What Comes Next

Here's a few numbers for your consideration.  The US now has something has over 28 million reported cases of Covid-19 with reported fatalities now hovering around a half million.  That is now basically the equivalent of losing the entire population of Atlanta.  Yet case numbers continue to decline, with Covid cases dropping 77% in the last six weeks.  Because of that decline the positivity rate nationally continues to decline as well.  I'm sure some of that has to do with the rotten weather we've experienced through much of the country this month.  Hard to attend a super spreader event in Texas if you're at home trying to figure out how not to freeze to death.  The prime reason for this decline in infections has to be the ramping up of vaccines.  We've now given over 64 million first doses of the vaccine and over 19 million second doses.  The other is that we're likely underreporting the amount of actual Covid cases in the country.  One statistic that's beginning to gain traction is to multiply reported cases by 6.5 to gauge the actual infection rate.  Those numbers would suggest a mind boggling 182 million of us have actually had the virus with many never showing an symptoms of being infected.  That equates to about 55% of the population.  The virus is running out of places to hide.

Whether these numbers are correct or not, we do know that vaccination is increasing with the constraint starting to be the lack of vaccine then places to go get jabbed in the arm.  That is rapidly improving as well and experts are starting to believe that we're going to have a glut of vaccines by the spring.  So the numbers are encouraging.  By May I think anybody who wants the shot will be able to get it.  I think my estimate of a reopening economy by Memorial  Day is probably to pessimistic.  I think it's possible we could see the first hints of normality by mid-April.

What I think comes after that is an economic ramp the likes we've not experienced in decades.  There's now over a year of pent up demand for everything denied to people for so long.  A primary spend will be  for entertainment, trips and all the accoutrements that come with that.  Finally going on that cruise you'd planned for last year?  Many will want new of everything; shoes, swimsuits new dinner outfits, you name it.  Haven't been to church or synagogue  since last spring?  Maybe the kids are going to need something nice to wear now that they've outgrown their old clothes.  Finally can get together  with your friend group or your significant other to go out to dinner?  Pick someplace nice and maybe you'll need a new outfit.  We had no vacation last year?  No problem!  We're going to Disney World!  We can now start to envision a world where you can once again attend a sporting event, go to a concert, go to a restaurant without feeling like you're in an isolation ward, go to a religious service, have a party, fly to see your parents, have your parents greet in person the grandchildren they haven't seen in so long or perhaps meet for the first time.  We can also start to think of a time when we can have a memorial service for those taken by this plague, have graduations, have a wedding, have a party, dance, and hug a friend.  All the things that have been denied us for so long will start to come back and people are going to embrace this great reopening with the same exuberance as sailors coming into port after a long stint at sea.  

The multiplier effect of all that money coming out of hibernation is going to be stunning.  You're already witnessing this in places that have relaxed Covid restrictions, but many of the largest cities are still under lockdown as much from the weather as the virus right now.  I think whatever GDP estimates out there for the next few quarters are probably low.  I think earnings estimates for the market may not reflect what I think is coming and that could be supportive of stocks in the coming months as well.

Speaking of the markets, they've been churning around a bit here in the last few weeks and that may seem counterintuitive based on the rosy economic forecast that I think could occur.  A few thoughts on this.  One is that the markets have been on an absolute ramp higher these past six months, with most major indices posting solid double digit returns during that period.  Valuations could appear high to some based on current earnings expectations.  What I think will eventually beat out that concern is the coming consumer demand.  People have had so little to spend on other than the basics of life and they're going to be in a mood to party.  The other thing to remember is that markets anticipate news and investors have been factoring in for months that there would be a point in 2021 where the economy would open up.  A "sell the news" reaction to some of that should be expected.  We're also seeing a rotation away from some of last year's high flyers and into those areas of the economy mostly primed to benefit from the coming reopening.  Along with these reasons comes the gentle reminder that stocks can correct at any time and one should be prepared to accept that markets have the potential to decline anywhere from 5-20% during a year and have historically done so.  Also we are nearing the end of the most favorable period of the year for stock prices and it wouldn't be too uncharacteristic for stocks to mark time for some period of time.  Know your asset allocation strategy and constantly review your risk/reward parameters.  

Some final notes on what I think is coming.  People will rightly point out that the above column perhaps doesn't take into account all the suffering that many have endured during the pandemic.  I am not trying to minimize what's occurred.  My job requires me to try to look into the future and with that I'd like to think I have some read on people.  Experience tells me that people are going to be in a mood to live again.  Besides many of those impacted the most from the lockdowns are those in service and entertainment businesses.  These are the people most likely to be the beneficiaries of the great reopening as it occurs.  I also think what's coming is already in the pipeline and isn't taking into account all of that stimulus the Biden Administration is going to push into the system.  Finally I think there will be a grand national reckoning when this is behind us.  We're going to emerge from this having weathered a great thing and we'll be dealing with the fallout from this for years.  That, however, is for another column. 

When The "Money" Leaves {Part II}

As I said yesterday,  all "the Money" from home  we met in Florida was done with Illinois.  

For some it was the fiscal situation up home.  One fellow told me that he and his wife had decided they were moving regardless of how Illinois voted for the constitutional amendment last fall to allow graduated income taxes.  {The amendment failed}.  For others the tipping point was the upsurge of crime, the riots and how local authorities seemed powerless to get a handle on it.  One person told me a particularly harrowing tale of what had happened around their business during the Kenosha riots and how that cemented their decision to put the business in their kids hands and leave.  The State's response to the virus was the decider for another I met.  All of them had seen too much and they were done.

Snowbirds from the north have long been a fixture in places like Arizona and Florida.  Most of these Illinoisans in the past haven't completely cut their ties to home.  Changing states solely for tax purposes requires a series of hoops to be walked through, the principle one being residency.  Residency in  general requires proof of domicile in the state in question.  One of the principle requirements is you reside in the new state for at least six months and a day.  For most of us in the Chicago region, 181 days in Florida or Arizona are a lot.  It's too hot.  Right now as I'm writing this we have at least two feet of snow on the ground and the thermometer will be lucky to hit 20 degrees as a high over the next week.  It's easy in February to pine for warmer days.  But for most of us the weather we want is what we get in mid-spring or the six weeks after Labor Day.  Warm but not too hot days, cool nights and relatively low humidity.  More people up by us hate the sweltering heat of the dog days more than the ice box we're in now.  It's hard to go six months in Florida or Arizona and avoid oppressive heat.  Weather is a big factor then, as is dealing with everything that is new and different.  Therefore it traditionally takes a lot for us to cut that final cord to all that's familiar.   "A lot" seems to have finally come about for many.  In particular a lot has finally come about for the type of people the state can least afford to lose from a financial standpoint.   

One thing the "Money" can often understand is basic financial math and those that can't hire people that do.  For those uninterested in finances there's attorneys, accountants and people like me to help explain things.  The cumulative effects of bad fiscal policy, syphoning tax dollars into nonproductive expenditures and away from areas that desperately need the cash have taken their toll on the "Money" crowd, for they realize that there's no amount of tax revenue governments can collect that will fix our problems.  As one person put it, "the only thing Illinois is good at is collecting taxes".  The crime is a secondary, but now major concern as well.  Finally, this crowd is tired of being scapegoated for every problem or social issue, both at home and nationally.  These people know they can't win any argument regarding these crucial societal problems so they shut up, and plan to move.

The "Money" doesn't throw a goodbye party when it leaves town.  Its basic instinct is to be hidden and so it leaves quietly as well.  In fact it leaves so quietly that you might not even know it's gone.  The family home in Hinsdale may still remain home base for the few months when a couple chooses to come back north  after completing their residency requirements.  Or the Lake Forest couple chooses to buy a smaller townhome near the daughter who's settled in the town next door.  You might still see them at local restaurants, church or synagogues when they're back home.  Maybe you'll play a round of golf with them in the summer at their club.  Also, there's multiple ways in the modern world for them to stay in touch with friends even from far away.  While these couples may show up for all the important events, like their neighbors holiday party when we can have these again, make no mistake.  They may occasionally return to their old haunts but their money's gone.  It's left for places that treat it better.  Florida qualifies.  No state income tax in Florida, also as important to the money, there's no Florida estate tax.  

What is hard for many, but in particular it seems hard for the political class to understand is when the money goes so does the tax base.  That's not a popular thing to say but it's the truth.  One gentleman laid it out to me as we watched the sun go down.  According to him, he paid last year nearly $100,000 in state income tax.  That'll be gone now that he's no longer a citizen of the state.  How many people in Illinois pay that kind of money in state taxes?  The answer is very few.  Half of Illinoisans pay no state income tax at all.  He went on to say that his property taxes {$45,000} are a wash to governments because somebody already bought his home.  But the lion's portion of the sales taxes he pays are now going to the state of Florida and now that they've moved he anticipates an increasingly larger percentage of what they give to charities to now go to their new local community.  Nobody tallies that type of loss.  And when both he and his wife are gone that money that he'd have paid in Illinois estate taxes will go to his kids and not to the state's coffers.

Money goes where it's treated best.  Always has and always will.  What was true in the time of the Romans remains true today.  States like Illinois don't want to acknowledge this uncomfortable fact but their citizens are voting with their feet.  Whether it's crossing the state line and moving to Indiana or moving far away, the money is fleeing, never for the most part to return except perhaps to be buried.  What will replace it is unknown.  Chicago and its surrounding region has traditionally been considered the business hub of the Midwest.  Perhaps that will continue to be the case.  Maybe all of Chicago's historical advantages will come to the fore again once we are free of the most devastating effects of Covid-19.  Perhaps new industries as well as a new class of entrepreneurs will emerge with the city and our region regaining what it was.  

Yet one must wonder.   

We now live in an era where businesses have learned how to disperse and operate all over the country.  We're living in a time  where for many reasons one can have a better quality of life elsewhere while still working for a Chicago based or regionally based business.  Up in the Chicago region we're plagued by so many social and economic issues where there seem to be no easy answers and we're ruled by a political class that either cannot or won't address the fundamental causes inherent to each.  Given all these things one has to wonder who replaces all those that have  left or will leave.  In a state losing population with what many consider an unfavorable business climate, who or what replaces the tax base that is moving away?

For the "Money" is leaving.  Make no mistake about that and if I'm correct more will soon follow what's already walked out the door.  One of the people we met was hosting a friend from home whom they were trying to convince to make the move.  From what I could tell that pitch had been made and accepted.  My guess is it won't take much to convince many more in the next few years unless things change.  

Hope I'm wrong.  Don't think I will be.

When The "Money" Leaves {Part I}

My bride and I vacated Chicago a few weeks ago.  We were tired of being cooped up and all of this was before the February snow and cold.  We took a big shot of courage and hopped on a plane for Florida.  I have to say that Florida was a welcome relief.  We hear stories about Florida being lax in terms of Covid precautions, but at least where we were that was not the norm.  You had to wear masks when going inside places and people were just as careful with disinfecting etc. as you see in our neck of the woods, but the combination of warmth and being outside felt like being released from prison.  You could eat outside and have a cocktail with friends on the beach along with proper social distancing.  I'm not going to tell you where we went but I will say that it was on Florida's West Coast and it wasn't Naples.  What I will also say is that we stayed at a very old resort that attracts affluent people from across the South and then largely it seemed from the Midwest.  There were a lot of people from St. Louis and Cincinnati where we stayed.  There were also many folks from the Chicago area at this place.  Many stay for months at a time.  A month where we stayed can run you north of $20,000.  Florida's west coast beaches are known for miles of white sand and fantastic sunsets.  Here's what dusk looked like each night from our beach:

This picture was shot on my iPhone and it doesn't do justice as to how amazing it actually looks on a clear night.  But this post isn't intended to be a travel guide.  The view is meant to set the table for the rest of the article.  See, sunset brought the resort residents each night to a beach bar on the property where you mingled and watched the colors change across the sky as the sun drifted below the horizon.  Since it takes awhile for this to occur you had a chance to talk to other like minded people.  In a setting like this Midwesterners tend to find each other and I ended up striking up conversations with multiple people from the Chicago area.  What was striking to me was all these people I talked to had already completed or were in the process of becoming former residents of both Illinois and the Chicago area. Later I'll get to what these people told me.  

Now I've written often about the fiscal problems in Illinois, Cook County and the city of Chicago but I don't spend a lot of time discussing the other issues that have engulfed in particular the Chicago region over the years.  I write about investments and many of these problems don't really have a place in columns about money and the markets.  Crime, corruption, poverty and racial tensions existed up by us long before the virus invaded our area.  Besides as I've said more than once there are many other places for people to go if they want a dose of politics.  But Covid has made many of our existing problems much worse if not downright frightening to many depending on where they live.  For the "Money" at least those I met, it seems the virus, the issue of fiscal insolvency and in particular the violence that has come in the last year has been the tipping point for a great reset in the lives of many of these people.

One of the gentlemen who trained me back in the day was somebody I've always referred to as the Consigliere.  Mr. C, as I'll call him here, had 25+ years under his belt when I met him and he was one of the smartest fellows I ever met when it came to understanding individuals and their financial assets.  Mr. C taught me to always pay attention to those he referred to as the "Money" and what they were doing not only with their assets but also what they were doing with their lives.  Now there's no perfect definition of who would be considered the "Money" but they're usually business people, medical professionals, families with intergenerational wealth etc. who on their own have become successful, usually live somewhat modestly and often have quiet influence within their respective communities. For the most part they're the type of people who were originally profiled in books like "The Millionaire Next Door" back in the 90's.  

In general I'd profile these folks in the following manner.  Also please understand there's variations of these people depending where in the country they live, but this will give you some idea of who I'm talking about.  The "Money" may live in a nice home in an affluent suburb or the nice section of town but it's often understated to what they could afford.  The "Money" doesn't necessarily buy a new car every two years.   The "Money" may or may not serve on local charitable boards but they know who to call if they need to talk to somebody in charge of something.  The "Money" can often cut through local red tape to get something done.  You can often find the "Money" at country clubs or other local institutions where they rub elbows with other people like themselves.  Before you decide these people are conservative snobs, understand that their politics cuts across the political arc.  If they have one thing politically in common they are not big fans of debt unless they can see a return on that type of investment.  If there's one area where the "Money" is universally willing to spend its money extravagantly it will be on educating their children.  They will choose where to live based on the reputation of the public schools and if that's not an option, they choose to then live where there's decent private schooling.   They expect their children to go to some form of higher education and for the most part there is an expectation, either explicitly or implicitly stated to their kids that they expect them to make something of their lives.  The most important fact about these type of people is they're quiet.  They don't tend to like to draw attention to themselves.  They prefer to remain hidden in plan sight if possible.  The "Money" is often behind that large anonymous donation at a charity event or that large bequest to some institution when they die.  The "Money" in a local community or neighborhood in a larger city is often the mover and shaker behind that new park or that new local community center.  Their only reward is perhaps their name on the establishment or a name on a plaque somewhere on a wall.

Now with that general definition out of the way,  let's profile the "Money" that I ran into at my little resort.  While I've changed some facts so that the individuals with whom I shared drinks won't be recognizable the basic underlying story is true.  First the people I met weren't inherited wealth.  That kind of Chicago money, if it goes to Florida instead of Arizona, often goes to Naples on the west side, Sarasota or Marco Island.   If it's really old money perhaps it winters or lives full time in Palm Beach.  That money may have roots in these old time Floridian resort communities going back generations.  Think in that regard the Kennedy family and their long time association with Palm Beach.  Rather the people I met for the most part had started up businesses up home and had either now sold them or passed on the running of the company to their kids.  One gentleman was a retired C-suite fellow at a major Chicago corporation.    From what I could tell all of these people had worked to build up a business or a career. 

As I said earlier, all of them were done with Illinois.  We'll talk about the why in our next post.

Quietly

Quietly the Covid numbers begin to move in the right direction.  Not the headline numbers of new cases and mortalities.  Those are still depressingly high.  27 million Americans have now been diagnosed with Covid-19.  Over 463,000 of us have died from the disease.  Folks, that's equivalent to losing the entire population of Miami. These numbers will continue to climb in the months ahead and we are well on our way to losing a half million of us by sometime in March.  People tried in the beginning to compare Covid to a bad flu season.  But in a bad year the flu kills between 60-80,000 people in the US.   Covid kills at a much higher rate than the flue.  Nor will the headline numbers be better when looking at vaccination rates.  These are still too slow, while vaccine production hasn't yet caught up with demand.  The Biden Administration has hoped to put 100 million doses into peoples arms in his first 100 days in office.  That is unlikely at the rate we're currently vaccinating.  Yet quietly and slowly the numbers are starting to change and even now we can start to see that the virus will soon start to run out of targets.  Stay with me  as I go through the numbers and on where I'm going with this.

Slightly under 10% of Americans have received their first dose of some form of the Covid vaccine.  That's over 41 million doses.  Roughly 10 million people have also had a 2nd dose.  That's about 3% of the population.  Now add the 27 million Americans that have already had the virus and that adds up to 68 million of us who likely have some form of immunity to the virus. That then gets us to over 20% of the population that likely has some form of coverage against Covid.  Now I know what you're going to say about now.  I know that a single dose of either of the two vaccines currently on the market doesn't confer immunity.  I also know that nobody has an answer to how long antibodies remain in the system for those who've recovered from the disease.  I also know that being vaccinated doesn't give you a 100% probability of immunity from the virus.  But we're moving in the right direction even if you've only had one dose and your odds of you becoming severely ill or dying should you be exposed to the virus are lowered.  Most importantly these numbers will only improve in the weeks ahead.  Right now we're giving something like a million shots a day.  If those delivery numbers stay constant then by the end of March we'll have administered something like an additional 51 million doses and with probably somewhere around 20 million people having both shots.  These numbers only assume we maintain the current vaccination schedules.  They don't account for increases in production or take into account the one dose injection coming soon from Johnson and Johnson.

And the numbers don't take into account the following.  Nearly 60% of Covid fatalities have occurred in people over the age of 65.  It's this population that has been targeted in most states as a priority to receive the vaccine.  We've also just had yesterday with the Super Bowl our last big opportunity for a national super spreader event.  We're going to see in the next few weeks if Americans have learned their lessons and either watched the game at home or limited gatherings to a few trusted friends.  After the big game there's really nothing on the calendar now until we can go back outside that historically calls for millions of Americans to gather together.   Finally Mother Nature may have given us a break as it's bone chillingly cold in much of the country right now, with that weather expected to last much of the next two weeks.  Snow and sub-zero temperatures don't encourage large gatherings.  In any event what large gatherings that may occur in the coming months:  St. Patrick's Day parades, Mardi Gras celebrations, Lent, Passover, Easter, the NCAA men's and women's basketball tournaments and the Kentucky Derby are likely to be muted affairs this year, if not cancelled.   

By Memorial Day it's likely we'll see that 100 million people vaccinated, with a sizable percentage of those folks having two jabs in the arms.  I believe Memorial Day should be the target for when enough of us have some form of protection that we can start opening things up.  That faint whiff of whatever will pass for normality in the air right now is likely one of the primary reasons the stock market has been doing well here in the start of February.  Winter & Spring are likely to be no picnic but quietly things are starting to turn for the better.

*Johnson & Johnson is an equity component of certain ETFs we hold for both clients and in personal accounts.