The Pandemic Might Be "Over," but Not the Repercussions
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 403. It's titled, The Pandemic Might Be Over, But Not Its Repercussions.

Last Sunday, President Biden said on 60 Minutes, we still have a problem with COVID. We're still doing a lot of work on it, but the pandemic is over. The president's comments the next day, Monday, caused vaccine manufacturers, Moderna, Pfizer, Novavax, they all sold off. Collectively, the major vaccine manufacturers lost over $9 billion of market value.

That's the collective value that dissipated when their stocks sold off. The difference between an epidemic and a pandemic is an epidemic is an increase in the number of cases, a sudden increase of a disease within a specific country or geographic region. A pandemic is an epidemic that has spread to several countries and continents.

If we look at the number of COVID cases, this is data from Johns Hopkins University, the number of deaths has averaged between 10,000 and 20,000 a week since this past May. That's the lowest since March 2020, and down from around 75,000 deaths attributed to COVID on a weekly basis in February 2022 when the Omicron variant peaked.

COVID hasn't gone away. It's endemic, which means it's found around the world, but cases aren't growing. And so I guess by that definition, the pandemic could be considered over. That's not really the point of today's episode, though, because it's just a matter of opinion.

In the past 30 months of the pandemic, we've done six regular podcast episodes on the COVID pandemic. The first was in February 2020, when the pandemic was first starting to spread. We covered it twice in March 2020, when the global economy was shut down. We had two episodes in the second half of 2020. And the last time we really focused on COVID was almost 18 months ago, March 2021, episode 333, how the COVID shock nearly destroyed the financial system.

The COVID pandemic has been one of the three biggest financial shocks in my adult life, and I suspect yours also. The others were the great financial crisis of 2008 and 2009, and when the internet bubble was created and collapsed in the late 90s and early 2000s. The aftermath of these financial shocks and crises can last for years, both on a macro basis, but also personally.

The pandemic has provided a crucial test for us, how we perceive and manage risk and uncertainty, both financially and personally. And many of the COVID-related episodes were about managing risk and uncertainty. I found an interesting data set, and I didn't realize this, but ISPOS, I-S-P-O-S, has been conducting a weekly poll in the U.S. since the beginning of the pandemic.

The responses to this poll, I think, are instructive as to, at least in the U.S., how households and individuals are adapting to COVID, to this endemic disease, both in terms of their risk perception as well as their actions.

The first question that I want to highlight is about self-quarantine. They asked survey participants whether they did self-quarantine, that is, stayed at home and avoided contact with others for 14 days. The most recent survey was September 9th to 12th, and 7% of the respondents said that, yeah, they had stayed at home and avoided contact for 14 days. Those responses have generally been in the high single digits since February.

And for much of the past year, they've been in the high single digits. The measure of people self-quarantining in sort of the teens was really way back in the spring of 2021, as well as in 2020, where more than 20% self-quarantined. But generally, it's been high single digits for much of 2022. Now that's actions, people staying at home.

They broadened the question and asked whether individuals that they surveyed stayed at home at all, just to avoid contact, social distance. From September 9th to 12th, 2022, when that question was asked, 28% said, yeah, they are still staying at home as much as possible, avoiding contact with others. That's the lowest it's been since the pandemic began.

A year ago, 46% of participants were staying home and avoiding contact with others. I was actually surprised at that number, that so many from a risk standpoint were still staying at home and avoiding contact, even if they didn't have any symptoms of COVID.

Another question is, and this is a risk perception question, how much of a risk to your health and well-being do you think the following activities are right now? They asked about dining in a restaurant. 29% of individuals in the survey said that dining out was either a large risk or a moderate risk. That's the lowest it's been since the start of the pandemic. Back in January 2022, 58% said dining out was significant.

a large or moderate risk. They also asked, have you dined out? And 64% of participants have eaten out at a restaurant in the last week. This was in September 2022. That's almost the highest it's been since the beginning of the pandemic. The highest was back in June 2021 at 67%.

What's interesting is I can actually find some data prior to the pandemic. And in a given week, surveys suggest that 64% of U.S. individuals ate out. And this would have been back in February 2020, before the pandemic hit.

Another risk question is, do you consider attending in-person gatherings of friends and family outside your household? Is that risky? 31% said it was a large to moderate risk. That's the lowest since June 2021 when it was 29%. Back in January 2022, 63% said visiting with friends and families was a high or moderate risk activity.

And for much of 2020, over 60% thought that. Again, this number was much higher than I thought. And then they asked individuals, have you actually done that? Visited with friends and family. And 64% said they had in the past week. Now, this is somewhat week-specific just because of holidays. But a year ago, 58% said they did. The lowest was 19% back in April 2020.

I didn't find data of what this was prior to the pandemic, but this also seems fairly back to normal. In other words, it seems that individuals, while they believe there's still risk out there with COVID, are still willing to take on that risk and eat out, visit with friends and family.

Let's consider then some of the major repercussions of the pandemic personally, as well as from an investment standpoint, an economic standpoint. The first repercussion, and I just, I don't know where I was. I mean, I knew there was some political fallout from the pandemic, but not this extreme. So last week, I happened to look at the reviews of Money for the Rest of Us on Apple Podcasts.

Reviews from listeners are always appreciated. This particular review was two stars from this past February. Here's what the reviewer wrote. So a guy, me, who states that his 96-year-old friend died of COVID is in sound, non-biased mind to listen to about financial planning? 96 and died purely because of the COVID virus? For

Versus just saying, 96-year-old friend died from flu virus or just pasted away? Died? But no, he had to say, died of COVID. Yeah, I'm done with this podcast.

The episode he's referring to is episode 374 on life cycle investing. At the time, I didn't think it was a controversial statement. My friend Jay had been healthy two weeks earlier. I spoke with his daughter. He was in the hospital with COVID. I spoke to him an hour before he passed away. He was struggling to breathe, and I told him I appreciated his friendship. Had he died of the flu or cancer, I would have said that because as humans, we're curious.

If somebody dies, we like to know how they died. I tend to be specific. Last week, LaPra and I were taking a walk at dusk. She heard what sounded like sprinklers turning on. She suddenly stopped and turned around, and I turned around too, and there was a rattlesnake poised to strike not six inches from where I had stepped. Yesterday morning, I went on a walk. I saw something out of the corner of my eye. It turned out to be a javelina about 20 yards away.

Javelinas are like moose. They just can't see very well. And if they get spooked, they can charge and attack. Yesterday evening on our walk, April and I saw two coyotes about 30 yards away. We stopped and let them pass. Now, had I gotten bitten by a rattlesnake or attacked by a javelina or a coyote, I would have mentioned the creature by name. I wouldn't have said I was attacked by an animal. I would have been specific.

But apparently, in some corners, saying someone died of COVID is now a sign of being biased. But I don't believe people have a specific time when they are meant to die. They die when their bodies break down due to disease, a pathogen, or when they are killed, sometimes by animals. I mentioned Jay died of COVID because his passing was sudden and not predestined. I'd like to think he'd still be alive, but we don't know. Maybe he would have died of something else a week later.

But the point is there have been massive repercussions from the pandemic. One is political repercussions. The whole topic has become this political lightning rod.

Other repercussions have to deal with work, how we work, where we want to work. A report in the Wall Street Journal showed that on average, office use is still only 50% of where it was in early 2020 prior to the pandemic. This is in 10 major regions.

metro areas, and it's based on data from Castle Systems, which tracks the security swipes to get in and out of a building. Only half as busy as it was. Midweeks, about 55% of where it was prior to the pandemic. Even in somewhere like Texas, return to office figures are around 50% to 60% of where they were prior to the pandemic. Two and a half years in, to me, that's just

astounding, and partly because people like to work at home. But most employees, office employees, are now involved in some type of hybrid work system where they're working at home and the technology to do that's there. It's become more normalized for Zoom calls, online calls. In my experience, just in the podcasting space or setting up calls, rarely do vendors want to do a phone call. Generally, at this point, they want to do a Google Meet or on Zoom.

Now, if we look at this ISPA survey, one of the questions, have you personally experienced the following in the last few weeks? Working from home or remote instead of at your normal workplace. And in September, 25% said they have worked from home or remotely. It's averaged in the mid-20s to the low 30s since June 2021.

Most people are going to their jobs because many of those jobs aren't in offices. They have to be physically there in order to do the work.

This averaged in the mid-20s to the low 30s since June 2021. Prior to that, it was in the mid-30s to mid-40s, but never got higher than 45%. Most U.S. employees worked at their place of business all through the pandemic. But there's still a meaningful portion, particularly office workers, that are still working from home.

How we're using offices, how we're using our homes has certainly impacted real estate, office real estate, home prices, rents, and we've discussed those in other episodes.

Another repercussion, and this is an economic one and one that we're dealing with every day and we've done episodes on it, it's on inflation. Back in episode 400, we looked at what if high inflation doesn't end and we discussed the idea of structural inflation. Maybe something has happened that inflation won't come down.

I refer to some work by Zoltan Pulsar. He's the head of global short-term interest rate strategy at Credit Suisse. He suggested that we're having more economic conflicts globally. He describes them as economic war, and that contributes to higher commodity prices, higher good prices, particularly as countries are shifting more of their domestic production to their own country where costs are higher. Those economic wars, including trade,

against Russia at this time with the sanctions and the cutoff of power to Europe. That's leading to higher commodity prices for natural gas. Pulsar is suggesting that isn't going to end anytime soon, and that will lead to structural inflation. In the episode, we talked about a shortage of workers, not enough workers, and that is leading to higher wages, and that could lead to structural inflation. And a few weeks ago, we looked at population trends.

and population shrinkage, and whether that was inflationary or deflationary.

There was one aspect about structural inflation that I didn't discuss that I want to spend a few minutes here. And this is from a paper that was delivered at the Jackson Hole Central Bank Symposium that the Kansas City Federal Reserve hosted back in August. I've mentioned this particular gathering, particularly Federal Reserve Chair Powell's comments, but I've been reviewing some of the papers that were given.

And the whole theme of the conference was on constraints and whether there are constraints due to COVID that are temporary or permanent. This particular paper was by Francesco Bianchi and Leonardo Malassi, and it was titled Inflation as a Fiscal Limit.

Their view, and they built out a very extensive model, is that low and stable inflation requires stable government debt and a belief by households and businesses that the government is responsible when it comes to the national debt and to the deficit. There is some inflationary forces that are temporary that can be caused by supply constraints or excess demand.

So economic shocks. But underlying that, there can be this fiscal inflation. And it's due to credibility of the government. And as households and businesses become less confident in the government, and this is apart from what they think about the Federal Reserve, the ability of the Federal Reserve or other central banks to control inflation.

That if there's a disconnect between what the Federal Reserve is doing and trying to control inflation through monetary policy, adjusting interest rates, but underlying this, there's large budget deficits, increasing national debt, that that can undermine the central bank and that can lead to structural inflation. If we look at the amount of government debt around the world, it tends to go through these step-ups. There's

A financial crisis, the government steps in with stimulus to help, and it leads to a step up in government debt as a percent of economy or GDP.

We saw that with the Great Financial Crisis, where the ratio of gross government debt to GDP for developed countries or advanced economies, prior to the Great Financial Crisis, it was around 70% of GDP. By 2011, it was over 100% of GDP. And then it sort of flatlined up until the pandemic. And now the ratio of gross government debt to GDP is

is over 120%. At least that's what it was in 2020. It is eased off a little bit, but it's still well over 100%. We see the same thing with emerging markets. Now, you don't get as big of a step up in emerging markets, but there has been a gradual increase in the ratio of gross government debt for emerging market countries relative to GDP.

Right now, it's around 60% of GDP, much less than developed countries because bond market participants are less willing to lend to emerging market countries. The authors of this paper believe that this inflation could not have been averted by just raising policy rates, that it has to do with beliefs and confidence in governments and in central banks, a theme that we've discussed in numerous episodes.

Their question then is, will inflation drift up as it was in the late 60s and 70s, where they believe much of it was due to this structural confidence issue, not just a spike in oil prices?

They also point out, though, and this is where it's challenging, is that you can't observe directly how people feel. How confident are they in the government and the stability of the debt situation? That it shows up in other numbers, numbers that we can observe. Higher interest rates, higher real rates, and what is known as the term premium.

When I look at those, and we'll look at the details of those, I don't see, at least in interest rates, that there's a lack of confidence in the U.S. government at this point. Before we continue, let me pause and share some words from this week's sponsors.

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At Georgetown SCS, the learning never stops, and neither do you. Write your next chapter. Be continued at scs.georgetown.edu slash podcast. The term premium measures the excess compensation or additional compensation that bondholders demand to hold government debt. It can be estimated, and the Federal Reserve Bank of New York does this, they look at

the expectations for what short-term interest rates will be. And they project those out, and they can deduce based on where interest rates are, where expectations are for the short-term policy rate. And then they compare, there's just what they call a risk-neutral treasury yield. What would treasury yields be if it was entirely based on expectation for these short-term interest rates? And for the 10-year treasury bond, it'd be around 4%.

And we're at 3.5%. Now, that risk-neutral treasury yield also factors in inflation expectations. So treasury yields would be about 4% just based on expectations. But the 10-year treasury bond yield is closer to 3.5%. The highest has been in a decade. But that difference is a half a percentage point, which means that this term premium is negative. Investors are not demanding additional compensation just because...

They don't trust central banks or trust the federal government, at least yet. They do expect that the Federal Reserve will keep short-term rates higher for longer, and that's priced in just based on higher inflation expectations.

So that's the term premium. It's not showing, from what I can see, a lack of confidence. We can also observe real rates directly by looking at the yield on Treasury inflation protection securities. In our Insider Guide email newsletter last week, I pointed out that real yields have increased and are now positive.

The 10-year Treasury Inflation Protection Security yield is 1.14% right now. So it's over 1%. The highest it's been in about a decade. But if we go back further into the 90s, 2000s, that real yield was often over 3%. Now, if we get there, we're going to have much higher interest rates than we have currently. If the term premium increased and...

real yields increased. And a real yield is indicative of there's just not enough demand for treasury bonds or for government debt, period. And so if the supply is increasing because of budget deficits and there isn't enough demand, we also have quantitative tightening where the Federal Reserve is letting existing bonds, treasury bonds that they own, mature. We're seeing real rates positive for the first time since 2020.

I know at Money for the Rest of Us Plus, we're going to be observing that pretty closely to see if it gets worse. If those real yields get higher, it's a sign of a lack of confidence in the government and central banks, the Federal Reserve, and potentially is indicative of more structural inflation, higher inflation. I absolutely hope that's not the case. One way out of this would be faster economic growth.

In order to get higher economic growth, we need greater productivity, the ability to produce more per worker. One of the speakers on a panel at the Jackson Hole Conference was Valerie Ramey, who is a professor at University of California, San Diego.

She's done a lot of work on productivity increases, many of which are driven by technology. And she pointed out that these technology changes tend to be large scale and more general purpose rather than specific, but more importantly, infrequent and randomly timed. Random, when a big boost due to new technology will lead to greater productivity. And they tend to be disruptive.

And we get these periods, these random, infrequent, but disruptive, large-scale technology changes that increase productivity for a time. And then they get implemented throughout the system, manufacturers, service businesses. And then we get what she describes as a technology lull. And that's where we are now. Productivity has been low. We need one of these big technology changes that gets distributed throughout the economy

In order to get productivity higher and hopefully grow the economy more than the growth in government debt so that it can be more stabilized so we get more confidence. Now, these are big picture trends that impact us personally with higher interest rates, higher inflation.

Another repercussion of the pandemic is just what we learned. What we learned about ourselves, about where we like to work, to even want to work, leisure. And I suspect you've had some investment lessons that you've learned. We moved to Tucson during the pandemic. It was a better fit than Phoenix. Certainly more wildlife here.

But I've also learned some investment lessons. And during the early days of the pandemic, when markets were selling off significantly, I had hedged by buying puts, protective puts on bank loans, which is non-investment grade bank debt that's syndicated into the marketplace. So when prices fell, those puts jumped significantly in value and I didn't sell. I waited because I thought, well, they're going to get even higher in price. But

But then the Federal Reserve stepped in and started buying up investment-grade bonds and non-investment-grade bonds that had been downgraded to non-investment-grade. And the value of my puts fell. I sold at a profit, but not as big of a profit as I would have liked. So I learned, at least my lesson was, when things hit an extreme, just take profits and don't get greedy. Now, I thought I learned that lesson, but I've also...

owned the Simplify Interest Rate Hedge ETF, PFIX. This is a position that benefits from rising interest rates. I bought it last September 2021.

But I sold it this past July because it looked like U.S. recession risk was increasing and that inflation has peaked as commodity prices came down. So I took profits. I made about 34% on that holding. But now we've seen interest rates go up again, 3.5% for the 10-year Treasury bond. And PFIX has gained 19% since I sold. That feels bad. But I didn't know. I don't like to be wrong.

One of the things that helps me accept that is to realize that this was a small mistake. The profit give up that I gave up since I sold PFIX back in July is only 0.2% of my net worth. It's a rounding error. So it's more of a psychological, dang, I wish I would have held on longer.

So how I feel is worse than the actual economic impact, which is why we need to keep our investments mistakes small. And this was a small mistake. But my real lesson is I'm just not really good buying hedges. I don't like how volatile they are when you use option strategies or in this case, an ETF that's using options. So it's very, very volatile. I just find that volatility of one position incredibly stressful.

I would rather just diversify into many different asset classes with different return drivers and scale my risk so that I'm comfortable with my portfolio, even if the stock market falls 50%, that I can live through that. I can make some adjustments, but generally I'm comfortable with my portfolio and I am, which is why I got rid of the hedge. If interest rates go up higher, I'm okay with that.

Because the bond closed-end funds I own, the preferred stocks I own, they'll fall in price, but I'm getting a very attractive yield and yields that I think will be higher than inflation. If we don't get this persistent structural inflation in the mid to high single digits. Hopefully not. If we do, I'll have to adjust.

Conclusion then, yes, the pandemic may be over. People are changing their perception of risk and their actions are changing, but the repercussions continue. The economic fallout, personally with individuals as well as globally with inflation. Now, clearly what Russia has done is another tail event that is impacting and contributing to inflation.

But there will continue to be repercussions from the pandemic in how we work, in homes, how we invest. And it could take us years and will take us years to process what has happened and adapt to it. It's okay to say COVID. It happened. What have we learned from it? That's episode 403. Thanks for listening.

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