UK-Variant SARS-CoV-2 Update

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That’s a London scene from the post-apocalyptic zombie flick 28 Days Later on the left, and a London scene from the pre-apocalyptic March Covid lockdown on the right. I say pre-apocalyptic because today’s Covid situation in London with a 70% prevalence of the B117 SARS-CoV-2 virus is a lot worse than the situation last March. No zombies yet, but 2021 is young.

Last Wednesday we published our analysis of behavioral Covid fatigue + UK-variant SARS-CoV-2 spread in the United States.

And we released a podcast on our work, also available on Spotify and iTunes

Last Friday, the CDC held a press conference and released an analysis showing that they expect this more virulent UK-variant strain (B117) to account for 50% of Covid cases in the United States by the end of February. We’ve stored a PDF of the CDC analysis on the Epsilon Theory website here, and you can read a summary of the findings in this WSJ article

Over the weekend, the two most prominent US Covid missionaries – Scott Gottlieb and Tony Fauci – both publicly reversed their stance on the trajectory of Covid spread. Gottlieb’s twitter threads on the B117 threat were particularly urgent, noting that “new variants may change everything. They’ll be 1% of all cases by end of next week, with hot spots in Florida and Southern California.” 

While on the one hand it’s gratifying that the CDC is validating what we wrote, on the other hand it’s pretty scary to contemplate the consequences of the B117 UK-variant virus accounting for 50% of all US cases 40 days from now. That’s what this update note is focused on – the consequences – because they are sorely underplayed in the WSJ article summarizing the CDC report. 

Consequence #1: if B117 is the dominant US strain, vaccination will need to reach 80%+ Americans for effective control of the Covid pandemic. That’s at least 10% higher than current vaccination policy contemplates, meaning that not only will 35 million additional doses need to be sourced, distributed and administered, but also the finish line in this race for herd immunity between an exponential process (B117 spread) and a linear process (vaccine delivery) just got pushed back. That’s bad news for the linear process. 

Consequence #2: if B117 is the dominant US strain by the end of February, the daily number of new Covid cases by the end of February will be significantly higher than today. This is the point that was completely missed in the WSJ article. B117 doesn’t become the dominant strain because it “defeats” the baseline strain. This isn’t a football game. B117 becomes the dominant strain by spreading even faster than the current fast-spreading baseline virus. The math here is as inexorable as it is sobering, and it means that the rollover in Covid cases and hospitalizations we are currently seeing is a temporary reprieve in advance of an even tougher battle. 

How tough? I dunno. Depends on how much we ignore the B117 threat and take this rollover in the holiday Covid surge numbers as an all-clear sign. An ‘Ireland event’ is a combination of two things – introduction of a more infectious virus AND a relaxation of Covid mitigation behaviors like social distancing and avoidance of indoor groups. Right now, we have it within our power to move both of these necessary conditions in the right direction. But we’re not. On the contrary, we’re moving both of these necessary conditions in the wrong direction, and by the time it becomes clear that we’re risking an Ireland event … well, it’s too late to prevent it. You can only hope to control it.

How do you control it? How do you respond politically to an Ireland event in the United States, where (extrapolating current UK numbers to the US) you could have 8,000 Americans dying from Covid every day? You shut down. And I don’t mean a Covid theater shutdown. I don’t mean an LA County shutdown, with its 50+ exemptions for any politically relevant constituency. I mean a true shutdown. I mean businesses and individuals shutting themselves down.

If B117 becomes the dominant SARS-CoV-2 strain in the United States over the next few weeks, I believe it will create a chain of events that are profoundly life-killing, job-destroying, and misery-producing. 

And I don’t believe that ANY of this is priced into markets.

I don’t believe that ANY of this is contemplated by the most popular trades and investment narratives du jour – “dollar debasement”, “reflation”, “number go up” (Bitcoin), “commodity supercycle beginning”, “cyclical recovery”, “earnings recovery”, “pent-up consumer spending”, etc. etc. – all of which are based on the core narrative of “Whew! The vaccination glidepath to recovery may be bumpy, but it is assured.” 

But does it matter?

Does it matter to market-world if this profoundly deflationary, risk-off, dollar higher, flight to safety chain of events occurs in real-world?

Will markets look through all this, particularly if the Fed and White House say all the right things?

LOL. Of course they will.

I have zero doubt – ZERO – that markets will ultimately look through the B117 threat, even if that threat is realized through unprecedented real-world shutdowns and trauma. 

But between today and that ultimate look-through, I also believe there is a significant chance of a narrative shockwave hitting risk assets, particularly those securities tied to a “Covid recovery” theme. You can’t jawbone the virus. You can’t declare by fiat or by narrative that B117 isn’t happening. This IS happening, and the common knowledge that this IS happening will punch our now dominant investment narratives of “earnings recovery” and “reflation” and “the worst is over” square on the nose. Maybe its just one good punch. But it’s a punch nonetheless.

What creates the B117 common knowledge that impacts markets?

I think it’s whenever we get news of the first cluster of B117 cases in the US. 

Right now we’re still in the case, case, case phase of the nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! cycle of exponential spread. You can still close your eyes and pretend B117 isn’t happening in the case, case, case phase. But once that first cluster hits the news … well, you can’t ignore that. That’s when B117 becomes common knowledge. That’s when every market missionary starts talking about it, not just Covid missionaries like Gottlieb and Fauci. That’s when every investor knows that every investor knows that our glidepath to recovery is not assured. 

When do we hear about the first B117 cluster in the US? No idea. If Gottlieb is right about 1% of US Covid cases originating from B117 by this Sunday, that’s a big number that would almost surely contain clusters and significant community spread. I think that news would hit risk assets pretty hard. But if Gottlieb is wrong and it takes longer to move into the cluster, cluster, cluster phase, then there’s more time for market-supportive “we can look through B117” narratives to develop. Bottom line: the longer it takes for B117 clusters to appear, the less the impact of B117 common knowledge on markets. 

But the cluster IS coming. As the kids would say, it’s just math.


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Lawrence Pusateri
3 months ago

This comment may have better been left after the podcast, but I will leave it here. In your analysis of who is available to catch the new strain you eliminated those who have been vaccinated and those who have already had Covid. The CDC has that number at an artificially high number and I agree with you on that.

However , if someone had Covid over 90 days ago are they not vulnerable to catch it again? Would that not make the number of people susceptible to the new outbreak even higher? Most of the people that the CDC says had it and never got tested would have 6 months or longer their antibodies may well be gone. As someone who has recovered I hope my analysis on this is wrong.

Kessler_Cascade
3 months ago

From what I’ve read, there is evidence against the premise the UK strain defeats natural immunity effectively (and evidence that vaccine immunity is all but the same efficacy). Evidence generally supported immunity lasting at least 6 months, and it is likely the immune system’s memory lasts at least 9-12 months.
The same cannot be said for the Brazil (and possibly SA) variants, where they seem to be seeing re-infections. Manaus, Brazil was estimated to have 50-75% of the population infected by October 2020 and they’re now seeing a 2nd surge. I think the new viral strain is certainly a probable cause (especially as it has mutations on the same regions that a virus exposed to repeated doses of convalescent plasma did).

Lawrence Pusateri
3 months ago

Thanks for the information Kessler 👊🏼

Canid
3 months ago

This is something that’s been running circles in my head for the last couple weeks. And I want to be clear that I’m speaking on from the perspective of the impact on markets here, not the impact on human life. When we first started hearing about the B117 variant, I had my “wall of worry” reaction. You know, the one where a nebulous idea takes hold of market participants who don’t really understand it, only for it to release the markets once a solution is found or it turns out to not be any problem at all. But by early January, I saw the case curves in the UK and Ireland. They were awful. And I started to get a flashback to January of 2020. Because this is exactly how things started then. I watched for a couple more days, and then on January 8, I sold 80% of my equity exposure. I bought it back one hour later. Not because I don’t think B117 has the potential to drive further exponential spread in the US. Not because I don’t think B117 could dramatically increase the number of deaths we see over the next 2-3 months. Not because I think we have any handle on this that could possibly reduce spread over that time period. I bought my equity exposure back because I view the market reaction to this as having two stories that I do think are fundamentally hard to challenge: The vaccine timeline is way, way closer right… Read more »

Peter
3 months ago
Reply to  Ben Hunt

Ben, I am surprised that you don’t think Inflation is a very real risk to stock markets (and other). Even if the Fed ignores rising inflation above 2%, wouldn’t the market have to start discounting the beginning of the end of the Fed Put ??
The key is the extreme valuations the stock market is facing now.
Doesn’t take much with these extremes, in fact Jeremy Grantham says it never is “an event” that pops the bubble (he ascribes this market as a classic bubble) .
All’s it takes is for Financial conditions to be a bit less bubbly than before.
Seems to me that evidence that inflation is starting to get out of hand qualifies as a “less bubbly financial conditions” thing.

Peter
3 months ago
Reply to  Ben Hunt

Thanks Ben, yes you did. it was just the words you used to Canid that caught my attention.

Desperate_Yuppie
3 months ago
Reply to  Ben Hunt

Are you willing to explain why you believe a resurgence is deflationary? It needn’t be lengthy, but I’m having trouble wrapping my head around how that is the outcome. Perhaps it’s because I assume a resurgence means more stimulus and more Fed asset buying, both of which have been and will continue to be inflationary. Help me see what I’m missing, because I am very obviously missing it.

Guy Larri
3 months ago

I’m not Ben, but I’ll offer a couple of thoughts anyway.

COVID resurgence leads to more lockdown and more
bankrupt companies which leads to more unemployed people. Unemployed people don’t spend much, so demand drops, so prices drop. Also lack of demand can lead to more bankrupt companies, an ugly feedback effect. That is deflationary. Also think of the price of oil. Much less driving is happening, much less air travel, so much less demand for oil.

There is a balancing effect however where supply drops due to bankruptcy of the weakest suppliers, so maybe the surviving suppliers can maintain or increase prices if weakened demand outstrips the reduced supply.

People talk about “a K shaped recovery”. We could talk about a K shaped resurgence. If you run a cinema, a theatre, a restaurant, a nightclub, an airline, resurgence drives you down. If you are Zoom or Amazon or provide meals delivered to homes, a resurgence drives you up.

It is not simple.

Sal Greco
3 months ago

Two questions Ben.

First, (from the Podcast) with regard to the contention that the number of cases may be overstated by the CDC b/c they use typical flu modelling of who reports their illness…. The CDC has several studies on their website (not conducted by them) that estimate the true number of cases based upon serological testing. When I looked at them awhile back, they suggested that the true actual case rate was likely 5-25x the confirmed rate. The CDS was not accepting/endorsing any of these studies, but is it possible that their total case estimate of 100m is backed up by more than just their traditional pro-forma flu modelling.

Second, why is it that … “the longer it takes for B117 clusters to appear, the less the impact of B117 common knowledge on markets”. That is not intuitive to me. What happens over time to appearance that mitigates the common knowledge process?

As always, regards.

SG

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