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Intro
This article will highlight why this coming Economic crisis could be the most severe that we've seen in our lifetime.
Corona virus (Corvid-19) has been the black swan event that broke the camels back. As the dust settles it will become very obvious as to the flaws in our response systems and the vulnerability of our supply chains. We will separate the economic effect of Corona virus v.s. the results of an already fractured financial system.
Our main goal is to help you distinguish the difference between the inevitable and the anomaly.
We will cover the timeline, facts/stats about the current state of the virus, the economic effect, the up-coming effects, and the worst and best case scenarios of the outcomes of the impact.
Key Terms
- Pandemic: A disease prevalent over a whole country or the world. A disease that has spread across many countries and affects a large number of people.
- Epidemic: A widespread occurrence of an infectious disease in a community at a particular time. Also a rise in the number of cases of a disease beyond what is normally expected in a geographical area.
- WHO: World Health Organization. Agency dealing with global public health. According to the WHO; Their primary concerns are 1) Ensuring healthy lives and well-being for all at all ages 2) Achieving universal health coverage 3) Addressing health emergencies and promoting healthier populations.
- CDC: Centers for Disease Control and Protection. The leading national public health institute of the United States.
- Corvid-19 (Corona Virus): A respiratory disease caused by a new corona virus that was first detected in China and which has now been detected in more than 100 locations internationally. The virus has been named “SARS-CoV-2” and the disease it causes has been named “coronavirus disease 2019” (abbreviated “COVID-19”).
- Disease Normal Distribution Curve: A graphical representation that shows the trade-off between the capacity of the health-care system to handle the spread and the growth factor of infected individuals. "Flattening the curve" is being thrown around to describe the attempt to mitigate the effects of the virus through containment and reducing the spread.
- R Naught (R0): Basic reproduction number used by health officials in order to describe the intensity of an infectious disease outbreak. Calculates the potential rate of spread.
- Supply Chain: The sequence of processes involved in the production and distribution of a commodity.
- Quantitative Easing: The introduction of new money into the money supply by a central bank.
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Timeline
* The timeline established is from data collected by the WHO and the CDC in regards to the outbreak. Since testing in many areas were delayed there are obvious discrepancies as to the TRUE number of cases being reported.
- December 31, 2019: First reports of Corvid-19 are reported from the Wuhan Province in China.
- January 1, 2020: Huanan Market (Where the first cluster of pneumonia cases were reported) is closed down for sanitation.
- January 3, 2020: Few more cases reported in Wuhan, first severe symptoms are reported to the WHO.
- January 7, 2020: CDC established the Corvid-19 IMS (Incident Management System).
- January 8, 2020: CDC begins testing anyone traveling from Wuhan, Province for sign of respiratory
- January 11, 2020: China confirms the first death from Corona Virus.
- January 13, 2020: Thailand confirms its first cases of the virus.
- January 15, 2020: Japan confirms its first cases.
- January 20, 2020: S. Korea confirms its first case.
- January 20, 2020: United States reports its first case in Seattle Washington. The man was 35 years old.
- January 23, 2020: China quarantines the Wuhan Province where the virus originated.
- January 30, 2020: More cases emerge in the U.S.- Several students from Miami, a few cases in Ohio, and several cases in Louisiana.
- January 30, 2020: WHO declares a public health emergency of International concern.
- January 31, 2020: U.S. Declares a public health emergency; providing mandatory quarantine guidelines for international travelers.
- February 10, 2020: Death toll for Corvid-19 IN CHINA ALONE, passes the death toll of SARS worldwide.
- February 14, 2020: First death in Europe from Paris, France.
- February 23, 2020: Italy experiences a severe outbreak in the northern regions of the country.
- February 28, 2020: First group-cases of community spread were discovered in northern California.
- February 29, 2020: Washington Governor declares a state of emergency in the state.
- March 1, 2020: First reported death in the U.S. reported in Washington State.
- March 3, 2020: Ohio cancels the Arnold Classic bodybuilding competition.
- March 5, 2020: Ohio receives its first testing kits.
- March 6, 2020: SXSW (South by Southwest) music festival is cancelled in Austin Texas.
- March 9, 2020: Ohio confirms its first case of the virus. Ohio declares state of emergency.
- March 10, 2020: Widespread cancellations of major events as well as shut-downs of several major schools.
- March 10, 2020: Trump holds meeting with top insurance leaders in the country to help work on solutions to the costs of testing for corona.
- March 11, 2020: WHO declares Corvid-19 a *Pandemic. Ohio confirms more cases.
- March 12, 2020: The House of Representatives discusses a Coronavirus response package (H.R.6201) with the white house. No deal has been reached as of the time of this article.
- March 12, 2020: Trump holds an address to the nation where he downplays the effect of the virus, again comparing it to the seasonal flu. The lack of leadership caused the equity markets to crash only moments after the briefing. Trump claims that insurance companies will waive all co-pays for Corona virus treatment. Only testing will be included in the co-pay waiver.
-March 13, 2020: Trump holds a press conference to address the nation. He is joined by top disease experts along with titans of retail industry. Trump Introduces a plan to combine the efforts of the private and public sector. Please see below for information on the news conference:
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*March 13, 2020 Press Conference Take-away:
* Its important to note that it was a responsible idea to release this news just before the markets closed so as to not induce further market panic.*
- CVS, Walgreens, Target, Walmart, and a few other retailers joined forces to offer their parking lots as testing centers, offered drive through shopping/testing, and offered to help in the efforts to combat the virus.
- Tests are finally being manufactured and will be released shortly.
- Trump says that interest payments on Federal student loan debt will cease during the efforts to contain the virus.
- Trump wrongly claims that insurance companies will waive co-payments for Corona treatment. They will only be waived for TESTING.
- Lab Corp and Quest Diagnostics, the two largest clinical laboratories in the U.S. agree to team up in the effort to produce test results for Corona.
- CDC and the FDA approve new testing kits.
- Trump said the U.S. will fill our Strategic Petroleum Reserves as a response to the price war that caused Oil to crash. The price of Oil immediately reacted to the news.
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Short-hand Timeline
*These numbers are based on information received by global health authorities. it is suspected that the actual number is much higher.
STORY OF YESTERDAY
1) China moves first, very efficient response to this crisis and handled with the utmost urgency. Cases have since slowed and fatality rates are flattening. Out of 80,815 reported cases from china there have been 3,177 deaths as a result. This shows a death rate of nearly 4%.
2) Singapore moves forward with testing immediately after the outbreak in China. 200 reported cases to-date and 0 fatalities.
3) Hong-Kong Follows suit with an impressive containment effort. 132 reported cases with 1 reported death to-date.
*It is important to distinguish these nations for their urgent response to the outbreak. These 3 countries had experience in battling the SARS epidemic and had strategic plans in place.
4) S. Korea was late to start testing which created some uncertainty. They quickly rallied and soon had tested more individuals than any other country in the span of several days. S. Korea has tested over 250,000 people since Jan. 20 with a population of only 51 million. 4th in the world in number of cases with 7,979 reported cases and 5 deaths to date.
5) Iran declares a state of emergency and indefinitely suspends their parliament. Iran was very slow in the response and due to the lack of preparedness they had many government officials contract the virus. It is reported that at least 23 top government officials including some fatalities. Among these cases include: One of Iran's VP's (Masoumeh Ebtekar), a member of a senior advisory council to Iran's supreme leader (Mohammad Mirmohammadi), high-level diplomat (Hadi Khosrowshahi), Mohammad Sadr, another member of the council, and cabinet member Reza Rahmani. To-date there have been 11,364 reported cases with 85 deaths.
6) Italy led a disastrous effort in the fight against the virus. Even after the country declared an emergency and limited travel inside the country there were still public events occurring all over the country. The most troubling negligence that Italy displayed was continuing to allow flights to leave from the airport in Milan. This means that every 5 minutes there was an export of Corona virus to some other part of the world. Italy has reported 17,660 cases to-date with a whopping 1,266 deaths reported. This is the highest fatality rate in the world at the moment.
*These countries describe the story of today. This is what the market already knows and what is priced in to the sharp declines in the commodities, equities, bond yield, and crypto markets.
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STORY OF TODAY
7) United States was dangerously late to begin testing. As of the time of the article the number of individuals tested is just under 2,300. There is no accurate report of the number of cases in the United States and with a growth rate as fast as Corvid-19 it may be estimated that 50k-120k may have the virus. The U.S. has recently declared a state of emergency and will be implementing a public/private partnership in order to combat the crisis. mobile testing centers will soon be in place. As the number of cases in the U.S. is publicly released we should see severe market reactions to the reality.
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STORY OF TOMORROW (next several weeks/months)
8) Something that is not being talked about enough is what happens from here. An area to focus on from here is the Southern Hemisphere. Countries like Brazil will have a hard time containing an outbreak of this size. Nations like India are especially vulnerable due to population size, density, and preparedness. Unlike China, India does not have an authoritarian government so it may be harder to contain the movement of people. The story of tomorrow is the southern hemisphere.
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Reasons why the Corvid-19 outbreak could lead to a systematic crash in global supply chains and bring on an economic depression:
1) Scientists use a measure called "R naught" which is a basic measurement of reproduction. This measure is used to identify how fast the virus is spreading. This measurement indicates that it is more contiguous than the seasonal flu. The comparison between the seasonal flu and Corvid-19 is only relevant in terms of their overlap of symptoms. They are NOT the same in severity or spread.
2) The global economy was already in a drastic slow-own starting 2019, indicating the onset of a recession.
3) Europe is getting hit hard. This is especially concerning because of the financial condition of Europe's economy. With a crippling manufacturing sector, aftershocks from Brexit, a bond crisis, and a prevailing debt crisis; this was the last thing that the EU needed. This will lead to a European recession. (Please see our previous article from 2019 titled "Euro Crisis". This recession was inevitable due to the systemic issues in the region; the anomaly of the virus may just amplify the severity of the recession and lead to a full depression, sending shocks throughout the global economy.
4) Fed started Quantitative Tightening (QT) in 2018 that led the markets into a panic. Rate changes, despite having an intimidate reaction from financial markets, takes time to hit the actual economy. A year after this decision the yield curve on the 2/10 year bonds inverted, showing a move in to bonds from investors. (More people in bonds = Higher bond prices = Lower Bond Yields).
5) China Trade-War and the tariffs that accompanied put massive pressure on suppliers, manufacturers, and producers. This came at a time where economic growth in Asia was already slowing.
6) The supply/demand shock of this virus hit an already crippling manufacturing sector. China halted its productions (and its economy as a whole); sending supply shocks throughout the global economy; most of which is dependent on Chinese exports. This is especially dangerous because it exposes the vulnerability of the current global supply chain and emphasizes the danger of sole-sourcing manufacturing. China shutting down could stop global trade and potentially bring Supply and Demand to 0, a phenomenon that no economist has ever encountered.The magnitude of what China did (sacrificing their economy for their social good) is unprecedented and needs to be addressed going forward.
7) U.K., Hong Kong, Germany, Italy, China, Turkey, Argentina, Iran, Mexico, and Brazil were either already in recession or teetering on the brink. The virus only added fuel to a fire of sovereign debt bubble, manufacturing recessions, and GDP slow-downs.
8) Many developing economies were in turmoil prior to the crisis. Countries such as Venezuela, Greece, Chile, Lebanon and Cyprus were dealing with some form of default on foreign debt, sovereign debt crisis, dollar shortages, and bankruptcy. Emerging market economies are much more susceptible to influence especially with something as severe as a Pandemic.
9) Oil price war between Russia, OPEC+, and the United States. (Please see previous article titled "Oil Turmoil".
10) Corporations like HSBC bank have laid of 10's of thousands of employees. HSBC specifically laid off 37,000 people from their banks.
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MARKET IMPACT
The market reaction has been something like this: (excuse the simplicity to my economists reading, this publication is for general audiences).
- Markets panic sell in response to rumors of Chinese supply shock.
- Smart beta funds get triggered into short positions and accentuate the market decline.
- Money managers with large exposure to equities begin receiving maintenance margin calls for their equity investments.
- The S&P500 experiences the largest single-day drop in history. Trading is halted at the open to avoid increased selling pressure.
- Commodities (Gold, silver, wheat, oil etc..) all take a massive dive. In times of economic uncertainty these precious metals and commodities are seen as a safe haven and generally see a lot of flow. This time around they all crashed with equerries, signalling that managers/funds were potentially closing their winning positions in order to meet the margin requirements for their losers.
- Corona numbers increase and as supply chains feel the shock, the equity markets react by continuing to sell off.
-Oil price-war kicks in and the Oil markets sees the largest single-day drop in history.
-As every additional country releases information, the markets react by panic selling to avoid further loss.
- Crypto, which is normally seen as a hedge to traditional investments due to its negative correlation, also saw the largest single day drop in history on March 12, 2020. This also indicates that money managers are panicked and closing out winning investments in order to meet their liquidity needs.
-The Federal reserve announces stimulus plan to pump $1 Trillion into the economy. Warning signs that this operation resembles the Q.E strategy from 2008.
What We Expect From the Markets Next
- As U.S. test numbers begin to release, the markets will react substantially if the severity is greater than we can handle.
- If Trump's comments are received well then Saudi Arabia and Russia will end their price war. This is due to the fact that if the Saudis and Russians kill the price of oil, the U.S. will happily buy at a discount and fill up the Strategic Petroleum Reserves. If we buy up the oil or the price war ends then the price of oil will recover. Once price begins recovery then demand will rise which will bring in other players looking to buy. It may not see levels of $100+ for many years to come but it could very well recover to sustainable levels ($50-$80) p/barrel.
- Bond prices will continue to rise until the Treasury yield hits 0. No telling if the bond prices will continue to rise if Treasury yields head into negative territory.
- Equity markets will continue to sell off as central governments, major funds, and most importantly, pensions, begin to re-appropriate funds from equity securities to more reliable investments.
- The Pension systems around the world could fail and maybe never recover if their managers were actively investing in risky positions (Trading volatility, shorting bonds, emerging market debt). This will lead to a rise in populism in some areas and a rise in socialism in others. Two very opposite reactions to a common problem.
- The global economy relies heavily on the U.S. dollar as a store of value. Most currencies in the world are pegged (linked) to the change in price of the dollar. The Fed is currently flooding the market with liquidity via repo operations. Flooding the market with cheap money will significantly reduce the value of the dollar and may lead to an unwanted increase in inflation.
- As the global economy feels the shock of the supply markets, they will try and rush into the only economy where they can get yield; I.e. The U.S. If economies all rush to get dollar-denominated debt, the value of the Dollar will Surge (Refer to the previous article titled: Dollar Squeeze).
- If markets cant get a hold of the selling and banks need to be bailed out like they were in 2008; We should see a huge spike in safe haven flows. Common hedges against the equity markets include: Gold and Bitcoin/crypto.
- Short the Euro. (Refer to the previous article titled: Euro Crisis)
- Long JPY. As a creditor nation, Japan will step in to provide liquidity to various economies. This increase in demand for the Yen will drive the value of the Yen higher....aggressively.
- There's an old saying in trading that "When China sneezes, Australia catches a cold". AUD will continue to under-perform every currency as the value of the Australian dollar declines.
- If Great Britain can get their case numbers under control (Unlikely) they will significantly out-perform their European counterparts.
- Crypto and Gold crowds are salivating at the low prices.
CONCLUSION
With the global economy on edge its almost impossible to determine the severity at this time. Could this be like the mild recessions of 1990 or 2001? Could this be a severe recession the likes of 2008? Could this potentially get worse and lead to a depression like 1929 or 1979?
As more information unfolds we should have our answers. We believe this recession is a hybrid of a late-cycle correction, debt bubble defaults, and a credit crisis, all rolled up into one. The fact that we're in the late stages of an economic expansion (along with a slow down in manufacturing) indicates that the global consumer is "full". Slow-downs in manufacturing are often followed by lay-offs from companies that cant afford to stay open without any business. Car manufacturers are especially sensitive to this change.
Sending workers home due to "safety concerns" will lead to an increase in the rate of Lay-offs. Corporations will use the virus as an excuse to send home large numbers of employees that they cant afford to keep. This layoff frenzy will add to the supply chain problem issue of global interdependence and will lead to political movements worldwide.
Corporations will use this an excuse to implement innovative technologies that will negatively impact the job market. (Think car manufacturers after 2008).
In conclusion: Due to the plethora of fragile economies combined with a deteriorating global supply chain, the effects of the virus will have dramatic impacts on the economy for months to come. Volatility should remain present through the summer so FX traders will be at an advantage over equity, options, bond, or futures traders.
Pipstradamus
[03.13.2020]
Disclaimer: This article is the result of the analysis carried out by analysts associated with ChartAddicts. The article does not purport to represent the views or the official policy of ChartAddicts. This is not investment advice.
Citations:
“Coronavirus Cases:” Worldometer, www.worldometers.info/coronavirus/#countries
“Coronavirus.” World Health Organization, World Health Organization, www.who.int/health-topics/coronavirus.
“Coronavirus Disease 2019 (COVID-19).” Centers for Disease Control and Prevention, Centers for Disease Control and Prevention, 6 Mar. 2020, www.cdc.gov/coronavirus/2019-ncov/index.html.