What caught my eye this week.

Mixed events in the global soap opera saga Coronavirus this week.

The good news is the Prime Minister returned from that episode to tell us we’re probably past the peak of Covid-19.

The focus now is on R, aka the reproduction number. Keep it under ‘1’ and the pandemic is not spreading exponentially.

As a nation our R number is now somewhere under 1. Probably between 0.5 and 0.75, although it may still be higher in some places like (tragically) care homes.

Ruh-Roh

The lower the R the better, obviously, but the question will increasingly be how much more [insert what matters most to you] damage we can take to lower it further?

Getting R down from the 3 to 4.5 level that looked like it might overrun the NHS was a no-brainer. But there’ll be diminishing returns.

Full lockdown – or even just heavy social distancing – has health as well as economic consequences, too. Some people will die earlier because we brought a recession upon ourselves.

Yet equally, every micro-notch higher in R that we accept means someone somewhere will die before their time from Covid-19.

That’s the equation for the upcoming weeks.

There are no easy answers. Perhaps there was a more promising hypothesis, but the past seven days looks to have done for it.

Spread ’em

I’ve been mildly obsessed with Covid-19 since January (and mildly infected, I believe, in early March). I’ve ridden a rollercoaster from being precociously concerned to evasive action to believing things might not be as bad as was thought and now I’m halfway back again.

Long story short1 a series of intuitions (or guesses, if you prefer) informed by endless reading about Covid-19 convinced me the virus was spreading far faster in the UK than was generally thought likely.

All the experts knew the virus was spreading more quickly than reported cases, of course. But I (no expert) believed it was circulating faster again.

That was a comforting thesis because it suggested (1) the virus wasn’t as deadly as even the more middling predictions suggested and (2) we might reach some level of herd immunity sooner rather than later.

It’s long been clear this virus has a Great White Shark’s nose for the elderly and vulnerable, and I’ve been frustrated we either couldn’t or didn’t shield them better.

But in a super-infectious scenario, for the vast majority of us Covid-19 would be a very mild infection, mostly asymptomatic.

And by the time full lockdown was called, I felt it was possible a large number of us in London at least had already had it.

That proved to be right… a bit.

Peak deaths for the virus occurred in early April. Working backwards gets you to peak infections towards the end of the second week of March.

But how many? For that we can first consider deaths.

It’s hard to unpick the roughly 30,000 or so excess deaths we’ve seen so far in England and Wales in 2020.

Most will be due to Covid-19, but some may have been attributed to the virus incorrectly. For example, there were fewer heart disease related deaths in March. Perhaps some were blamed on Covid-19?

But just crudely guessing 30,000 and assuming an infection fatality rate (IFR) of 1%, that gets you to three million or so infected, with peak infection probably occurring in or around the period of voluntary lockdown, but just before mandated lockdown.

So overall millions have been infected – but not enough to be good news.

Unless… the IFR was much less than 1%, because far more people had been infected?

Start spreading the blues

That left antibody testing carrying the baby.

The hope was antibody testing would reveal that in areas of rampant morbidity to the coronavirus – such as Italy, London, and New York – many, MANY more people had been infected.

If this was true then you could indeed pull down the IFR.

Well, over the past seven days we got the first large scale data – from New York City and Stockholm – and it’s probably not good enough.

The New York City testing is the most promising, implying 25% of its citizens have had Covid-19. However, while that shocked the media it was much lower than I’d been hoping for.

Indeed as reader @Vanguardfan points out, 25% implies an on-consensus IFR of around 1%, if you take into account the number of presumed deaths to Covid-19 in New York City.

And 1% is no comfort if you apply it to the UK’s population of 67 million.

Now, not every last citizen will need to throw the viral dice – we should get some natural resistance to the virus on a population level, before everyone has had it.

However if we assume the chunky herd immunity thresholds that most experts think we’d need to see – at least 50%, possibly more like 70+% – even New York is far from having ‘earned’ an inherent resistance through its deathly exposure2.

This is disappointing to me, though it won’t be unexpected to the experts. It looks like they called it.

Hopium

Much is still unknown about this virus. For every potential fact I find in early research about it, you can retort with another. Anyone waiting for scientific confidence (proof, for shorthand) better have a lot of series lined up on Netflix.

The huge list of Covid-19 links below (perhaps 20% of what I’ve read this week) gives just a taster.

It’s possible that amid this uncertainty there may be other off-ramps from the bad (though not worst-case) scenario:

• Maybe a large number of people can kill the virus with their immune system so easily that they don’t develop antibodies.

• Or maybe it’s spread much more widely among the most vulnerable parts of society, which is terrible news right now, but may have elevated the fatality rate and hopefully left the survivors with some resistance.

• Summer could well curb the spread anyway, which at the least should give us time to better prepare for any resurgence.

• Maybe the herd immunity threshold will prove lower than presupposed.

• Or more likely it may turn out that just a few key social distancing actions – no handshakes, avoiding crowds indoors, and washing your hands – will do 90% of the R-lowering. (The Swedish approach.)

• Kids may not be infectious, too, taking them out of the equation altogether.

I have reasons for making all those suggestions, based on my own reading.

But the truth is there’s an equally long list of reasons to be pessimistic.

As Freddie Sayers concludes in a sober piece on UnHerd that pits Sweden’s top epidemiologist against our own leading figure:

…it’s time to stop pretending that our response to this threat is simply a scientific question, or even an easy moral choice between right and wrong.

It’s a question of what sort of world we want to live in, and at what cost.

An ‘ell of a recession

Bottom line: I no longer hope for a very quick exit from this nightmare, unless perhaps R collapses extremely rapidly in the next few weeks and we can go back to trying test and tracing.

And this probably kicks the V-shaped recovery into the long grass. The drag from physical distancing and other anti-viral precautions alone could knock a few percentage points off GDP, even if we go back to semi-normal.

What are football matches, trade conferences, pubs, easy air travel, and the Glastonbury Festival worth to GDP, to name but a few lost causes?

Even if fatal Covid-19 cases do plunge and more normality can be reinstated, for as long as outbreaks flare up it may be hard to persuade some people to take their chances.

We’ve been bombarded with deathly warnings about the virus and kept under house arrest for a couple of months on its account. Dinner and a show on Friday night? Many may continue to Deliveroo and chill instead.

And while a cocktail of better treatments (drugs and regimens) will probably be assembled by the end of the year, that’s, well, the end of the year.

So L-shaped recovery it is. Probably what’s priced in by the global stock markets, anyway.

You see, a lot of people are talking about market mania after the quick bounce from the March lows.

But this is mostly a US market thing. And in the US market it’s mostly a tech thing. And of the tech companies, it’s mostly a bunch of cloud giants who couldn’t have come up with a better driver of demand than ‘shelter in place’. Strong demand now, plus their valuations turn on the years of prodigious earnings they’re expected to make long after Covid-19.

No, if you want a market that’s geared to the global economy, look to the UK’s FTSE 100. Its 2020 performance (red) already looks like an ‘L’, versus the (blue) S&P 500’s squint a bit ‘V’:

Source: Yahoo Finance

I’ve always been more worried about the financial impact of global lockdown than most, even while I was slightly more sanguine about the virus.

And now I see economy-dinging restrictions continuing.

So I’ve a horrible feeling that while the UK pandemic probably is past its peak, with the economy it’s like we’re back when people were gasping at footage of Italians stuck inside, hardly realizing the sort of misery we’d soon face.

Note: Fed up with virus chat? I’m planning to drastically reduce the number of Covid-19 links here next week. We’ve just hit that peak, too!

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1. Read the past two months of Weekend Reading comments for the real-time discussion! [↩]
2. Presuming such an immunity actually exists, which isn’t definitively proven, but which seems likely. [↩]

I noticed a few of the wilier cats among the Monevator crowd were holding US government bonds going into the coronavirus crisis. They seemed pretty pleased with themselves, so I decided to see what’s up.

After all, there’s no better time to change your strategy than after the horse has bolted…

Most of the passive investing gurus advise holding high-quality domestic bonds (i.e. gilts, if you’re a UK-based investor). But then, most of the passive gurus are from the US. What if there’s some kind of American Exceptionalism playing out here and I’ve been a Lee Harvey Oswald-style patsy all this time?

To assuage my fears I logged into the ETF-screening and portfolio-building service, JustETF.

I compared unhedged1, intermediate government bond ETFs of the US, Euro, Global, and UK persuasion.2 I pitted them against each other and an MSCI World ETF during as many stock market bloodlettings as possible. My fears were un-assuaged.

Coronavirus Crisis – government bond comparison

The yellow line is why those Monevator cats are purring about their US Treasury bond holdings.

World equities hit bottom on 23 March. Our team of high-quality government bond ETFs were all straining in the opposite direction that day – stopping our portfolios and us jumping off the ledge.

Some did more work than others, however. As world equities clocked a loss of -26.4% (relative to 20 February), the bond ETFs countered with gains of:

• 4% – Intermediate UK Gilts (Blue line; ticker: IGLT)
• 7.6% – Intermediate Euro Government bonds (Red line; ticker: IBGM)
• 11.9% – Intermediate Global Government bonds (Orange line; ticker: SGLO)
• 17.7% – Intermediate US Treasury bonds (Yellow line; ticker: IBTM)

Gilt returns peaked on 9 March and then the pound slid 12% through to 23 March. Gilts turned negative on 18 to 19 March while overseas bonds were buoyed by the falling pound. The Euro has fallen away since, but US Treasuries are still up 11.9% to gilts’ 5.3% on 24 April.

Consider my interest piqued.

Global Financial Crisis (GFC)

The same ETFs are back in play bar the global government bond effort (it was only launched in the midst of this crisis).

The world turned dark on 6 March 2009 with losses reaching -38%.3 Thankfully our bonds would have offered a ray of hope:

• 18.6% – Intermediate UK Gilts (Blue line)
• 47.7% – Intermediate Euro Government bonds (Red line)
• 73% – Intermediate US Treasury bonds (Grey line)

The pound took a beating against the US dollar in 2008 and, though it recovered some ground in 2009, by the end of the crisis the US Treasury bond ETF was up 62% versus 57% for the Euro gov bonds and 16% for the gilts.

Clearly we’d have all slept more soundly with US Treasuries in our portfolios.

Incidentally, notice that shark’s jawbone image you get when you compare the grey line’s upward flex versus the orange line’s downward gape from October 2008 to August 2009. That’s what textbook negative correlation looks like and that’s why we hold high-quality bonds in our portfolio.

European Sovereign Debt Crisis

The world was down -14.9% on 2 Jul 2010.4 By that day our bond ETFs had responded with:

• -2.1% – Intermediate Euro Government bonds (Red line)
• 4.6% – Intermediate Global Government bonds (Orange line)
• 5.2% – Intermediate UK Gilts (Blue line)
• 9.1% – Intermediate US Treasury bonds (Yellow line)

Okay, Euro Government Bonds were not the place to be during the European Sovereign Debt Crisis. Fair enough. Once again US Treasury bonds proved to be the safest of safe havens, though there was less than a percentage point in it by 13 December 2010.

It’s starting to feel a bit voyeuristic – like I’m some kind of rubber-necking vulture looking for another carve-up.

Still, why stop now when we’re having fun?

2018 Global Stock Market Downturn

World equities delivered an unwelcome Christmas present of -15.9% in just a few months to 24 Dec 2018.5 Bonds took until 3 January to respond properly, after the sales were in full swing:

• 1.5% – Intermediate Euro Government bonds (Red line)
• 1.7% – Intermediate UK Gilts (Blue line)
• 4.5% – Intermediate Global Government bonds (Orange line)
• 6.4% – Intermediate US Treasury bonds (Yellow line)

Again US Treasuries were the place to be in comparison to gilts.

JustETF doesn’t have the data to take me back further in time. But if the last 12 years’ worth of downturns are anything to go by then I have just one question…

Is this a thing?

US Treasuries look better than gilts for UK investors when it comes to stock market crash protection over the last decade and more.

But it’s also nice if your assets provide long-term returns, so let’s see how our options stack up on that score:

US Treasuries win again.6 Not by a devastating margin, but you wouldn’t say no.

And there’s certainly a rational story to justify holding US government bonds. America is the global superpower and the dollar is the world’s reserve currency.

Why wouldn’t everybody run into the arms of US Treasuries during a meltdown?

Moreover, the pound is described as a pro-cyclical currency: it tends to fall when the global stock market falls. In which case, you might well expect to see an exaggerated spike in US Treasury returns (as measured in pounds) at the very moment equities nose-dive, especially as currency volatility is meant to dominate government bond returns.

Wait! Let’s get a longer-term perspective

A portfolio is for life, not just for bear markets.

This table comes from the Sarasin Compendium Of Investment, albeit from 2012. It shows that US Treasury bonds are far from a no-brainer for UK investors when viewed over a different timeframe. 

This comparison of 10-year government bonds shows that UK investors averaged a return of 8.9% per year versus 7% for US Treasuries of this period when returns are measured in pounds (see the Sterling Return column).

Notice that in 1987 – the year of the Black Monday Stock Market Crash – US 10-year government bonds returned -19.7% in pounds, whereas gilts brought home 15.5%. The falling dollar wiped out 21% off the return of Treasuries.

Global equities suffered another set back in 1990 as Saddam Hussein invaded Kuwait and Japan entered its multi-decade slump. Gilts spiked 9% while US Treasuries dropped -9.5%. Unhedged currency exposure backfired again, this time to the tune of -16.7%.

So. Maybe this special relationship isn’t all one-way.

The monumental returns of the 80s and 90s (I weep that I was in short trousers not the market then) ended with a pop as the dot-com bubble burst. US Treasuries trounced gilts in 2000 and 2001, but suffered a reversal in 2002.

If you scan your eye down the Currency Effect column, you can see from the size of the effect versus return that most of the differential between gilts and US Treasuries (sterling return) is explained by exchange rate volatility. 2008 was the annus mirabilis as the currency effect added 57.7% to the year-end return of US Treasuries.

Still, it’s surprising to see that gilts came out on top over the whole 15-year period.

It’s a struggle to go back much further than this with the data we have access to. We do know that the 1970s oil crisis smashed up global equities in 1973-74 and that UK equities suffered their worst loss on record during this period: -71%. Gilts were a car crash, too, going down 50% between 1972 and 1974.

Meanwhile, the pound lost just -1.28% to the dollar in 1973 and then gained 1.29% in 1974. I highly doubt you’d have noticed that shimmy, what with the oil crisis, recession, double-digit inflation, miners’ strike, the Three-Day Week, and general elections every five minutes.

Did any Monevator readers have market exposure during this one? I was there but my only assets were a £5 Premium Bond, a romper suit, and dimples.

Where does that leave us?

Good question. Opting for US Treasury bonds is a currency play for UK investors pure and simple. You’d be betting on the pound falling against the dollar as investors head for the safe haven hills.

Despite recent history and the supremacy of the States, events don’t always unfold as expected. I read a couple of research papers that said the Euro was a reliable safe haven until it wasn’t. And of course, we’ll only find out that reality is no longer following the script at the worst possible moment – when we need diversification the most.

Multiple papers concluded that UK investors should hedge any global bond exposure they have, including this report from Vanguard:

In Figure 10, we examine the performance of unhedged global bonds, hedged global bonds, and local market bonds in the bottom decile (the worst-performing 10%) of monthly returns for the global equity market. We find that hedged global bonds provided more consistent returns and in many cases better levels of counterbalancing than local bond markets. Unhedged global bonds, on the other hand, had a much wider range of returns and in the majority of cases did not provide similar levels of diversification.

Thus, hedging away the currency risk is necessary if global bonds are to provide the maximum level of diversification and fill the traditional role of high-quality bonds in a balanced portfolio.

Ultimately, I’m a passive investor because I want to keep my investing life simple. I’m unlikely to be agile or informed enough to know if there’s no longer good reason to believe in the dollar as a ‘risk-off’ currency.

Yes, I get my head turned when I come across a fund that would have been amazing to hold these last few years. But by the time I’ve found out about it, it’s already too late.

My portfolio is built for the next 40 years (I hope) and I believe it’ll get through the next 40 months just fine.

Take it steady,

The Accumulator

Bonus chart: August 2011 stock market downturn

After I finished the post, I had a nagging doubt I’d missed something and here it is. The oh-so memorable August 2011 slump. At last there’s a recent-ish downturn when US Treasuries didn’t completely dominate gilts. World equities had their darkest hour on 19 August 2011 bottoming out at -18.7%.7 Gilts topped the charts that day:

• 1.8% – Intermediate Global Government bonds (Orange line)
• 2.4% – Intermediate Euro Government bonds (Red line)
• 3.7% – Intermediate US Treasury bonds (Yellow line)
• 5.1% – Intermediate UK Gilts (Blue line)

US government bonds had nudged slightly ahead by the time equities nosed into positive territory on 13 March 2012. In reality it was neck-and-neck with US Treasuries on 11.2% and gilts on 10.9%.

1. i.e. Not currency hedged. [↩]
2. Long bond ETFs would be more dramatic but we’ve never recommended them here due to the potential losses from interest rate rises. [↩]
3. Relative to 12 October 2007. [↩]
4. Relative to 15 April 2010. [↩]
5. Relative to 29 August 2018. [↩]
6. The 6 March 2009 start date is defined by the launch date of the youngest product in our line-up: iShares Global Government Bond ETF. [↩]
7. Relative to 8 July 2011. [↩]

What caught my eye this week.

When we look back on lockdown in a few years’ time, we’ll each have different memories.

For some of us the period will be marked by the loss of a loved one to Covid-19, or by commuting to essential work on near-empty roads and trains.

But for a majority, these strange weeks will be reduced to a mental mood board made up of just a few memories.

Chatting with friends and family on Zoom. The novelty of virtual drinks over video. Trying to teach the kids something other than how to turn off their screens. Joe Wicks’ workouts. Unlimited Internet porn. Quiet walks around the neighborhood. The birdsong and the incredibly clean air.

I suppose I’ll remember listening to the Ninefox Gambit on Audible while taking my daily wander, marveling at the British weather’s knack to deliver sunny stretches at the most inconvenient of times. I’ll definitely remember Skyping my mother to finally show her the progress of my garden (she’s into week six or seven now of a self-isolation spent mostly in hers). There was that friend’s 50th birthday on Zoom when this was all new, and several dozen of us crammed into the screen like a University Challenge episode on steroids.

Cooking too much as if my friends were coming over for dinner, and then missing them when of course they don’t…

Once in a Lifetime

That’s the sort of stuff memories are made of.

But in reality – as suggested by the number of relevant links below – I’ve spent 4-6 hours each day digging into Covid-19, consuming everything from Tweets and news stories to research papers (or at least their abstracts!)

If you’ve been following the comment threads that have followed Weekend Reading these past few weeks then you might be the same. We’ve had hundreds of contributions, suggestions, and counter-suggestions. Great stuff.

However some readers – and my friends and family as usual – think I’m crazy.

They are happy (or commendably humble) enough to leave Covid-19 to the government experts. They don’t want to second-guess the consensus.

They’re passive pandemic-ists.

Whereas I like to believe that I’ve been trying to figure out the virus in part to inform my naughty active investing.

Or that’s what I tell myself.

Really, I’m sure it’s also my way of coping with Covid-19, just the same as other people are drinking too much or working out twice a day or pressure cleaning the patio.

As Arthur Brooks wrote in The Atlantic this week (my bold):

At present, Covid-19 is more of an uncertainty than a risk.

Will you get the virus? What happens if you do? When will the crisis end? Are we creating an economic depression?

People can opine and make informed guesses, but no one really knows the answers to these questions.

It’s natural to try to convert uncertainty into risk by gorging ourselves on available information.

And I’ve definitely been doing that.

Brooks thinks it’s futile and only liable to make things worse. It makes me think of my late father, who if he were still here would be both vulnerable and sanguine.

I’m sure he’d have quoted the serenity prayer at least once. You know the one:

“Grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.”

But I can no more do that then I can sit in a tracker fund, however sensible. It’s not me.

Stop Making Sense

One comment asked last week why I’ve not written an article about the virus, and fully outlined and sourced my hypothesis?

(Which for what it’s worth has basically been that it’s more widespread and not as deadly as commonly believed – all less controversial now than a few weeks ago, I’d suggest – and that an ongoing extreme lockdown could do worse to us via economic damage, including health-wise, so we should phase out of the justifiable emergency measures ASAP, and more directly focus on protecting the most vulnerable.)

The first reason is the one I gave him, which is I have no expertise at all in this area. My hypothesis was simply where my reading and hunches were leading me, and I was happy enough kicking that about with readers.

But the other reason is that word ‘hunches’. It’s perhaps also another reason why I don’t write about active investing here anymore. (The main one being that most people will definitely do better investing passively!)

People want certainties. They want to know sunlight does or doesn’t slow the spread of the virus. They want to know that low P/E stocks will do better than high P/E stocks. They don’t want to wonder too much why one city has had thousands of deaths from Covid-19 but a similar city has not. They want to be told that investing for the long-term is better than being tactical and trading, or vice-versa, and they want evidence to show it.

Me, I’m very comfortable with fuzzy, nuance, intuition, and changing my mind – for good and for ill.

Life During Wartime

One day we’ll know all about this virus and everything will be proven, but by then it’ll be too late to do anything.

And one day we’ll know if the FTSE 100 at 1990s-levels was the buying opportunity of a lifetime, or the opening bell on a multi-year bear market that sloped in ahead of a looming depression.

Again, by then it’ll be too late to do anything about it.

I’m not saying I know what will happen, obviously. I’m saying I’ve got to try to guess. Doing so will be my memory of 2020, in the end. Each to their own. (And incidentally I’m very glad I don’t have to decide for the nation. All governments have made mistakes, but these are crazily difficult times.)

How are you coping with the coronavirus uncertainty and life under lockdown? Let us know in the comments below.

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