Well done everyone, we flattened the curve and COVID fatality rates are falling! However, economic freedoms and mobility remain constrained as localized government restrict economic activity. This prosperity delay will undoubtedly create frictions as Americans yearn to recover their livelihoods. The acute phase of the economic crisis has passed, but the tension between businesses and institutional authorities will determine the speed of the economic recovery. The Fed, President and Congress appropriately sized their support measures for the “isolation to flatten” phase, but they have not diagramed out support for the “find a vaccine” phase. Should policies continue restricting economic activity while we await a distributable vaccine, things will get more complicated, more acrimonious, and much more expensive. Expect markets to gyrate within a range until our public institutions and our private citizens reach agreement on how, and how fast, business will resume.
We did it! We flattened the curve. The dire forecasts for hospitalizations and respirator shortages have gone unrealized. In early March, the often-cited Health Affairs Journal estimated that due to the rapid spread of the coronavirus, infected patients would require 1.7 million hospital beds, 274% above existing bed capacity. Fortunately, we never came close to those projections. According to the CDC this morning, New York hospitals have a 32% vacancy rate, New Jersey hospitals have a 38% vacancy rate and California hospitals have a 40% vacancy rate. Barring a much larger second wave of infections, our vigilance has saved the healthcare system, and therefore its ability to save us! Overall, the most important measure of progress in our war on COVID isn’t test counts, case counts, or hospital utilization – it’s daily fatality rates. This measure captures the efficacy of all collective efforts to save lives. At the peak on April 16th, COVID complications killed 4,928 Americans. Yesterday 1,746 lost their lives. To visualize this and substantiate this deceleration, I have included a country comparison using a 7-day rolling average below:
In summary, not only have we flattened the curve, but we have also reduced daily fatalities by about 50% from the peak. Meanwhile, rising summer temperatures, robust transmission preventions, improved treatment protocols and promising vaccine developments should further curtail the COVID threat. Now that we have flattened the curve, and halved our fatality rate, can we rebuild our economy?
The Asian Flu of 1958 killed the equivalent of roughly 200,000 Americans today… approximating the median estimate for COVID. Economically, US GDP fell 10.4% in the first quarter of 1958 as citizens and businesses isolated voluntarily. Heartened by declining case and fatality rates and a vaccine that worked roughly 50% of the time, consumers quickly returned to consuming, lifting third and fourth quarter GDP 9.3% and 9.4%, respectively. By the end of 1958, US GDP hit a record high.
The Hong Kong Flu of 1969 killed the equivalent of roughly 200,000 Americans today… approximating the median estimate for COVID. Economically, US GDP never fell during the outbreak, although a shallow and perhaps unrelated recession followed in 1970. Nonetheless, GDP by the end of 1970 stood well above where it ended in 1968. A vaccine for the Hong Kong flu did not become prevalent until after the disease ran its course.
One can only conclude, based upon these two modern-era pandemic comparisons, that without intervention, US economic actors move quickly to restore household prosperity once acute viral threats have passed. These V-shaped economic recoveries resulted from millions of voluntary decisions balancing health and economic risks individually, rather than collectively. V stands for voluntary.
This week, I cracked open the often referenced “Roadmap to Pandemic Resilience, massive scale testing, tracing, and supported isolation (TTSI) as the path to pandemic resilience for a free society”. This operating manual for re-opening the US economy cites the following as requirements:
Essentially, to ensure a safe and resilient economy, we must expand testing from 325,000 people today to 20 million+ people per day by August. If negative, the tested will receive a digital “all clear” certificate on an app that will enable them to move freely about the economy until being retested, optimally, twice a week (requiring 36 million tests per day). If positive, the tested will need to quarantine for 14 days and cell phones that the tested came within 6 feet of recently would receive an exposure alert, prompting an immediate test. By testing and tracing we will theoretically know everyone who has had or might have COVID and we can test them, trace them, clear them, or isolate them. Johns Hopkins recommends that we immediately hire 100,000 people to help with contact tracing. Meanwhile, local governments and health departments have drafted requirements and recommendations for businesses to help lower the R0 ratio that measures disease transmission strength. An R0 of greater than 1 implies rising infectious rates while an R0 of less than 1 implies falling infectious rates. Currently, Shelby County Tennessee (where I am typing) has an R0 of 1.14. In response, the Shelby County Health Department has issued a 15 Page Directive on how to conduct social and business affairs responsibly. The Occupational Safety and Health Administration (OSHA) has also prepared a 35-page handbook on safe workplace standards to assist business owners with compliance. CDC and WHO have similar playbooks to help businesses protect those in contact. Essentially, you may or may not open your business depending on the type of business, you may or may not serve a full clientele depending on your business, you must provide PPE equipment and alternative work solutions for employees to reduce the R0 and you will be subject to inspection and possible closure for recklessness or non-compliance. If you see something, say something. In Memphis, just dial 311.
This week, Elon Musk directly violated Alameda County’s stay at home order by reopening the Tesla plant. Alameda acquiesced. Shelley Luther, a salon owner in Texas was arrested last Tuesday for illegally opening her hair salon. The Governor effectively pardoned her and accelerated the reopening timeline for Texas hair salons. Shelley has raised over $500,000 on Go Fund Me and has started a non-profit organization named “Courage to Stand” to advocate for small businesses suffocating under well-intentioned rules and requirements. Countless stories of desperate small business owners fighting for freedom have followed, with more assuredly on the way.
On July 30, 2020, 2nd quarter GDP figures for the US economy will be released. Currently, the Atlanta Fed estimates a GDP decline of 44% after a 4.9% decline in the first quarter. These numbers calculate to an overall inflation-adjusted GDP loss of $2.3 trillion for the American economy… or over $7,000 per American citizen. An American family of four has therefore seen a statistical prosperity deduction of over $30,000. Should fear and forced closures continue, the stimulus splurges from our government will need to grow much larger still. The House Democrats passed legislation for another $3 trillion in stimulus on Saturday, forcing the Republicans to counter shortly. President Trump added his support for further support. However, I suspect cries from the governed themselves to restore individual economic freedoms will grow noticeably louder, forcing policy makers to concede, and as they do, economic estimates will rise…. as V is for voluntary.
Have a great weekend!
David S. Waddell
CEO, Chief Investment Strategist