What story is the market telling us when we see the U.S. stock market index (S&P500) continuing to drop after the most severe single move drop in history? What does it say when, in an age where digital technology and renewable resources are increasingly replacing mineral stores of value, that Gold prices would be trading at almost 1700 vs the Dollar? What does it say about the global economy when the price of WTI crude oil was trading at $55 last week and now is heading towards that $42.5 level? What are all the macro investors seeing that the economy is ignoring?
It's no surprise that Corona virus has severely impacted an already fragile global trading market, global supply chains, and consumer demand. The global economy had just cooled off following the signing of the Phase 1 trade deal with China as well as the resolution of Brexit. Besides a few threats of conflict between U.S. and Iran, the global space has been cooperating since 2020 and markets have loved it. Currently, countries are mobilizing their resources to stop a spread of Corona virus (Corvid-19) and, as a result, are less concerned with maintaining orderly supply chains. Consumer appetite is down in almost every region of the world which directly leads to manufacturing production slowing down. The signs of a recession have been building for several years as we headed into the late stages of the economic cycle. Here are the biggest factors that are likely to cause this next recession/depression as well as some warning signs:
- Global Manufacturing slow down
- U.S. Manufacturing slowdown
- Global Consumer Demand
- U.S. Consumer demand
- Corona Virus impacting the economy
- Corona Virus Disrupting supply chains
- Corona virus related Job Losses
- Chinese manufacturing stopped
- Federal Reserve lowering rates too fast
- Debt bubble on dollar denominated debt
- Banking crisis in Europe
- Debt crisis all over the world
- Political/ revolutionary unrest around the world
- Pension systems are failing globally
Warning Signs Explained
We'll elaborate on a few of these impacting forces below:
1) Manufacturing is a very important economic indicator because it tends to show signs of slow down earlier than the rest of the world. When retailers feel a slow down in consumption (people buying goods) then they reduce their order sizes with their manufacturer. When we notice a slow down in manufacturing in some key sectors such automotive and technology it tells if consumers getting "full" and demand about to slow down. Slow down of manufacturing is not a sign of a recession by itself, however, when we consider how late we are in the economic cycle, it is crucial that we pay attention to the warning signs.
2) China has been hit extremely hard by the Corona outbreak and have felt serious shocks throughout their economy. Millions of people are staying home from work and thousands have been laid off since their companies cant afford to pay them. China is one of the largest GDP nations in the world and have a major impact over the global supply chain. Most companies who need technology or textile manufacturing are partnered with China in order to achieve competitive pricing. This slow down in economic productivity can have a serious impact on companies such as Apple, who rely heavily on Chinese manufacturing. Other institutions like the bank HSBC have a plan to lay off some 35,000 people in the Asia region.
3) Markets and economies are two separate beasts. Markets panic when the economy is uncertain and are decisive when the economy takes a turn. The global economy was falling apart as trade tensions were disrupted and new alliances were formed. Some smaller nations like Venezuelan, Chile, and Lebanon are in debt and are dealing with a period of high inflation and economic disparity. The U.S. stock market was on a consistent bullish move during all of these global revolutions and was bound to correct once the investors' greed slowed down.
When the virus hit these already fragile economies it just acted as an accelerant for the fire that was forming. Corporations are feeling the pressure from having their supply chains disrupted, people are feeling the impact of rising inflation, and governments are dealing with debt crisis all over the world. Large money houses/ governments are dumping commodities such as oil so that they can retain as much dollars as possible. Gold should continue to spike until a timeline is announced for getting rid of the virus. Once a timeline is established the commodities and currency markets should be back to normal. The economy might not be able to recover as fast as the markets do.
The one factor that is now in the background is the Election year in the U.S. The impact of this election has a major role to play in how markets invest in the future. Corona virus has taken the front seat in priority. Keep an eye on the Manufacturing data that comes out and you'll notice the trend. If you're trading currency pairs then here is what we've noticed the investors do during this crisis:
- Sell a currency when first cases/deaths are reported in that region
- Buy if the government takes an aggressive stance to protect borders and quarantine the sick
- Sell if signs of spreading get worse after the initial effort to contain
- Buy Gold
There are plenty of factors that threaten to tip the scale. We didn't cover all of them in this article but urge you to do you research and find out for yourself!
Disclaimer: This paper 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.