Litany against Fear
I must not fear.
Fear is the mind-killer.
Fear is the little-death that brings total obliteration.
I will face my fear.
I will permit it to pass over me and through me.
And when it has gone past I will turn the inner eye to see its path.
Where the fear has gone there will be nothing. Only I will remain.
(from Frank Herbert's Dune)
Hoping this finds you healthy in mind, body, and spirit - as much as circumstances allow.
We wanted to share what we've learned this past week. A summary of what follows:
As described in our last note, Fielder's model had forecast that Italy’s curve would peak last week. Indeed, that appears to be the case ...
This is less an indication of our forecasting skills than it is a reinforcement that our simple framework for modeling the virus's progression based on observed deaths is approximately correct. This, in turn, increases our confidence on the USA, which our model suggests is on course to peak within the coming week in terms of overall deaths.* This is not a unique view, as most others, including NY Governor Cuomo, have similar forecasts. Indeed, the number of new hospitalizations and COVID-19 deaths in New York appear to be leveling based on the past few days' data.
This week our perspective expanded thanks to two experts we trust: Dr. John Ioannidis and Dr. Peter Attia. Separately, they are advocating something critically important: We simply do not have good data on the true fatality rate. (Another way of saying, we do not know the denominator.) Although we already knew this, Ioannidis and Attia helped us appreciate an important nuance.**
Heretofore, we have been focused on when the curve flattens. Now we know that the curve appears to have flattened in Italy and might be beginning to flatten in the US. (Fingers crossed!) This, however, only informs us on the near-term. We cannot yet be rationally pessimistic or optimistic about the longer-term outlook. The reason is that we don’t have good data on what the true fatality rate is. If it is high, the number of deaths to date implies a very small percentage of the population has been infected with the disease. That likely means a long – or at least recurring – pattern of off/on shelter-in-place. And thus, it will be a continued brake on our economy.
If, however, the fatality rate is much lower (as Attia and Ioannidis counsel it might be), this implies a large percent of the population has already been exposed to the virus.*** Which means it would likely be safer than many believe to jump-start our normal lives and economy.
Today we do not know whether 2% of the population or 40% of the population has been infected by the virus. Knowing whether it's 2% or 40% would make huge a difference in rational public policy. Likewise, it would key to positioning our portfolios. At this time, investors simply do not have sufficient data to be rationally bullish or bearish.
The solution that Attia and Ioannidis both espouse is to conduct randomized testing on a broad population. From this we can infer the true infection rate and death rate. From that, we can infer what percent of our population has been exposed to the virus. That knowledge will give policy makers the conviction necessary to make critically important decisions. The same goes for investors.
To be clear, we are focused on gaining conviction on the long-term outlook, not the short-term. Obviously, the virus is horrible for the economy in the near-term. Markets, however, are forward-looking. If we ultimately gain conviction that economic activity largely returns to normal within a few years, our outlook will be positive. We’d want to own more stocks at these lower prices. If, however, we ultimately believe we’ll see a recurring bout of on-again, off-again shelter-in-place orders for the next year, our outlook and positioning will become more cautious.
Only randomized tests of large populations can give us the data necessary to know. We are thus keeping a keen eye out for news of such tests being done anywhere in the world. So far we have clues from relatively widespread testing in places like Iceland, Korea, cruise ships, and specific cities within Italy and Germany. Please share any such information that you come across on the subject.
What We Do Know
What we do know is that central bankers and politicians will do whatever it takes to fight rising unemployment or falling prices (consumer prices or asset prices). The Fed has dramatically increased its purchases of government bonds and is now buying even corporate bonds. Why stop there? Yesterday, former Fed Chair Janet Yellen suggested the Fed should be allowed to buy stocks as well. (The Bank of Japan does.) You can’t make this up. It is truth stranger than fiction.
Congress passed a $2 trillion stimulus package. It will not be the last. People are hurting financially. Many can’t afford their next meal. The businesses that employ them are failing. It is the greatest economic threat of our lives. Washington will stop at nothing to mitigate the damage. Get ready to see fiscal and monetary activism that none of us heretofore conceived possible. Certainly, it will have consequences – some intended, some unintended.
“We are neither a feeble society nor a feeble economy,”
So declared Vernon Smith, a Nobel Laureate in Economics, in yesterday’s Wall Street Journal (“The Economy Will Survive Coronavirus”). We too are bullish on the resilience of innovative people everywhere, particularly in America. Despite this optimistic bias, we are realists. None of us yet knows the nature of the changes seeded by the virus these past weeks. We can only observe carefully the changes that we see unfolding and invest accordingly. This is our best chance of avoiding the mind-killer of fear.
We value our dialogue with each of you and look forward to sharing our thoughts as they evolve/change with better data and frameworks. All we ask in return is that you share differentiated or contrary thoughts that might come to you.
To brighter days ahead!
Frank Byrd, CFA Steve Korn, CFA
*As we emphasized in our prior note, all models are wrong; some models are useful. Ours has been useful in helping us have a better sense for the path and dynamics of the virus’s spread. We view our model’s utility as less predictive than helping us be better observers.
**Listen/read for yourself…
Dr. Peter Attia:
Dr. John Ioannidis:
Video interview (long but worth every minute)
BTW, Ioannidis was one of the first to blow the whistle on Theranos
***The Ioannidis article has drawn plenty of ire from folks – including some people we greatly respect. They miss his point. He is not saying don’t worry. He’s not saying the current shelter-in-place hammer is not wise; he embraces it and is personally complying. All he’s advocating is that it’s paramount to obtain better data than we have. This is so obtainable with random testing. Otherwise, we are all just guessing. Left to that, we may become prone to sheltering in place longer than is warranted. He is NOT saying that we should be more conservative, because we have too little data.
Fielder is an independent, fee-only adviser that provides asset management and family office services.
Disclaimer: While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein.