Coronavirus Survival Kit
This week a number forces combined to give pause to economic outlook as it relates to value and opportunity, and desirability.
Over $ 5 trillion was wiped out in stock market declines missing no one’s portfolio, or holdings. And COVID-19 continued its’ global march affecting countries like Iran and Italy with many reported cases causing much angst; while China struggles with its’ impact, effectively offline as the world’s workshop. Causing many companies to issue warnings about supply chain disruptions and profit warnings. What also became clear this week is that global credit expansion is actually declining. While at the same time global output is in decline as evidenced in reports of continued lackluster car sales and declines in everything from oil consumption to meat to soybeans. This is reflected in the lower prices that have declined all week. We have also seen meaningful action taken by the “bug out crowd” who hope to escape the passing storm.
One thinks that this has all makings of a rogue wave. It is well canvassed that the world was short on liquidity last year. The fall in China output will place them in negative growth for a period, not yet known. However, with car sales down some 90% and many businesses running short of capital liquidity the outcome is clear. China will need to bailout not just many of their banks but whole industry segments. The question is with what capital? Printing money to prop industry in a world not consuming is a recipe for failure. Many loans China has made globally will fall short on payment. And the human impact on China is not really known and it will take several more weeks before a truthful picture emerges. And there are many theories out there as to the hastened impact of 5G on the virus spread. The truth will come out on this theory over time. What is clear is 5G from Huawei will be banned in the US shortly.
When you couple this with global angst over the virus, people become worried and tend to tighten their spending behavior and already it is quite clear that typical social norms are changing. Just go to any Chinatown anywhere to find a lack of people. Spending will be redirected, perhaps to paying down debt as optimism declines. Now add to this supply chain disruptions which will manifest in lowered employment, another decline in spending is introduced. People not working or sick do not spend.
This the lack of liquidity combines with lessened demand and credit creation, human angst over the virus, and lower asset values to create a situation whereby confidence is lacking not just in consumers but in bank lending who see their own woes of liquidity to corporations who question their businesses and in some cases their survival through difficult times as declining sales, regardless of why, lower both values and expectations.
This combined rogue wave of a lack of confidence has come together this week to affect everything and everyone. We should expect and will experience more volatility in the coming weeks as the combined impact takes hold. And phrases like “no bid” will become more common as what we will see in days ahead will make 2008 feel like a walk in the park.