Monday, January 27, 2020

Is the Market Grossly Underestimating the Potential Impact of the Coronavirus Epidemic?

The potential for a consequential disruption in China's supply chains appears to be vastly under-appreciated.
Despite the current drop in stocks (less than 1.5% as this is written), there's a tremendous reservoir of complacency about the economic and financial impact of the coronavirus epidemic. The zeitgeist reflects an implicit confidence that the coronavirus will blow over like the SARS scare a few years ago and the impact on the global economy will be essentially zero.
Have all the risks already been fully discounted? Here are some of the reasons why the assumption that this will have little effect on the U.S. economy and stock market may be misguided:
1. Patient One (the first reported case of 2019-ncov) on 31 December was unlikely to be the person in which the mutation enabling person-to-person contagion occurred. The latest genetic analysis suggests the virus first mutated into its present form sometime between late October and late November.
It's thus highly likely the virus had already been spreading for at least a month before 31 December. The symptoms of this new virus are not that different from typical flu strains, so why would authorities spend the time and money searching for a novel flu in a patient? The only reason authorities become involved would be a cluster of flu/ pneumonia patients dying.
Hundreds of thousands of people die of the flu every year, between 12,000 and 50,000 in the U.S. alone, so the death of a patient with flu-like symptoms is not uncommon enough to trigger an official investigation.
This line of reasoning suggests there was already an expanding pool of virus carriers long before officials discovered the new virus and began acting to limit its spread.
If this is the case, then the virus may have spread outside Wuhan before officials reacted.
2. This virus is a new type, and this makes it especially dangerous as humanity may have limited immunity to viruses that are sufficiently different from existing variations.
There are several bits of evidence that this novel flu is both contagious and dangerous. One is that health workers have caught the flu from patients despite all precautions and anecdotal evidence that the disease has spread from one family member to everyone else in the household.
The other is the relatively high death rate. Based on data from Chinese authorities (likely incomplete) , about 3% of the patients have died. The great flu pandemic of 1918-19 killed about 2.5% of its victims, and since it was highly contagious, it's estimated 50 to 60 million people died in that pandemic--often young healthy people.
3. The incubation period for this flu may be up to 14 days, and someone who has it may be asymptomatic (display no symptoms) for 5 or 6 days. This means screening passengers for fever is essentially useless.
Even more alarming, the new virus doesn't always cause a fever, making screening for fever even less effective.
Despite these data points, the American populace is being assured that screening is effective and so it's perfectly safe to travel as usual. This complacent confidence appears to be unfounded.
4. The Chinese populace is highly mobile within China and the world. Hundreds of thousands of Chinese work in other nations, and a significant percentage of these offshore workers returned home for Lunar New Year and will be returning to their jobs in the U.S., Europe, Africa, Southeast Asia, the Mideast, etc. next week.
To assume that none of these returning workers are asymptomatic carriers of the flu is a stretch.
5. Researchers are busy developing a flu shot to offer some immunity, but if this virus is virulently contagious, the question becomes: can authorities outrace the spread of the virus? Realistic estimates of how long it will take to develop and test a vaccine are 6 to 7 months, and that's if everything works perfectly, i.e. the virus doesn't mutate, etc. Producing hundreds of millions of doses and administering the vaccine to hundreds of millions of people will take additional time.
6. The implicit model for this coronavirus in the mainstream is SARS, which was isolated and contained. But this new virus may be much more contagious and so the relatively rapid and successful isolation of SARS may be a misleading model.
7. Authorities seem to prioritize "don't panic" messages, as if fear of this flu is irrational. But fear of a risk that cannot be assessed with any confidence is entirely rational. The smart strategy is to lay low and wait for more evidence on the nature of the risk.
8. The potential economic impact of this virus is grossly underestimated. The Chinese economy is particularly vulnerable now for a number of reasons. In essence, all the low-hanging fruit of rapid development have been picked, and adding more debt to boost building and consumption is no longer as effective now that debt has soared.
The world has depended on China's skyrocketing consumption for growth for the past 30 years. Should China's economy actually contract due to the knock-on effects of the virus, the global economy will soon follow.
How fear triggers a domino-like effect in an economy is poorly understood. In an economy that's already teetering on recession, quarantines, disruption of travel and commerce and a generalized "circle the wagons" response to uncertainty will push the precarious economy over the cliff.
Once tourists cancel trips, incomes plummet and businesses are forced to close. There's no guarantee that they will re-open after months of recession.
If you fear catching a potentially life-threatening flu, you're unlikely to go shopping for a new car or furniture; you'll put that off if at all possible.
Then if you read about layoffs and recession, you decide the car and furniture can wait indefinitely.
This is how the transition from complacency and confidence to fear and caution ripples through the economy, as the initial impact unleashes knock-on effects that increase caution which then reinforces reduced spending and investment.
9. Confidence in the truthfulness and effectiveness of authorities is already low in China, and this loss of confidence will likely spread to other nations as people awaken to the authorities' obsession with "keeping the economy going" by discounting the risks with false assurances that "everything is under control."
When people realize everything is not under control and they've been misled to grease the wheels of commerce, the legitimacy of the state may come into question: if they downplayed the flu, putting me and my family at risk, why should I trust them about anything else? The epidemic has the potential to trigger a political crisis as well as a severe economic slump.
10. The potential for a downward spiral of confidence is high as authorities will be pressured to increase their reassurances that all is well at every new wave of evidence that the virus is spreading despite their efforts. Doubling down on "don't panic" as the virus spreads will eventually backfire and unleash the very panic they feared.
11. Global stock markets are at all-time highs or near-term highs, on the euphoric belief that central bank stimulus will push stocks higher essentially forever. The virus has to potential to refocus attention on sales, profits and future risks, and that could change the general mood from complacent confidence to uncertainty, which is Kryptonite to market confidence.
The virus might be the needle that will pop all the speculative bubbles, regardless of central banks' stimulus.
12. History suggests that this virus may rise in two waves. The initial wave may die down and everyone sighs with relief, assuming it's like SARS: everything's fixed, risk is back to zero. Restrictions are eased, travel bans lifted, etc. Then the second and much more virulent wave rises, catching everyone by surprise.
13. The potential for future mutations which increase the lethality of the virus are not being factored into current risk assessments. Assuming the virus will retain its current configuration is a leap of faith.
The potential for a consequential disruption in China's supply chains appears to be vastly under-appreciated. Again, the working assumption is that any disruption will be temporary and everyone in China will be back to work as usual in a few weeks. The market has yet to discount the possibility that China's supply chains will be disrupted for months, with all the ripple effects that would generate throughout the global economy.
The market also has yet to discount the possibility that China's consumption could crater (buying an iPhone 11 is no longer a priority, etc.) and knock-on effects in its currency and debt markets could disrupt global financial markets, potentially triggering insolvencies in overleveraged companies not just in China, but in the developing and developed economies as well.
While it's too early to predict global depression, it's also too early to predict a rapid return to pre-epidemic normalcy.
Here are some informative science-based links on the coronavirus, courtesy of longtime correspondent Cheryl A.:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Sunday, January 26, 2020

Some Practical Questions about the Coronavirus Epidemic

Restrictions that allow a significant number of people to move about, either with official approval or unsanctioned "black market" activity, cannot stop the spread of contagious diseases.
Like everyone else, I've been reading the mainstream media reports on the Coronavirus epidemic. I haven't found any information about the practicalities that immediately occur to me, such as:
1. When public transportation is halted and commerce grinds to a halt as people avoid public places and gatherings, thousands of employees no longer go to work. Who pays their wages while the city is locked down? The employers? Then who compensates the employers, since their income has also gone to zero?
Does China have a universal unemployment insurance system that can quickly issue payments to all people who are no longer going to work and getting a paycheck from an employer?
What about the thousands of migrant workers who don't have regular employers? Who pays them? If they're technically not officially sanctioned residents of the city, they don't exist in government records.
2. If people idled by the lockdown are supposed to live off savings, what about all the marginal workers with few resources? What are they going to live on once their meager savings are gone?
3. Given the choice of obeying the lockdown rules and starving or slipping out of the city to find paid work somewhere else, how many migrant workers will choose to slip away?
4. Unlike the developed West, many people in China still have ancestral villages to return to, rural towns where their grandparents or or other close relatives live. If work has dried up and you're fearful of catching a potentially lethal virus, wouldn't it make sense to slip out of the city and make your way back to the village where you can hunker down until the epidemic blows over?
Since people who caught the virus may not know they're a carrier, how will this migration not spread the disease to rural areas with few medical resources?
5. The typical city has about a week's supply of food, fuel, etc. at best. If the lockdown runs longer than a few days, scarcities of essentials will ignite hoarding, and remaining supplies will be snapped up.
Since the city's residents need food, fuel, etc., it must be brought in regardless of the lockdown. This brings outside workers into the city and provides residents desperate to flee avenues to escape the lockdown. Every individual involved in this system is potentially exposed to the virus or is a potential asymptomatic carrier of the virus leaving the city.
These realities leave officials with an impossible choice: either truly isolate the city, which isn't possible for more than a few days, or allow the stupendous flow of goods required to sustain millions of city residents, thereby creating uncontrollable avenues for the virus to spread beyond the city as transport workers and those fleeing the lockdown travel to other cities.
6. The only way to end a contagion is to identify every carrier of the disease and immediately isolate them in full hazmat mode, and then track down every individual they had contact with during the incubation/asymptomatic period of the disease--up to two weeks--and isolate all these individuals until they either develop the disease or pass through the crisis unharmed.
This was the basic procedure used to end the SARS epidemic in 2003. As this article from the The New England Journal of Medicine explains (Another Decade, Another Coronavirus, (via correspondent Cheryl A.), the Wuhan Coronavirus shares characteristics with SARS and cannot be dismissed as just another run-of-the-mill flu virus.
During this process of isolating / quarantining everyone with the disease and everyone they had close contact with, all healthcare workers caring for these people must also remain isolated from the general populace lest they become infected and spread the disease outside the quarantine.
Treating people in crowded hospitals where hundreds of people are coming and going and moving freely into the rest of the city won't stop a contagion from spreading.
If the only way to end a contagion is to identify every carrier of the disease and immediately isolate them, and then track down every individual they had contact with during the incubation/asymptomatic period of the disease--is this even possible in China now?
Please study the map below before claiming it's still possible.
7. China is making a big show about sending 1,000 doctors to Wuhan, but precisely what medical treatments are available for this virus, how effective are these treatments, and do they require a physician to be administered? If the answers are: there are no effective targeted medical treatments for this virus, and doctors are not required to administer what is available, then why expose a scarce resource--physicians--to the disease since they really can't do much to halt it or heal the patients?
Isn't sending 1,000 doctors to Wuhan more a PR move than anything else? And if it's basically a PR stunt to appear to be "doing something," doesn't that call the entire official response into question?
If there is no targeted treatment available, then the recovery of the patient is a function of their immune system. Building tent hospitals that are porous--healthcare workers returning home after their shift, relatives visiting the stricken, workers moving supplies in and out of other facilities, etc.--will do little to isolate carriers and potential carriers. And since complete isolation is the only way to stem the contagion, these porous tent hospitals won't do much to limit the contagion.
8. Are the travel bans on tours and other travel restriction measures 100%, in other words, not a single individual is being allowed in or out? If the travel restrictions are haphazard, then what's stopping asymptomatic carriers of the virus from traveling freely around the world?
There are many other practical questions about the epidemic and China's response that aren't being addressed in the conventional media. While we don't know precisely how contagious and lethal the virus is at this point--and it could mutate into a more contagious and lethal variation within a carrier at any moment--we do know complete isolation of every carrier and everyone they had close contact with is the only way to end the contagion.
We also know cities can't truly be isolated for longer than a few days, and we know people can't live without food, water, fuel, etc. and money to buy these essentials. We also know that restrictions that allow a significant number of people to move about, either with official approval or unsanctioned "black market" activity, cannot stop the spread of contagious diseases.


My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Friday, January 24, 2020

Don't Be Too Sure

Don't be too sure that the coronavirus will blow over and have no effect on global growth.
If there is anything that characterizes this moment in history, it's complacency: everyone's so sure that current trend lines will continue, onward and upward, and risk has been tamed for the foreseeable future.
Don't be too sure.
1. Don't be too sure that the coronavirus will blow over and have no effect on global growth.
2. Don't be too sure that "the Fed has our back" so stocks will always resume their steady climb after every spot of bother.
3. Don't be too sure that the official Chinese pronouncements that the coronavirus is contained are actually accurate.
4. Don't be too sure that there won't be a second and far more lethal advance of the coronavirus once all the overseas Chinese who went home for Lunar New Year return to their jobs in the U.S., Europe, Southeast Asia, etc.
5. Don't be too sure that people will respond to the natural fears of the coronavirus by rushing out to buy a new iPhone, vehicle, etc.
6. Don't be too sure that bubbles in over-valued stocks and housing won't pop.
7. Don't be too sure that global tourism won't take a body-blow from the spread of the coronavirus.
8. Don't be too sure that the risks of the coronavirus spreading can be assessed by anyone with any accuracy.
9. Don't be too sure that the U.S. economy is bullet-proof and so President Trump is a shoo-in for re-election in November 2020.
10. Don't be too sure that the citizenry's tolerance for Fed-driven wealth-income inequality is as limitless as the Fed's balance sheet.
11. Don't be too sure that the super-low unemployment rate is a reliable measure of business confidence or the health of millions of small businesses.
12. Don't be too sure that the Fed's vaunted "wealth effect" won't reverse.
13. Don't be too sure that all risks are known and have been discounted.
14. Don't be too sure that the global health system is capable of dealing with the spread of the coronavirus.
15. Don't be too sure that central banks' lowering interest rates is going to reverse a global recession.
16. Don't be too sure your favored tech stock won't crater as over-valuation mania is replaced by fear.



My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Thursday, January 23, 2020

The Future of What's Called "Capitalism"

The psychotic instability will resolve itself when the illusory officially sanctioned "capitalism" implodes.
Whatever definition of capitalism you use, the current system isn't it so let's call it "capitalism" in quotes to indicate it's called "capitalism" but isn't actually classical capitalism.
Try a few conventional definitions on for size:
Capitalism allocates capital to its most productive uses. Does the current system actually do this? You must be joking.
Capitalism is based on private labor and capital freely choosing where to invest time/assets. Does the current system actually do this? You must be joking.
Capitalism enables comparative advantages which enrich everyone. Does the current system actually do this? You must be joking.
The core dynamics of "capitalism" around the globe are:
1) Central banks create unprecedented sums of currency and credit and distribute them to the top of the wealth-power pyramid: banks, financiers, corporations, the super-wealthy.
2) The recipients of the central banks' free money and credit dominate production, finance and the political sphere, controlling these forces to serve their own interests to the detriment of the biosphere and 99.9% of humanity.
3) The system depends on ever-increasing debt and leverage in every sector, household, commercial and government. If debt and leverage stop expanding, the system crashes.
4) Energy must be abundant and affordable to the average worker or the system crashes.
5) Despite the supposed benefits of "comparative advantage" globalization, costs of essential goods and services are rising relentlessly everywhere while wages stagnate everywhere.
6) The abject failure of "green solutions" such as recycling to the horrendously wasteful landfill economy.
7) The unholy alliance of surveillance capitalism and increasingly repressive states.
8) The unprecedented dominance of stock and financial markets, to the detriment of the real economy.
The current issue of Foreign Affairs magazine is emblematic of the status quo's calculated avoidance of these dynamics: the issue's focus is "The Future of Capitalism," but there is literally not one mention of central banks, the dominance of financial elites, the dependence of the system on ever-expanding debt and leverage, soaring costs of essentials while wages stagnate or the inconvenient reality that there is no substitute for hydrocarbon fuels.
Instead, the "future of capitalism" is presented as a choice between statist (i.e. Chinese) and private-sector (i.e. American) versions, ignoring the reality that both versions depend on central banks issuing unprecedented, gargantuan sums of freshly issued currency and credit, enormous expansions of public and private debt, ever-higher speculative leverage and ever-greater consumption of hydrocarbon fuels.
Rather than "efficient allocation of capital," we have monopolies and cartels profiting from a staggeringly wasteful landfill economy based on extracting ever greater quantities or energy to squander on traffic congestion, destructive addictions and planned obsolescence.
Rather than an "invisible hand" benefiting everyone, we have a self-serving state-cartel system that squashes competition, exploits the politically powerless and stripmines resources, workforces and a financial system designed to benefit the few at the expense of the many.
We inhabit an unsustainably destabilizing psychotic dualist reality, an officially sanctioned "capitalism" in which everyone is getting better every day in every way as central banks, financiers and the super-wealthy go about their self-serving business, and the lived real-world economic reality described by the eight dynamics listed above.
The psychotic instability will resolve itself when the illusory officially sanctioned "capitalism" implodes.



My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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