A critical look at the Dr. Erickson Bakersfield COVID-19 video

This video from California Dr. Erickson has gone viral, and is being held up by everyone wishing to argue that the approach the US took to the virus was wrong. I suspected a lot of confirmation bias, and decided to go through the video and take notes.

Within the first five minutes, I already noted four claims that were either misleading, or flat-out wrong—enough to disqualify the source, and any further time spent watching it.

  • He starts off by saying “Our approach has been to look at this by the science”, as if nobody else is doing that. No medical problem in history has received more focused global attention than COVID-19. And since extremely few people are actually qualified to have an opinion on COVID-19 scientifically, then understanding the consensus view is really important.
  • He claims the initial shut down of travel from China, and other early measures, were “good things to do, when you don’t have facts.” That’s simply wrong. We had a LOT of facts. We had observations of the outbreaks in Wuhan, Iran and possibly Italy. We already had a fairly accurate understanding of its contagiousness (R0), to know that this is an exponential growth outbreak. Also, stopping travel has long been known to be important tactic in response to an infectious disease outbreak. These measures are by no means just “stuff you do when you’re blind”.
  • “We quarantine the sick, but we’ve never seen a situation where you quarantine the healthy.” This is so misleading. We didn’t “quarantine the healthy”; we imposed social distancing by mandate, rather than trust voluntary behavior. And the reason that decision was taken, was to ensure the spread was successfully slowed, rather than risk a nationwide repeat of Iran, Italy, Spain & NYC.
  • He claims initial models were “wrong”, because they predicted millions of deaths, “As we’ve seen, that didn’t materialize.” OMG. Duh!? Anyone who listened to Dr Birx reporting the first model predictions will recall, “2M dead if we do nothing. 100k if we take these measures.” The 2M figure was IF WE DO NOTHING! And taking the measures we took resulted in (so far) 60k deaths. Knowing how sensitive models of exponential growth are to input parameters and real-time changing dynamics, the models were pretty good!

With that, I’d had enough. This is a misleading video, but one that will unfortunately be judged by many though confirmation bias. Doing a bit of Googling, I’ve seen that others more qualified than me have condemned the video as well.

The Dummies Edition of The New, New World Order

In the midst of this possibly one-in-a-lifetime shock, I’ve been very interested in thinking about and imagining what life will look like moving forward. As input to that thinking, I’ve been summarizing interesting essays and interviews of others, including Raoul Pal’s gloomy economic forecast and Ray Dalio’s socioeconomic outlook.

Today, I’ve come across a fantastic speculative vision put forward by Joe McCann, entitled The New, New World Order. I absolutely encourage you to read it beginning to end, but for the attention-challenged, I’ve tried to summarize the key themes below:

  • Self-suffiency — Self-sufficiency will become a national security interest. Whereas profitability and lower product costs drove manufacturing abroad, this crisis has exposed the risk of moving any critical link in the supply chain outside the country. Expect to see domestic manufacturing, in some areas, return to the US.
  • Socialism — It has started with the direct deposit of $1,200 in to everyone’s bank account, and will not stop, as it would be political suicide for any politician to terminate people’s “stimulus checks”.
  • QE ∞ — In the Quantitative Easing post-2008, the Federal Reserve started buying stuff like mortgage-backed securities. Today, it’s buying junk bonds, and in “unlimited amounts”, meaning we now have “unlimited quantitative easing”. This will completely distort markets, as natural price discovery is no longer possible.
  • Indirect nationalization — By propping up industries financially through bailouts, like the airlines, we are nationalizing them indirectly.
  • National healthcare — The crisis has exposed the US healthcare system as a vulnerability in national defense, and this will now be addressed as a national security issue. We will see regulation stripped away and mountains moved to advance this industry technologically.
  • Proof of health — Just as proof-of-identity is required of so many things, we’ll begin to see proof-of-health (immunity, antibodies, etc.) become a thing, for entering large events, boarding planes, etc. Expect to see technology advancements in this area, including public blockchains to solve the global standards and trust issues.
  • New working-class divide — Remote working will persist, and grow dramatically. This will have impacts everywhere, including real estate. But most importantly, it will create a new social divide, between those whose work happens virtually, and those that happen on land.
  • Education — Online education will grow and thrive. The Ivy’s will remain, but expect to see closures of many of the second tier (and lower) universities. Expect to see vocational training surge, as training related to the repatriation of manufacturing will be in demand. Also expect to see the nature of that training change, as the nature of human involvement in manufacturing won’t look like it did in the 1960s, given automation.
  • eSports and eEntertainment — Expect to see less Hollywood productions, and less live sports, and more user-created content, eSports, distribution channels, video and streaming.

Ray Dalio on COVID-19

Ray Dalio of Bridgwater Associates made a virtual TED appearance to discuss the context and consequences of this current COVID19 crisis. I’ve tried to paraphrase his ideas in this article.

What are the consequences of COVID19?

To imagine who will be affected and how, globally, one has to think in terms of incomes and balance sheets, and realize there will be holes in both.

The response we are seeing, as in similar historical situations such as 1930 to 1945, is the creation of money and credit. Who are the major producers of this money and credit? The United States and Europe. The US Federal Reserve is buying Treasury’s debt, and the Treasury is distributing that money primarily to Americans. The Europeans are doing the same. The European bank is smaller, as the world runs on about 70% dollars.

It’s important to observe that there aren’t many banks around the world, and so the rest of the world will have holes that are not filled. Much of the world will not get the money and credit being created, and this will result in disparities. This question of who gets what, and the resulting wealth distribution is a defining moment.

Defining moments repeat

Such defining moments happen every 75 years or so, and generally occur as the result of four forces that drive economies.

  1. Productivity — This comes from people learning, investing and doing things well. It results in slow growth, 1% to 2% per year. It’s not volatile, because knowledge isn’t volatile. It improves the quality of our lives.
  2. Short-term debt cycle — This is the business cycle. Recessions and expansions, that are about 8 to 10 years in duration.
  3. Long-term debt cycle — These happen with a periodicity of about 50 to 75 years, and whose end are marked by disruption, in which new types of money and credit emerge. The last was 1945, with the end of WWII and emergence of the Bretton Woods monetary system. This created the new world order, the American world order, that we have today, in which 70% of the world runs on the US dollar.
  4. Politics — This is all about how we deal with each other. Internal politics are how we deal with wealth and value gaps. Do we have a common national mission, or do we fight over wealth? Internal struggles lead to revolution, peaceful or otherwise, and shifts in wealth. External politics happen between countries, as rising powers challenge existing ones, producing risk of wars where cooperation isn’t achieved.

Are we headed towards a global depression?

Yes, but with caveats, because that’s a loaded term, often used for fear mongering. What do we actually mean by a depression?

  • Between 1929 and 1932 we had a large drop in the economy, and double-digit unemployment. Are we like that today? Yes.
  • Back then, they printed a lot of money. Interest rates hit zero. Are we like that today? Yes.

So this is not a recession. It’s a structural breakdown that we’ve seen many times in history, and we’ll see the same four levers used in response:

  1. Cutting spending. Austerity.
  2. Debt restructuring, forgiveness.
  3. Redistribution of wealth through taxation.
  4. Printing of money.

Will those things get us out? How will they be balanced? These are the open questions. What we do know is that the greatest force we have is our capacity for inventiveness and adaptation, if we can cooperate.

We also know that when we emerge after two or three years into a new world order, that the restructuring should make us healthier. The people who haven’t saved, or those who have prioritized luxury over saving will face a reckoning, and society will adapt/evolve towards healthy behaviors.

Has the market failed to recognized this?

This is something we can’t know. What we do know is:

  • Developed markets are off 20%. Emerging markets are off 45%, as they won’t benefit so much from the new money and credit being created.
  • We’ll see a huge restructing, and it will be defined entity by entity. For example, we will some some hospitals go bankrupt. Supply lines will change. What it means to be self-sufficient will change.
  • In the crisis of 2008, we had banks with leverage that faced insolvency when things went south. Governments decide which are systemically critical, and then create money and credit to keep those alive. Those not systemic are allowed to fail. This current crisis is more complex. There are banks, but there are far more affected entities beyond banks. All those little businesses. Who will we save, and how?

What kind of industries have the best prospects going forward?

  1. Those that are stable —The lifelong meat & potatoes industries, that are not leveraged.
  2. The innovators—Those who can adapt and innovate and don’t have balance sheet problems. They will be the big winners.

What should an average investor or 401k holder be thinking?

Investors must understand they will not be successful trying to “play the game”. Being successful in the market is more difficult than winning gold medal in the Olympics. Nobody thinks about competing in the Olympics, but everybody feels they can compete in the markets. This is the very worst thing you can try to do. Don’t try to time the markets, chase winners, or avoid losers.

So what is the most important thing to do? Be diversified. Have some stocks. Have some bonds. Have a bit of gold. Have a bit of what might be found in a new world order.

Are we retreating from globalization?

Yes, and we have been. There is idealism, and there is reality.

Who will write what checks to people in countries that are outside their domain? The reality is a lot of those people won’t be helped. How will people react? Over the last 500 years there’s been a lot of internal rivalries and wars. There’s no global legal system. Power is the currency.

Dalio is a globalist in ideology; a dreamer that the best of the best can work together for the common good. But the reality is that we’re in a fragmented world. Can I depend on someone not taking advantage of me? No, you can’t. Within countries, nor between countries.

China has been helping many parts of the world during this crisis, but to even acknowledge that is dangerous politically. The world is so fragmented, that it’s dangerous to say thank you.

How does capitalism need to be reformed?

Dalio is a capitalist through and through. But there comes a time when reform is necessary, and that’s when we see that the outcomes of the systems in place aren’t what we want, and understanding the system dynamics that lead to those outcomes.

All throughout history, societal systems work for those who control it. The government and entrepreneurs have a symbiotic relationship, and help each other. The consequence trickles down to education; the top 40% spend 5X more on their children’s education, than those in the bottom 60%. It’s self-perpetuating.

The solution is not to give money away, but find ways to expand productivity to those places where it’s low. This is even a psychologically important distinction—earning vs receiving.

Moving on from COVID-19

Seeing so many fragmented discussions about how and when we move on from COVID-19, I wanted to try to capture the considerations in a single, coherent note.

The vaccine and its timeline

Let’s start with the vaccine. Once a vaccine is available, then this crisis is mostly over and the world can return to normal, as getting vaccinated will (for most people) immunize them against getting sick from infection.

From the time of this writing (April 2020), we’re looking at 12 to 18 months before a vaccine will be available. Why so long? Because you can’t inject billions of people with something that isn’t very, very, very well tested.

Since closing the global economy for 12 to 18 months would be a financial and humanitarian catastrophe, a lot of energy is being spent thinking about how we can “open up” earlier. But this is far more challenging than many realize.

Herd immunity

If everyone in the world could get infected, most would live, and we’d find ourselves in a state in which the large majority of people have immunity through COVID-19 antibodies. This is often referred to as herd immunity.

So why don’t we just let the virus run its natural course, and reach herd immunity as fast as possible? For two reasons:

  1. An unacceptable number of deaths. Say 60% of Americans were infected through herd immunity. With a mortality rate of 1%, that would result in close to 2 million deaths. A reasonable ethics question is whether the costs (economic and health) of stopping the economy compensates the loss of such life? The United Kingdom, in fact, originally planned to attempt herd immunity, but back-tracked in the face of the second problem.
  2. Because of how extremely contagious COVID-19 is, letting the virus run its course quickly overwhelms the hospital system—which, in turn, results in a skyrocketing effective mortality rate, as many who would otherwise survive, die from lack of medical treatment.

Hospital saturation

For those who develop life-threatening COVID-19 complications, hospitalization, and in particular, access to an Intensive Care Unit (ICU), is their only hope of survival.

As it happens, there aren’t many ICU units in the world. As a consequence, a relatively small outbreak can immediately overwhelm the local hospital system. If on average there’s one ICU per 10,000 people, and a COVID-19 outbreak quickly results in 1% requiring an ICU, that’s one ICU available for every 1,000 who need one.

And when that happens, the consequences can be terrible, as we saw in Italy and Spain, where at one point, people over the age of 65 arriving to hospitals were simply sent home to die, as there was nowhere to treat them. Under such circumstances, the natural mortality rate of COVID-19, which appears to be roughly 1%, can increase to 10% and more, because so many die due to lack of hospital access.

And that brings us to possibly the most misunderstood aspect of this crisis:

The main problem with COVID-19 is not the individual risk of death. Rather, it’s that the virus’s contagiousness leads to outbreaks that immediately overwhelm local hospital systems, and that, in turn, results in a spike in deaths.

Mandatory lockdown works

How do you prevent outbreaks? Simple. You prevent humans from coming in contact with each other, which is what countries are doing through mandated lockdowns. Here in Spain, it’s illegal to leave your home except for necessary trips to the grocery store, pharmacy, doctor, etc.

When lockdowns are in place, people stop coming in contact with each other, and you soon start to see the “flattening of the curve”:

Voluntary lockdown, less so

The approach in the United States began mostly as an appeal for voluntary “social distancing”, which helps. However, in a voluntary system, not everyone will follow it. In fact, many—especially the young—don’t even understand the need to, as they perceive the problem to be one of individual mortality, which is a low risk for them.

And so we get situations like Albany, Georgia, where a group of people who likely didn’t really understand the risk, or perhaps believed that COVID-19 wasn’t present in their community, gathered for a funeral, which prompted a local outbreak, and immediate overwhelming of the local hospital system.

The problem with opening up

Donald Trump often speaks about wanting to open up, as soon possible, even if on a limited basis. This sentiment is echoed by politicians in other countries. Just today, as the curve is flattening in Spain, the scope of people allowed to return to work was increased.

So what’s the problem?

We are nowhere close to reaching herd immunity, and so new outbreaks will occur. And it only takes a very small outbreak to overwhelm the hospital system.

There is clear optimism of re-opening in the United States, as daily new cases have stabilized. But as of today, 60% of all cases in the United States are concentrated in only five states!

At present, there are 560,000 cases in the US. Since testing has been limited, let’s assume the total infected and/or recovered is 10 times higher, or 5.6M. With a population of 350M, that would represent less than 2% of the country’s population having been infected today. As such, the United States, like nearly all countries, is nowhere close to herd immunity.

So as soon as the United States, or any country in a similar situation, “opens up”, there will be people who mistake individual-mortality as the core risk, or are otherwise uninformed, will gather with other people, new outbreaks will occur, requiring new lockdowns, to flatten the new curve. This will happen over, and over.

This has already been observed in countries like Japan and Singapore.

What’s the solution? Test, Isolate, Trace

In the short-term, there’s little that can be done. We can watch each day as Donald Trump speaks of opening up soon, followed by Dr. Fauci trying to reign in false hope.

In the medium term, the solution seems to be a process called test, isolate, trace. Let’s call it TIT.

In a TIT process, the general population would be broadly, randomly and frequently tested, in order to try to find the real danger—those who are infected and contagious, but are asymptomatic. These are ones that cause outbreaks.

Such testing would obviously require a cheap and fast testing technology. When available, one could imagine traffic stops, voluntary drive-ins, random stops in malls, etc. Testing would be happening everywhere.

When an infected person is discovered, they would immediately be transported to an isolation center, where they would be kept until testing negative. Here in Spain, the federal government has been asking counties to identify hotels, convention centers and similar venues where infected people could be placed in such a TIT process.

When an infected person is discovered, an attempt would then be made to identify everyone they’ve been in contact with, and then those people would be located, tested, and for the positives, the process would start again.

It’s believed that a TIT process—combined with societal behavioral changes including social distancing, wearing masks and frequent hand-washing—would allow life to return to something resembling normalcy prior to the availability of a vaccine.

How do we implement TIT quickly? First, we need fast and cheap test kits to be available. Second, we need governments to organize and execute the process. Finally, we are likely to see achieving a TIT process tremendously accelerated through private technology initiatives.

Apple and Google have already announced a collaboration to develop mobile device based contract tracing technology, that preserves individual privacy.

There’s tremendous scope for technology to help. In addition to contact tracing, I would imagine that app-based tracking would also help in widespread testing, as it would be easier to identify those who have previously been infected, have antibodies, and can be skipped. At a certain point, random testing could be replaced with notifications of those requiring a test.

Therapeutics

One final possibility to shortening the path to re-opening the world would be the discovery of one or more therapeutics that prove effective in the treatment of COVID-19. You’ve probably already heard mention of some leading candidates in the press—i.e. remdesivir and hydroxychloroquine.

Such therapeutics, if effective, wouldn’t provide the preventative protection of a vaccine, but would lower the effective mortality rate of infection in those places where the medicines are broadly available. For example, if something like hydroxychloroquine could improve the mortality by a factor of ten, then COVID-19 would become more akin to the common flu.

Conclusion

I’d like to conclude with a summary of what I believe are the key take-aways:

  1. It will likely be more than a year before a vaccine is available.
  2. The main problem with COVID-19 is not the individual risk of mortality. Rather, the main problem is that its contagiousness leads to outbreaks which overwhelm local hospital systems, resulting in a spike in deaths.
  3. The problem with opening-up prior to a vaccine, is the near certainty of new outbreaks, overwhelmed hospitals, requiring new lockdowns to flatten the new curves.
  4. The medium term solution will be a process called Test, Isolate, Trace i.e. TIT.
  5. Private technology may result in TIT moving from a medium-term solution, to a short-term solution.
  6. Therapeutics offer the potential to shorten the time to re-opening, as a means of lowering the effective mortality rate.