COVID-19 Markets Update

I’m going to keep my financial market commentary fairly brief this week. I am still of the view that this situation gets worse before it gets better (both in terms of the underlying pandemic as well as the impact on markets). Last week was an almost calm week relative to what we’ve experienced over the last month. We had index swings of “only” 3-5% and the VIX dropped off a bit and spent much of the week in the 60s. We should consider any interruption to the free fall a victory. Over the past month we have experienced a massive system shock, a huge correction in every asset class, and a subsequent throwing of the proverbial kitchen sink at the problem by all central banks on earth. We now know (as we had assumed before) that central banks will stop at nothing to try to avoid calamity. Whether or not it is enough is anyone’s guess at this stage.

One thing which has become somewhat simpler over the last week (and not many things have) is that correlation between the real world and the financial world is now extremely high (just as correlation between asset classes has increased). You can almost be certain that a deterioration of the situation in the real world will lead to further deterioration in the financial world. There is no universe where this outbreak causes full-scale havoc in the US without being accompanied by full-scale havoc in financial markets. Last week one of my game-changers was a significant deterioration of the situation in the US – I think that is just about upon us now.

So for those continually asking me to answer the impossible question of “when does this bottom out”: In my humble opinion, as I have said from the start, that will only happen when we see significant positive improvements in the battle against the pandemic. Unfortunately we haven’t had any so far. I was deeply disappointed by the numbers in Italy towards the end of this week. I had desperately hoped that we would have seen some positive results by now. I am still optimistic that we will, but we will need to wait another week at least before see the daily rate of deaths stabilize.

That’s it from a markets point of view. I could bore you with further deterioration in the credit markets, further escalation of the oil war, the largest sell-off in sterling in 30 years followed by a sharp recovery, etc. The bottom line is: Markets are still a mess, and I don’t expect that to change quickly. I would however like to share some random thoughts that I had this week. These aren’t necessarily positive or negative, they are just food for thought:

1. NHS: I am immensely proud of the NHS and their equivalents. We are being asked to stay home while thousands of workers are fighting this battle on our behalf. They are our modern-day warriors, risking their lives around the clock. It is hard to not draw a parallel with soldiers going into war.

2. The count is now 300,000. The latest 100,000 cases took just a few days to rack up. In a normal year 5-8% of the global population contracts flu. Yet we don’t report that 500 million people got the flu. Also, 190k are infected, but 110k have recovered. I wonder whether we shouldn’t at least just report the infected numbers only. Do we need to try make these numbers seem worse than they are? It also seems to me that any patient who contracted Corona and passes is labelled a Covid-19 death. Yet this time last year if a diabetic or cancer patient who has had underlying health issues for years died of flu, it would not have been labeled a flu death. As horrid as this pandemic is, we need to remember that Covid-19 is essentially a “finisher” more than a “killer”.

3. Testing: We are going to see numbers spike massively next week. Particularly in Germany and the UK. Why? Because those 2 countries are massively scaling up testing. We are absolutely under-counting global cases right now, no doubt. But there will be some panic when we start establishing just how many cases there really are. The flip-side: the implied mortality rate will come down. And obviously there is a huge benefit to testing as it makes it easier to fight this battle. Italy has a mortality rate of 8% – that tells me that a) they aren’t testing enough, and b) they probably had a mass pandemic long before they were aware.

4. Health systems are under strain: Hospitals in certain regions of extremely well-run countries with solid health systems are reaching capacity. That is alarming. But when you look at the numbers, take Switzerland as an example: 6400 infected, 6300 in mild condition, 100 in serious or critical condition. Are we missing a trick here? Surely a huge percentage of the 6300 shouldn’t be taking up hospital beds at all. Hospitals will be forced to get more selective. Unfortunately, that spells doom for the elderly with pre-existing health conditions (who are already not being prioritized). But equally: There comes a point where hospitals need to turn away the healthy 26 year old male with no underlying health conditions (one of the 6300 mild cases). The 26 year old healthy male has a 90% chance of making it at home. Then there’s the 42 year old with mild asthma who likely won’t make it at home but almost certainly WILL make it in hospital. Surely he gets a bed? Tough decisions are already being made (we know that from Italy), but they are likely to become even tougher over the coming weeks. Hospitals will need to allocate beds on the basis of maximising survival rates overall.

5. Treatments/cures/vaccines: A lot of you have asked me whether I have a summary of what progress companies are making. I am attaching a summary courtesy of JP Morgan (who I am certain will have no issue in anyone spreading uplifting information at a time like this). Can any of you envisage turning on the television at some stage in the next few months and hearing some amazing news from one of these companies? I can. Let’s keep our fingers crossed.

Let’s hope that next week we will have better news. It is easy to be pessimistic and downright apocalyptic at times like these. But we all need to be positive. I firmly believe that we will get out of this in the next 1-2 months. Enjoy your time at home. Catch up on things you didn’t have time for in the last few years. 90% of the economically active are now sitting at home on couches, yet we need productivity and ingenuity more than ever before. Spend some time figuring out how to help friends who own SME’s, offer assistance to your local community, trust and support your government, spread positive vibes instead of alarmist articles that create more panic (nobody is in need of a more vivid picture of gloom right now), and most of all do your bit to protect your parents and the elderly and vulnerable in your family and community. If it isn’t clear by now: Their number one objective in life for the next few months is to dodge this thing.