I’m breaking my self imposed rules again and wondering aloud about the virus and it’s path.
Today my focus is on stuff we don’t like to talk about but maybe might have an impact on the way we think as investors.
  1.  What happens if you we can’t develop a vaccine for a number of years?  I hope we can, and think we can but hope is not the same as hard science and engineering. If that is the case the only path to safety is either complete eradication of the virus or some form of herd immunity?
  2. What happens if we can’t eradicate the virus? Maybe there are completely symptom less super spreaders out there who will never be detected? Maybe one or a number of countries refuses to eradicate and goes for herd immunity. Do we close all access to these countries?
  3. What happens if we scare people so much that they refuse to effectively come out of isolation? The Times ran a story a few days ago that upwards of 28% of people don’t think we should end lockdown even after passing the five tests. Today it ran a story that litigation by scared or infected employees will mushroom. Might we have done too good a job of scaring people ?
  4. Might these attitudes contrast with emerging  numbers which suggest that the fatality rate is actually around 0.5%?? That makes this a very nasty virus – much worse than a bad flu – but not quite the absolute disaster we first imagined?
  5. Testing and tracking is all good and well but in an open world it might never work completely. What level of deaths and infections is ‘enough’? And if we want that as low as possible is the corollary that we end the open world we have grown used to have and keep borders shut New Zealand style? But what will be the economic and social cost of this measure?
  6. If globalisation does go into reverse at what point will we all realise that despite its vices it also had many virtues?
  7. Might a second wave cause huge economic damage but perhaps more importantly cause massive social upheaval as many revolt against new lock down measures?
I don’t really know the answers to these questions but they keep nagging away at my internal thought processes.
On a practical point my sense here in the UK is that we probably won’t see any meaningful relaxation until after the next three week cycle which takes us to early June. Then we might see baby steps every few weeks before say a 50% opening by September. But even then I think we can forget most international travel except for essential stuff. My sense is big public events will remain closed until at least the end of the year.

Charts Extravaganza!

Charlie Robertson, chief economist at Renaissance Capital has  come up with a smart way of looking at how the pace of infections for Covid 19 is slowing or growing in different countries. He’s been looking at the % of new daily cases that are testing positive.

According to Robertson, “if the figure is low (ideally less than 5% which was the peak Korea saw), then you can guess there is not a lot of virus around. I assume that the tests will be done on roughly the same sort of people in every country, ie those turning up at hospital”.

The next three charts below use this analysis to map out different parts of the world.

First off, we have analysis at country level, with an emphasis on the developing world. Using this analysis Robertson reckons that emerging Europe and South Africa are looking good relative to Latin America and could justifiably ease lockdown, especially if the goal is Danish style “flattening the curve”. Worse news in the data for Nigeria and Pakistan, as well as Senegal.

On this basis, the UK looks to be in better shape than much of the negative media coverage would suggest. Sweden by contrast might be running into a few problems.

Next up Robertson turns his analysis to different states within the US – echoing an analysis the Economist magazine ahs also been developing in recent days.  On this basis it might be worth avoiding not only much of the South but also Delaware, Nebraska, Iowa, DC, Kansas and Wyoming.

Bear markets over the last 150 years

SocGen quant analyst Solomon Tadesse this week put out a great little paper entitled “Beware of the oddity in this bear rally: lessons from 150 years of markets”.

This has done the work that many of us have wanted to do for the last month. He has delved deep into the annals of market history and looked at 150 years of bear markets.  His main observation is that “a recovery from a bear market bottom, both cyclical downturns and sudden market crashes, has often been gradual, with frequent adjustments along the way, reflecting the weight of uncertainty surrounding economic recovery out of the ashes of crises. In that respect, the ongoing surge in global markets strikes as an oddity, even after factoring in the massive bridges of support from monetary and fiscal stimulus. Based on an exhaustive analysis of bear markets of the last century and half, under the most conservative scenario – that the market has indeed reached cyclical bottom in the March sell-off – the S&P 500 would finish at about 2715 by year-end, a 7-8% cumulative correction from the current level of 2,939.”

More to the point the chart below confirms what most of us have suspected – that the peak to trough decline in most extreme bear markets needs to be between 40 and 60%, with 50% about right. The latest sell off does not even get remotely close to those levels.