Coronavirus: COVID-19

When calling ourselves Canary Capital we drew inspiration from the adage “Canary in the coal mine”. There is no better time than now to live up to this name.

The following thoughts are for discussion purposes only. We do not pretend to have any medical certification and therefore are not offering any medical advice. We are not directing you towards any investment strategy or stocks, we are merely attempting to raise issues about the virus that you may not have considered. We acknowledge that everyone has their bias and therefore we do not pretend to cover all topics fairly.

If you find this newsletter interesting please feel free to distribute it to interested parties. We will attempt to answer all questions that are referred to us if you email us your questions and comments.

“What the wise man does in the beginning, the fool does in the end” – Warren Buffet

By now I imagine all of you will have done some reading and research on COVID-19.  Rather than Canary rehash the information readily available on mainstream media we have selected a number of articles that we think may be of interest.

Chris Martenson (Economic Researcher, PHD in Pathology), has been broadcasting his daily video update since 25 January. I have watched these videos each day because his predictions have been spot on. I do recommend you subscribe to this independent source of information.

Michael Osterholm, a world recognised expert in infectious disease epidemiology authored the book “Deadliest Enemy” published in 2017. It’s worth reading because it was written without the emotion of the current day. He has also published numerous articles that you can source through a Google search. Interestingly, he has participated in a recent podcast with Joe Rogan.

Dr Neil Ferguson from the Imperial College of Science, Technology and Medicine (London), is publishing works that are influencing both Boris Johnson and President Trump. His work and articles are worth noting simply because he influences public policy, but has recently been called into question. There is enough material out there if you are interested like his testimony to the UK Parliament on the 25^th March 2020. It does go for 3 hours so be warned.

Bill Gates gave a TED talk titled “The next outbreak”, on Apr 3, 2015. His latest on the topic is titled “How we must respond to the coronavirus pandemic’ was released on March 24, 2020.

Here is a video of selected moments from the Event 201 pandemic tabletop exercise hosted by The Johns Hopkins Center for Health Security. This was produced in partnership with the World Economic Forum and the Bill and Melinda Gates Foundation on October 18, 2019, in New York, NY.

Its conclusions did not focus on the medical implications because of the time it takes to develop and distribute a vaccine. Effective control could only be determined by an empirical determination of the R0 factor (the Reinfection Rate). The major conclusion of the think-tank exercise was to keep the economy running.

I would like to draw your attention to this tweet. It shows the exponential spread of the virus if effective social distancing measures are not put into place, and how doing so can flatten the curve.

COVID-19: Facts and Figures

This is not meant to be an exhaustive reference section, it is merely intended to indicate the conflicting views that influencing the news cycle. It may also explain the variety of mixed messages that are being broadcast every day.

The base case facts are:

• In this article published in 2017, it is estimated between 291,000 and 646,000 people worldwide die from seasonal influenza-related respiratory illnesses each year.
•  There are only two possible outcomes if we assume COVID-19 does not mutate. A mutation changes everything.

1. A vaccine is developed. Best estimates indicate that the earliest this is possible is within 12 months.
2. “herd immunity” strategy neutralises the effects of the virus. This can only be effective when the R0 factor is quantified. If the R0 factor is 3 then 60% of the population has to have been infected (190 million Americans). Using best-case data from the Diamond Princess, where there was a 1% fatality rate, 1.9 million Americans will succumb to the virus. This number puts into perspective the seemingly low percentage mortality rate of COVID-19.

• Adverse outcomes will occur if the health system is placed under severe stress. Health systems under stress, for example, Italy, are forced to make judgment calls on where to spend their scarce resources thus effectively choosing who lives and who dies.
• There is both an economic solution and a humanitarian solution. They differ widely in response and effect. The politics is to walk the line in between and still get voted back into power. The optimal solution is to have the virus go through the smallest number of the population until a vaccine is developed. Can we wait out the virus by quarantine until a vaccine is available?
• Health workers are in the high-risk category.
• Case fatality rates from the Chinese data is presented below:

Source: Centre for Evidence-Based Medicine (CEBM)

Meanwhile, the coronavirus case fatality rate for patients with other factors is currently:

• 10.5% for people with cardiovascular disease
• 7.3% for people with diabetes
• 6.3% for people with chronic respiratory disease
• 6% for people with hypertension
• 5.6% for people with cancer

Source: RACPG

ECONOMIC PERSPECTIVE

From an economic perspective, we are fighting two different forces. Firstly we have shut down all pathways for liquidity except for the stock market and the bond market. The bond market is mainly a professional market so the only opportunity to raise substantial cash resources is to sell shares. Governments all over the world are now printing money in incredible quantities. The markets corrected sharply in September 2019 when the Federal Reserve attempted to withdraw 300 billion dollars of liquidity, which ended up forcing the Fed to reverse its policy. We do not think it will be any different this time. Where is all this money going to go? There has been credit destruction but the Fed is committed to printing more cash each week than it did in the entire GFC of 2008.

In our experience, the bottom is not in place until volatility starts falling. Below is a volatility chart, on a monthly basis for the Australian SPI index. Note that volatility has not risen to levels seen at other corrections. Whilst it might feel like the end for our younger readers, it has been worse before.

On a daily and weekly basis, the volatility across all stock markets has started to flatline. Although it has stopped rising, volatility needs to fall before we can begin to hope the low is in place. This does not exclude lower prices, which can occur as volatility falls. When volatility suggests the low is in place we will send updated charts.

Two of the major themes Canary has for 2020 are firstly a loss of confidence in governments; and secondly a rise in agricultural commodity food costs. We will discuss these themes in the next issue.