually arrive at the same solutions. But thinking about solutions and executing them are two different things. If you haven’t acted on any of these obvious but important strategies, waste no time. Time is running short.

There is one more thing I can say that you may not have thought of, especially if you are new to business downturns: Don’t allow yourself to believe that what has worked in the past to build your business isn’t going to work any longer. Changes will be necessary, but the fundamentals of business do not change in a crisis. On the contrary, they become more important than ever.

And one of those fundamentals is the trust that your customers have in you and the products and services you provide them. This is, along with cash, the most important financial resource you have. Don’t make the mistake of going quiet with your customers and hoping to ride out the storm. And don’t market as if things are normal or will be normal soon. They won’t buy it. If you don’t stay honest and in constant contact with them, that trust will be degraded. Now is the time to up your game. Now is the time to show your customers that they have, in you, a trustworthy fellow traveler that is eager to make their problems and worries less severe.

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