Gnostic Capital Large Cap Portfolio Return for the 3rd Quarter Ended 09/30/2020.

The blog model portfolio closed out the quarter ended September 30th, 2020 valued at $400.37 USD per share. When compared to the valuation on June 30th, 2020 ($341.04 USD) per share, this represents a return for the quarter of 17.4%.

The portfolio was valued at $326.45 at year end 2019; the return, net of fees and expenses for the first 9 months of 2020 stands at 22.6%.

In a normal year, a 9 month net return of 22.6% would be highly satisfactory indeed. However, taking into account the extreme investment inflation, brought on by an eye-popping 20.4% increase in M2 money supply, in the US for the first 8 months of 2020 (9 month M2 reports are not yet available), means that the portfolio barely eked out a positive return ex-IPI (investment price inflation).

As to the major indexes, for the 3rd quarter, the DJIA increased by 7.7%. Over that same nine months, the S&P 500 grew by 8.5% and the NASDAQ grew by 12.4%.

In the first 9 months of 2020, the DJIA produced a return of -2.9%, the S&P 500 index appreciated by 4% and in the first 9 months of 2020, the NASDAQ produced a return of exactly 30%. Based upon the representative makeup of the various indexes, there was a very distinct movement, in this inflationary cycle, away from manufacturing and low value services, towards high margin technology based equities. Despite owning a goodly number of Fintech oriented firms within the large cap account, the portfolio was insufficiently weighted in tech to keep abreast of the NASDAQ. Given the unwillingness of governments to remove the monetary stimulus, it seems unlikely that a sector rotation of any consequence will occur.

The 4th quarter of 2020, for me, is incredibly difficult to predict with even the slightest degree of clarity. How does one assess the outlook for equities and an economy on the backdrop of a 30% annualized rate of increase in M2, now ongoing in the United States? This is nothing I’ve ever experienced in my lifetime. I doubt few have; a modern day playbook, in first world nations, does not exist when confronted with such a scenario.

All hopes, in the public arena, seem occupied on a potential release of a successful vaccine for SARS-COV2 in the next quarter, or, at the minimum, a declaration that a vaccine has passed the necessary commercial thresholds to at least be delivered to front line medical personnel. That may be the case, and I hope that this will prove out.

As a pragmatist, I think the world pinning hopes upon the release of a vaccine and then “all will go back to normal” is a false hope, at least for the coming year. When one talks to immunologists off the record (nobody will go ON the record to offer a reality check), I have no doubts that a vaccine will work, for some. Those in good health, in the right age group, possessing a healthy immune systems and not afflicted with underlying conditions of any consequence will, no doubt, generate the necessary antibody response required to, for a while, be somewhat immune from the covid virus. There seems to be a growing body of medical opinion that the amount of viral load is one of the major risks when contracting covid. Accordingly, medical personnel working on the front line will likely experience a very good benefit from vaccination.

Outside of front line health care workers, the high risk pools of the population worldwide are not likely to experience such a favorable outcome with vaccinations. Testing being done worldwide is, as always, prescreened by pharmaceutical companies to reduce the risk of adverse reactions or lack of efficacy. The rest of humanity, those that are elderly, those that have some degree of compromised immunity and those with underlying conditions will not likely obtain the same benefit, if any, from the first bouts of vaccine.

As with influenza vaccines, which are largely ineffective at normal dosing levels for seniors, I have to assume that a covid vaccine will need to have a far higher dosing to be effective, beyond the statistical incidence of chance, on the elderly. Higher strength vaccines require their own separate trials and often takes considerably longer to obtain regulatory approval. In order to offer a higher strength vaccine to the market specific to seniors, the vaccine strength must be tested on the elderly. Auto-immune issues are one of the greatest problems with high-strength dosing of vaccines for the senior population and those are not inconsequential potential side effects. Rushing out a vaccine as quickly as is being proposed fails to assess the long term risks of being vaccinated. Prevention of death via complications from covid is the present focus, but if a senior develops an auto-immune based cancer a few years later, as a result, that’s a risk few drug companies are willing to consider acceptable. Yet, here we are, ready to inject every senior citizen based upon just a few months of short term data.

Clinical testing of high strength dosing is another issue. TRY finding tens of thousands of senior citizens that are healthy enough (lack of underlying conditions, etc.) to even qualify for the test pool. Yes, Moderna and other drug companies are reporting the inclusion of some older persons in their test groups. There is a world of difference between a 55 year old ex-navy seal triathlete enrolled in the phase 2 and 3 trials as compared to your average 75 year old first world inhabitant. Anti-body “menopause” generally starts in the mid-60s of the typical human life, so drug companies that rely upon the youngest of the senior group to test vaccines are likely going to overestimate efficacy on seniors, by a whopping margin. According the the AARP, anyone over the age of 55 is considered to be a senior and the vaccine companies are taking advantage of that massive age gap, when they note that older persons are part of the phase two and phase three trials. There are only SO many 55 year old ex-navy seal triathletes, the demand for their participation in drug trials greatly exceeds supply.

The obstacles, well understood by pharmaceutical companies in producing effective vaccines for the elderly, are likely, in my view, to be such that those at the greatest risk of contracting covid and having a severe outcome, will NOT be “in the clear” for the coming winter season. This, once it is explained to the public in such a way that it sinks in, might produce a real case of the “mopes” for the developed world and for many sectors of the economy. The public at large is hoping that by spring break 2021, everyone will be able to fly to vacations, to go on jam-packed ocean cruises, to eat at buffet restaurants with wide open seating and to sit in enclosed theatres and concert facilities. Medical professionals seem to be micro-dosing the media with nuggets of information, contained within articles to suggest much of the mass spreading of the virus is, more likely than not, due to indoor aerosol dispersion. Should the public come around to an understanding of the difficulty with controlling aerosol transmission in confined settings, many people, particularly the vulnerable, will be far more reluctant to sit indoors in confined public spaces this winter. If I am right, this coming winter will experience a continued outbreak ramp up that could produce a far higher rate of infections than was evidenced during the winter and spring of 2020. On the plus side, those contracting the virus are experiencing far better outcomes on the whole, than in the first go around. This is due, in large part, to the younger age profile of those being diagnosed.

Perhaps my reservations are misplaced, but lacking a cure, and thinking of a world in which a covid vaccine might only work well on those that don’t tend to have a high risk of a negative outcome when they do contract covid, we might have to come around to the notion put forth by the Japanese government, of “coexistence with covid”. Covid is here, it will be here for many years to come, and we must model our behaviors in such a way as to acknowledge personal risk that we assume by going on with our daily lives.

Certain industries might have a, more or less, permanent reduction in their business outlook given the realities of covid. Yes, we all want to resume holiday travel in 2021, but most of us envision that holiday vacation as it used to be, not as it is now required to be, given the new level of safety protocols in place. Yes, we recall the enjoyment of a restaurant meal with friends, but is the current restaurant experience even the slightest bit enjoyable? Wearing a mask to a restaurant, waiting until a table has been disinfected, putting a mask back on everytime that one goes to the washroom or leaves their seat, having a nervous server deposit plates in front of you as quickly as humanly possible and no possible way to evaluate their degree of discomfort due to the ever present face mask; most of the public outings that people used to enjoy are now chores, and who wants to pay money to endure such experiences?

The travel industry subjects us to even worse disinformation spins than do the medical professions. Yes, we read that airlines are wiping down seats, but since human beings are the carriers of the virus, there is no way to fully eliminate the risk of contagion in air travel. We will all have to come to grips with this reality. Formal acknowledgement that the virus is airborne means an entirely different thing for airlines. The movement of oxygen in ALL current jet aircraft is down through vents and then in a circular fashion via fans, until sucked into vents on the floor of the cabin. This means that all passengers carrying a viral load will have their virus passed throughout the entire cabin in just under two minutes; that is how long it takes to push the air from the vent, into one’s lungs, out again, through the entire cabin via fans and ultimately down to the floor. There is no way around complete circulation of aerosol viral particles through today’s aircraft and no spin the airline industry can float to the public provides the slightest degree of medical assurance. HUMANS, not the planes themselves, are the carriers and the business model of the passenger airline industry is packing passengers together in a confined space, for potentially hours at a time. The airlines omit the key point of viral transmission, planes don’t release virus on passengers, passengers release virus on other passengers.

I think that this is an appropriate time for many to contemplate the makeup of their investment portfolios. Actual seniors (not the 55 year old ex-navy seal triathletes that are hand-selected to be included in vaccine test groups) routinely account for 20%-25% of the western developed world populations. They possess the highest discretionary incomes and have the highest net worth of any demographic group. Tourism relies on them, restaurants depend on them and they throw around vast amounts of their discretionary capital in the economy. The possibility that this important consumer group will remain as shut-ins for another winter season (those who are afraid for their lives only go out for necessities) may continue to pose risks for certain consumer based business models that depend upon mass social activities for some time to come. If my suspicion, that a covid vaccine will only be of real benefit to certain groups, is proven valid, then many businesses and some entire sectors may not snap back “as before”. For the sake of numerous service companies, entertainment companies, restaurants, airlines, hotels and tourist related businesses, I do not want to be correct in this instance. Governments cannot continue to push money into the economy as they have done in the first 8 months of 2020 without, at some point, losing total control over the inflation narrative. There will continue to be winners in this revised economy; being a stoic, one should approach investing from a standpoint of the world as it exists, not as we want it to be.