Recorded: June 9, 2020
Don Luskin is the chief investment officer of Trend Macrolytics. Contact: http://trendmacro.com Twitter @DonLuskin
Albert Lu: Welcome to the Power & Market Report. I’m Albert Lu and joining me now from Dallas, Texas, is Don Luskin, chief investment officer of Trend Macrolytics. Don, greetings from the most locked down state in America. I made this sign for you: California 188. You can explain what this means later. We’re number one and apparently proud of it.
Don Luskin: Great.
AL: How are you, Don?
DL: I’m doing great. Nowadays, how are you is not a trivial question. Glad to see you’re healthy, Albert.
AL: Healthy, happy, yeah, and doing very well. You produced a series of videos recently — which I’ve really enjoyed — and which I thought sort of illuminated what’s really going on when it comes to COVID, the actual numbers. You were upfront with this long ago. I forget when we did our first interview related to COVID. This is before we had hard, concrete numbers. But you made one comment that I haven’t forgotten and that comment was, you know, recessions hurt people, too. Recessions cost lives, too. This was one of the things you investigated through these videos. But you talked about a lot of other things. So let’s start with the premise: Common knowledge may be common, but when it comes to COVID I don’t necessarily think it’s knowledge. A lot of it is sort of ill-conceived rumors and pseudoscience. Whatever you want to call it, but unreliable nevertheless. So take it away.
DL: All right. So much of what you have been hearing about COVID-2019 — and especially when it was new and we didn’t have any actual experience with treating it or counting it or measuring it or testing for it — all we had to go on were models by epidemiologists. The people who make these models, they have the same kind of training as the people who make models on Wall Street. And if you remember the crash of 2008 and 2009, that was caused by the inadequacy of those models. Well, you’d think we’d learn that lesson. But we’ve hired these same guys to model the course of viruses. And based on those models we deliberately caused a global depression in order to suppress the enormous number of deaths that these models forecasted. The thing now, in the fullness of time, we know what’s so completely absurd about that is we can look at the number of deaths that have actually occurred and we can tell ourselves a story.
Well, it would have been way worse if we hadn’t locked down the economies and suffered this depression in order to save lives. You can tell yourself that story. But now, with actual data work, rather than just forward-looking models, we can go back and see whether that’s true, because all around the world in different countries, in different states, in different counties, and different cities there have been different lockdown policies. And so, we can see which lockdown policies produced the best public health results — in which one of those regimes did you have the most of the fewest infections, the most of the fewest cases, the most of the fewest fatalities? It’s a big, diverse laboratory experiment. We can check also to see not just whether you had public health success depending on what mandates you passed or what laws you passed, but what people actually did — because it’s kind of creepy, but everybody’s got a cell phone and people keep track of where your cell phone is and they supposedly anonymize the data. But Google and Apple, they’re tracking you everywhere you go. So you may have had a stay-at-home order in your city or your congressional district or your state, but we can track your cell phone and see if you did really stay at home.
So it’s not just a question of looking at what the laws are. It’s a question [of] looking at what people actually did, so we can correlate what people actually did during the lockdown era with cases and fatalities. And here’s what you come up with. It’s really a sad truth, but there’s no evading it. There is absolutely no correlation between the degree of lockdown and the degree of success in controlling COVID-2019. There should be. You’d think there would be. Common sense tells you there should be, right?
It’s an infectious disease, so if you had perfect compliance where nobody had any contact with anybody else, shouldn’t that be perfect? Well, maybe, but we’re not talking perfect. We’re talking about a range of imperfect solutions and with the range of imperfect solutions that we actually implemented in the world, which were strong enough to cause the depression we’re in, it turns out it makes no difference whether you had a very locked down state like California. That 188 you showed at the beginning, that’s the lockdown score that in my model I assigned to California. Of the 50 united states and the District of Columbia, California is the most locked down state. It actually had fairly good results in controlling COVID-2019. But New York was only slightly less locked down, maybe. I forget what the score is — like 187 or something. It had horrific results. New York State with only about 20 million people and it had worse results than some whole countries. Then a wide open state like South Dakota that hardly did any lockdown at all? No problem with COVID-2019.
Now, I know what you’re thinking. You’re thinking it must be something else. Maybe it’s just a natural population density, that maybe in a place like New York we’ve got people crowded into apartment buildings and busy streets. It’s a natural breeding ground, no matter how much you lock down. You know, in the prairies of South Dakota, nobody runs into anybody anyway. So how could COVID-19 get a start? Well, you can control for that statistically. It turns out that makes absolutely no difference. Here in my home state of Texas, the five densest counties — that includes Dallas (where I’m talking to you from right now), Houston, San Antonio, Fort Worth, Austin (these are five of the densest biggest cities in America) — and of the 254 counties in Texas, some of which have like two guys in them and a few cows, those dense counties had the best results at controlling COVID-2019. So it’s not density.
We know that the disease is crueler on old people who get it, rather than on young people who get it. Control for age makes no difference. General health conditions make no difference. Just about everything you can think of to test to see what made the difference. Why did some places have such good results and some places have such terrible results? Some places so few deaths, some places so many.
It turns out there’s only one variable that makes any difference at all, statistically, and that is the reliance of each state or county or city or wherever you want on public transportation. That’s why New York, New Jersey, and Connecticut did by far the worst among the U.S. states, because they are linked together in America’s biggest, busiest public transit hub. It’s only been about three and a half weeks since those geniuses in New York decided that they actually ought to shut down the subways at night and wash them now. As soon as they started doing that, oh my god, the fatalities in New York, they’ve just ground to a halt. It’s been under a hundred fatalities now on most days for the last two weeks.
So, I guess you can say the whole planet had a big learning-by-doing experiment, where for some reason we decided that this particular flu-like disease was going to be the one we just had to stop. I don’t know why this one got that distinction. There was a similar one in 1968, a similar one in 1957, [and] nobody did anything about those. We had about the same number of fatalities as a percentage of the population at that time, but for some reason we decided to shut down the global economy to fight this one. We caused a depression. You know, looking back on it, it turns out that that made no difference at all. COVID-2019 is a living thing. It has its own agenda. It has its own life cycle. It doesn’t have a brain. It doesn’t have plans. It doesn’t have intentions. But like all living things it has an arc of history. It turns out that for COVID-2019 there is a period of about six or seven weeks where once it gets a foothold, it grows. Then, it plateaus, and then it stops. Nobody seems to know why. It doesn’t matter whether you cause a depression or not. So if it doesn’t help to cause a depression, my advice to you is don’t cause a depression.
AL: Don, it’s a very interesting analysis there. So lockdown doesn’t matter. Population density doesn’t really matter. Subways appear to matter. That’s the kind of ongoing joke within my group here, Don. My dislike of subways. We did a shoot once in New York City and my co-host noticed my reluctance to get in the subway to do anything and that became a joke among the crew. I wasn’t worried about COVID. This was years ago. I was worried more about urine and other things than COVID.
DL: You just don’t like rats.
AL: Exactly, rats and all the other things. So subways make a difference. You’re not going to be getting Christmas cards, I guess, from the transit authority. But it sort of makes sense that that would be a problem. It comes up anytime people are discussing getting back to work in New York. So much of our information comes from New York-based journalists. They always ask: Huh, it seems like the subways would potentially be an issue. And that’s a sensitive issue, obviously, because they have some sort of a business and they have expenses, that’s for sure, and debt. So they want to get back to business.
But what about other things, Don? Seems like if you’re measuring deaths in the numerator, some of these assumptions are not going to work, because if you were measuring infection rates, maybe then densities would matter. But you’re actually measuring deaths. So one other factor would be that the places that had the most deaths did not take care of their vulnerable population very well. As an example, I’m thinking about, in some places, nursing homes being forced to take COVID patients. Have you looked at that or are you interested in looking at that?
DL: Very interested looking at that. I do want to let you know, though, that [in] the correlation studies that I just described, I’ve run them both ways. I’ve run them on fatalities and just simply on cases where people didn’t die. And you get exactly the same result, which is to say no result at all, no correlation.
AL: But okay, but can we trust the numerator there, Don? Because we don’t really know what the — you’re talking about reported confirmed infections, right? What about all the ones that are asymptomatic that we don’t know about yet?
DL: Fair question and that, I think, ought to just reinforce our agnosticism that we just simply don’t know what we’re dealing with here. There have been a number of serological studies where, instead of testing for the active disease — you know, the swab test — they’re doing a blood test to see if you have antibodies against the disease. There are places in California where typically you’ll get maybe 30 or 40 basis points to the population as confirmed cases, but maybe 4% of the population. So, you know, 50 to 80 to 100 times greater turns out had the antibodies but never even got tested. Never had symptoms, so why would you get tested? You don’t want to have a swab put up your nose if you can help it.
Now, in New York City they’ve done those serological tests. They’ve done this in Boston too. And as many as 20 to 25 percent of the people have the antibodies. So that means that the fatality rates that are being reported are minuscule, because so many people have it who didn’t even know they have it and they didn’t die. So, you’re right. I mean, the denominator is completely unknown, unreliable. For that matter, so is the numerator. Because, as you correctly said, the fatality rates in New York — notoriously because of the ridiculous regulation that caused nursing homes to have to accept infected patients — but even in places that didn’t make that administrative mistake, typically 85 percent of the COVID deaths are among people older than 65. And as you get from 65 to 75 to 85 to 95, the curve of your likelihood of dying of it just goes up and up and up. And that gets multiplied by the number of so-called comorbidities you have. So, if you have congestive heart disease or if you have diabetes or you’re obese or something like that, you just add those things together and pretty much you get COVID, it’s a death sentence. But did you die of COVID or did you die with COVID?
So what’s the numerator? What’s the denominator? Nobody knows, so considering how much ignorance there is about this — even ex-post — boy, it was a stupid thing to do to cause a depression.
AL: Yeah, it absolutely was. And, you know, more and more people, even CDC, WHO, are acknowledging certain things, like surface transmission, are not as big of an issue as we thought. Even the person-to-person transmission with asymptomatic people was exaggerated. A lot of people are coming out saying lockdown was a mistake. Not just you, but people actually in government, saying it was a mistake. That is all the good news that came with the bad news, right? That we overreacted, that’s the bad news. But the good news is that we can get back to business now and people are demanding it. And even here in California, June 12 a lot of stuff is going to open. The last holdouts, gyms, and whatnots. Poor people who’ve been out of business — they’re coming back. So that seems like good news. Is it good news, though, because you mentioned in one of the videos — I thought it was an excellent point — even if you recover you never get back to where you would have been if you didn’t make those mistakes? We made a ton of mistakes. So where do we go from here? We’re opening up now. What are we going to see? We had a good report last week, I guess, given the circumstances. But what are we going to see in the next couple months?
DL: Well, what we’re going to see is the movie running in reverse. In the news yesterday, the official gurus at the National Bureau of Economic Research officially now say that we’re in a recession. They say that the top of the previous business cycle is February, and so the recession started in March. So that seems like it makes sense. For a recession to have played out just in March, April, May, and now first nine days of June, with such ferocity is completely unprecedented. The velocity and the magnitude of it put together are absolutely unprecedented. What you’re going to see is when this thing suddenly clears, you’re going to see a bounce-back that is just as unprecedented.
We are going to have three or four or five months of growth that are just going to be one for the books. It’s just going to be absolutely amazing. I think we’re probably going to get back to the prior peak GDP, which would have been in February of this year, probably by February or March of next year. Now that means we will have had a lost year. You’ll never get that back. As you said in the introduction, that lost year is not just unfortunate in terms of people’s income and wealth. It’s also unfortunate in terms of their health, because the thing that is most correlated with good health outcomes and longevity is if you have the economic endowment to eat well and exercise well and seek the medical tests and care that you need. And if your income is held back, if your wealth is diminished, and you have to spend the money on other things in your health, you’re just not going to live as long.
And so there are seven billion people on this planet who have endured this depression who will never get that lost year back. That lost year economically is probably going to take one or two or three weeks off of everybody’s lifespan, as a statistical average. That’s not saying every single person will live three or four weeks less. It means on average, because of this, people will live three or four weeks less. Now because there are so many billions of people for whom that’s true, the number of life years that are lost are measured in the many tens of billions. How many life years did we save by locking down the economy? Well, according to my studies, we saved none at all. People would have died anyway. That doesn’t make it a good thing that they died. It just means that we have consigned everyone else to a shorter life in order to achieve absolutely no benefit in terms of saving anybody’s life.
So as we go back into opening up the economy and you hear people say, oh, that’s so terribly cruel, you greedy capitalists. You’re consigning people to infection and death by reopening the economy and getting to go to sporting events. No, that’s not the way this works. It’s a false choice to think that you have to choose between life and dollars. [The choice is] between life and life. If we can have higher incomes, more wealth, we’ll have healthier, longer lives. If you believe in health and well-being, you believe in opening up and getting the global economy going again, man.
AL: Yeah, Don. I’m so glad especially for these small- and medium-sized companies that have really been hurting, that they’re going to get to open up. But I want to ask you about the delayed effects of COVID and the lockdown that might get in the way of this recovery, this volatile recovery that you’re alluding to. What about, for instance, people who haven’t had to pay rent for a couple months and now get this big bill? Are we going to see a lot of evictions and then foreclosures that come from that? What about companies that receive money to not lay people off and then are just delaying those layoffs for a couple months? Do you anticipate any of that happening and that getting in the way of your thesis of the strong recovery?
DL: No, I’m factoring those things in, Albert, because that’s why the recovery isn’t going to all happen in one day. Every time you have a recession, it takes at least two or three quarters, it normally takes two or three quarters, to get back to pre-recession GDP. And then once you’ve done that, you can have many, many, many more years of economic expansion. But it typically takes two to three quarters to get back to where you were. And the reasons why it’s not instantaneous is because you have to clear all that economic wreckage that you’re talking about.
Now in this case there’s actually less economic wreckage to clear than normal because the length of this recession will be so short. This will probably be just a three- or four-month recession. And then the recovery is probably beginning right now. You alluded to that very strong jobs report we had on Friday that so surprised everybody. That means that the recovery is underway right now. Isn’t it ironic that they’re finally officially declaring it to be a recession now that it’s over and we’re actually beginning the recovery? That happens about half the time in history. So typically in a recession you don’t just endure it for two or three months. You endure it for three quarters, four quarters. The Great Recession 2008-2009 lasted six quarters. So that economic damage really builds up. More and more people lose their jobs, capital depreciate, people move, they lose their skills. It’s really important to stay on the job and keep your skills sharp in a technology driven economy as dynamic as ours, where the skills that you need to do your job change so quickly. If you’re not on the job, you don’t know what the new skills are.
So, the great news is that while this recession is very deep, it’s very, very brief. We’ll see what the unintended consequences are. But another hallmark of this particular recession is that the Fed and the congress stepped in with various — use whatever words you want, depending on the emotional spin you want to put on — call them bailouts, call them relief, call them stimulus, whatever. This is typically what happens in a recession, and it helps recovery to some extent. But in this case it’s totally going to help, because all of these extraordinary measures by governments here and around the world were put in place practically before the recession even happened. The parachute was deployed way before you hit the ground, all right? So I think we’re going to be very pleasantly surprised by how robustly we come back.
We’re never going to get our lost year back. That’s a whole other matter. But we’re not going to be swimming around in a jobless recovery for two whole years, like we were coming out of the Great Recession.
AL: So the economy is coming back and, you know, I heard a guy on Bloomberg, I think, talk about the nature of this recovery. You can read into it a little bit more, because when you’re talking about small restaurants and shops that have basically laid off everyone and shut down, well, that’s a pretty good indication of a bottom. They can’t go much lower than firing everyone and shutting down and now they’re reversing that. So that’s a good point. With the larger companies, the tech companies, if they have layoffs coming, you’re not going to see that for a little while. But overall, I kind of buy your thesis that we’re going to open and we’re going to come back. That’s the economy.
Now, let’s talk about the stock market. The Nasdaq broke 10,000 for the first time. It seems kind of insane because even though, yes, you have heavy hitters like Amazon and Netflix in there that were able to go about their business and even enhanced their business more so. It still seems strange that the Nasdaq is setting record highs and the S&P is less than half a percent from where it was at the beginning of the year. That seems a little bit strange. What’s your take on the stock market?
DL: Well, it’s not as strange as you would think. We’ve had ten recessions, not counting this one, since World War II. And in five out of ten, in half, the stock market had completely recovered and was at new all-time highs before the recession had even hit bottom. So you just have to remember stocks are forward looking. They’re not always right, but they are definitely looking forward. They’re not driving through the rearview mirror and Mr. Market is kind of voting with me on this. Mr. Market is saying we are going to have a very v-shaped recovery.
AL: But a lot of this you say is forward looking. I would say Fed looking. They’re definitely looking at the Fed and all this stimulus that has come and more that they’ve sort of promised. I’m wondering: Is 10,000 just the new 8,000 now and we’re just going to march on from here — meaning that we’re not as well off, that things aren’t quite as well as they look? But this is going to be the new baseline? We’ve got a new price level and from here we’re just going to go on even though built into that number is actually a loss that you’re not seeing?
DL: Well, the way I think about it is [that] I think, over the intermediate and long term, stocks are going to be pretty much priced based on the performance of the underlying companies. And, you know, these companies, like Google and Apple, they are just reinventing the world in their own image and they are going to rule the world until some other company that you haven’t even heard of comes along and it has the same kind of success story in the same small number of years that they have. That’s just called capitalism. It’s called creative destruction.
The ones that I’m more interested in as opportunities are some of the old-fashioned companies — the financials, the industrials, energies, materials — that just got completely destroyed. For instance, the S&P 500 energy sector. It lost more than all of its forward earnings estimates from the January top to the March bottom. I think the market cap of it fell by something like 60, 70 percent. From its bottom, its up 90 percent, and it would still have to rally another 35 to get back to where it was in January. So, the Nasdaq, in particular, but the S&P 500, too, is dominated by those same companies because it’s a cap-weighted index. So, these giant cap companies, these FAANG stocks, I think these five or six stocks represent, I think, something like 15 or 16 percent of the market cap of the S&P. So there are vast swaths of companies that still have a very long way to go to recover. And I think there’s a long-term bright future for these terribly innovative companies that you’ve mentioned.
But just over the next six or seven months, I think I’d want to put my money on the companies that got wiped out, where people are not betting that they can recover robustly: energy companies, financials, airlines, industrials, so on.
AL: Don, if we are in a recovery, when is the right time for the Fed to pull back some of its support? And what should happen in the realm of fiscal stimulus as well? Should we be easing back on the rhetoric regarding fiscal stimulus?
DL: Yeah, easing back on the rhetoric and easing back on the reality are two different things.
AL: It’s an election year, Don. We’re just going to get talk.
DL: There’s no shortage of rhetoric. You know, it wasn’t very respectful, but I saw a funny political cartoon suggesting that all the looting and the riots we’ve had in the last 10 days themselves have been a form of stimulus, because think of all the spending and capital investments it’s going to take to rebuild all that.
AL: Oh, geez.
DL: The reality that people forget is that sometimes the best stimulus is to have a really big shock that requires people to rethink their lives and to rebuild, to use new technologies that they were aware of but really hadn’t quite been goaded into using yet. So you saw Netflix’s most recent earnings report. They reported just this enormous gain in viewers. Now, you know why. It’s because there was a lockdown and you know people had to stay at home and watch movies on TV instead of going to the theater. Duh. But I was amazed at the many people who hadn’t already subscribed.
AL: Good point, yes.
DL: Necessity is the mother of invention. We’re recording this on Zoom, which is just like an amazing high-def video platform.
AL: Security-enhanced Zoom, I might add. So they’ve learned something out of this.
DL: Yeah, I don’t believe we’re being hacked as we speak.
AL: No, switched through U.S. servers on an encrypted channel.
DL: There you go.
AL: Yeah, although I want everyone to see this. I’d be happy for them to hack this conversation. I want everyone to hear it. But it’s like you said. It’s pushing people in ways that are positive, not negative.
DL: Most afternoons now, I’m doing Zoom cocktail parties with friends and their wives. And, you know, just because we’re not traveling as much and visiting them in other cities and all that stuff, we’re having more intimate, more frequent contact with those people than we were having before because of this technology — which, prior to the lockdown, the only time I ever used Zoom was with you.
DL: We can have a cocktail afterwards, okay? I’m not putting you down.
AL: Yeah, I never got invited to one of these parties, Don. We’re going to have to talk about that. I’ve got one comment about everything you said in terms of the data, because I thought it was a great analysis. And I have one minor criticism. That criticism is that that was a great analysis, much better than I’ve seen elsewhere, but it was still answering a “we” question — in the sense of what should we do. I was talking with a friend about all these other countries and what they’ve done, similar to the conversation that I had with you. And we said, well, you know, Hong Kong had success. They did this. Taiwan had success. They did that. Japan did this. And at the end of the conversation, he just said, you know, these things work and I said, yeah, but we’re never going to do that — the surveillance or whatever. Japan is sort of a distance culture as it is, so they had an advantage. That’s not going to work here. And he said, you’re right. America is going to have to find an American solution.
And I think the American solution is personal responsibility. Helping your neighbor, that sort of thing. I think a lot of it comes down to an “I” and “you” question. Not a “we” question. Meaning, it’s not: Should we get on a plane and go see a client? It should be: Should you get on a plane and go see a client? It’s not: Should we go into a busy studio and record an interview? It’s: Should I do that? And the choice should be mine, whether it’s lives versus money or lives versus lives. Whether you’re a doctor [and] do you choose to go to work? That is the only thing I would add to that. But overall, I thought, I haven’t seen many people looking at it that way and if you’re going to be actuarial about it and look at the numbers at least do it properly. And I think you did a great job of doing that, so thank you.
DL: Fair enough. Let me underscore how very significant it is that the only sustainable solution to this is one that people motivate themselves, because they become inculcated with the knowledge and the morality to know that it’s the right thing to do for themselves and for their community. All these crazy draconian laws that are one thing in Japan, another in Hong Kong, another in Michigan, and another in Orange County, California. Those top-down solutions aren’t the way to do it. The only sustainable thing is from each of us as individuals.
AL: I have one question for you though. A “we” question. Should we go get a burger and beer on Greenville one day? I hope the answer to that is yes, Don. I’ll be there in a second.
DL: You got it, man. Can’t wait.
AL: All right, thanks again, Don. Take care.
DL: Thank you.