The Bear Case – Betting Against A Vaccine

That bear case.

It’s worth, occasionally at least, reversing the normal thought process just to see what happens. More normally we’re trying to work out what the future holds and then apply that to what we think investment valuations are going to be in that future. Then, obviously enough, position ourselves to capture the change in value between now and then.

Reversing this process can be valuable, even if only as a thought experiment. To assume the worst economically – and thus about valuations – and see what is required for us to get there.

Following this reversed logic, instead of asking when it the coronavirus all be over, think through what would happen if it doesn’t. Doesn’t finish that is. And then think of how likely that is, that it won’t?

There are two ideas for it not ending. The first is that we end up going through a series of lockdowns like we did earlier this year. These would be unpredictable – they would depend upon the unknown of hot spots of infection. We might have months, years, when things seem under control and then they’re not. They would also not be evenly spaced over geography. There’s that awful warning of measles in the Faroe Islands (which can stand in for any smaller or geographically remote community) where successive and divided by decades pandemics swept through and killed tens of percents of the population. The 1846 outbreak so well known in the literature (largely because someone wrote it all down while there) was only one of such pandemics.

That would not be good for economic growth and therefore not for investment valuations.

We could have the same basic background, those repeated outbreaks with no method of amelioration and we could simply ignore it, take the human losses and carry on as best possible. That would also not be useful economically or for investment valuations.

That is the bear case. That we never do gain an effective vaccine nor some cheap and easy to administer – and fast to act – cure. Like, say, penicillin for certain STDs which now cure an infection (OK, not all, but most) in days and at the cost of a few $.

OK, but how likely?

That economic growth would be much lower in either of those two worlds would seem obvious. So, therefore, would future profits and thus stock prices now. Current stock prices being the net present value of all future income, that being leveraged to economic growth.

But there’s another point to add in here. That future is uncertain so therefore that net present value is based upon the expected future income. The expected bringing probability into play – how likely is the scenario of no vaccine and no cure?

Well, OK, we don’t know how to cure any viral diseases even as we know how to treat many of them and also have vaccines against many. But you grasp the point. How likely is it that we’ll end up with coronavirus being both endemic in the population and also of the severity in terms of lockdowns and limitations as it was this spring?

I would say that this outcome is impossible. Or so close to impossible as to be something we can forget about when evaluating out investment priorities.

Treatments and general issues

Treatments are better now than they were – many fewer people are put onto ventilators now for example on the basis that they often seem to do more harm than good. We know that Vitamin D aids. A number of drugs in trial many of which appear to aid but none are knock out treatments.

It’s also true that new viruses tend to evolve into less dangerous forms, that’s just something that happens (killing the host immediately, even killing it at all, is not an evolutionary benefit to the virus). Further, human genetics makes them less dangerous over generations but we’re really not wanting to wait long enough for that to come into play.

Vaccines

What really matters here is the arrival of a useful – no, not perfect, just useful – vaccine. At that point, with enough of the population vaccinated, then we can allow coronavirus simply to grumble along in the background as with influenza and those 15% of the common colds that are caused by coronaviruses.

So, what about the vaccine then? This is slightly difficult as I’m not about to claim that anyone has one, right here, right now. Nor am I going to walk through the development process. Rather, offer the 30,000 foot view. Which is that of course we’re going to gain an effective vaccine and in the not too distant future as well.

Why?

Why am I so sure? Well, we do know how to make vaccines. It’s more a matter of applying the expertise of modern industry than anything else. And we’re certainly doing that:

COVID-19 studies continue apace, over 2,000 ongoing/planned

We also seem to be getting close:

The head of the Trump administration’s Operation Warp Speed program, Moncef Slaoui, expects drugmakers to file with the FDA for emergency authorization of a coronavirus vaccine by late November.

Sure, political appointee and all that but still. The money’s being spent to get there and the effort put in.

The question then becomes well, what do we think are the odds that we’re not going to have a vaccine within teh next few months? Within a month the odds are zero. Within a year? I’d say 100% as a firm and solid number. 6 months? I’d say still at around or near that 100% number.

But that is one of the great questions for us as investors. When is the vaccine – or a cheap and reliable treatment – going to be available and rolled out to most of the population. Because at that point covid-19 becomes like the close cousins, influenza. Something that happens every year and that we take little economic note of. It’s simply part of the background of life.

The case against

The case against the problem being solved is that the assembled might of the world’s medical industry can’t come up with a vaccine – or treatment again – for a now well known virus. It’s only at that point that we need worry about significant long term and ongoling economic effects of the coronavirus. And that, in turn, is the only time we’ve got to worry about another collapse in equity values.

Sure, there cvan still be variations, but a full on slump requires either that the vaccine doesn;t come through or that we all start to believe it won’t. And, to be honest with you, I can ‘t see that happening.

Even if we say that immunity doesn’t last then that again just makes it like influenza where we have an annual shot. OK, the ‘flu is different in that we’re changing the shot each year as it mutates rather than repacing lost immunity but in effect it becomes the same thing.

My view

I simply do not see that there isn’t going to be a vaccine for the coronavirus. Therefore I can’t see the case for a further significant slump in the economy as a result of further lockdowns. Yes, we’ll have the local things we’re getting now where bars must close and so on. But not the great gaping hole in the economy we did in March.

The investor view

As regular readers will know I’ve long been saying that I think we’re going to get a V shaped recovery. As we indeed seem to be getting, the only question being how close we’re going to get to February’s numbers before that runs out of steam.

Looking at matters the other way around I simply cannot see the bear case for a significant further collapse in the economy. Therefore also not for stock prices. Simply because given the attention being paid to the effort I don’t see a case where there isn’t a vaccine in the next six months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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