In today’s DDDD (data-driven DD), after a long hiatus due to less free time, we’ll take another broad view of the current state of the United States economy and public health. We’ll be looking at some data to answer a few questions. Namely, what the state of the pandemic is globally and in the United States, whether or not we will have a second Great Lockdown (yes, historians are now calling this the Great Lockdown), statistics on the resumption of economic activity, and the looming unemployment and eviction crisis, and how this all might affect the stock market.
On face value, we can see the number of confirmed cases rising exponentially again in the United States, after a flattening of new cases during the lockdown.
New cases by country
This is in contrast to countries like New Zealand, which has been declared COVID-19 free for several weeks, and much of Europe which has significantly reduced new cases and has even reopened for tourism. Within the US, the previous epicenter, New York, has seen a drastic reduction in new cases and is moving towards re-opening.
NY New Cases
On the other hand, another exponential rise in confirmed cases have been seen in several other states that have fully reopened, including California, Texas, and Florida, the three largest states in the union.
California New Cases
Texas New Cases
Florida New Cases
Part of the increase in new confirmed cases can be attributed to more widespread testing within these states, so we’ll have to look at confirmed deaths to really see if things are getting much worse. If deaths weren’t rising, then the increase in cases could even be considered good news because this implies excessive testing and a much lower case fatality rate than expected.
California New Deaths
Texas New Deaths
Florida New Deaths
It looks like there is a true increase in cases within these states. Keep in mind that the new deaths statistics will lag behind the new infections rate by several weeks. The new deaths rate has just started increasing exponentially again at the beginning of July, and this will become even worse, even if governors impose new lockdowns and restrictions because of the delay.
Will a Second Lockdown Happen?
The second question to ask is if there will be a second wave of lockdowns. California recently just announced a rollback in the lifting of restrictions in response to the new increase in cases, setting a precedent for other states to follow suit. However, whether or not there will be a second wave of lockdowns in states is unclear, and depends on several key factors.
Despite initial opposition from health officials telling the public masks do not work, there has been a reversal in messaging, and the government is now encouraging people to wear masks in public. Even Trump is wearing one in public now, especially since there is no longer a shortage. The scientific consensus seems to be that surgical masks are effective in preventing the wearer from transmitting COVID-19 to others if they are sick, but not so effective from having the wearer catch it. This has worked in many other countries, especially in Asia, where people might be publicly shamed or shunned for not wearing a mask and potentially exposing others to COVID-19, which explains why places such as Japan and Taiwan have never seen real widespread transmission. However, in the US there is significant opposition towards mask wearing, and wearing mandates may not be widely followed in some states. According to one study, the critical mask adoption rate is calculated to be approximately 73% for the epidemic to be contained. If states are able to successfully convince their population to start wearing masks in public, above that rate, then a second lockdown will not be needed. However, even with a mask mandate in California in all places where social distancing is not possible being enacted a month ago, it does not seem to have been widely followed enough to prevent a rise in new cases and deaths. My personal opinion is that most people are now desensitized to COVID-19 news, and no longer care enough to wear masks in public, and hence the 73% critical adoption rate will not be met in most states, even if there is a mandate implemented.
Especially important as it’s an election year, a new wave of lockdowns will likely be dependent on the political popularity of it. I wasn’t able to find any reliable recent polls about it, but based on media and political discourse, it looks like the concern right now is more with saving the economy, with the population desensitized towards COVID-19 deaths. A Single Death is a Tragedy; a Million Deaths is a Statistic. This famous quote can be applied to virtually every natural disaster and massacre. Nobody cared about COVID-19 until March when suddenly Tom Hanks and NBA players were diagnosed with it. Everyone then started panicking and raided their local grocery store to buy up all the toilet paper (for some reason). So what will make people care about the pandemic again?
This is probably the best indicator for when things will go crazy. Once enough hospitals run out of ICU beds to treat COVID-19 patients, they will start having to turn away patients and the case fatality rate will skyrocket. This will likely cause a media frenzy and re-instill widespread panic, shifting political opinion towards more lockdowns. How close are we to this? This statistic is much harder to collect data on and interpret because available ICU beds tend to be fragmented. Since it’ll be logistically difficult to relocate patients to the other side of a state if all the ICU beds in one county fills up, what matters isn’t necessarily how many beds are available in the state, but how many hospitals in each county have reached capacity. Since that’s much harder to interpret and find data on, we’ll just look at the available ICU headroom, which does not include potential extra beds that may be created in response to COVID-19.
California ICU Headroom
Texas ICU Headroom
Florida ICU Headroom
From this data, California’s pretty much safe, while Texas’ is close to running out of beds and Florida has pretty much reached capacity.
Another thing to keep in mind is that it will be much more difficult to solve the lack of ICU beds in these states compared to New York. The vast majority of the state’s population live at or near New York City, which is densely populated (in case you’re geographically deficient). This means the problem can easily be solved by simply adding a bunch of beds in one central location, and sending a hospital ship to one place. This can’t really be done in more sparsely populated states like Texas and Florida. Based on this data, we’ll likely see some panic about COVID-19 again in the coming weeks with ICU beds running out in multiple states.
The Reopening, Oil, and Economic Activity
The state of reopening
In general, the north east, which was the hardest hit in March, is still in the process of rolling back restrictions, with most other states having already fully reopened. However, many of the new hot spots, like California, Florida, and Texas, are starting to impose new restrictions. The stock market is starting to realize this, with a selloff happening once California announced a complete rollback of re-opening, closing all indoor dining in the state, and there’s fears that the other hotspot states might follow suit.
New Jobless Claims
With a few weeks of many states completely reopening we’re now able to see what the best case scenario for the economy would be. Although dramatically reduced from April highs, there’s still over 1 million new joblessness claims per week, way above pre-pandemic figures. Furthermore, these new joblessness claims have stopped decreasing and are starting to slowly rise back up again, and this is with most of the economy re-opened. Since full reopening in many states are still recent, we don’t have other economic indicators, such as personal savings rate and consumer confidence to see if people are actually re-engaged in the economy or people are still avoiding economic activity out of fear of COVID-19.
Another thing I’ve been keeping an eye on for a while is crude oil stocks. Despite a rally back up from the (negative) lows on the May contract, WTI has been struggling to break $40 and recover to pre-COVID levels, although being near it. While digging through some data provided weekly by the EIA, I noticed something interesting with crude oil stocks – despite re-opening, it’s still increasing.
Crude Oil Stored (kbbl)
Except for one small dip in the middle of May, crude oil stocks have been slowly rising throughout this entire re-opening, despite many oil producers cutting back capacity. Worse yet, an OPEC meeting scheduled later this week is expected to relax production cuts, putting even more crude oil into the supply. Excluding the SPR (Strategic Petroleum Reserve), the story looks slightly less scary for commercial producers.
Crude Oil Stored for Commercial Use (kbbl)
This however does not mean we’re going to be seeing negative oil futures again, since producers have gotten smarter about avoiding a storage squeeze in Cushing.
Crude Oil Stored for Commercial Use @ Cushing (kbbl)
Refinery utilization, although steadily increasing, is still significantly below pre-pandemic levels.
Refinery Utilization Rate
The conclusion that can be drawn from this is that oil-based economic activity (i.e. travel and energy usage), while increasing, is still well below what it was in February. Crude oil producers however, are still outproducing what refineries are taking in, and crude stocks have been steadily increasing throughout the entire reopening despite increasing oil prices.
The Looming Housing Crisis
Another thing to mention is the ticking time bomb that is the expiration of the unemployment boost provided by the federal government on July 31, and the eviction crisis coming our way as eviction courts reopen and process them. Mortgage forbearances are also starting to expire, with around 8% of all active mortgages in forbearance. According to one source, 36% of renters and 30% of homeowners did not pay their full housing payment in time. This will probably take a few months to really see the effects of this, but it’s definitely something to consider.
How This Might Affect Stocks
We’re already seeing the first waves of bankruptcies, mostly from companies that were already in a poor financial position like Hertz, JCPenny, and GNC. For the bull case, most of the rally for the past few months have mostly been concentrated in tech stocks, which are much less directly affected by the pandemic, with some companies like Amazon even benefitting from it. They’re usually very financially healthy, and can easily operate in a pandemic, if not benefitting from it. In fact, some stocks like AMZN, TSLA, ZM, and SHOP have gone parabolic in the past few weeks, which is usually not a good sign. On the bear case, most economists predict a prolonged U-shaped or L-shaped economic recovery, and a wave of bankruptcies for companies that couldn’t be rescued by the Fed. As mentioned above, I also believe we’re going to be seeing a second wave of lockdowns in the coming weeks as ICU beds start running out, making the economic situation even worse. Eventually, a shrinking economy, mass unemployment, and reduced spending will ultimately hurt the earnings of even the tech stocks. GOOG and FB earnings ultimately rely on businesses buying ads. AMZN and SHOP earnings rely on consumers buying things. Another argument for the bull side is that due to monetary policies such as QE and 0% treasury yields, along with the unattractiveness of emerging markets in the current economic climate, there is a massive modern savings glut – money that has nowhere else to go. This by itself could take another essay to explain, so I might talk about this more in a future post.
For those that have been following me the past few months, my positions remain unchanged. After briefly joining the bulls for a few weeks, then 🦘gang, I’ve now converted back to a 🌈🐻. My only major position right now are VIX calls, with July, Aug, and Sept expiry, which I entered a few weeks ago when VIX was at 26. There’s a few reasons for this – I still believe in my long-term thesis that the stock market is in a bubble, with the past few months accelerating the inflation of it, and my belief that the US will eventually mishandle the COVID-19 response, forcing the government to lockdown again once ICU beds run out. I’m no longer day trading, and will swing trade my current positions when a good selling opportunity comes – I’ll keep this post updated if I sell.