Update on My Investment Portfolio:

Why I’ve Just Sold Most of My Stocks 

“Be fearful when others are greedy, and be greedy when others are fearful.” – Warren Buffett

I’ve just sold about 75% of my stock portfolio. I’ll tell you why…

The Economic Outlook Is Scary

At a macro level, our economy is fragile. For one thing, the US has never been in so much debt. The national debt has been growing pretty much non-stop for 20 years, but it accelerated significantly under Obama and Trump. It is currently $26 trillion. That is 107% of our GDP. The last time the debt-to-GDP ratio was that high was in 1948, at the end of WWII.

And then there is our consumer debt: the debt private citizens carry on mortgages, loans, and credit cards. That hit $14 trillion in March, a record high, surpassing by almost $1 trillion the record set at the height of the 2008 financial crisis.

This level of debt is scary. But what’s scarier is that there are only two or three elected officials left that believe in balanced books and sound money.

The business outlook is bleak. Since January, US GDP has dropped nearly $3 trillion, from $21.8 trillion to $19.2 trillion. Thousands of small and medium businesses, employing millions of medium- and low-skill workers, have been shut down. The economists I trust are prognosticating that as many as half of them are closed for good.

By these and many other metrics, the US economy today resembles that of the economy after the real estate bubble collapsed in 2008, except for debt, which is worse. Given that, it seems reasonable to believe that we are looking at an attenuated recession and a feeble recovery.

Longtime readers know that I don’t buy or sell stocks based on macro analysis. But I don’t ignore it either.

The Upcoming Election

This is the main reason I converted 75% of my stock portfolio to cash.

The pollsters and their pundits are predicting that Trump will be ousted in November and the Democrats will sweep the House and perhaps even the Senate. The Democratic agenda is for higher social spending, $500+ billion on infrastructure, and higher taxes for businesses and high-income earners. But I’m even more concerned with the talk about eliminating the cap on the Social Security tax.

Wall Street doesn’t respond well to the threat of higher taxes. So as we approach the November elections, if it looks like Biden will be elected and the Democrats will win both houses of Congress, it’s very likely that we’ll see a big drop in stock prices. A 30% to 50% drop wouldn’t surprise me.

So those are the three reasons I decided to sell most of my stock portfolio: I have a continuing concern about US debt, a suspicion that we have entered into another extended recession, and a strong hunch that if it becomes apparent that the Blues will dominate the November elections, the stock market will take a dive.

Longtime readers will rightly be surprised to know that I’ve sold off 75% of my stock holdings. They will remind me that my investment philosophy has always been to buy world-dominating companies and hold them long-term. They will further remind me that as recently as April 6, I repeated that viewpoint in explaining why I did not sell any of my stocks as the markets were tumbling from the Corona Crisis.

Yes, I’m violating that rule now. Let me take you through my thinking process…

I “lost” millions in March and April. The loss was just on paper, but it still didn’t feel good. Because I didn’t panic and didn’t sell then, I was able to see the market climb back up this “wall of worry.” And now I’ve regained (again, on paper) all that I had lost.

The balance of my stock portfolio is at an all-time high. But there is a fair chance that the market will take a dive sometime between now and November. And if it does, it could be, as I said, a steep dive – 30% to 50%.

So I did what I sometimes do when I’m in a confusing situation like this. I interviewed the three parts of my brain.

First, I asked my limbic brain, the part that’s in charge of my emotions: “How would you feel if that happened?”

And Limbic Brain answered: “Like horse shit. Like a fool. But I would blame-hate you for keeping our money in the market.”

Then I asked my reptilian brain, the part that’s in charge of my instincts: “What would you do if Limbic Brain felt like that?”

And Reptilian Brain answered: “I would definitely panic. I would be afraid the market would drop even further. I would take flight. I would tell Limbic Brain to sell everything – all of our stocks – immediately and eat the loss.”

And finally I asked my rational brain: “What do you think of all this?”

And Rational Brain said: “Normally, I’d tell you to ignore Limbic Brain. I’d say that Reptilian Brain is bluffing. But in this case, why take the chance?”

“What do you mean?” I asked.

Turning to Limbic Brain and Reptilian Brain, Rational Brain said: You have told us how badly you would react if our portfolio dropped again by 30% to 50%. How good would you feel if we held on to our stocks till November and they went up in value?”

“Like by how much?” they asked.

“Say, 10% to 15%,” Rational Brain said. “Which, I might remind you, would be an unprecedented three-month climb, considering where they are now.”

Limbic Brain and Reptilian Brain went into the corner, as they always do when confronted by Rational Brain, and conferred. After a few minutes, they emerged.

“So how would you feel about our making another 10% to 15% on top of our current gains?” Rational Brain asked.

Limbic Brain shrugged. Reptilian Brain, lacking shoulders, said, “Meh.”

Rational Brain turned back to me. “As you can see,” he said, “my less intelligent but immensely muscle-bound siblings don’t really care if our stock portfolio goes up. But they really, really are going to go nuts if it goes down again.”

“Yes, I can see that,” I said.

Rational Brain leaned forward and stared into my eyes. “You know what you should do,” he intoned. “Sell all or most of your stocks right now and wait until November. You will be giving up the unlikely possibility of getting modestly richer over the next three months. But you will be safe from the more likely possibility of becoming considerably poorer.”

“That makes sense,” I said to Rational Brain.

He winked. “That’s what I’m here for.”

And that’s why I sold 75% of my stock holdings. If you are having some of the same concerns regarding your investments, conduct an interview. Your brain parts are yours, formed by your own knowledge and experience. See what they have to say. And then do what your Rational Brain advises.

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“The most reliable way to forecast the future is to try to understand the present.” – John Naisbitt

Investment Real Estate Outlook for the Rest of 2020 and Beyond 

On Sunday, I briefly answered a question sent in by P.J., who asked: “What do you think about real estate, given what seems like an inevitable recession and possibly worse?”

I explained that I am concerned – very concerned – for two reasons:

1. The economy – the real economy, not Wall Street – is in serious trouble. We have huge unemployment and record levels of small businesses shutting down for good. That’s bad for a good swath of real estate: all the buildings that cater to smaller businesses.

2. The extended shutdown has given tens of millions of American workers and thousands of companies the opportunity to experience business with an office-less office. We’ve learned that so much of what was being done in the office can be done just as well remotely. We’ve also learned how convenient it is to have everything we consume – food, clothing, toys, entertainment, etc. – delivered to our homes. This has already had a huge impact on the way we work and live. I’m expecting to see more employees working from home and less office space leased per dollar earned.

These two realities are definitely going to affect the real estate market. So today, I’m going to give you my off-the-cuff thoughts on what those effects will be.

The Real Estate I’m Worried About 

 High-End Shopping Centers 

Three of my book club friends have made their fortunes developing large-scale, luxury shopping centers and strip malls. They are partly retired now, so I suspect their current positions in these properties are limited. But I’m going to ask for their thoughts at our next meeting. If I owned a lot of that kind of real estate now, I’d be worried.

Class-A Office Buildings 

 During an extended recession, many businesses are forced to cut down on all non-vital expenses. Given this, and considering what I said about so many people working remotely, I would not like to own a lot of such buildings right now. I am not predicting a collapse of this kind of property. But if the economy stays sluggish and GDP stays low, we will likely see steeply dropping ROIs as tenants do not renew their leases.

Luxury Single-Family Homes

I have another friend that’s been doing quite well building and selling million-dollar homes for the last 10 years. This has been a side business for him, but it’s netted him a profit of about $500,000 per home. At breakfast recently, I asked him how he was doing. “I was between houses when this thing started,” he told me. “I’m not going to do anything until the economy starts moving again.”

High-End Residential Developments

From about 1990 to 2004, I was a regular investor in a friend’s residential real estate developments. He built and sold 100- to 400-unit developments at $400,00 to $600,000 a door. And even though those units are worth more than a million each now, I wouldn’t invest a dollar in a new project like that today.

Other Luxury Properties

I just spoke to a guy that wants to build a $32 million, super-duper sports complex here in Delray Beach. He sent me the brochure. It looks amazing. He’s going to ask me if I want to invest. I’m going to say no.

Middle-Level Commercial Properties

If Class-A commercial isn’t appealing, Class-B commercial is even less attractive today. My experience with that kind of income property is that it is much less resilient than residential properties during a recession. You can keep your houses and apartments rented during economic slumps by simply lowering the rent. You can’t do that with middle-level commercial properties. They can sit unoccupied for years.

The tenant in a commercial building that I own in Delray Beach has been asking me to sell him the building for more than five years. I was getting a great return on this investment, so I wasn’t interested. Yesterday, I signed it away.

Hotels (and Motels)

What have I forgotten? Oh, yes, hotels! That’s an easy one. If I were invested in hotels, I’d definitely be worried today… Hey, wait! I just remembered. I am invested in hotels – at least a half-dozen of them through my brother. So I am worried! But for him, not me. Since I’m a limited partner in these properties, my potential losses are limited to my original investments. But as the general partner, he’s on the hook. Big time. Right now, he’s jumping through hoops to keep the doors open. He’s doing a great job of that, but if occupancy drops by, say, 50% for the next several years, things could be bad.

REITs? 

 I don’t own REITs (I don’t think), because I own so much property directly. But if I had a significant position in REITs, I would want to check the sort of property they were holding and measure it against the concerns I’ve mentioned above.

The Real Estate I’m Not Worried About 

Working-Class Apartment Buildings

I’m not worried about the apartments I own in working-class and middle-class neighborhoods. The rent rolls would probably go down in an extended recession, but not hugely, because new construction would come to a halt. Since my total debt load on those properties is less than 5%, I’m confident I’ll be able to maintain them even at a rent reduction of 50% or more. Plus, the asset value should return when the economy returns.

Company-Occupied Office Buildings

I’m not at all worried about my investments in the dozen or two office buildings whose tenants are companies I own or control. These have always been my favorite properties because my partners and I can control the rents and mandate payments. Plus, most of these companies are in the digital-information business, which has not been badly affected by the Corona Crisis and will probably do okay going forward, even if we enter into a period of economic doldrums like we did after 2008.

That said, I just put a $14 million project on hold in Delray Beach because my partners and I want to see what happens with the economy and our local businesses before moving to the next step (construction).

Land Banking

And finally, I’m not worried about the properties I’ve bought over the years for “land banking” purposes. These are well-situated lots and acreages that provide no income but cost very little to maintain. Since they were always long-term plays – and by that I mean 20 to 50 years – I’m not sweating about them now.

What All This Amounts To

I believe that many parts of the real estate market are going to be hurting over the next few years – principally, the high end.

I believe there is a good possibility that the shift towards working at home will continue, and that will temporarily drive down income from office buildings and reduce the size of that market over the longer term.

I have the same long-term concerns for high-end and even middle-level retail real estate.

But even though my partners and I have had some rent deferrals and vacancies in our residential properties, I’m not worried about those investments because of the safety margins we operate with.

When it comes to investment real estate, I’ve always been very conservative. I invest primarily for income (not growth) in income-producing properties for which there will always be a demand. And I use leverage (mortgages) on a temporary and limited basis.

My formula is not optimal for increasing wealth in an up market. But it is good for reducing my exposure to a long down market.

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Ever since Trump took office, conversation with many friends and most of my family has been a challenge. They feel about him the way some of  my conservative friends and colleagues feel about Hillary Clinton. When feelings are strong, reason declines and facts lose their context. I like a loud argument as much as any Irish American, but I don’t like an intellectual joust that leaves emotional bruises. Those bruises last longer when ideology insinuates itself into argument. Ideology leads to groupthink. Groupthink leads to war. And war is always destructive.

When news of the coronavirus broke, there was every reason to believe we were in a global crisis. Crisis often galvanizes otherwise opposing factions to band together against a common enemy. I hoped, naively, that this would be the case. Alas, it did not happen. The threat of COVID-19 became, almost immediately, an ideological topic.

The reports we were hearing from China and Europe through the World Health Organization (WHO) were positively frightening. But the numbers associated with those stories didn’t make any sense. So I began to write about it and do some research on my own. The more I studied what was being said, the less I believed it. And when the shelter-in-place solution was introduced as the “scientific” protocol for reducing the eventual death rate from COVID-19, I was challenging it in my blog posts and conversations.  

That was not well received by my friends and family members who were getting their information from the mainstream press. They were convinced not only that sheltering-in-place was the right course of action, they believed that the USA had been hobbled by Trump by not putting it into effect sooner. It didn’t seem to matter to them that Trump’s earlier doubts about  it were not his, but the recommendations of the WHO, the CDC, and the White House panel of experts headed by Dr. Fauci.

We do agree on one thing: The Trump administration bungled its response to the threat. But my friends/family think the mistake was in implementing mass quarantines too late. I think the mistake was in implementing them in the first place. 

Living in Fear of the Fear of COVID-19 

“Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.” – Ben Franklin

I want to resume my wrestling, but K is worried that I will catch the virus from a training partner and infect the family.

My brother-in-law is worried about the throngs of (mostly young) people that have descended on Atlantic Avenue and its restaurants since they reopened a week ago. “It’s all bullshit,” he says. “Nobody is keeping social distance or wearing masks. Even some of the servers aren’t wearing masks.”

My fellow members of The Mules, the book club I belong to, want to have our next meeting virtually, as we’ve had the last two.

It’s difficult for me to speak about the virus with any of them because I know they are seriously frightened. But I believe their fear is unsubstantiated by the facts. And it angers me to think that they have been prompted into that level of fear by politicians and media that are using this crisis to further their political objectives.

So when I do speak about it, I find it difficult to restrain my anger. I state my opinions in definitive terms in hopes of shocking my friends/family out of their panic. It is a foolish approach. My sister reminded me of that yesterday, and she was right. So I’m writing this today, another essay on what I’ve learned about the coronavirus and why I believe the fear they are living with is based largely on misinformation.

I want to begin with some facts. But before I do, I implore you to read these facts with an open mind. Keep in mind that they all come from sources that you probably trust: the WHO, the CDC, Dr. Fauci and team, and several dozen studies done by respectable research institutions since the last essay I published on the virus itself.

*Fact One: Based on current death rates, COVID-19 ranks 13^th on the list of the ailments that people, worldwide, die from each day. It is exceeded by cardiovascular disease, cancer, respiratory diseases, lower respiratory infections, dementia, digestive diseases, neonatal disorders, diarrheal diseases, diabetes, liver diseases, kidney diseases, tuberculosis, and HIV/AIDs. It is also exceeded by road injuries and suicide (which is on its way up). The number of people that die from cardiovascular diseases is more than 20 times greater. (This would not have been true had you made the comparison when the death rate was at its peak, but it is true now.)

You may be thinking that you are not interested in comparing COVID-19 to cancer or heart disease, since they are not contagious. In terms of my topic – which is fear – I think that is an illogical position. But put that aside…

* Fact Two: Of contagious diseases, it ranks 7^th, after lower respiratory diseases, neonatal disorders, diarrheal diseases, digestive diseases, tuberculosis, and HIV/AIDs.

The fatality rate of COVID-19 is the primary reason that some epidemiologists were so concerned about the disease in the first place. Early reports had it at double digits, then at 6%, and then at 3.4%.

Those were the numbers that spurred the call for mass quarantining. But those numbers were based on case fatality rates.

As I explained in every essay I wrote on the subject, this is an useless and potentially misleading statistic. The case fatality rate does not measure a disease’s actual lethality rate. It measures only how many people died compared to how many people have been diagnosed as positive.

We can only know the actual fatality rate (some call it the infectious fatality rate) when we know how many people have died compared to how many people have been actually infected.

That was impossible to determine in March or even April because test kits were limited and no one was doing randomized tests of people that showed no symptoms.

Those tests have been conducted in the last four weeks. And what they are showing us is that the earlier case fatality rates overestimated the true fatality rates by a factor of 10 to 50.

For example:

* Fact Three: A new randomized study of 3000 people in New York State found that 13.9% of those tested for antibodies were positive. That means 2.7 million New Yorkers have already contracted COVID-19. When this was reported, there were 257,216 cases with 15,302 deaths. That equates to a case fatality rate of 6%.

But as I explained above, the case fatality rate is meaningless until you know the number of people infected, not just the number diagnosed. I suggested in my April 8 essay that it must be at least 10 times higher because symptoms for so many were flu-like and because of the lack of testing available then.

Adjusting for the latest findings, we can see that the actual lethality rate is a bit more than 10 times case the fatality rate, coming in at about 0.5%.

* Fact Four: This same study found that 21.2% of those tested in New York City were diagnosed as positive for COVID-19 antibodies. New York City’s population is 8.4 million. Extrapolating on that, we can assume that about 1.78 million denizens of the Big Apple were already infected with COVID-19 at the time. This means that even in the worst hot spot in the country, the actual fatality rate was 0.6%.

* Fact Five: These findings are similar to those from antibody studies done in Santa Clara, CA; LA county; and Kansas. Dutch, German, and French studies also show a much higher incidence of the virus than case studies would suggest – which means much lower real lethality rates.

My friends and family members that have a different view than I do tell me that the actual death count from COVID-19 is higher than reported. They tell me that there were surely people that died from it in the early days that were not diagnosed. I don’t doubt that. But if you understand the protocols that were put into place in by the CDC in early March, you can deduce that this must be a fraction of the distortion that occurred during the period of time when the death count was in the thousands.

* Fact Six: The CDC’s recommendations for reporting COVID-19 deaths included patients that died with “symptoms” of the disease, even if they didn’t die “of” the disease. In other words, if a patient that died of pancreatic cancer happened to test positive for COVID-19, the cause of death should be noted as COVID-19. (Note: When the state of Colorado did a study of this recently, differentiating those people that died with COVID-19 symptoms from those that died of COVID-19, the COVID death rate dropped by 25%!)

It’s hard to understand why the CDC would have made this recommendation, since it is patently unscientific. Most symptoms of COVID-19 are similar to flu and other respiratory diseases. Even in hot spots, less than half of those with COVID-19 symptoms test positive. Several emergency room and ICU doctors have commented publicly on this anomaly, complaining that they feel pressured to report deaths as due to COVID-19 when there is no certain reason to think it is so.

A fatality rate of 0.5% is considerably higher than the 0.1% or 0.2% fatality rate of influenza. But as I have explained, there is an important difference between COVID-19 and influenza. COVID-19 does most of its killing among populations of older people that have other life-threatening, “comorbidity” issues.

* Fact Seven: A study by the AMA found that 94% of hospitalized COVID-19 patients in New York City had serious underlying conditions. 53% had hypertension, 42% were obese, and 32% had diabetes. The median age was 63.

* Fact Eight: In New York, the fatality rate for COVID-19 patients between 18 and 45 is 0.1%. For children, the fatality rate is statistically zero percent.

These numbers correspond to the analysis I did in March. Also, multiple studies have shown that children are not significant “vectors” of COVID-19. That means they don’t spread it very well.

The chances of contracting COVID-19 are much greater in confined spaces than they are in the open air.

* Fact Nine: A Chinese study of 3000 COVID-19 deaths found that all but one of the patients contracted the disease indoors. (The one exception contracted it through contact with someone that had just arrived from Wuhan province.) Yet many state governors, like New York’s Cuomo, were forcing elderly COVID-19 patients into nursing homes – which accounts for the severe contagion and death rates that we saw in those facilities across the globe. (This policy has just recently been reversed, weeks after the results of this study were reported.)

There have been several new studies suggesting that herd immunity for COVID-19 might be much lower than the 60% to 80% that was originally projected. I haven’t had time to locate these studies, so I can’t call this a fact. I know the projections are between 10% and 40%. 10% makes no sense. But 40% could explain why we’ve seen the recent drop in mortality.

There is no disputing the fact that you can reduce the speed at which the virus spreads by social distancing and washing hands. This is the strategy of flattening the curve. But flattening the curve is about slowing the spread of infection – not necessarily decreasing the eventual death count – which is what happened because of measures like social distancing and hand washing, not the lockdown.

* Fact Ten: Studies from Germany and Switzerland found that the flattening of the curve of the contagion happened weeks earlier than originally believed. In every case studied, the peak appears to have been before lockdowns were implemented. What that means is that the lockdowns did not work. They were not the reason the curve flattened. They had, if any, only a negligible impact on the curves in those countries.

* Fact Eleven: According to an analysis by Stanford University, there is no statistical correlation between lockdowns and COVID-19 deaths between those states that locked down early and those states that locked down late.

Those are some of the facts. And all of them come, as I said, from the WHO, the CDC, and reputable university and scientific studies.

So this brings me to the point of disagreement I have with friends and family members that believe the lockdown was and still is necessary, and that the movement towards opening the economy puts them and others in danger of dying.

Spend five minutes thinking about the above facts, and you have to agree that the proper response to the coronavirus threat would have been to isolate the most vulnerable (which we did not do) and not shut down the economy.

In fact, there is an argument to be made that sheltering-in-place has caused and will cause thousands and potentially hundreds of thousands of additional deaths. Deaths from depression, suicide, and domestic violence, as well as the deaths of many people with symptoms of heart attack, stroke, etc. that should have gone to the hospital but didn’t because of the fear of getting infected.

* Fact Twelve: Vaccinations for children have abruptly fallen at an alarming rate since the shutdown. In Michigan, fewer than half of infants 5 months or younger are up to date on their vaccinations, which may allow for outbreaks in diseases like measles.

But I won’t make that argument. It’s more important to make another point.

Unless we develop a miracle vaccine in the next few months, there are going to be lots more people dying of COVID-19. We don’t know how many. But based on the facts I’ve listed above, I hope it’s clear that there will be no lowering of the death rate by any continuance of the lockdown.

And speaking of a miracle vaccine, we have seen an historically unprecedented acceleration of efforts, private and public, to find a vaccine. And according to reports on both sides of the argument, we are making progress. At least a half-dozen vaccines have been approved for initial, phase one testing.

But here’s another fact to consider:

* Fact Thirteen: 90% of drugs that are approved for initial, phase one testing fail to make it to phase two.

The logic behind the opinion that many hold – that mass quarantines will minimize future deaths because the spread of the virus will be slowed – is faulty. The opposite is the case.

The only valid purpose for the lockdown that ever made any sense was to flatten the curve and thereby prevent hospitals from being so overwhelmed that they could not properly treat COVID-19 patients. But I’ve not found a single report that verified a death caused by, for example, lack of access to a ventilator.

What the lockdowns did, without question, is slow the race towards herd immunity. That means (again, barring the development and approval of an effective vaccine in the next few months) we will almost certainly have a second and even a third wave of the virus. And when those waves come, they will likely be different – maybe more lethal – strains. Which would mean, for certain, that the lockdown strategy will have resulted in many more deaths.

That is what makes me angry. And that is why I am upset when I hear my friends and family members say that those that favor opening the economy are putting money ahead of lives. It’s simply not true. The facts don’t support it. If we want to reduce the eventual death count, we must allow the virus to spread among the large percentage of the population that has little to no chance of dying from it. We have to reach heard immunity before a new, more lethal strain comes back and infects us. (This, by the way, is what happened with the Spanish Flu of 1918.)

I am angry and I want to blame someone. But I can’t blame my friends and family members who are scared because of the misinformation they’ve relied on.

I blame the mainstream media for not investigating the pandemic with any seriousness. And I blame some newspapers and news programs for pursuing reporting that was evidently meant to scare people.

These reporters and commentators failed very early to do even the simplest arithmetic, which would have made them understand how misleading the early case fatality rates were. Since then, they have ignored the studies that have unearthed the evidence listed above. Why they continue promoting their false narrative is anyone’s guess.

But because they will continue to promote their false narrative, the people that have taken it for truth will likely continue to believe it. They will continue to find ways to blame the Trump administration for the deaths that will follow, ignoring the fact that the mistake it made is clearly the mistake of shutting the economy down.

As I’ll explain in a moment, though, none of that makes any difference. We are already fast into the opening process and that isn’t going to stop.

But before I get into that, a few words on what I think we should have done.

In retrospect, the smarter federal policy would have been to:

1. Allow those that had a near zero chance of dying from the virus (children and people under 28) to lead their normal lives, spreading the virus among their peers at a controlled but relatively free pace, so that we could move towards herd immunity as fast as could be reasonably done.
2. Advise healthy people in their 30s, 40s and 50s (whose chances of dying from COVID-19 are less than 1%) to act like responsible adults capable of making adult decisions.
3. Focus 80% of our resources to quarantine the 20% of our population that is most vulnerable to the disease.

In retrospect, the correct response from the CDC and the president’s task force would have been to recognize, immediately, that the arithmetic that gave us “official” lethality rates of 10% and 6.5% and 3.4% (and the early predictions of millions of US deaths) was obviously wrong.

In retrospect, state and local governments should have kept parks and beaches open so that people could get the exercise and the sun they needed. They should have advised anyone concerned about catching the virus or passing it on to their elders that the likelihood of that happening in the outdoors is tiny compared with the chances of catching it in any sort of “sheltered” place.

In retrospect, we should not have required nursing homes to take back their clients that had been diagnosed with COVID-19. That’s what caused the spike in deaths that we saw. We should have isolated those people and, thus, reduced the huge percentage of deaths that occurred in such facilities.

* Fact Fourteen: 41% of the Americans that have died from COVID-19 were in nursing homes. In Minnesota, the percentage was 81%. In New Hampshire, it was 72%. In Rhode Island, it was 75%. In a dozen other states, it was more than 60%.

The coronavirus is very contagious. And it is lethal to older people that have serious comorbidity issues. But it is not lethal to the rest of the population. To most of those that have been put on unemployment – mostly younger, healthier people – it isn’t a great threat at all. And to those that are vulnerable, shelter-in-place increased their chances of dying from it.

Those are, it seems to me, the facts.

The curve has flattened in most of America, but COVID-19 has not been conquered. Not at all. It will come back and it will continue to kill. In one of my early essays, I predicted that it would kill between 60,000 and 120,000 this year and as many as 600,000 if we don’t reach herd immunity.

The lockdown did not and will not diminish that number. Only herd immunity (either acquired naturally by spreading the infection or with the help of a vaccine) will do that.

In retrospect, it would have been better to if the WHO, the CDC, and the administration had reduced, rather than inflamed the panic that has spread like a virus across our country. It would have been better if they had admitted, early on, that the original arithmetic and modeling were bad and waited for the facts.

I would like to think that anyone that that is fearful now could get a realistic grip of reality by focusing on these facts, but that may not happen. When you have invested so much emotional energy into a fear about the future, it’s difficult to give it up.

I doubt, too, that when this is over, those that have accepted the viability of the lockdown will change their opinions. They will be suspicious of facts that don’t support the narrative they have been sold. And the media and public figures that sold that narrative aren’t likely to admit that they were wrong either.

They make minor adjustments to their stories to accommodate realities that cannot be refuted, but will hold on to the scientific evidence that is more difficult for lay people to understand. They will do this to protect themselves from the shame they must feel when they think about what they have created.

For my part, I’m going to do my best to bite my tongue whenever I hear fearful friends and family members fretting about the opening up of the economy. Biting my tongue is an easy price to pay to avoid saying something that pisses them off.

A tougher issue for me will be how I go about taking advantage of all these openings. For one thing, as I said at the top, I want to resume my wrestling. That would mean rolling around on the floor with young guys who, if they had COVID-19, would likely be asymptomatic. I understand why K has forbidden me from doing that. I believe the actual risk is infinitesimally small, but being wrong is not chance I’m willing to take.

I will have to put off my favorite form of exercise until K’s fear subsides. And I realize that’s not going to happen until the pandemic narrative she has been listening to gives up the ghost of its beliefs about the lockdown and shelter-in-place strategies.

That will happen well before we have an effective vaccine. I can see it happening already. K had her hair done yesterday. My brother-in-law hugged a friend. It is people like this, not the protesters that have been opposing the shutdown, that will bring the American economy back to life.

They will do it not because they believe the shutdown was wrong, but because they are sick and tired of being locked up.

There is only so long that a mentally healthy person can stay locked up in a prison of fear.

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Every day, more people are walking the sidewalk alongside the beach across the street from my house. A month ago, someone would pass by every three or four minutes. A week ago, it was a steady trickle. Now, it’s a light but continuous stream.

The rules haven’t changed. The shelter-in-place mandate is still active. But as each day passes, more and more of my little city’s self- imprisoned population have decided to ignore the extremes of social distancing and get back out into the sunshine and fresh air.

I’ve not been interviewing them, so I can’t say why. But from the way they walk and even greet one another, I’m thinking they just don’t believe we are in the midst of a plague. Some no doubt think we’ve passed the peak and the threat of the virus is no longer serious. Others, like yours truly,  probably never thought it was that serious to begin with. Still others, probably don’t think at all.

But their numbers are increasing, and I don’t think it will stop. For whatever reason, we haven’t seen the body counts the media teased us with in January and February. Most of us haven’t seen any dead bodies at all.

As of today, I’ve finished my two-month-long exploration into the virus and the shutdown and its economic repercussions. I’m looking forward to resuming my morning walks and thinking about other things.

The Corona Economy, Part V

What Will America Look Like in 2021? 

“Unemployment is sky-rocketing; deflation is [here] for the first time since the Great Depression. I don’t care whose fault it is. It’s the truth.” – John Mellencamp

As I said on Wednesday, US fiscal history is a history of borrowing money to fight wars.

During the country’s first eight decades of existence, our wars were relatively small and inexpensive. That was chiefly because the Treasury’s income was small then – restricted to what it could get from sales taxes and import duties.

To finance the Civil War, which cost $2.7 billion ($42 billion in today’s dollars), Lincoln introduced the income tax – which made increasing debt and fighting expensive future wars that much easier.

WWII cost us more than 10 times as much as the Civil War ($323 billion or $5.8 trillion in today’s money). It also gave birth to the wealth- and life-destroying machine that Eisenhower warned us against: the military-industrial complex.

The atomic bomb deprived that machine of the ability to produce carnage on a global scale, so it fed on proxy wars (Korea, Vietnam, Afghanistan, and Iraq).

Then, in 1964, President Johnson launched the first of a succession of social and ideological battles – the wars on poverty, drugs, and terrorism.

And now we have the War on COVID-19.

Like the spectral enemies we fought before it, COVID-19 is a formidable killer of human beings. And like the wars against poverty, drugs, and terrorism, the cost of the War on COVID-19 is immense and will be ongoing. What irks me is that most of the perfectly intelligent people I speak with have no idea how expensive it will be. The fact is, it will likely eclipse the cost of all previous wars.

Let’s add up the damage so far:

* $10 trillion in lost production (GDP) – that can never be recovered

* $4 trillion to $6 trillion in “bailout” distributions – that will produce no sustained benefit to anyone

* $5 trillion in stock losses – that may take years to recoup

* And some trillions more in pork barrel legislation that will likely follow in the next few years

With that kind of damage on the country’s P&L statement, it’s inevitable that  the Treasury’s balance sheet will soon be in the red by more than $30 trillion. That would be 150% of our GDP – the highest debt-to-GDP ratio in our nation’s history. (Higher even than the previous WWII record of 119% in 1946.)

You might be wondering: How is it possible for an economy to get into that much debt without collapsing? How is it possible for the US to escape the fate that felled the Romans, the Germans, the Chinese and – most recently – the Venezuelans?

In those cases, the mechanism for economic collapse was hyperinflation. Gradually at first, and then accelerating as the national debt mounted, the world’s faith in the solvency of each of these countries eroded.

That is what many of my historically attuned colleagues believe is going to happen again here in the US. And to be fair to their viewpoint, all the markings are there.

So how is inflation an answer to excessive debt?

It’s because inflation reduces the onus of debt by making each owed dollar less valuable. At an inflation rate of 10% a year, each trillion dollars of debt is effectively reduced by $100 billion. At an inflation rate of 50%, the debt would effectively shrink to next to nothing in just a few years.

And if you think an inflation rate of 50% is unlikely, you need to spend 15 minutes researching inflation in the countries mentioned above. There have been plenty of times in the past when over-indebted economies saw annual inflation rates of 50%, 100%, and even 200%. In Germany, Zimbabwe, and Venezuela, inflation rose to 1000% and even more!

An inflation-diminished dollar would be good news for the Treasury’s balance sheet, but it would be terrible news for the rest of the country. It would mean the purchasing power of every dollar earned would decrease by that amount. At 50%, the loaf of bread that costs $2 today would cost $10 in 2021, $50 in 2022, and so on.

Likewise, the cost of tools and raw materials and energy typically rises and falls alongside inflation. And those costs make it more expensive for businesses to produce the goods and services they provide. But they can’t increase their fees at the same rate and, thus, take a beating, with many of them going out of business permanently.

I don’t think we have an immediate threat of hyperinflation. In fact, what we’ve been seeing so far is deflation (a reduction in prices) of oil and gasoline and most commodities and equities, and most bonds. But deflation cannot cure the debt disease, which is why it’s normally short-lived (and followed by inflation).

The Great Recession of 2008 was caused, as all recessions are, by debt and speculation. Banks, brokerages, and insurance companies had leveraged up with sub-prime real estate debt and were on the verge of bankruptcy when the Fed, under Ben Bernanke, descended from the skies and attempted to save the economy with quantitative easing (flooding the bond markets with fake dollars).

That effort, from 2009 to 2014, saved most of America’s largest financial institutions (that irresponsibly created the debt), but it did not save the economy.

The economy entered into a period in which many middle- and working-class Americans lost their homes and got considerably poorer. At the same time the Wall Street was getting richer – much ricer – and awarding multimillion-dollar bonuses to its brokers. When all was said and done, the US economy had experienced the largest transfer of wealth in its history – with $10 trillion passing from Main Street to Wall Street.

In retrospect, it’s easy to see that the 2009 bailout was a bad idea. But the corona bailout could be worse.

The big difference is this: Back then, the bailout was optional – a “grand experiment,” as Tom Dyson put it. But the corona bailout is being done out of necessity. Because of everything we’ve talked about in the last few days, the government has no choice: Bail out the Treasury or risk going bust.

Nobody is against the current bailout. Not our trading partners, not our politicians, not the CEOs of big business, not the owners of mom-and-pop shops, nor the 26 million unemployed Americans. They are all depending on the US central bank to bail them out and, along with them, the entire world’s economy.

Think about it. For the first time since Obama was elected, Republicans and Democrats have come together to embrace a massive spending spree larger than any in our history. The only differences among these traditionally competing groups in this case is how much to overspend: whether the bailout should stop at $4 trillion or $6 trillion or $10 trillion or more.

The Problems With Free Money 

Free money, as I’ve said a hundred times, is never a good idea. And it’s an especially bad idea when it’s the federal government giving it out to foreign countries, domestic corporations, and to its populace through blanket giveaways like this one.

When money is given freely, it is often wasted. And it always creates dependency and entitlement. When fake money – dollars created out of thin air by an entry ledger in the Fed’s books – is given away freely, the net effect is reduced productivity, greater social and corporate dependency, and a weakening of faith in the US dollar. The first of these damages, reduced national productivity – has already happened on an enormous scale. The second is happening now. And the third is almost sure to follow. The only question is when.

I’ve no doubt that a portion of the productive sector of the economy will recover strongly after America opens up its economy next month. But I’m quite sure that it will not fully recover, as thousands – perhaps tens of thousands – of businesses will not be reopening and millions of Americans workers will remain unemployed.

How long the Corona Recession will last is anybody’s guess. Trump is hoping it will be short-lived and the economy will be firing on all cylinders by election time. His opponents would rather have America endure another bout or two of lockdown to ensure public discontent till then.

Nobody can possibly know what’s coming. We’ve never been in this sort of situation before. But it would be foolish to presume that we can replace the $10+ trillion we’ve lost these last three months by simply resuming our old work lives.

I’d say we enjoyed a good economy last year, but the fact is it wasn’t very good at all. The recovery after the crash of 2008 was a tepid one, with growth averaging a measly 3% a year. And the debt, as I explained Wednesday, mounted strongly during the Obama years and then skyrocketed once Trump took office. The $30 trillion of federal debt we’ve incurred will have to be dealt with sooner or later.

So how will America deal with this humongous debt?

Will we follow the historical pattern of inflation leading to hyperinflation leading to debasement of the currency and then total economic collapse?

Or is there another way?

A Bit More History 

From 1933 to 1939, President Franklin Roosevelt instituted the New Deal – a series of large-scale reforms and programs meant to stimulate the economy and end the Great Depression. (See “Did You Know,” below.)

The New Deal was popular. It put the Democrats into power for nine administrations, from 1937 to 1964. And it is credited with bringing the American economy back from near collapse to the strongest in the world.

Many good programs were launched through the New Deal, including the Reciprocal Tariff Act of 1934 (which opened up international trade) and the regulation of the worst practices of banks, insurance companies, and brokerage houses (which, till then, had been basically free to bamboozle and swindle their customers).

But one thing that wasn’t good about the New Deal was a series of executive orders that suspended the gold standard, unlinking the value of the dollar to the price of gold. This changed US monetary policy forever by allowing the amount of dollars in circulation to be a decision made by a handful of central bankers, rather than millions of businesses and consumers that make decisions by prices, which are controlled by supply and demand.

What some New Deal fans don’t talk about was that in 1937, during Roosevelt’s second term, there was a significant downturn in the economy. Production and profits declined sharply and unemployment jumped from 14.3% in May 1937 to 19.0% in June 1938. This proved to some the faults in the New Deal. (Maynard Keynes, for ones, was a doubter. He attributed the eventual recovery to the efforts of the private sector up to and through WWII.)

Whether it was the New Deal or private enterprise or both, there is no argument that what made America the leading economic power after WWII was the expansion of the gross national product.

The halcyon days of the 1950s and early 1960s were the consequence of the enormous expansion of capital enterprise that took place during those years. Growth in production eradicates debt and creates prosperity by virtue of added authentic economic value. That and the population explosion married to an expansion of consumer consumption were the true driving forces of America’s economic ascension.

Could it happen again?

Could America be first again? That’s a question that will be answered in the next 10 years. Can American enterprise innovate its businesses to lead the world? Or will faith in the US economy and its dollar crumble and send America down the path of the collapsed empires of the past?

You can ponder that question, if you will. But if your goal is to get yourself and your family into recovery mode, you’ll have to put your energies into building wealth the old-fashioned way: producing and selling value for a profit, and saving that profit for the future.

I’ll be talking about how you can do that in future blog posts as, after today, I’ll be back to talking about something I don’t need Wikipedia for – personal productivity, business growth strategies, personal finance, and the well-lived life.

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“Credit is a system whereby a person who can not pay gets another person who can not pay to guarantee that he can pay.” – Charles Dickens

K and I were in LA for two weeks at the end of February. We were visiting two of our three kids and our four grandkids. If you’ve ever spent time with toddlers and preschoolers, you know they are always drooling, sneezing, and coughing. And often their parents are too. (Well, not the drooling.)

This is because young children are incredibly good at catching colds and the flu, and very good at spreading them. Typically, they infect their parents, who are also relatively young and healthy. Then their parents spread the cold or flu to everyone they come in contact with.

Thus, it didn’t surprise us to be showing symptoms of the flu when we returned to Florida early in March. We spent a week with symptoms. Normal for me. K usually recovers more quickly. And we thought nothing of it.

Two weeks later, when I began researching the coronavirus, I wondered if we might have caught it. But we had been in LA several weeks earlier than it was said to have started there. So I ruled out that as a possibility.

At the beginning of April, I was reading articles suggesting that the virus might have come to America significantly earlier than the experts had been saying. I speculated that it could be true. We now know it was.

Two recent autopsies proved that the virus was in LA in January, as the victims died on or about February 5. And several more reports confirmed it, with cases identified in late January and early February.

That is good news for everyone. It means that the actual lethality rate of COVID-19 is, indeed, much less than the case fatality rate. In fact, a recent antibody study suggests that 5% or more of the LA population is or has been infected. And that means, as I’ve been saying from the beginning, the lethality rate is just a fraction of 1%.

And this is hopeful news for me and K. Those flu symptoms we had in early March might just have been a dose of coronavirus that our adorable grandkids were kind enough to give us. I’ll let you know after my serology test next week. Meanwhile, back to my exploration of the Corona Economy…

The Corona Economy, Part III

What the Media and Our Representatives Don’t Understand 

Last Monday and Friday, we talked about the general state of the US economy. We took a look at its P&L and balance sheet and concluded it was a bankrupt enterprise that is losing money at an astonishing pace.

2020 will be a watershed year for the US. In terms of the usual data points that measure economic health, it has already neared or surpassed numbers that are as bad as we’ve seen in 100 years.

Unemployment is as high as it was in the Great Depression. The GDP is shrinking quickly. Government spending is at historic highs. Tax revenues are tumbling by the trillions. The federal debt is $24 trillion and will grow by $6 trillion to $10 trillion by the end of the year.

Those are scary statistics. And not just for Americans. Notwithstanding efforts by some countries to achieve economic independence in energy and other vital resources, the global economy is inextricably connected. When any country in the world sneezes, the rest of the world catches cold.

Few in Washington or in the mainstream media are alarmed about this. The attitude seems to be: We’ll deal with it after we defeat the coronavirus.

In fact, an ethos has spread that is disturbing. Being worried about the economy means you don’t care about human life. I see a parallel to the way they responded to the threat of the virus in its early stages. “It’s nothing to worry about,” they said. “We should go about our daily lives without concern.” (It was not just the administration that took this position in January and February. It was the pols and reporters from both sides of the aisle.)

It’s only gotten worse since then. The reportage of the pandemic has been politicized. The right presents hopeful new data as reasons to open up the economy. The left interprets the data darkly and insists that the closure should continue.

One hopes a crisis would bring people together. The Corona Crisis seems to have done that in Italy and Sweden and some other European countries.  But in the US, the divide is wider now than ever. And the animosity is higher.

So we stay in lockdown to slow the virus and, therefore, insure a second and possibly third outbreak. And we spend trillions of dollars we don’t have to “protect” American businesses and workers, even though all the spending is putting us on the brink of an economic collapse.

And yet, economic collapse (which is happening at an exponential rate) is not being discussed with the alarm it deserves – particularly among left-leaning pols and the mainstream media. Some of that is surely due to political animosity. But I think a bigger problem is the widespread ignorance of the way our government gets and spends money. This is true generally of the population at large. But what’s disconcerting is that the ignorance is widespread among the politicians that do the spending and the media that report on it.

A Simple Question 

This takes us back to where we left off on Friday. We know that our government is broke. We know it doesn’t have huge stockpiles of gold and silver or even dollars. So is it able to pay for the $6 trillion to $10 trillion deficit we are putting ourselves into right now?

It’s a simple question. I recently posed it to a few of my smart and educated friends. I’m talking about doctors, lawyers, business executives, and college professors. None of them had any idea.

That’s understandable. In most colleges, economics (let alone government fiscal policy) is not a required course. But you’d think that government officials that vote on spending bills and reporters and columnists that write about government spending would be well-versed on the subject.

I don’t think they are. In fact, I believe most of them haven’t the foggiest idea about how our fiscal and monetary policies work.

But you don’t need to understand these things to be a politician, a political reporter, or a columnist. Nor do you need to understand them to be able to function in almost any career.

I believe I could have had pretty much the same career I’ve had as an entrepreneur and business consultant without a background in fundamental economics. But I do think that the experience of running a business and trying to squeeze a profit from it for many years has given me a good understanding of some of it. Such as:

* There are several ways to make money: You can earn it, you can steal it, or you can be given it. The first is the best of the three because it won’t land you in jail and because it’s not dependent on the kindness of strangers. You are in control of how much money you make.

* The only way to earn money is to exchange something for it – your time, your expertise, or something you own.

* The best way to have that exchange is on a voluntary basis, with everyone free to buy or sell as they wish. This is called a free market. A free market, therefore, is the best way to create economic growth.

There is one more way to make money: You can borrow it and invest it and have the investment pay off the loan and leave you with a profit.

This is a standard practice of at least half the businesses in the US and the rest of the world. Some make the borrowing (debt-financing) work for them. Some don’t.

The trick to making debt-financing work is to invest the money in something that has a good chance of being profitable. That’s why investing in infrastructure generally makes sense for businesses and for economies. But spending borrowed dollars to pay for spending is generally a terrible idea.

You know this from your personal experience. You have friends and family members that are always maxed out on their credit cards, always hiding from their creditors, always getting into more and more debt because they borrowed money they couldn’t possibly pay back.

This is the core problem with the solvency of America right now, and it’s why it’s so important to understand how our government spends the trillions of dollars it doesn’t have.

The Idiot’s Guide to Monetary and Fiscal Policy in the US 

I’m hardly an expert in economics. And my understanding of fiscal and monetary policy has come very slowly over many years. In fact, before writing these Corona Economy essays, I asked Tom Dyson, a colleague who understands this subject much better than I do, to give me a refresher course. “Explain this to me as if I were one of your children,” I said. “Actually, no. Your kids are super-smart. Explain it to me as if I were a really dumb version of your kids.”

And he did.

Tom began by pointing out that there are two federal systems that operate together: the fiscal policies of the government and the monetary policies of the Federal Reserve, our central bank.

The fiscal system is what I was talking about on Friday. It’s how our government gets and spends its money. On the get side is tax revenue. On the spend side is everything our representatives vote for to get themselves elected: military spending, social spending, spending to support our businesses, foreign aid, etc.

If, in any particular year, the government spends more than it gets from taxes, it creates a deficit. If it spends less than it gets from taxes, it creates a surplus. (This is the fiscal counterpart of profit and loss.) In theory, we should want the fiscal system to balance the budget every year – or, in good years, to create a surplus.

In fact, since WWII, we’ve had a lot more years with a deficit than a surplus. I’ll get to that in a moment.

The Mechanics of Debt 

When the government runs a deficit, it has to cover that deficit somehow. The way that’s normally done is with debt. The Treasury posts a sign saying, “We need dollars. Anyone out there want to lend us some?”

This is done through Treasury bonds, which are basically loan contracts. [See “Did You Know?” below.] The person who buys the bonds is the lender. The government is the borrower. And as with most loan contracts, the borrower (government) promises to pay back the lender (bond purchaser) the amount of the loan plus interest.

If, for example, the government spends a billion dollars more than it makes in taxes, it must sell a billion dollars’ worth of Treasuries to make up the difference.

And if the government continues to runs deficits and sell bonds to cover them, it’s going to get deeper into debt.

The problem with growing debt is the same for the government as it is for businesses and consumers. The government has to pay interest on it. If the debt is great and the interest it has to pay is high, the government can find itself in a position where it’s forking over a large percentage of its income (from tax revenues).

A Potentially Catastrophic Problem… or Is It? 

This is a crude example, but it is essentially the problem that the US government has right now. It has been deficit spending almost every year for the past 70 years, and at the rate of more than a trillion dollars every year for at least 10 years. It has a debt of $24 trillion now and a loss in tax revenues of maybe $4 trillion. Add to that another $4 trillion to $6 trillion that it will be spending on the Corona Crisis, and its overall debt is likely to be $30+ trillion over the next few years.

But is that really a bad thing?

Common sense would tell you it is. But there are economists that will argue it’s nothing to worry about. At an interest rate of 1%, it’s “only” $35 billion. Our tax revenues can easily cover that.

Maybe. But what if our lenders – all those people, businesses, and countries that have been lending us that money (buying Treasury bonds) for so long – decide they don’t like the fact that the US has so little collateral. What happens if our credit dries up?

In fact, that’s already happened. You’ve probably read about it. It happened in what they call the repo market.

We’ll pick up on that next time.

“Performance is better than promise. Exuberant assurances are cheap.” – Joseph Pulitzer

The Corona Economy, Part II

Will America Survive It? 

Alec writes:

Today marks the 29^th day in a row that I have worn pants with a drawstring.

I went into Rand’s room this morning and woke him up. I said, “Rand, you have to get up.”

He raised his head up from his pillow and said, “Why?” Then he went back to sleep.

My wife is running a business with 10 restaurants and goes to work every day. She is busier than ever… as other restaurants gradually close, they are filling a growing number of carryout orders for breakfast, lunch, and dinner.

Her text this morning read, “Has at Costco $1.49.”

How she had time to text me, or what the text meant, I didn’t know. But thinking it might be vital information, I texted back, “WHAT??”

Her reply was, “G gas.”

I thought, “Wow, gas, $1.49 a gallon. I can’t remember when gas was that cheap. I’d better rush to Costco to get gas before they run out.”

I jumped into my car and backed out of the driveway. Then I realized: I hadn’t gone anywhere for 29 days. My gas tank is still full!  (Later, I did the math and I am driving an average of 0.7 miles a day. I may not need gas until the middle of June.)

But America will soon be “opening up again.” Not because Donald Trump wants it to.  Nor will it happen because we’ve passed the peak of the contagion. (There will be a second wave.) State governors will have lots to say about it, but they won’t actually make the important decisions. America’s people – its entrepreneurs, professionals, corporate executives, and employees will.

“Opening up” is  bit of hyperbole. Our economy was never truly shut down. It was regulated into a crippled gait. In six short weeks, the US has experienced a financial collapse it hasn’t experienced in a hundred years.

As I write this, for example, more than 22 million American workers have filed for unemployment. Millions more will surely be filing in May and June. Both Treasury Secretary Steven Mnuchin and the Fed’s James Bullard have said they believe that unemployment will bypass 20% and could end up higher than it was during the Great Depression of 1929.

The unemployment rate hit a record of 25% in 1933 – 4 years after the Great Depression – and remained over 14% during the entire decade of the 1930s. The highest rate since then was 10.8% in 1982.

Another concern: The 2008 financial collapse was triggered by mortgage defaults. What is happening today is just as serious – rent defaults. According to Rent Payer Tracker, as of April 19, one-third of the 13.4 million renters surveyed hadn’t yet paid their April rent, ordinarily due on April 1. An increase in rent defaults isn’t likely to collapse the economy by itself, but it reflects a trend I’ve seen even among friends and colleagues that are financially secure: People are reluctant to pay bills they don’t have to pay.

The big picture is the gross domestic product (GDP), the total output of the US economy. With so many businesses, large and small, inactive or unprofitable, Goldman Sachs projects that GDP could decline by 24% by the end of June.

Think about that. Total GDP output in 2019 was about $21.4 trillion. If it drops 24%, that’s an annual loss of over $5 trillion of economic activity. And that’s on top of the macroeconomic factors we covered in Part I of this series:

* The US government is currently in debt to the tune of $24 trillion.

* It’s been running at a $1 trillion annual loss for years.

* The Treasury itself is broke. Its bills exceed its revenues by several trillion dollars.

* The government recently spent $2.5 trillion it didn’t have.

* On the other side of the ledger, federal tax revenues will be at least $2 trillion less than they were last year.

Add it all up and you have an already broke government increasing its deficit by as much as $10 trillion in a single year!

The government is working furiously to avoid a total collapse. Their strategy is to give away trillions of dollars in paper money. They have already given half a trillion via the Payroll Protection Program and have committed to another half-trillion more. And that’s not counting the 1.5 trillion that went to bail out Wall Street.

As you remember from Monday’s essay, the US government doesn’t really have any wealth to distribute. It’s broke and is getting broker every day by billions of dollars. If, as I suggested, our government were a business, only a fool would invest in it or lend it money. But that’s how it’s been surviving these past several years – by selling Treasury bonds to the likes of China, Saudi Arabia, and Europe.

That’s of no apparent concern to some of our legislators and public thinkers. They are criticizing the giveaway so far for being too conservative.

Regarding the 20% to 24% projection of GDP loss, a NYT columnist said, “This time, with government deliberately shutting down commerce, it could well fall faster.

Only a World War II-scale response can make up that difference.”

And where will government get the money?

His answer: “At a time when inflation is close to zero and the government can borrow for 30 years at less than 2%, this is precisely the moment to borrow to underwrite a recovery that also modernizes the economy.”

Never before in US history has so much money been doled out so quickly and with so little understanding of or regard for consequences. Rarely have so many politicians from both sides of the aisle favored such a level of spending.

As Bill Bonner recently pointed out, the Small Business Administration giveaway is forcing banks to review and approve loans at a surrealistic rate.

“Every half a second,” he writes, “they’ve had to check out the facts… verify the value of collateral… and assure themselves that everything was on the level – after all, they were giving out as much as $2 million per application!”

“Who gets the money?” Bill asks. We can’t be sure. But when money is being given away so fast and furiously, there’s a good chance that much of it will be unproductive. “Like subprime mortgages in 2007,” Bill says, “All you need [to qualify] is a pulse. Even hedge funds are eligible.”

The millions that have been fired or furloughed will be getting a few hundred dollars a week while the shutdown continues. Meanwhile, the hundreds of US senators and representatives and their thousands of aides will continue at full pay while they try to spend our way out of all this mounting debt.

“Don’t worry,” they assure us. “We are going to take care of this.” Assurances from people that have never run a business and have little to no understanding of how a real economy actually works.

So what is it they don’t understand? We’ll talk about that on Monday.

“Imagine preventing health crises, not just responding to them.” – Nathan Wolfe

My Last Essay on the Coronavirus (I Promise!)

5 Important Questions; 5 Conclusions 

Once again, we were having a family argument about the coronavirus. The topic last night was: “Why Donald Trump Is Killing People With His Plan to Reopen the Economy.” But after a good five minutes of perfervid shouting, it turned into an argument about how dangerous the virus really is.

“And now COVID-19 is the biggest killer in America,” J said.

“That’s not possible,” I said.

“I read it in The Washington Post.”

Now J has been right about that damn lefty rag before, so I had to check my facts. I tracked down the article this morning. It was published on April 16. The author had given COVID-19 the “biggest killer” title based on a single week’s data.

J was right. The article made that claim. But I feel that I was right too. Because the “fact” that it was on the top of some chart last week doesn’t mean it is or is going to be the leading killer this year. As always, it will be heart disease and cancer. Coronavirus will do its share of killing. It will make the top 10, edging out suicide, kidney disease, and maybe even pneumonia (from common colds and influenza). But I doubt it will edge out accidents, lower respiratory, cerebrovascular, and Alzheimer’s diseases.

Today, I’m going to try to answer the question of how deadly this novel virus is as part of what I promise will be my final essay on the virus itself. (I will be following up on Monday’s essay on “The Corona Economy” with two or three more essays, and then I’ll probably join the fray and register my view of how the crisis will change the way we live. But that will be it!) 

There are four reasons this will be my final essay on the virus itself:

* I normally write about subjects I know, like business and wealth building and so on. It’s exhausting to have to research and check facts to support my conclusions about the virus.

* When I began writing about the virus in mid-March, I was presenting ideas that were largely contrary to what I was seeing in the major media. It was fun to make claims and predictions that seemed outrageous and might offend. But in five short weeks, the consensus of expert opinion, along with the media, has moved uncomfortably close to what I was saying then. I have no interest is presenting ideas that the world is accepting as true. There’s no point in it.

* My family, my editor, and even some of my loyal readers have asked me to stop. As SC said recently, “Enough already!”

* If we get the right kind of testing done soon – and it appears we will – there will no longer be an argument about the most important questions.

So what I’m going to do today is present my argument against The Washington Post claim, and then reiterate (with some revisions) the five most important questions and answers about the coronavirus and COVID-19.

Question One: Comparatively Speaking, How Deadly Is the Coronavirus?

Let’s begin with some big numbers. How many Americans will COVID-19 kill in 2020? And how will that number compare to America’s biggest killers?

I’m going to address the second question first, because part of it is easy to answer.

In 2018, the most recent year the CDC had published records for, the top killers were as follows:

1. Heart disease: 655, 381

2. Cancer: 599,274

3. Accidents: 167,127

4. Lower Respiratory Diseases: 159,486

5. Cerebrovascular Diseases: 147,810

6. Alzheimer’s: 122,019

7. Diabetes: 84,946

8. Influenza and Pneumonia: 59,120

9. Kidney Disease: 51,386

10. Suicide: 48,344

The first expert estimates for COVID-19, you may remember, were 2 million to 3 million. Dr. Fauci and team’s first guess was 100,000 to 240,00. Just before they announced that range, I had come up with a range of 85,000 to 205,000, which was published in my March 30 blog. Shortly after that, Fauci and team dropped their estimate to 60,000. But that wasn’t meant to be the death toll for the virus itself. Just how many would die by August first.

So how many will die?

As you’ll see from my answers to the next several questions, that’s impossible to know until we know how many Americans (and other populations) have already been infected. Based on what I’ve seen, I’m sticking to my original guess. But I’m going to narrow down the range. My current guess is more than 85,000 but less than 120,000.

Conclusion and Prediction: COVID-19 is not the most dangerous health crisis Americans face today. It won’t come close to heart disease and cancer, but it will be significant, killing more than 60,000 but less than twice that.  

Question Two: How Deadly Is the Coronavirus by Age Group?

Throughout March, the media focused a great deal on the fact that COVID-19 seems to be especially deadly to older people and people that have “compromised immune systems” or “comorbidity issues.” This had most of my coevals frightened.

Then, about two weeks ago, another narrative hit the headlines: It’s killing younger people too! Even babies!

And that scared the shit out of everybody.

Let’s take a look at these two claims by comparing CDC figures on deaths by age group for COVID-19 against deaths from cold- or influenza-induced pneumonia.

From the beginning of February until the middle of March, 682,565 Americans died.

Of those 682,565 that died, 13,130 (roughly 2%) died from COVID-19 and 45,019 (roughly 6.5%) from cold- or influenza-induced pneumonia.

COVID-19 Percentages (based on 13,130 deaths)

Under 1 to 24: 16 or 0.12%

25 to 34: 113 or 0.8%

35 to 44: 289 or 2.2%

45 to 54: 751 or 5.7%

55 to 64: 1,773 or 13.5%

65 to 74: 2,919 or 22.2%

75 to 84: 3,576 or 27.2%

85 and older: 3,693 or 28.1%

Cold- and Influenza-Induced Pneumonia Percentages 

Under 25: 111 or 1.8%

25 to 34: 117 or 2.2%

35 to 44: 188 or 3.5%

45 to 54: 441 or 8.4%

55 to 64: 963 or 18.4%

65 to 74: 1,152 or 22%

75 to 84: 1,165 or 22%

85 and older: 1091 or 20.8%

At a glance, you can see one thing clearly: The percentage of people under 25 that died from COVID-19 was extremely small – i.e., about one-tenth of 1%. That is less than half the percentage of that same age group (2%) that died from colds and flu.

From this, it seems reasonable to conclude that if you are younger than 25, your risk of dying from COVID-19 is effectively non-existent.

What about the other age groups? From 25 to 34, from 35 to 44, and so on?

To get a better sense of that, I clustered them into three groups: 55 and over, under 55, and under 35.

* 55 and over: 91% of those that died from COVID-19 were 55 years old or older.

* Under 55: 9% of those that died were under 55.

* Under 35: 3% of those that died were under 35.

Now let’s look at the same age groups for cold and influenza:

* 55 and over: 83% of those that die from influenza are 55 years old or older.

* Under 55: 17% of those that die from influenza are under 55.

* Under 35: Only 4% are under 35.

From Dr. Jean-Laurent Casanova, a pediatrician who studies the genetics of disease severity.

“What we’re seeing here is the same for tuberculosis, malaria, all infectious disease of humankind. Some people control the infectious agent very well, others die, and there’s everything in between.”

Comparing the two sets of data points above, we can see that:

* Older people (older than 54) represent a somewhat larger percentage of those that die from COVID-19 than from influenza. But it’s not a huge difference. It’s eight percentage points – 91% as opposed to 83%.

* The percentage of people under 35 that die from COVID-19 is virtually the same as for colds and influenza: 3% versus 4%.

* Virtually no one under 24 dies from COVID-19, compared to 2% for influenza.

In terms of age, COVID-19 seems to be less lethal than cold- and flu-induced deaths for people younger than 25, about 20% more lethal for people over 55, and has about the same true lethality rate for people under 55.

Conclusion: People older than 55 have a higher likelihood of dying from COVID-19 than they would from getting pneumonia. But it looks like it’s only 20% higher, so they shouldn’t be terrified. Their risk of dying from it is still less than 1%. People between 25 and 55 should be as worried about dying from it as they are about dying from pneumonia. And people under 25 shouldn’t worry at all.

Note: Yes, if you are under 55 and are in contact with older people, you should be concerned about spreading the virus to them. But that doesn’t necessarily mean you should be in lockdown, as I’ll explain in a bit.

Question Three: What Is the True Lethality Rate of the Coronavirus? 

If you have been reading my earlier blogs on this subject, you already know that I believe the true lethality rate of COVID-19 is much lower than the case fatality rates (CFRs) that were reported from the end of February. First, the reported CFR was 12% (based on Wuhan and northern Italy). Then it was 6% (based on I can’t even remember right now). Then the WHO announced that it was 3.4%.

In my March 30 blog, using the data available, I estimated the real lethality rate to be between 0.85% and 1.02%.

At the same time, or maybe a day or two later, everyone including Dr. Fauci and team), was estimating the rate to be 1%. (Which, of course, made me feel that I was doing the math correctly.)

But because there was no way of knowing exactly how contagious the disease was and how long it had been in the USA, I said that I thought the true lethality rate could turn out to be as low as one-tenth of that, or one-tenth of 1%.

We won’t know the answer until we’ve done enough random testing of the population (not testing of symptomatic cases). But there have been studies that point towards a rate of less than 1%. For example, in South Korea, which conducted random testing of more than 140,000 people, officials found the actual fatality rate to be 0.6%. And apart from Wuhan, the rest of China has reported a lethality rate of 0.7%.

Conclusion: The actual real fatality rate of COVID-19 is (and will be) between 0.2% and 0.4%, about double the rate for influenza but nothing near the estimates authorities were working with when they decided to shut down the economy.

Question Four: How Contagious Is the Coronavirus? 

On March 30, I said:

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 [on average] each person that gets the virus will infect 2.3 more.

An Ro of 2.3 may not sound so contagious – but if you do the math, you’ll discover (as I showed in that essay) that the virus can spread from one person to 11.6 million people in just 14 exponential steps!

The coronavirus is a very fast-moving bug. But that rate is not fixed. It’s dependent on its ability to move freely from one host to another. Without barriers, it can grow at these rates. And that’s why some of the earlier articles posted on social media were predicting that millions of Americans would die from it this year.

But nature doesn’t work that way. We are designed to combat viruses just as viruses are designed to infect us. The way we do that – the way we protect ourselves from all threats – is with adaptive behavior. In the case of snakes and lions, we wear shoes and walk carefully though the jungle. In the case of past viruses, those of us that were concerned with catching the flu – generally older people – got flu shots and avoided people with runny noses. As for younger people and their children, it was hardly a concern.

With the coronavirus, we have been practicing much more stringent adaptive behavior. Some of that has been voluntary and some of it has been mandated. These practices definitely slow the spread of a virus but they will not reduce the eventual number of Americans that will eventually be infected. That will be the percentage of the population we need for herd immunity.

One of the many things we don’t know now is how many Americans are now or have already been infected with the coronavirus. This we will find out soon – after we’ve completed several large randomized tests of the population. (Either the swab test for the virus itself, or the serology test for antibodies.)

The guesses I’ve seen ranged from 20 million to 60 million. To achieve herd immunity (more on this in the next section), we’ll need a lot more than that – possibly more than 100 million. Remember, the higher the number of infected, the lower the real lethality rate. Let’s hope that this bug has spread like wildfire. It will mean that we may have reached the peak already. And that means fewer deaths with each passing week.

Conclusion: The coronavirus is very contagious, at least as contagious as influenza. It is likely that it has already infected 30 million to 60 million. If we are lucky, we will discover that the number is much higher than that.  

Question Five: Has Social Distancing Really Helped Us Defeat the Virus

In my March 30 essay, I concluded that social distancing was good and necessary – especially in hotspots – because by slowing the spread of the virus, we reduce the risk of overwhelming our hospitals.

For the moment, at least, that strategy has worked. New York City, the “center” of the pandemic in the USA, is no longer short of hospital beds and ventilators.

But is social distancing the best way to conquer the virus?

Epidemiologists agree that the only way to extinguish a virus is through herd immunity. And as I said on Friday, herd immunity is what happens when a large percentage of the population has developed immunity. Depending on the virus, that percentage can range from 40% to 60%. When you get to those numbers, the virus cannot spread like it needs to because its host population is too small.

That is what happens every year with the flu.

According to the CDC, about 40% of the adult population in the US is vaccinated each year. That gives most of them (virus vaccines are imperfect) immunity for a year or two. In addition, tens of millions of Americans achieve immunity naturally by contracting the flu and recovering. That gets us to the 50% to 80% needed for herd immunity – and the virus dies off. (It usually peaks in two to three weeks and descends in an equal amount of time.)

But by imposing social distancing, we extend the virus’s natural life cycle and slow its spread.

That is why epidemiologists are warning us about a second and third wave. It is almost certain to happen precisely because of social distancing.

Conclusion: Yes, social distancing keeps hospitals from being overwhelmed. But it also interferes with the development of herd immunity. We can (and probably should and certainly will) “open up America.” But we will definitely have other waves of the coronavirus until at least 160 million (50%) of us have immunity.

So What Should We Do?

Everyone’s best hope is the development and deployment of an effective vaccine as soon as possible. And we are certainly working hard on that. Except for HIV, I can’t remember a time when so much effort has been put into creating a vaccine. But effective vaccines are not easy to develop. (We’ve been trying to develop a vaccine for HIV now for more than 30 years.) It’s generally agreed that, for the coronavirus, the best we can hope for is 12 to 18 months.

In the meantime, the virus will rise up and infect people every chance it gets. And if our policy is to continue with shelter-in-place, we won’t be able to stop the spread of the virus until an effective vaccine is ready. (And available in sufficient supply to immunize 100 million Americans.)

The only sensible option is to allow the virus to spread. Not freely, but in a controlled way that is based on what we know about its lethality.

If we accept the facts that (1) herd immunity is the only way to kill the virus, (2) the real fatality rate is 0.1% or 0.2%, and (3) a vaccine is a year or so away, doesn’t it make sense to try to achieve herd immunity as quickly as we can, while doing everything possible to isolate those who are most vulnerable?

By achieving herd immunity naturally, by isolating the vulnerable but otherwise letting the virus spread, wouldn’t that render the second and third waves of the virus weak or even impotent?

The administration has issued its guidelines. They are based on gradually opening up the economy. This makes sense from a distance. But the guidelines do not take into account the data that is most important to know: the fatality rates by age group.

Rather than being guided by social distancing, which segregates everyone, we should have different approaches for different vulnerability groups. We should have a policy that isolates the most vulnerable (over, say, 75 years old and anyone with a seriously compromised immune system), promote social distancing for people between 25 and 75, and let everyone under 25 resume their regular activities. That way, we would allow the virus to spread quickly through the population of people that have the ability to withstand it. And that acceleration will get us to herd immunity soon, probably in weeks. Once we reach herd immunity, we won’t have to worry about a second or third wave. (Most of the 600,000 Americans that died of the Spanish Influenza of 1918 died in the second wave.)

And What Should You Do?

I can’t tell you what to do – but I’ll tell you what I’d do.

If I were younger than 25 and had children, I wouldn’t worry about them or me getting sick and dying of the virus. The odds of that happening are probably the same as the odds of dying in a plane crash.

I would be comfortable interacting with people of my age and younger. But I would not interact with anyone older than 65 or anyone younger that had comorbidity issues.

If my children or I did get infected, I would keep us isolated until I was sure we were not just symptom free but tested negative so that we would not infect others.

If I were older than 25 but younger than 65, I’d feel free to interact with people under 25 and I’d keep a social distance from people of my age group.

And if I were older than 65 and worried about getting infected and dying, I’d self-isolate and stay isolated till there was herd immunity.

I am older than 65 but I’m not worried about getting infected and dying. If I did get infected, my chances of living would be better then 80%. In terms of getting and spreading the disease unwittingly, I’d follow the social distancing rules I mentioned above.

One more thing I’d do and advise anyone else to do. If I got symptoms, I wouldn’t wait to get an appointment with my doctor. I’d get tested not just for COVID-19 but also for any other upper respiratory disorder, including influenza. I’d do that because I understand that you don’t die from the bug itself. You die from pneumonia. And pneumonia, when treated early, can usually be treated with antibiotics.

Looking at it from a social perspective, the bottom line for me is that old and immune-compromised people should self-isolate. And the rest of the world should look forward to getting back to the sensible adaptive behaviors that are recommended for treating influenza.

“Economics is a subject that does not greatly respect one’s wishes.” – Nikita Khrushchev

The Corona Economy, Part I: Will America Survive It?

New York City is losing billions in tax revenues, and Mayor Bill De Blasio is going to have to lay off thousands of city workers. He is upset about this. He’s calling on the Trump administration to bail out the city. “We can’t do anything about this,” he pleaded. (I’m paraphrasing.) “Only the federal government has the power to help us.”

Many in my family feel that we should keep the economy shut down “for as long as it takes.” They also say that the federal government should keep cranking out financial aid “for as long as it takes.”

“Human life is more important than money,” they say.

The trouble with mixing ethics and economics is not that they are incompatible. Quite the contrary, they are inextricably linked. The problem is that if you talk about them simultaneously, you never get anywhere.

Both subjects are important. Neither is dispositive or scientific. But economics has the advantage of a vocabulary of facts and a language of numbers. Thus, if you want to have the conversation about both, it’s better to start with the facts and numbers.

So let’s do that.

* As of April 13, 1.1 million small business loans had already been approved, totaling $253 billion in bailout money. By the time you read this, the federal government’s $350 billion small-business relief fund will be nearly exhausted.

* The total “relief package” already enacted will cost about $2 trillion. There is good reason to believe that we will have a second and perhaps a third one at that same level.

* On April 17, we learned that more than 5.2 million Americans had filed for unemployment benefits that week – which means that the virus put more than 22 million out of work in less than a month.

* There are about 127 million households in America earning, on average, about $150,000. (That’s the mean, which counts the rich people. The median income is $60,000.) Ten million unemployed, multiplied by, say, $100,000, is $10 trillion. At an average tax rate of 20%, that’s $2 trillion in lost federal tax revenues.

* Tens of thousands of small businesses, representing hundreds of billions of dollars in tax revenues, have been shut down. Many of them will not reopen.

* For some years now, the federal government has been running at a deficit of about $1 trillion a year.

* Total US debt is nearing $24 trillion and rising fast.

Would You Invest in This Company? 

Think of the federal government as a business. I know that it’s not a business, nor is it intended to be. But hear me out.

You are an investor, trying to decide whether you want to buy this company.

The first thing you do is look at a spreadsheet of the financials – a P&L (profit and loss) statement and a balance sheet (assets minus liabilities).

You look first to the bottom line of the P&L, which tells you how profitable this company is. Hmm. Can that possibly be true? Is this company really losing $1 trillion a year?

Maybe they are investing for future growth, you tell yourself. Maybe, like Amazon in its early days, the Feds are spending money they don’t have in order to acquire income in the future. But when you look at the company’s projected income, it’s going the wrong way. Projected tax revenues are going down. Way down!

And what about its balance sheet? What about the company’s net worth? You glance at the liabilities and what do you see? You see $24 trillion in debt!

Surely, the company’s assets must offset this figure. You check that side of the ledger, and you see about $500 billion worth of gold (by today’s prices). Okay. You also see that the company has a great deal of valuable property (national forests and monuments and buildings and so on). But that property is  encumbered. It can’t be sold.

From this perspective, the US looks like a terrible business opportunity, right? It’s big-time broke and losing billions of dollars every day.

And thanks to the Corona Crisis, that debt and those losses are going to pile up faster than ever. The current bailout package is estimated to cost $2 trillion, bringing the projected loss for 2020 to $3 trillion. But to make matters worse, tax revenues are crashing. As I said above, it’s likely that they will drop by as much as $2 trillion this year.

Meanwhile, Mayor De Blasio is facing a fiscal crisis. Tax revenues are down more than $8 billion. And even with firing thousands of city employees, New York will still be short more than $6 billion by the end of this year… just to pay its upcoming bills.

That’s why he is complaining about Trump. He knows he doesn’t have a magical way to create the dollars he needs to solve his problem. But the federal government does.

The government has the Treasury, which issues Treasury bonds (IOUs), and it has the Federal Reserve (the central bank) which, among other things, decides how much interest it will charge US banks to borrow money from it. But the Fed can also, if it wants, put “liquidity into the system.” What that means is that someone that has access to a database that keeps track of the money supply (how many dollars are out there) hits a button and billions (or trillions) of dollars that never existed before appear out of nowhere. This is what most economists mean when they say “printing dollars.” (We’ll get into that in more detail in Part IV of this series.)

This is why some people are worried about the economy now. The federal government is in crazy debt and is losing money faster than it ever has before. Millions of people are out of work and tens of thousands of small businesses are dead in the water. That means a lot of pain and suffering. And the possibility of a deep depression like we haven’t seen in 100 years.

You may be thinking, as my brother-in-law said last night, that these facts and numbers must be false. After all, everyone knows that the USA is “the richest country in the world.” It can afford a shutdown of three to six months. You may be thinking, as some have said, that the economy will bounce back to full strength as soon as we get past this pandemic.

Maybe. But I doubt it. If I’m going to bet, and I probably will have to, I’m going to bet that things will get worse before they get better.

I’ll tell you why I am pessimistic on Friday, in The Corona Economy, Part II