Covid-19 – Applied Macro

Vaccine Hesitancy

As the rollout of COVID vaccination programs progress, the issue of reaching as many people as possible becomes critically important.

The anti-vax movement gets a lot of press in the news but that is not the group I want to talk about. They seem to be broadly typical of conspiracy theorists, so there is nothing I have to say which would make any sense to them.

The group that is far more interesting are the vaccine hesitant, who are not conspiracy theorists but often have rational foundations for not wanting to take the vaccine. I should be clear that I am very pro-vaccine and got mine as soon as I could and encourage others to do so, but I would like to explain why and how my views might differ to a vaccine hesitant person.

My friends and family don’t trust it so nor do I

I would think this is the most common reason and the most easily understood. They will often put more weight on the opinions and behaviors of those close to them, and so it should not be a surprise that vaccine enthusiasm/hesitancy exists in pockets with groups of friends and family likely to have similar views.
Reaching out to communities in ways that make sense to them is key and there is no simple answer.

I have a personal history to not trust new medicines

This is very real and very understandable. People who have had bad experiences with other medical treatments are likely to be cautious and require more convincing to participate.

I don’t trust the government

Nor do I. I have a lot of sympathy with people who are confused by the messaging and have lost faith in this government. Boris and his cronies lie all the time; they have used the crisis to create a kleptocracy where they and their friends are given lucrative contracts and serial failures like Dido Harding are promoted and given £37bn to waste. I am particularly annoyed that in the chaos of Boris Johnson’s government, important public health messages are often hidden.

But thankfully we do not have to take Boris’ word for the vaccine being good. The globally available information is compellingly behind the vaccination program including every government, international agency and scientific body. To think that there is collusion between all of these groups takes us into the realm of conspiracy theorist rather than hesitant. A good rule of thumb to know whether a conspiracy theory is plausible is to think about how many people have to be in the conspiracy and for how long. Tens of thousands of unconnected people keeping the massive secret for over a year is just not possible.

I have Information overload

There is vast amount of information available on COVID and the vaccine. Plenty is true but complicated, and a reasonable amount is misinformation. Sorting through it is not simple, especially for a general population with no particular training in medicine, statistics or ethics with low trust in authority.

In the face of this, people can find it very hard to make decisions and ‘doing nothing’ becomes the default and easiest outcome.

The technology is too new

mRNA technology has actually been around for a long time. The first vaccines were developed 30 years ago and 10 years ago we had good working candidates. But it took the pandemic for the funding and regulatory attention to move them into production. https://www.nature.com/articles/d41586-021-00019-w

I expect to hear much more about this technology in the coming years as we develop new ways to treat diseases such as cancer.

The vaccine was rolled out too quickly to be safe

This was a concern of mine but some research last year showed that a lot of the slowness in previous vaccine approvals came from bureaucratic delays rather than safety requirements. Much of the approvals process can be done simultaneously rather than sequentially which really sped things up. Similarly the vast funding enabled us to develop later stages of the research before waiting to finish the early stages.

Also, each vaccine had to be separately approved by each country’s own regulator ie you have a very large number of independent entities with chance to raise issues with the vaccines or the process.

It is best to wait to be sure it is safe

This makes sense as an argument.
The reason I do not agree in this case is that normally you would be waiting until lots of people have done it in case there is a problem which the testing stage missed. This normally takes time but given the speed of the rollout this time there have now been 5.6 BILLION doses delivered. This is an unfathomably large number, so far above the number you need to get approval which is in the thousands.

I am worried about the side effects

This would be a sensible reason for hesitation and is a normal human response. I do not share it as, related to the point above, we know so much from those 5.6 BILLION doses. With that many doses, it would be a shock if there were no individual tragedies, but the scale of the rollout means that our confidence is very high that the risks are vanishingly small. Unlike for COVID where the risks are well documented and much higher. For example, the risk of blood clots from the vaccine do exist but are vastly less than the risk of blood clots from COVID.

A complicating factor is misinformation about side-effects (e.g. leads to fertility issues or contaminates breast milk) – these are simply untrue.

Another common fear is that there might be a long-term problem (e.g. you will get cancer in 20 years’ time). I do not have much to counter this except to wonder why no other vaccine has ever had that problem. I am also very well aware of the long-term effects of COVID which are very real and could be very severe so I would much rather be protected from that.

I value my freedom and do not want to be forced to take it

This argument feels backwards as freedom for most people increases if we all have the vaccine as the vulnerable can safely leave their homes. I wonder if they feel this way about other forms of government coercion and want to protest their right to drive through red lights at 100 mph outside schools while drunk. Sometimes society limits our “freedom” to damage other people.

The vaccine does not really work

The argument here is that you can still catch COVID after being vaccinated. This is true but misses that you are drastically reducing the risks of more serious problems and virtually eliminating the risk of death.

Similar arguments are made about masks and other prevention measures, but I think this is a conceptual error on safety. Reducing risk is still a good idea even if it cannot be reduced to zero. I happily wear a seat belt and drive a car with an airbag even though it is still possible to die in a car accident.

The best metaphor I have seen about combining risk reducing strategies is to think of each of them as a slice of Swiss cheese.

Any single slice has large holes in it. But put them all back-to-back and you cannot see through it.

Some of the slices such as masks may have larger holes and some like vaccination have smaller holes. They are not alternatives but work best in combination.

You can still pass on COVID if you are vaccinated and so my decision only affects my health which is my business

This has some appeal as an argument. Even if you are double jabbed then you can still catch COVID and you can still infect other people. So what is the point?

This is misleading because vaccinated people:

are less likely to catch COVID ie less likely to have it
likely to have a much lower viral load ie are less infectious
are likely to recover much more quickly ie are infectious for less time

The combination of these three means that you do not have the exponential growth in the population and the virus dies out.

Conclusion

With a little reflection, it is pretty obvious that if no one were vaccinated right now, deaths in the UK would again be in the thousands per day not dozens. If everyone took the decision to delay, we would collectively be in a terrible situation.

In fact, a notable positive from the rollout has been how large the take up has been. Polls suggested that a large number would not take the vaccine but the take up has been far in excess of that.

This suggests to me that the anti-vax believers have likely not changed their mind but the numbers of vaccine hesitant has been steadily reducing. The arguments I have made above are far from new, and people are gradually moving towards accepting the vaccine.

Regeneron – Has Trump found a cure for Covid?

I have followed Trump’s Covid case very closely and it has been very confusing as the timeline of symptoms and treatment has not matched up to what we know about the progression of this virus. I am left thinking that the main difference between the particular case of Trump and others was his use of Regeneron. He claims it is a cure, I’m thinking it may have made him worse.

Timeline

Tuesday Sep 29th – We see Trump debate for 90 minutes. I see no signs of any symptoms.
Thursday Oct 1st – He tests positive. The only symptoms are reports of fatigue on the Wednesday and Thursday, but clearly not severe as he attended a fundraiser without major incident.
Friday am Oct 2nd – Trump personally requests and takes “Regeneron”, supplied by his golf buddy from the company Trump has held shares in. This is an experimental drug not approved by the FDA, but he gets emergency clearance to take it and Dr Conley agrees to administer it. His doctor then reports that his only symptom is mild fatigue.
Friday evening Oct 2nd – Trump has a rapid drop in his oxygen levels and takes a helicopter to hospital. Scans show signs of lung damage (i.e. pneumonia) and he is seen by a team of world class pulmonary experts. He is treated with remdesivir and notably the strong steroid dexamethasone.
Over next week – only very sketchy and misleading medical reports. From his videos we can see indications of pneumonia with a cough and shortage of breath. However he does appear to be improving and so the reason for the lack of transparency is not obvious.
Oct 13th Trump appears much improved, reportedly testing negative for Covid.

Is this a normal timeline?

It really isn’t. The onset of mild symptoms and rapid recovery would imply that he had a mild case of Covid, which is the most common outcome, even for people of his age and weight.

The hospital admission, lung damage and use of dexamethasone prescribed by highly regarded experts in their field can only mean that he was genuinely very ill and in real physical stress. For this to have been caused by Covid, it would imply a much more serious case – but in a Covid case these more serious symptoms typically occur 7 days after the onset of symptoms because they are caused by the overstimulation of the immune system going into overdrive. Further, if it had been caused by Covid, then it would not make sense that he could be released from hospital after only 3 days.

The evidence of serious illness is certainly clear, but the timeline is not consistent with it being caused by Covid.

How to reconcile this inconsistency?

Trump’s explanation that Regeneron cured him fits his view of himself as a genius who can treat himself better than anyone. He asked for this specific drug just as he asked for Hydroxychloroquine earlier this year, which Dr Conley also agreed to administer to him. But the timeline is exactly the wrong way round. He took the Regeneron before the emergence of the lung damage and drop in oxygen levels so it is hard to see it as the cure.

A common theory is that Trump had Covid for a week before he admitted to having it, and so the emergence of the overactive immune response is still the correct timeline. This does not reconcile with his rapid recovery unless we combine the theory that he had been sick for week with the theory that the Regeneron helped shorten his illness. This does not explain why he had no visible symptoms all week, whilst having a severe case of Covid which was about to get much worse.

I am left wondering if it was the Regeneron that caused the problems. In this hypothesis, Trump has a mild case of Covid but takes a massive dose (8g) of monoclonal antibodies which strongly stimulate his immune response. This overstimulation might have lead to pneumonia which is then treated by dexamethasone, after which he is recovering well. Trump does not want to admit that he caused the problems which would explain why he did not allow his doctors to give details on his condition.

Perhaps his Covid case was always mild and so it would have gone away without much intervention.

Breaking news

Eli Lilly has a very similar drug to Regeneron. Their trial has been paused due to safety concerns.

https://edition.cnn.com/2020/10/13/health/eli-lilly-pauses-trial-monoclonal-antibody-coronavirus/index.html

Would I take Regeneron?

I do not want to make a judgement from such sketchy information on a new drug. I would prefer to wait until clinical trials are completed and then we can see if it works or not.

Has the US stock market disconnected from the real economy? Part 4

In my previous three posts, I examined the pricing fundamentals of the US stock market. In this post I will look at possible explanations for the pricing.

Don’t fight the Fed

The argument here is that the Fed is active in monetary policy to offset the negative effects of the recession. In the recessions of 2001 and 2008, interest rates were around 6% and could be slashed giving a huge boost to the economy. In addition, in 2008, the Fed began its expansion of its balance sheet and continued it with QE in 2010.

In the recession of 2020, the Fed’s tools are more limited but it is fair to say they are using them as aggressively as they can and have managed to get long term interest rates to fall despite the vast surge in government debt issuance. The question remains of why the Fed will be so much more effective now than in previous recessions as the forecasts and pricing suggest.

The argument that yields have fallen and so the yield on all assets should follow is decent and intuitive but doesn’t explain why pricing is so much more optimistic than in previous recessions. In the other recessions of 2001 and 2008, we also saw sharp falls in interest rates but the impact of the drop in growth and thus earnings vastly overwhelmed this. The argument to justify the current situation would have to be rather different, that earnings will not drop very much (unlike previous recessions) and that Fed intervention will be huge and long-lasting, despite a rapid recovery of the economy.

It is true that Fed intervention this time around is truly monumental, the increase in the size of their balance sheet is over $3trn in the past quarter alone. If you can remember as far back as the Global Financial Crisis, the increase of $1trn in the balance sheet was seen by many as dangerous and would inevitably lead to hyperinflation. It may indeed be true that this huge intervention has flowed through to other asset markets, driving this stock market rally, but I do not expect the rise to be permanent. I do not expect the Fed to keep buying $3trn a quarter in financial assets to support the markets, particularly if the analysts are correct in expecting profits to immediately bounce back.

Private investors

This is an argument I find rather appealing. Fiscal transfers from the US government, in response to Covid, have been massive but poorly targeted. For example, the PPP (Payroll Protection Programme) came in the form of forgivable loans which did not have to be fully spent on payroll. Much of $500bn PPP has been in effect gifts to affluent people who do not need it to support spending.

Overall transfers from the government have been over $1trn, whilst spending has fallen by nearly $400bn. This leaves a lot of extra cash sitting in the bank accounts of affluent people and since they are not spending it, they are investing it. I would suggest in equities and putting that much money into the US market in a short time is going to have a large impact on the price.

Looking more closely at the typical small investor in the US, there has been a recent move to choosing their own stocks. They will tend to pick stocks they have heard of, that has been rising rapidly, that is sexy. They buy tech stocks like Amazon, Apple, Google, and Facebook. They even buy Tesla because Elon Musk is so often in the headlines and he makes it sound like a tech stock.

This is a classic bubble environment. A rapid influx of new money causes a spike in prices, whether it is art, vintage cars, fine wines, or stock markets. Tesla is now worth more than all the other car manufacturers in the world combined while producing less than 1% of the cars. It takes a lot of effort to find a fundamental rationale for that.

Has the US stock market disconnected from the real economy? Part 3

In the last two posts, I examined the fundamental basis for earnings of the US stock market. In this post, I will look at pricing and to what extent the market is discounting any of the risks highlighted.

Given that we have been looking at earnings already, all we need to get to the index price is to multiply by the Price-Earnings (PE) ratio from the chart below.

It is clear from the chart that PE ratios have been rising as confidence in the durability of profit growth has cemented. The current pricing levels are such, that even if earnings do return to record levels in late 2021, we would still have a PE ratio at the highs of the last decade.

This suggests that far from pricing any risk that NIPA data might be correct, or that the earnings drop might resemble previous recessions, the market is currently fully pricing a return to record profitability and excellent growth in profitability to continue from there.

I would rate stock market optimism as extremely high.