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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.

 

  1. 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 13th 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 7th, 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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When I first started making more money than I was spending, I asked my partner to recommend someone to help me do my taxes. “You should speak to Sid,” he told me. He does my taxes and he’s good. Plus, he got rich as an accountant, and that’s not easy to do.”

Sid was his father-in-law. He must have been in his 60s back then, in the early ‘80s, but he looked older. He was tall and gaunt with an angular face and thin gray hair. He was shocked when he discovered how little I knew about money.

Perhaps for that reason he adopted an avuncular attitude towards me. He advised me on taxes, but that was just the beginning. He quizzed and lectured me on sales and marketing and business communication. And he advised me on investing, too.

“Why are you spending all that money on art?” he would exclaim. “It’s just decoration! Just pictures on the wall!”

He failed to dissuade me from collecting art, but he was a big influence in helping me develop a philosophy of wealth building. “You’re making good money now, kid,” he said after I received my first big dividend. “But if you’re not smart, you can lose that much and more with a single stupid move.”

Sid had been a very aggressive businessman (as was his son-in-law). But when it came to investing, he was a conservative as one can be. He bought for himself and recommended to me only two asset classes: triple-A municipal bonds and Treasury bonds.

“What about stocks?” I frequently asked him.

“Stocks are for shmendriks and schmucks,” he’d howl. “Bonds! Buy bonds!”

The Corona Economy, Part IV

War, Debt, and the Eve of Destruction 

“I found this national debt, doubled, wrapped in a big bow waiting for me as I stepped into the Oval Office.” – Barack Obama

In Part I of this series, we looked at our government’s financial situation the way an investor would look at the financials of a business. The conclusion: From a P&L and balance-sheet perspective, it looks awful.

In Part II, we saw how much worse those financials are going to be at the end of this year: a bigger deficit (by $6+ trillion), a smaller GDP (by about 20%), a much larger debt (around $30 trillion).

In Part III, we rued the fact that these facts are not understood by 98% of the voting public, and are misunderstood and/or ignored by 80+% of our elected officials and the media that report on what they’re doing.

And in case you’d want to be one of the 2% of the population that does have at least a basic understanding of how money works at that level, we provided an introduction to US fiscal and monetary policies (as we understand them). Today, we continue where we left off.

The Idiot’s Guide to Monetary and Fiscal Policy in the US (continued)… 

When our government spends more money than it takes in, it covers the difference (the deficit) by borrowing money. It does that through its Treasury, which sells bonds (government IOUs) for the dollars it needs for its overspending.

Treasury bonds are attractive to savers and investors for two good reasons. (1) They are generally considered risk-free because they are “backed by the full faith and credit of the US government. And (2) as “fixed-income securities,” they provide the investor (bond buyer) a guaranteed return paid out on a predetermined basis.

Guaranteed returns by the world’s largest and “strongest” economy? Of course there will be a big demand for T-bonds. Individuals want them. Banks want them.  Pension funds want them. Even foreign countries want them. Not necessarily as a primary investment, but as an asset they can count on when everything else is in flux.

Whether the bond buyer is a retired plumber or a sovereign nation, Treasury bonds promise a solid foundation for any portfolio, providing a sense of security that’s the next best thing to gold. Think about it. Holding T-bonds is like owning a share of America! So long as America doesn’t declare bankruptcy, those IOUs will pay off.

A Wee Bit of History 

The history of US debt is the history of its wars. Before the Civil War, the national debt was relatively modest, because before then there was no income tax. Wars were funded with sales taxes and the like.

The Civil War changed that. Between 1860 and 1866, the debt rose from $64.8 million to more than $2.7 billion, approximately $42 billion by today’s standards. To keep the nation whole, President Abraham Lincoln pushed debt to nearly 30% of gross domestic product and introduced the first income tax in American history.

After that, every war led to ever-higher debt levels. WWI elevated the national tolerance for federal debt, bringing it to $27 billion. More importantly, Woodrow Wilson changed the way debt was approved. Congress’s previous approach was to approve each bond sale individually. Wilson introduced the “debt ceiling,” whereby the US Treasury was told how much it could borrow overall and the administration was allowed to manage the sale of individual rounds of debt. This law has remained in place ever since.

President Franklin Roosevelt made a big “contribution” to raising our debt through the New Deal, elevating borrowing to over $40 billion to fight the war against the Great Depression — nearly doubling the national debt when he took office.

WWII was the next big step in the history of US debt, with the government spending more than $323 billion ($5.8 trillion in today’s money) to defeat Germany and Japan. Much of that money was borrowed. And between 1940 and 1946, US debt climbed from $42 billion to $269 billion, much of it held by individual Americans in the form of Treasury bonds.

But between 1965 and 1978, two more “wars” dramatically boosted the national debt. One of them, from 1965 to 1975, was the Vietnam War. The other one began in 1966 when Lyndon Johnson signed the Medicare program into law. Like the Vietnam War, it was a battle we would not win. But unlike the Vietnam War, the costs of fighting it have never ended or even diminished.

Since then, the national debt has not stopped growing. It grew under President Reagan and under George H.W. Bush and Bill Clinton. (Although the rate of growth slowed considerably after Clinton got Congress to enact tax increases early in his first term.) In the year 2000, our government went into the new millennium with a debt of $5.65 trillion.

Debt slowed a bit in the 1980s and 1990s. Then, on Sept. 11, 2001, President George Bush Jr. spearheaded yet another war – the war on terror. But the invasions of Afghanistan and Iraq were not funded by additional taxes. They were funded by debt, growing at a rate of $400 billion to $500 billion per year.

The Great Recession of 2008 brought deficits beyond the $1 trillion mark. And under Obama, that continued, although it did diminish by more than half during the second half of his presidency.

Then, in 2018, Donald Trump was elected president. Many hoped he would reduce spending, but that didn’t happen. Instead, he oversaw a deficit increase to $1.3 trillion during his first full year in office.

And now we have the war on COVID-19.

Bartering for Dollars 

All of these wars since the Civil War have been funded by government debt. Initially, it was private citizens and businesses (and wealthy industrialists) that bought that debt. But in recent decades, it was foreign countries – countries like Germany, Japan, Saudi Arabia, and China – that were producing budget surpluses and looked at Treasury bonds as a safe haven for their extra dollars.

Germany was an early buyer of bonds. Japan became one soon thereafter. As the years passed, other countries became big buyers. When Saudi Arabia discovered it was sitting on an ocean of oil, it could think of no better way to save its excess dollars than by parking them in T-bonds, backed by the full faith and credit of the USA. After China abandoned government ownership of all businesses, it rapidly became a net surplus economy as well. And it, too, invested its extra dollars in US Treasury bonds.

Which is why you’ve probably heard some people say that the US dollar (and, actually, the American economy) has been supported in the last two decades by Germany, China, and Saudi Arabia.

But surpluses come and go. And about 6 years ago, China changed its priorities vis-a-vis saving its surplus wealth. It continued to buy Treasury bonds, but it also began to buy large amounts of gold. And perhaps more importantly, it began a massive investment in its own infrastructure and overseas ambitions.

“Luckily” for our government, large financial institutions (and particularly hedge funds) began buying (and trading) billions in US debt at the time. This increased the supply of dollars bidding for the T-bonds and, thus, kept the rates down to reasonable levels.

But in the last year, this supply of dollars diminished. That, and the continuing reduction in demand from China, put the Treasury in a terrible situation. If the supply got too small – less than the demand for dollars (our deficits) –  it was possible that the Treasury couldn’t keep up with its payments. That would mean a literally bankrupt USA. And that would mean the end of the world’s economy, as we know it.

In Greek tragedy, the hero is sometimes saved by a deus ex machina – i.e., an intervention by the gods. For America, that came in the form of the Federal Reserve. To make up for the reduced demand from bonds from our traditional buyers, the Fed began buying bonds itself.

Now you may be wondering how the Fed can afford to buy bonds. After all, it is a semi-autonomous central bank that is required by law to balance its books.

Here’s how Tom Dyson explains it:

“The Fed doesn’t ‘inject’ money supply into the economy. Instead, it ‘trades’ it or ‘swaps’ it via transactions with the entities it’s giving the money to. So, for example, if the Fed wants to give the government some fresh money, the government must give it some Treasury bonds. If the Fed wants to give a bank some fresh money supply, the bank must give it something in return.”

It’s called “quantitative easing.” And that’s how the Fed balances its books. It sits on a pile of collateral representing every dollar it has printed and “traded” for something.

Tom again: “Basically, the Fed is a bank that makes huge loans and takes collateral. And the collateral serves as its capital base.”

That is all good and dandy so long as the Fed can unwind these trades when the economy has stabilized by returning the collateral and receiving the dollars back. But recently, the Fed has moved into uncharted territory – making loans whose collateral is questionable, at best. For example, the Fed has recently started accepting the equivalent of junk bonds as collateral. There’s even talk of the Fed purchasing equities with its printed money.

Quantitative easing, as it was done after 2008, was a way for the Fed to help the banking system and lift the stock and bond markets. Back then, the Fed was giving dollars to banks and helping them grow. This was great for the banks and for Wall Street, but it wasn’t good for the economy because the great majority of those QE dollars remained within Wall Street.

About a year ago, the Fed began doing something it hadn’t done since April 1942. It agreed to monetize the government debt. The government’s need for dollars was at all-time highs. But because the usual buyers of T-bonds (foreign countries and, more recently, hedge funds) were reducing their buying, a crisis developed in the Repo Market – a critical market where the government finances itself with short-term loans. There was a “shortage of dollars,” as many analysts put it. A dangerous thing.

So what the Fed did was step into the gap and start buying T-bonds. Billions and billions of T-bonds daily to prevent interest rates from skyrocketing, which would then skyrocket US debt payments and put the Fed on the verge of bankruptcy.

As Tom put it:

“There are no more lenders. So the Fed is now being forced to assume the role of ‘lender of last resort’ to the Treasury… financing the US twin deficits and monetizing the Treasury’s debt. All with printed money!”

Quantitative easing is problematic for many reasons, but it didn’t erode the value of the dollar after 2008 because the stock market went bullish and stayed bullish until this year. The world and its economists, its politicians and its journalists took the rise of the stock market and the modest (3%) rise in GDP as a sign that the US economy could be trusted again. But what the Fed is doing now is different. It is not trying to save Wall Street. It is trying to save the Treasury itself. As Tom put it, this new strategy is “Project Argentina.” [See “Worth Reading,” below.]

On Friday, I hope to finish this series of essays on The Corona Economy. I’ll talk about how this new desperately-seeking-recovery strategy will put our government in an impossible situation that can only be resolved by a miracle or a long and devastating economic depression. And how you can both gird yourself against economic disaster and, at the same time, invest in the miracle that could be.

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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.

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“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 29th 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.

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“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.

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“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

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“The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.” – Winston Churchill

Corona Crisis: Business Survival Tactics 

I’m reading a lot about how to stay busy during the shutdown. Practice meditation and yoga. Catch up on old movies. Learn a foreign language, etc.

If I were retired or happily unemployed, that’s what I’d do.

I don’t have that option. Like almost all the businesspeople I know, I’m working as hard as I can ever remember working.

And with good reason. We are in a crisis. A pandemic-triggered, macro-economic, business-demolishing crisis that has already killed 10,000 people, shuttered and/or bankrupted thousands of businesses, and put 15 million workers on the dole.

My guess is that the virus won’t end up being as deadly as many fear. But my fear is that the economic repercussions will be great.

The business outlook is grim.

Since March 1, the restaurant industry has lost more than 3 million jobs and $25 billion in sales, and roughly 50% of restaurant operators anticipate having to lay off more people in April.

Three out of five small businesses cannot conduct business remotely. And that’s probably why, on March 26, 74% of small businesses polled by the National Federation of Independent Business said they are being negatively impacted by the Corona Crisis. Just two weeks earlier, the equation was reversed. At that time, 75% said they were doing well.

Trimming the fat is important. Making sales is more important.

In my April 1 blog, I talked about how, despite my instincts and objections, I agreed with some of my partners – particularly in restaurant, hotel, and apartment businesses – to slash every dollar of unnecessary expense and to put some non-essential employees on furlough.

My brother, in whose real estate business I have invested for many years, has done that and more. He has put off improvement and expansion projects, furloughed non-essential employees, and asked those that remain to take on more responsibility. His hotel managers are manning the welcome desk. His apartment managers are selling leases.

He’s also reducing debt expenses by negotiating terms with banks. He’s put in nine applications for the government payroll programs, and he’s applying for additional small business loans.

This is a downside of the hotel business that neither of us anticipated. His plans for surviving market downturns and even extended recessions were predicated on occupancy reductions of 15% to 50%. We never even imagined a scenario where you have virtually no customers. That wasn’t the case even in the Great Depression.

So he’s doing everything he can think of in terms of expense reduction and loans. But he’s also looking to buy triple-net leases and sell them to his investor base. A year ago, a good deal might get you 4%. Today, he’s finding properties that are yielding 6% and 6.5%.

None of these efforts individually would have been enough to keep these businesses running. He and his executive team have had to work doggedly, tirelessly, and creatively to cover cash flow obligations through the rest of the year,

And even if business gets back to normal in 2021, he’ll still be dealing with a considerable debt load that will take him years to pay off.

If you are in the supermarket, alcohol, or delivery business, your sales are probably doing fine. The online publishers I work with haven’t yet seen a drop-off in revenue.

But they are not relaxing. Rather, they are working furiously to keep sales going. They are completing marketing campaigns that once took months in weeks or even days. Our legal and compliance teams are working overtime to get those advertising campaigns approved and out the door. And so far at least, all those extra efforts are paying off. About 75% of these online publishers have maintained their previous revenues. The other 25% are actually doing better than before.

You Don’t Know What Your Customers Want 

It makes sense to imagine that at a time like this the last thing consumers want is to buy products and services that are not essential. They should be saving their money to pay for staying alive. They can start buying your products again next year, when the threat of COVID-19 has receded.

That has a certain logic to it. But it’s not how consumers are responding now. For just about every industry where consumers can keep buying, they are. That may change. But for the moment, we need to keep that in mind.

The Good News About the Current Business Environment 

When things get as scary as they are today, the brain’s reptilian and emotional representatives begin arguing. The reptilian rep wants to fight or flee. The emotional rep worries about the damage either action will cause and blames the reptilian rep for causing the problem in the first place.

These conversations are loud and boisterous – so loud and boisterous that they make it impossible for the representative from rationality to get a word in edgewise.

I am happy to know that most of my partners and key employees understand that. They have all made plans for a serious drop in sales, but they are also pushing hard to optimize their sales and marketing.

And there are good reasons for them to be optimistic.

* The cost of media is dropping fast. 

If you are a digital marketer, you’ve already noticed that the cost of advertising on Google (PPC) and Facebook and other social media platforms is coming down. The main reason for this is that there are far fewer companies marketing now. As the demand for ad space goes down, so does the price of it. I’ve been told that the same thing is happening with TV and radio advertising. Less competition and lower prices sounds like a good thing. Don’t you agree?

* The demand for many products is still strong. 

The publishing businesses I own or consult with sell books, magazines, and newsletters. The topics range from business to travel to health and to investing. In February, when we began talking about options for dealing with impact of the Corona Crisis, we expected to see sales drop and refunds soar.

They didn’t. In fact, there has been little to no fall off on either front-end or back-end sales so far. Three of my clients have seen increased sales this first quarter. Most are seeing steady sales. For some, sales are dropping – but only by 10% to 15%.

There is a logical explanation for this. Most of them are publishers of health, business, and investment information and advice. One could argue that at times like this, consumers want more information and advice from sources they trust. I do think that’s what’s happening here. But I do not believe that these businesses are immune to the Corona Crisis. I have advised them that if the economy stays in lockdown for more than another month or so, they should expect the honeymoon in sales to end.

The main point is this: We considered the cost savings we’d get by reducing our ad spend but decided to continue for a few more weeks, and were rewarded for it.

But the larger decision to keep selling isn’t the only thing we are doing. We are also trying to figure out how to attract new customers and possibly capture market share during this time when so many of our competitors are standing aside.

* New opportunities are emerging. 

 Several of my colleagues in the information-marketing world, for example, have launched crisis-focused publications that talk about how the crisis is affecting their particular industries, with specific advice on how to respond.

A friend of mine in the furniture business has been advertising year-long, zero-interest payment plans. He tells me it’s working. In fact, he says, sales in March were higher than they were last year. (This is also something the car industry is doing.)

I’ve received several notes from legal firms I work with, offering to take care of any estate-planning “issues” I might want to address. And notes from accountants offering to help process government loan applications for me. (I might have seen such efforts negatively if they had come from firms I didn’t already know. But since they came from trusted sources, I took them as helpful and replied to some of them. Good for them and good for me.)

During the bull market that ended with this crisis, big companies and brands grew tremendously, as you’d expect. Small businesses did, too. But at times like this, small businesses have an advantage over their larger competitors. They can move more quickly – adapt and innovate to not just maintain revenues but also increase them by capturing bits and pieces of the market from the big guys.

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“Quick decisions are unsafe decisions.” – Sophocles

Tough Decisions 

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

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

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

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

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

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

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

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

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

What can we do now? 

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

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

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

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

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

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

Consider the rental real estate business 

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

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

And that limit is when we run out of money.

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

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

So what are we going to do? 

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

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

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

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

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

These are a few of the actions we are taking:

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

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

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

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

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

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

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

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

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

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

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

Hope for the best. Plan for the worst.

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