Scared New World

The coronavirus came upon us so quickly, and was of such a magnitude, it outpaced the ability of most people to systematically think through the consequences.

Instead, as one would expect, everyone and every government focused on trying to understand the physical nature of the virus, and possible ways to mitigate it in order to avoid getting sick or, in the case of the latter, having national healthcare systems run over.

As individuals, we were forced to deal with a variety of questions. For example, what did self-quarantine actually entail? Would basic food stuffs still be available, or was the supply chain going to break down? What were the immediate consequences of the travel bans? What was going to happen to the economy as a whole, and the individual stock sectors most effected?

And that’s just for starters.

With the passage of a few months, now seems to be a reasonable time to try to think this thing through a bit more thoroughly.

Specifically, what are the possible short, medium and longer-term consequences of the Coronavirus?

Following, in no particular order, is my list. I’d love to hear what I missed.

1. Strong Investment Opportunities. Any sign of a sustained downturn in new cases and fatalities, especially if coupled with new tests and treatments, should result in a strong stock market rebound.

Maybe not strong enough to get us back to where things were when this started, but enough so that the panicked concern about failing pensions and retirement savings will ease.

Personally I have been buying companies I want to own, but only after the big sell-offs. Where special opportunities have presented themselves, for example Exxon at $24.00, I have jumped in to make a quick trade – a few days, or a week at the most. I have also been selling puts to get a premium on the stocks I want to buy cheap and hold for the long-run.

Because, this too will pass.

However, for most people the best way to play the market rebound will be to wait for  the inevitable next big sell-off then make a straightforward buy-and-hold investment in the SPY ETF. It is a bet on the future of the USA once this thing is over. For reasons I’ll discuss momentarily, I think that’s going to be a good bet.

2. Sell-off in Coronavirus Related Stocks. Drug companies and other businesses which soared based on the perception they would profit from the ‘Rona’, will return to market levels.

3. A Kinder, More Caring World. Having experienced the pain of isolation, people will come out of quarantine more caring, more open, and more active in seeking out the comfort of friends. People in general will be far less inclined to taking friends and everyday pleasures for granted. I have lost count of the number of friends who have reached out to me over the last couple of months, some of whom I haven’t heard from for years. I think we’ll see a big surge in spending on meals out and, in time, as airline and hotels offer compelling incentives, travel will return to normal levels.

Against this, we'll also see soaring divorce rates because without the release offered by exterior diversions, and forced into closed quarters for an extended period of time, couples that shouldn’t be together will be forced to recognize that reality.

4. An Increase in Telecommuting. For some time there has been a soft trend for corporations to allow eligible employees to work from home. That trend will kick into high gear, with several knock-on consequences:

For example, there will a growing number of service companies, including consultants and coaches, whose sole role is to help companies better manage their remote work forces.

Coupled with the heavy demand witnessed for streaming services during the lock-down, the shift toward more telecommuting will accelerate the push for 5G to go into hyper-drive.

Of course, that also means office rental companies will come under pressure.

5. A Dramatic Increase in Big Security Breaches. Stephen McBride, my colleague at RiskHedge.com recently wrote a compelling article on the rising threat of cyberattacks, which you can read here. The basic thesis is that only a relatively small number of companies are properly equipped to provide cybersecurity for a home-based workforce, so imagine the stress on internal security systems with millions of untrained individuals using home computers to log into secure networks?

In terms of taking action, I currently have a stink bid in on the HACK ETF, which is focused on companies providing cybersecurity. It is fairly priced now, but as I expect additional big sell-offs in the months just ahead, why overpay? Someone smarter than me once observed that whether you win or lose with an investment is determined by when you buy, not by when you sell.

6. China’s Brand is Tarnished. I haven’t dug very deep into the narrative that China either accidentally (or deliberately) unleashed the virus, or covered-up the extent of its spread. However, the totality of the negative coverage on Chinese actions, including the fragility of the Chinese supply chain – especially for items considered to be important to the national security of the west – will attract an unwanted spotlight on the Chinese for years to come. Once lost, trust is a hard thing to win back.

The consequences of this growing attitude towards China will be far-reaching and hard to fully comprehend at this point. However, it’s a safe bet that corporate risk-managers and government oversight bodies, before signing or renewing a contract, will now have to fully analyze the potential risks of doing business with a Chinese company.

I think we’ll see Trump’s tough moves against Huawei, which prior to the virus were initially met with a tepid response, mirrored throughout the western nations. This will only be exacerbated by the increase in cyberattacks. Of course, no one in the risk management or government oversight business is going to want to risk their jobs by getting the China risk wrong, so we can expect a lot of damage to certain Chinese sectors, and a commensurate increase in opportunities for trusted western companies providing similar products.

There have also been calls at the highest levels to penalize China by reneging on the trillions of US debt they own, something I have mentioned as a possibility over the years should push come to shove. And push has very much come to shove in terms of the global economy.

Regardless, the blow-back against China – rightly or wrongly - could be serious enough to see the current Chinese president Xi lose power and a whole new team take control. Stay tuned.  

7. Geopolitical Troubles Aplenty. Start with the collapse in energy prices, which will turn the economies of Russia, which derives over 70% of it’s export revenue from oil and gas, and Saudi Arabia, which derives over 90%, on their heads.

While Russia has a more coherent societal structure, and a populace accustomed to wading through hard times, there’s no question this will put big pressure on Putin to do something dramatic to survive.

In the case of the Saudi’s, this could lead to an economic collapse and the end of the royal regime. While we can’t know what will replace the royals, odds are good they won’t be overly friendly to the US which has kept the unpopular Saud family in power all these decades.

Meanwhile, in Europe, the schism between the impoverished southern member countries and the more successful North will put tremendous pressure on the EU, and on German in particular. With Britain taking it’s exit, the unthinkable becomes thinkable, and we could see the EU collapse.

I think we can count on these, and other global hot-spots, to provide us with lots of excitement and maybe some trading opportunities over the next year or three.

All of which continues to provide support to the US dollar, which, despite its unprecedented abuse, remains the only viable globally accepted reserve currency. Because, really, what’s the alternative?

Especially if am right and…

8. Trump Wins by a Landslide. Provided that all but the most dire scenario comes to pass, and the country gradually re-opens – with the death count coming in well below the dystopian predictions of the US media, as it seems it will -- Trump will roll over Biden, or whomever the Democrats prop up against him should the old letch get taken down by Fingergate.

His victory will be all the more stunning because it will mean he will have weathered a nuclear level attack by the opposition and most of the media, including a shameless weaponizing of the coronavirus designed to take the Bad Orange Man down.

But short of a smoking gun and a dead wife, all of those efforts will boomerang against Trump's opponents, ushering in a Republican controlled Congress and a new era of American prosperity. For reasons I'll expand on in a moment, this will have YUGE consequences.

Hmmm, smells good like an intern should

9. A Change in Personal Health Habits. People will become more careful about things like personal sanitation, hand-shaking, avoiding people who are sick, etc.  

This could be as distinctive a societal change as was the case for those who grew up during the Great Depression who, for the most part, were forever after careful with their money.

Now, people will be equally careful of their health.

I am sure there will be commercial opportunities in this paradigm shift, maybe the return of the nice gloves which used to be all the rage in antiquity with both men and women. I suspect we’ll also see the installation of body temperature monitoring devices at the entrances of public places, restaurants, hotels, etc. And who knows what else.

Coming to Hands Near You Soon?

10. Mass Migration from the Cities. After being traumatized by forced quarantine in city apartments, coupled with the acute fear of living in viral hotspots and the rise in telecommuting, will lead to an immediate migration from the cities to remote yet attractive locations.

We have a house in Stowe, Vermont and, once this phase of the virus clampdown is over, it will be exactly the sort of place people will gravitate to. It is reasonably upscale, with abundant outdoor activities and decent restaurants, some of which will survive to serve the influx of city folks. However, any small and decent town, and probably the small cities, will see a pick up in demand for real estate. The big, heavily taxed cities are going to get hit hard.

I can support this contention by noting that there was a big influx of New Yorkers into Vermont following 911. That influx will pale in comparison to what’s coming to a small town near you soon.

11. Trump will reshape global politics.  After winning large this November, Trump will be fired up to push forward with his agenda. This is where things get really interesting. Logically we start by asking, “what does Trump want?” Because most of what he wants, he'll get.

So, what does Trump want, other than Pelosi to be wheeled off to jail or an insane asylum? Quoting the website of his presidential campaign can provide some insights:

“President Trump is working hard to implement his ‘America First’ platform, continuing his promise to the American people to lower taxes, repeal and replace Obamacare, end stifling regulations, protect our borders, keep jobs in our country, take care of our veterans, strengthen our military and law enforcement, and renegotiate bad trade deals, creating a government of, by and for the people.”

Touching on some of the key items:

· Lower Taxes. Could Trump go for a flat tax? No question it would jump-start the economy, as was demonstrated by a 24% increase in Hungary’s GDP after they adopted a flat tax. But has Trump ever expressed support for a flat tax?

The answer is “yes”. In fact, he wrote a book about turning around the economy that included the following flat tax proposal:

"Called the “1-5-10-15” income tax plan–the tax changes consist of the following:

* Those making up to $30,000 will pay 1 percent.

* Income from $30,000 to $100,000 results in a flat 5 percent.

* $100,000 to $1 million income will be taxed at 10 percent.

* On $1 million or above will be taxed 15 percent."

While people are skeptical that a flat tax will pass, I think the average Trump supporter would be all for it. Of course, the immediate consequence, other than a boost to the economy, would be that the roughly one million people now employed in the tax preparation business would have to find new opportunities.

As would the legions of bureaucrats who deal with this stuff.

However, as Trump weighs all the available options for jump-starting the US economy, the flat tax will stand-out.

Per my comments above, this would fundamentally change the world because, in order to be competitive, and with the economic devastation around the globe every country is going to want to be as competitive as possible, all the other major economies will be forced to follow suit.

Especially if, as almost certainly would be the case, the US economy blossoms under the new tax regime.

· Repeal and Replace Obamacare.  While it is hard to figure out exactly what Trump has in mind for health care, it seems to revolve around reverting to a system where health providers are encouraged to compete head to head for business.

He also favors transparency in terms of medical bills, so that people can see just how ridiculously expensive many of the treatments are.

Regardless, to fully think this one through requires more research, starting by asking which entities profit most from Obamacare as it is currently structured, as those are the forces that will go to the barricades in an attempt to thwart any meaningful reform.

Another headwind against health care reform will come because the national and global nature of the current healthcare scare will give rise to calls for the outright nationalization of the healthcare system.

Given the complexity of the healthcare situation in the US today, I would say the most likely outcome of a second Trump term in this regard will be a stalemate, with not a lot of change.

· End Stifling Regulation. This is a ‘target rich environment’ with the potential for sweeping changes in the regulatory regimes across too many industries to imagine at the moment. However, assuming that Trump will go on the equivalent of a war footing to get the US economy back on it’s feet, I think it is also safe to assume that energy, banking, healthcare and biomedical research industries will all get relief.

This really could be huge, as a task force of business-minded folks dig deep in the ways the government can better support, or at least get out of the way, of US businesses

More in the way of speculation, there is also a chance – albeit remote –we could see a return to something that looks like a gold standard. In his heart Trump knows the printing of trillions of dollars every time the country goes into crisis mode is an economic and moral mistake, and will look for a clean way to get out of it.  While it would not be easy to implement, a gold standard could underpin the US economy like little else.

By happenstance, Nick Giambruno, the editor of the International Man, is likewise quarantined here in Cafayate, giving us time to catch up and share ideas, usually while on horseback. On the topic of Trump and the gold standard, he says his research has found instances of Trump making cogent arguments for the idea.

I did a bit of poking around and found a quote from an interview with Trump that appeared some years back in GQ magazine.

"Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money."

If nothing else it demonstrates that Trump has given the matter some thought.

As you know, I could go on… and on.

For example, there’s the strong possibility that one of the consequences of the virus will be the end of cash, and a switch to an entirely digital global payment protocol. After all, who wants to stand in line at an ATM, handle paper currency or coins handled by an unknown number of people, or go into a bank if they don’t need to?

Of course, doing away with cash would also allow governments to much more closely monitor the citizenry, and to collect a lot more taxes by all but eliminating the informal economy. Trump might resist this idea, but I suspect the European countries, which are already moving in this direction, will jump on that bandwagon sooner rather than later.

At the end of the day, this coronavirus is the instrument ushering in the Fourth Turning, the seminal work of Neil Howe and William Strauss. To wit, the world went to sleep one night, and woke up the next morning in a changed world.

The consequences I have mentioned here are, I am sure, only a gentle scratching of the surface. However, it is worth keeping in mind that the immense scale of the changes now sweeping the world increases both the size of the risk, but also the opportunity.

There are currently a lot of moving parts, but in time the pieces of the scared new world will fall into place. There will be winners, and there will be losers.

By stopping now and again to think about the consequences, hopefully we can end up on the right side of this thing.

On that front, for years I have firmly believed that the Strategic Investment Conference (SIC) put on by Mauldin Economics, a firm I’m a partner in, is the best annual investment conference, literally in the world.

That’s because it’s brand is so strong we are able to attract the very best of the best, including the top money managers, leading geopolitical thinkers, and pretty much the smartest people working in the field today.

Faced with the insurmountable challenges of holding the conference as a physical event, Mauldin has pulled out all the stops to assemble a live, virtual edition of the SIC featuring all the great talent that would otherwise have served as faculty at the cancelled physical event (including the previously mentioned co-author of the Fourth Turning, Neil Howe).

There are a couple of big advantages to this Virtual SIC, which will broadcast daily presentations between May 11 and 21, starting with the price. Normally the attendees pay thousands of dollars to attend, but thanks to the cost savings of doing the event virtually, the registration fee will only be $395.

In addition, to keep the physical event small and collegial, it is usually limited to just 450 attendees. With the high percentage of repeat attendees even getting a seat would have been a challenge. The Virtual SIC won’t have that limitation.

If you are interested in the event, which runs from May 11 to 21, click below for all the information. The event is being very professionally produced, with all attendees receiving the faculty support materials and ongoing access to the recorded presentations, so it won’t be some half-assed basement Zoom thing.

I’ll be watching, as well as most investor friends I know.

Learn more about the Virtual Strategic Investment Conference by clicking here now

End Notes

Having grown weary of reading so many conflicting articles by so many instant experts about what may happen next in terms of the health impact of the coronavirus, I decided to do my own research to try to get to something approximating the truth about the thing.

And so I started digging into available data about the normal death rates in the US and elsewhere (including Sweden which has taken a more laissez-faire approach to the virus) versus the reported deaths from the Coronavirus. My hope was to develop a solid understanding of just how serious, or not, this virus is.

I was going to share my calculations with you in this edition, however, I want to spend more time on the research to confirm what I am finding.

Which, so far, is that the coronavirus, while certainly very infectious, is nowhere near the killer it is being presented as in the media.

In fact, even in the most severely hit areas, the number of deaths is little more than a rounding error, and very much concentrated in older people and at-risk populations. If my calculations are right, this is nothing that should have triggered the unprecedented wholesale shutdown of the global economy.

I’ll send those numbers out when I finish them, probably later this week.

In the meantime, impacting me and my family on a personal level, Argentina has ruled that all domestic or international commercial airline flights here are banned until September 1.

Fortunately, if one has to be quarantined, being quarantined in a province with no active cases, in a gated community with an operating golf course and over thirty kilometers of horse trails, and blessed with abundant sunshine and fresh food, very definitely makes this a Gilded Cage.

Yet, it is still a cage.

I sincerely couldn’t imagine being trapped in a New York apartment, almost no matter the size.

More soon.

Until then, happy trails, however close to home they may take you.

David

P.S. I apologize for any and all typos and grammatical errors. I’m a one-man shop for Sendero.

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