April 23, 2020
The Battle between Science, Economics and Politics
We are hearing a dizzying array of facts and opinions about the threat of the Covid-19 Virus (Virus) and how that should factor into reopening the economy. We will attempt to set forth herein a summary of information we obtained from our various sources of research, in order to help supplement the reader’s current understanding. It also sets the template that informs RPg’s macro view of the situation, which helps guide our investment decisions for the TAG strategies.
According to the CDC and an Oxford University study, approximately 50% of the people who get the virus (infected) don’t know they have it because they have no symptoms (asymptomatic); another high percentage have symptoms similar to a cold or flu– they don’t feel the need to call their doctor and a few days later they are better. Based upon the hypothetical estimated number of people actually infected (see PROBABILITY following), the percentage of people who have more severe symptoms such that they get tested is approximately 1%.
Because of the aforementioned symptom experiences, studies from Stanford University, Oxford University and epidemiologists at Johns Hopkins University have suggested the real number of people who have had the Virus is between 50 and 200 times the number of “confirmed” cases. If we use the mid ranges of their estimates, 85 to 100 times, and apply it to the number of confirmed cases in the US of 746,625 (per CDC as of 4/21/20) we get a potential 63,463,125 to 74,662,500 infected. If we divide that by the total US population of 328.2 million (2019 US Gov.), we get a hypothetical probability of 19% to 22%.
According to the CDC with data through 3/30/20, these are the rates per 100,000 people by age group.
Age/Rate: 0-4/0.3; 5-17/0.1; 18-49/2.5; 50-64/7.4; 65-74/12.2; 75-84/15.8; 85+/17.2
The total number of hospitalizations represents approximately 0.14% of the US population. This is calculated using the CDC’s overall hospitalization rate of 4.6 per 100,000 people relative to the US population of 328.2 million. In New York City (NYC) through 4/19/20, as reported by New York State, there were 35,746 hospitalizations. Per Wikipedia, NYC’s 2018 population was 8,398,748. That implies a hospitalization rate of 0.42%. Given that NYC is the epicenter of the Virus and 4/19/20 could represent the peaking period, it suggests the implied national rate of 0.14% may be reasonable.
Per the CDC through 4/21/20 there were 39,083 deaths. If we divide that by the estimated 63,463,125 to 74,662,500 people that may be actually infected, we get an implied mortality rate of 0.06% to 0.05%. The mortality rate for the ’19-’20 “flu” season is 0.12% (per CDC). However, because these are significant hypothetical estimates, there are many in the healthcare field that don’t want to rely on them until they can get their confidence level from massive testing.
The evidence is very clear and generally well understood. Per the NEJM study of cases through 3/28/20, 94% of deaths had one or more underlying conditions (comorbidity), the vast majority which were: diabetes, chronic lung disease, cardiac disease. Per The Hospitalist for New York State through 4/6/20, 86% had at least one comorbidity, the vast majority of which were: hypertension, diabetes, hyperlipidemia, coronary artery disease.
Therefore, to date, it might appear that getting “infected”: (a) is a low probability, (b) would generally result in no to mild sickness, (c) means hospitalization and mortality is a very small percentage and significantly limited to older, comorbidity persons.
It doesn’t take an economist to understand that when we shut down large portions of the economy, we will get depression like numbers. The social science is also clear that such levels of economic decline have their own costs in human lives: suicide, domestic violence, drug and alcohol abuse, destroyed families, increases in crime.
So, there is a tug of war between the risk to human life from the virus versus from economic devastation. In order to make that decision, there needs to be an understanding of the relative risks. Clearly the early warnings of death estimates from the virus were horribly incorrect, primarily due to faulty assumptions in the models due to inadequate infection rate numbers. Clearly the economic costs are apparent to millions of small businesses and 22 million unemployed. There is also the devastation to millions of retirees whose retirement funds could decline by 25% to 40% from a depression era stock market decline and earning only 1% or less on their remaining funds.
We discussed “political risk” in our 2020 OUTLOOK. The arrival of an exogenous shock (which we also discussed) has certainly elevated the risk that some might seek to exploit it for political gain, irrespective of the damage to millions of Americans. The politics can be clouded by legitimate public health concerns just as those concerns can be clouded by politics.
Now that the economy is officially on course to reopen, the resistance to that will come from both directions. Currently it is in the form of the call for “testing” as the criteria for reopening the economy; some are insisting on testing at least 20 to 30 million people before we can even consider opening. That is “moving the goal posts”. The economy was shut down on March 15 for a period of 15 days with the singular expressed goal to “bend the curve” so as to not overwhelm the hospital system. When it was clear the peak of infections might not occur until mid- April, the shut down was extended to April 30th. It is very hard to get information on hospital capacity for the Virus. However, we can look at the above hospitalizations for NYC (the Virus epicenter and arguably the largest and densest population concentration in the country) at 35,746 and compare that to Gov. Coumo’s estimate in late March that they would need 110,000 beds (it should be noted that two days ago the President and Gov. Cuomo announced the Navy hospital ship COMFORT was leaving NYC as it was no longer needed). At the White House Task Force April 20th briefing, the Army Core of Engineers (ACE) Gen. Semonite stated that there is now excess capacity in many of the states where the ACE built new hospital capacity. We have also seen a tremendous public/private partnership to ramp up production of a myriad of medical supplies, which continues to grow exponentially. In the hotly debated issue of ventilators, no patient needing one has been denied; Gov. Coumo was calling in late March for 30,000 ventilators; NY needed only 7,000 and they got them; the NY hospital system is now offering to lend out excess ventilators to other systems. So, the reason for the shut down appears to have been accomplished.
There is also another more subtle moving of the goal posts. The reopening Phase One describes the “vulnerable” demographic as those with among other conditions, obesity. Previously this demographic was described as “at risk” and, as noted above, obesity was not only not one of the major comorbidities, it was not included at all. Unfortunately, America’s problem with weight has and may be around for a long time (that’s assuming you agree with the government’s definition of obesity). Keeping the economy shut down might be better replaced with free memberships in any of the many diet programs!
Finally, some scientists were quoted in the 4/18/20-4/19/20 WSJ suggesting we can’t have fall sporting events with fans because it only takes one person in attendance to be infected and that will infect so many others. So, here is another new standard, no large group gatherings until there is no longer any infection. Even with a vaccine, that will not eradicate the infection, nor will it guarantee everyone will chose to get the vaccine. Per Wikipedia, only 29% of Americans in 2018 chose to get the “flu” vaccine.
We believe the American people will in large part decide when and how fast the economy opens. There will certainly be some fear hangover from two months of forced consumption of virus information. However, we believe as the true facts of the virus’s risk to the average citizen become increasingly understood and as personal experience reinforces that understanding, Americans will return to life as normal. We did after the 2017-2018 flu season which had 61,099 deaths and 959,000 hospitalizations; in fact, we never stopped life as normal!
We also believe the economy may grow as fast in the 4th quarter as it declined in the 2nd quarter. Why? Because the decline was government induced and the reopening is government induced, both aided by unprecedented fiscal and monetary support.
The TAG and RPg strategies are positioned with maximum allocations to growth through tactical buys and holds during the market decline.
Important Disclosures:
Risk Paradigm Group, LLC (RPg Asset Management or RPg) is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC). Tactical Allocation Group (TAG) joined Risk Paradigm Group, LLC and became a division of the firm on July 22, 2016. Additional information regarding Risk Paradigm Group, LLC can be found on our website at www.rpgassetmanagement.com. RPg does not provide tax or legal advice. Please consult an independent tax advisor for additional guidance.
This material has been prepared solely for informational purposes and is not to be considered investment advice or a solicitation for investment. Performance provided is past performance. Past performance is not indicative of future results. Investments may increase or decrease in value and are subject to a risk of loss. As with any investment strategy, there is potential for profit as well as the possibility of loss. No representation or warranty is made that any returns indicated will be achieved. Investors should consult their financial advisor before investing.
Any projections, market outlooks, estimates or expectations of future financial or economic performance of the markets in general are forward-looking statements and are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Actual results or events may differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements. Information contained herein is as of the period indicated and is subject to change. Any views expressed herein are those of the author(s) at the time of writing and are subject to change without notice.
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References to Indexes: The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the equity performance of larger companies in the U.S. Please note that an investor cannot invest directly into an index.
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Sources: Bloomberg, CDC.
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