Social Distancing 🦠

Salve ragazzi,

The news is bad.

The human costs of Covid-19 have been heartbreaking and they’re going to get worse.

It’s hard to be optimistic.

Here’s where my head has been over the last two weeks …

Global economy
On the cusp of a sudden stop. The supply shock that started with China’s shutdown percolated through EM and DM income statements and supply chains. Now we’re going to experience a demand shock with a magnitude unlike any the world has seen in peacetime.

Financial markets
What started as a repricing of fundamentals in the real economy is transitioning to a crisis within the financial markets. Reflexivity is hitting high gear. The Saudi decision to flood the oil market doesn’t help (e.g., credit intensity of shale complex).

Emerging markets
Investors are fleeing EM at the fastest pace in history; the IIF reports $55B in portfolio outflows in less than two months (this is 2x the size of outflows during the Global Financial Crisis). We’re looking at tremendous capital / dollar scarcity in EM for the foreseeable future. Good time to go hunting for opportunities.

PE / VC fundraising
The good times (in DM) are over. I anticipate that the decline in public equities is going to lead to a material decline in fundraising for 2020, in part because of the denominator effect on large institutions’ asset allocations. Despite the dollar scarcity in EM, I suspect institutional investors will sit on their hands until things settle.

Monetary and fiscal policy response
The Fed cut rates to zero, restarted its asset-purchasing program at $700 billion, and reopened swap lines (notably not with large EMs … but maybe they’ll decide to do some repo?). Absolutely necessary moves, but insufficient in and of themselves. The velocity of money is going to collapse.

The U.S. government needs to start issuing large cash transfers to households — at least $1,000 per person per month — and implement a moratorium on debt payments for 3-6 months. Nearly 40% of Americans can’t meet a $400 emergency expense out-of-pocket, and the access to / affordability of healthcare services constrains our ability to defeat the spread of the virus. Small businesses are going to get destroyed.

Hospital capacity
If Italy is our analog, the United States is confronting a calamity. The number of hospital beds in the United States declined by 40% between 1975-2015 — a period in which the U.S. population grew by 100 million people.

We had fewer than 900,000 hospital beds in 2015, in a country with more than 62 million people aged 62+. We are very good at critical care, but at some point, patient volumes will outpace our capacity to cope.

Unknown unknowns
Amidst the global economic shutdown, financial market volatility, and the state of U.S. leadership, there is a non-zero risk that an international actor is going to try something cheeky.

* * *

This is probably the last “normal” week for the foreseeable future, at least in our household.

My wife is a neurologist, but she was already scheduled to work inpatient in the hospital next week — just as the infections and critical care volumes are expected to grow (assuming Italy as the analog).

I’m anticipating that her role as a specialist will be taking a backseat, and that she’ll be rotating through some grueling critical care line shifts in the weeks to come.

I’m worried it’s going to get dark.

So, stay safe out there.

Practice social distancing.

Let’s look out for one another.

We’re all in this together.

Alla prossima,
Mike

———

From the Bookshelf

Everybody knows that pestilences have a way of recurring in the world; yet somehow we find it hard to believe in ones that crash down on our heads from a blue sky. There have been as many plagues as wars in history; yet always plagues and wars take people equally by surprise.

In fact, like all our fellow-citizens, Rieux was caught off his guard, and we should understand his hesitations in the light of this fact; and similarly understand how he was torn between conflicting fears and confidence. When a war breaks out, people say, ‘It’s too stupid; it can’t last long.’ But though a war may well be ‘too stupid’, that doesn’t prevent its lasting. Stupidity has a knack of getting its way; as we should see if we were not always so much wrapped up in ourselves.

— Albert Camus, The Plague (Everyman’s Library: 2004)

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.