Shock Waves
Posted on Sunday, February 23rd, 2020
Markets are laser focused on the Corona Virus and how it may impact the largest economy in the world. The numbers coming out of China in regards to the virus cannot be trusted but, economically, we do know that since the Lunar New Year (LNY) coal consumption and traffic congestion have not resumed normal levels.
China is stuck in a Catch – 22. They can’t get the economy going without people going back to work. They can’t get people to go back to work until the virus is contained. They also can’t start bailing out companies and banks until the problem is fully known. There is no use trying to reboot the economy if the virus is still spreading. Authorities have to wait until the virus is under control before they attempt to mitigate the economic damage.
The virus is now spreading to Japan, South Korea and Italy. Those countries’ will give us a better idea of how widespread and dangerous this virus is and allow better predictive analytics. Our focus is on how it will impact the global supply chain and economies around the world. China’s economy is a much bigger percentage of the world’s economy than when SARS broke out earlier this century and any slowdown will impact other economies much more significantly than in 2003.
Central banks keep propping up markets. That is why no one fears a downturn. “The central bank will bail us out.” This time might be different. Those same central banks need to hold their fire until this possible pandemic is sorted out. Otherwise, it’s a waste of ammunition of which they are already in short supply.
Central banks are essentially waiting for the shock wave to come. Workers are expected to return to work tomorrow. That is highly unlikely. China is facing one of the largest financial and social disasters in history. This could get dicey. The Chinese government fears insurrection more than anything else. Lock your society in a room with their family for 30 days with no outside interaction. Then tell them they lost their jobs. Imagine.
The crisis may come from the corporate debt markets this time. From China to the US the performance of stocks has masked the real problems in the corporate debt world.
Last month, Federal Reserve Bank of Boston President Eric Rosengren warned that financial asset bubbles pose a risk to stability amid a “reach for yield” by investors as a result of continued accommodative monetary policy. Surging corporate debt was identified as a key vulnerability in the International Monetary Fund’s October Global Financial Stability Report. Gregor Stuart Hunter 2/12/2020 Bloomberg
This virus will be blamed but these things always end. Longer duration US Treasuries and gold have been outperforming so far in 2020. When the performance of bonds and stocks diverge we always take the side of bonds. At some point, stocks and bonds will stop their divergence. Perhaps, stocks will come down a bit and bond yields will rise a bit. No harm no foul there. But, if we are right about this virus, stocks are not discounting the risk to global supply chains and corporate debt enough. At some point the consideration is the return of capital not the return On capital. This is one of those times.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.