This morning I was fortunate to be able to participate in a call with former Homeland Security Chief Michael Chertoff and former Director of Operations for the CIA Chad Sweet. Their knowledge on pandemic preparation, security, etc, is invaluable. I want to pass along some of the important pieces of information from that call. Additionally, I have spoken with many of our managers over the past two days and was on an investment committee call with 12 CIOs and will include anecdotes from those calls as well.
Needless to say we are in uncharted territory. There has never been a shutdown of the US economy with this breadth. Undoubtedly we will have a monstrously negative 2nd quarter GDP. That is somewhat priced into markets today. The question is the duration of the slowdown and the speed of recovery. The pace of the virus will be key to determining these trajectories, Michael and Chad addressed that issue. The government reaction has been swift and robust. If the virus impact is relatively short, the economy should explode in 2021, the markets sooner.
Chertoff and Sweet:
1. This emergency is similar to a bioterrorism attack. The government has prepped for this type of attack for since 9/11. The difference is there is no mass evacuation required and no infrastructure rebuild to follow.
2. The key to a successful path through this epidemic is clear directions and people following the prescribed rules. Social distancing, working at home when feasible, etc, will reduce the strain on our medical system.
3. The US has 1 million hospital beds but only 10,000 respirators. If the infection rate gets large, it will overwhelm the healthcare system and doctors will be placed in the unenviable position of deciding who gets to use the ventilator. The social limitations should help reduce the number of severe cases, which they feel is more important to the healthcare system than the mortality rate. Long term ill patients consume medical resources for long time periods. Not to sound cold, but dead patients don't consumer resources.
4. Weather should definitely slow this virus down, possibly ending the infection process by mid-summer. The travel ban to China and other actions helped stave off the onset of the virus in the US, which will work to our benefit as we are one-month closer to summer than a country like Italy.
5. Unless there are changes in the overly bureaucratic FDA, it would be 12-18 months for a vaccine. This becomes dangerous if the virus reemerges in September, much like the Spanish Flu of 2018. The majority of deaths from that pandemic occurred in the second season. The impetus for the FDA to act judiciously has never been higher.
6. Their view is that the mortality rate is only slightly higher than that of the flu. The bigger issue is the percentage of serious cases requiring hospitalization (morbidity rate), which exacerbates the healthcare resource problem discussed earlier. They feel this percentage could be as high as 10%.
7. The media is dropping the ball, contributing excessively to the hysteria by reporting snippets of data such as a 52 year old dying from the virus. This out of context reporting misinforms the public (but it helps ratings).
8. The Administration's early mistake was not their reaction, but their expectation that the virus could be eradicated and that would be victory. They have now appropriately shifted their expectations that victory is slowing the spread so as not to overwhelm our healthcare resources. Under that scenario, April 15 and May 15 are key dates for measuring the retransmission and growth rates. If the number of cases has stopped doubling by those dates, the virus should "burn itself out" If we haven't achieved knocking the growth rate below 100% by then, we run the risk of this coming back as a full blown pandemic in the fall.
9. Outside of the early messaging mistakes, the financial and medical response from government has been on track and for the most part textbook.
10. South Korea's success is due to their 70 years of being in a state of war. They practice and have stockpiled supplies in the event of a chemical or germ warfare attack from the North for the past 70 years.
11. If the number of infections tracks too far up and will overwhelm the number of beds available, the government will have to lower their standard of care and open college dorms, hotels, and parking lots for care centers.
12. The virus won't be rendered completely gone until either a vaccine or exposure to the virus infects the majority of the population.
13. China's reports of no more cases are BS. China consistently lies about their activities. Additionally, people are loathe to self-report this illness because the government will yank them out of their homes, along with their family, and isolate them.
Regarding our portfolio, I have been on calls with our PE managers. Our allocations to distressed managers (XXX and XXX) should benefit from this environment. Additionally, based upon the investment committee call I was on earlier today, it appears our secondary investments with XXX should also benefit as CIOs are concerned about liquidity and are looking to sell selective PE interests. I have also been on the phone with XXX XXX at XXX-at this time they are flush with dry powder and only have one portfolio company to worry about which means, unlike other managers with larger portfolios, they can focus on using their cash for opportunistic purchases versus shoring up existing portfolio companies.
For our overall portfolio we have quite a bit of cash and will use it strategically but patiently as this situation will not be resolved in the next two weeks. We should be thinking in terms of months, with a mid-late June time frame being realistic and a success.
Have a great day
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