Topley’s Top Ten – March 16, 2020

Author

Matt Topley
March 16, 2020

1.Thursday NYSE Down Volume Hit 80%

Every Time The MarketFinished Higher 12 mos. Out

2. Selloff Erases All of US Market Cap Gains Since Election Day 2016

Bespoke

With the US stock market down nearly 7%yet again today, the total market cap of US companies as measured by theRussell 3,000 has fallen $11.5 trillion in less than a month.  On February19th, total US market cap was just over $35 trillion.  It’s at $23.8trillion as of this morning.

What makes this drop even morenoteworthy is that $23.8 trillion was the market cap of US companies onElection Day 2016.  At this point in time, all of the market cap gainsseen since President Trump’s election victory have been wiped out.  Visitour membership options page tolearn more about Bespoke’s research.

3.Two of the Worst Days Ever for S&P Corona Virus.

Nasdaq Dorsey Wright

4.International Markets Have Worst Day Ever Including 2008 Crisis.

MSCI World Index Record Down Day

5.Growth Still Outperformed Value in Corona Virus Pullback

6.Black Swan Versus Imbalance in Economy.

Normally recessions aretriggered by too big imbalances in the economy such as too much investment inhousing (2008), IT (2001), or commercial real estate (1990). As a result, theduration of a recession normally depends on how long time it takes to correctthe imbalances causing the recession. The current slowdown is not driven by anendogenous build-up of an imbalance in the economy but rather by an exogenousshock that literally came out of the blue. This argues for the current slowdownto be short and deep. This is also what we saw during the pandemic flu in1918-1919, where the recession lasted only seven months, and this was even in asituation where the second wave of infections in the fall of 1918 was moredeadly than the first. During the 1918-1919 pandemic flu, 5% of the worldpopulation died, and 1/3 got infected. For more see chart below and hereand here.

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Let us know if you would liketo add a colleague to this distribution list.

Torsten Sløk, Ph.D.Chief EconomistManaging Director

7. Pullbacks During 11 Year Bull….Corona Virus Hits Bear Level.

S&P 500 Snapshot: Officially a Bear Market–by Jill Mislinski, 3/12/20

8. S&P Appreciation Persisted Across Time.

9.Why the U.S. Doesn’t Have Enough Hospital Beds

Sometimes too much efficiency can be a bad thing. By Stephen Mihm

Hospitals often speakof what’s called “surge capacity” — the ability to absorb a sudden influx ofpatients because of a terrorist attack, a natural disaster, or even, yes, apandemic. Given the possible influx of patients sickened by the newcoronavirus, how much of a surge can U.S. hospitals accommodate?

Not as much as you might think. For years,cost-conscious hospitals have emulated the lean, just-in-time principles thathave revolutionized manufacturing. The result has been a health-care systemthat is far more efficient, but unprepared to handle a sudden influx ofseriously ill patients.

Over the first half the 20th century,hospitals expanded, adding beds at a steady clip. By the late 1950s, the UnitedStates had approximately nine hospital beds for every 1,000 people. Many ofthese beds went unused in normal times, but came in handy during periods of extremestress.

For example, in the winter of 1957 and 1958,an epidemic of influenza swept the country. This was the worst outbreak sincethe famous pandemic of 1918, but hospitals managed to absorb the surge withoutany problems. Even in New York City, which was harder hit than most, hospitalscoped with the increased demand, adding a few extra beds. The epidemic came andwent with little damage. Hospitals didn’t overflow with patients. Thingskept running.

In the 1960s and 1970s, hospitals expandedtheir facilities, thanks to government subsidies that encouraged capitalspending. This eventually created a surplus of hospital beds at precisely themoment when growing concern over medical costs began to fuel a search for waysto limit hospital stays or eliminate them altogether.

The turning point came in 1983, whenCongress transformed how Medicare reimbursed hospitals. Up to thispoint, the government had followed a fee-for-service arrangement. If a Medicarepatient occupied a bed, the hospital could bill the government for whateverservices the patient incurred. If anything, this arrangement gave hospitals anincentive to be inefficient, keeping patients in beds longer than necessary.

By contrast, under the new system introducedthat year, a patient’s particular diagnosis was translated into a flat paymentfor their entire hospital visit. This unleashed market forces on hospitals asthey began billing by the case, not by the day.

Its effects can be glimpsed in the data onoccupancy rates in the nation’s hospitals. From 1945 to 1983, hospitals in theUnited States kept approximately 75% of beds in use, leaving a quarter readyfor unanticipated surges. But after Congress acted, occupancy rates began toplunge, reaching 65% within two years and bottoming out at around 60% thefollowing decade.

Hospitals began consolidating and cuttingcapacity, just as Congress intended. The rise of managed care and othercost-conscious models also moved much of the business of delivering health careout of hospitals and into doctors’ offices and other settings.

As the need for hospital care declined, thenumber of beds per capita declined, too. By the early 1990s, the number of bedsper 1,000 population had fallen by50% from its peak. Over the next decade, a growing number of analysts beganto worry aboutthe unthinkable: a future shortage of hospital beds. The aging of the largerpopulation — especially baby boomers — looked particularly worrisome.

Yet little changed. Worse, there were growingsigns of strain on emergency rooms and intensive care units. Between 1997 and2004 alone, 12% of the nation’s 24-hour emergency departments closed entirely.They weren’t profitable, particularly given that many of the people who showedup in them lacked insurance to pay for the visit.

This translated into increased pressure on theremaining ERs. Indeed, statistics show that emergency-department diversions — whenhospitals nudge ambulances to take patients elsewhere — began increasing atthis time. So, too, did the number of Americans seeking care from emergencyrooms.

Increasingly crowded waiting rooms meant longer waits. This in turn led more patients to leave withoutbeing seen at all. In California alone, for example, the number of visitors toemergency departments who left against medical advice shot upward by 57% from 2012 to 2017.

For hospitals struggling to cut costs, theidea of adding beds — particularly expensive ICU beds — wasn’t particularlyappealing. True, some hospitals added criticalcare beds, but this barely kept up with population growth and demand. In fact,studies over past 20 years have highlighted that while the system can handlenormal levels of patient admissions, it’s ill-prepared tohandle something like a pandemic.

But the problems beget by decades ofcost-cutting and razor-thin margins don’t end with the availability of beds andemergency-room care. They extend to the most basic materials used in hospitals.

Since 2000, a growing number of health-careproviders adopted the just-in-time inventory methods pioneered by automanufacturers. Industry publications and academic articles alike have touted thecost savings that could come from pursuing this approach. In 2015, for example,a supply chain manager at Chicago’s Mercy Hospital told reporters, “It’s our job to make sure clinicianshave what they need when they need it, but we must also make sure we don’t havetoo many dollars tied up in inventory.” Mercy proceeded to cut its on-handinventory by 50%.

This included the equipment most critical forhandling a pandemic, such as respirators. Michael Osterholm, an infectiousdisease expert who has long warned that the U.S. is unready to handle theinflux of patients caused by an outbreak, recently noted: “No health care organization has gone out andstockpiled lots of personal protective equipment. They have always bought it ona just-in-time basis.”

Again, keeping costs to a minimum is laudablein normal times, even necessary. The same can be said for all the othercost-cutting measures unleashed on hospitals in recent decades. And yet, it mayhave set us up for disaster.

In the end, the pandemic may do more than killpeople and sow chaos. It may do something more shocking still: destroy thequaint belief that market forces can cure all that ails us.

10.The Opposite of Fear

March 12, 2020

Based on what I’vebeen seeing regarding people’s reactions to the unfolding coronavirussituation, many seem to be trying to keep themselves out of fear mode.

Instead of fear,they suggest to adopt a mode of thinking and being they typically describe withwords like optimism or love.

Stay positive. Don’tbe afraid. Don’t panic. Turn towards love.

Yet when you look attheir responses and attitudes, what they’re really doing is one of more ofthese:

  • Hoping that everything will be okay

  • Guessing

  • Waiting

  • Ignoring or downplaying risks

  • Making claims based on mathematical ignorance

  • Reposting debunked memes

  • Trying to encourage others not to fear

  • Stocking up on food and toilet paper

  • Sanitizing their hands like a Golgafrinchan phone

Is this really theopposite of fear though? Is this even moving away from fear all that much?

I’d say that theopposite of fear is more likely to include actions such as these:

  • Seeking to understand the situation more accurately

  • Gathering facts, details, and relevant predictive information

  • Assessing risks

  • Making rational predictions based on relevant models and data

  • Identifying, defining, and prioritizing problems

  • Devising solutions to problems

  • Implementing solutions and lifestyle adjustments

  • Sharing facts, details, and actionable info with others

  • Asking questions to increase understanding

  • Cooperating with others to identify, prioritize, and solveproblems

  • Coordinating with others to implement solutions

  • Monitoring changes to the dynamic situation

Many people aredoing a bit from both lists, which is to be expected. We have our rational sideand our irrational aspects.

Is it really helpfulthough to focus on fear as one of the main problems though? Is this actuallyhelping much?

When you think thatyou need to overcome fear first, does it help you behave more rationally? Doesit lead to assessing risks and solving problems?

Or does trying tonot be afraid lead you towards some form of distraction or other behaviors thatdelay or subvert more rational behaviors?

I think it’s hardfor our characters to really grasp what the opposite of fear is supposed to looklike, especially in terms of actions. When we tell ourselves not to be afraid,what do we actually do? What does doing “not afraid” actually look like? Thatisn’t so clear.

It appears thatdoing “not afraid” often looks like inviting other people to stop being afraidand to start loving and helping and supporting each other.

We’re all in thistogether. Don’t be a hoarder. Stay calm. And there will be rainbows andunicorns again… but unfortunately no leprechauns since St. Patrick’s Dayparades are canceled.

The “don’t beafraid” admonition is one of those lines of thinking that sounds good at first,but it tends to fizzle into actions that don’t necessarily help that much. It’snot so terrible to remind ourselves not to be afraid and to turn towards love,but then where we take this beyond sharing platitudes and memes? The energy ofthis idea tends to fizzle out pretty quickly.

Reminding people notto fear probably might help a little bit, but it’s probably better atattracting likes and one-line comments than really moving the needle forwardfor most people.

Lately I’ve beenfinding that what moves the needle forward more than “let’s not be afraid” remindersis sharing detailed and rational info that helps people better understand howto frame this situation, what we can reasonably expect next, and why certainactions are rational right now, such as Tomas Pueyo’s coronavirus article thatI’ve been referring many friends to, or SébastienNight’s coronavirus article for the entrepreneurialperspective.

It’s good to want tomove away from fear, but I think we can do better than suggesting that theopposite of fear is love and squishiness. I think we’re better of framing theopposite of fear as rational investigation, risk assessment, andproblem-solving.

Given the egregiousleadership vacancy at the federal level in the USA right now, we’re going tohave to pick up the slack ourselves to make up for those shortcomings as bestwe can. Reminding each other to embrace love instead of fear is okay now andthen, but let’s be sure to embrace, encourage, and demonstrate rational actionto identify and reduce our risks as well.

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