I’m getting a steady flow of pushback against my Black Swan article and tweets. People keep saying that the regular flu kills more people than the new Chinese coronavirus, as do drunk drivers, and what-have-you. Medically, the outbreak is no big deal. All this coverage is panic and fluff.
Others have written in to say that 2019-nCoV is far worse than it seems. It seems less deadly than SARS, but since the death statistics lag the new case statistics by about two weeks, it’s misleading to compare the current death toll to the current number of cases. And it’s clear that this virus is far more contagious than SARS was.
Both sides have valid points to make, but this focus on the medical aspects of the outbreak entirely misses my point, which is economic.
I’m not a doctor nor an epidemiologist. It would be presumptuous of me to try to forecast the medical aspects of this outbreak in any way.
And of course, as a human being, I feel for those who are suffering. I don’t dismiss that. But the human cost is another subject for another time and place.
My key point is that the economic fallout from what’s already been done will be enormous—and it’s just getting started.
Anyone watching the news should be able to see this.
Consider:
- The increasing number of airlines cancelling flight to China through March—I’ve read it’s over 50,000 flights and counting.
- The thousands of people stuck on cruise ships—with or without any coronavirus cases on board. People will remember this years after the outbreak is over.
- Apple, Starbucks, and many other businesses shutting down entire operations in China.
- Scores of cities in China on lockdown.
- Millions of people in China not working.
- Western companies not being able to fill orders on products made in China due to broken supply chains.
- Oil is down—and rightly so—because the travel and transportation industries are taking it on the chin.
- What is the direct and opportunity cost of all the quarantine facilities, hospitals, and more being set up in China and around the world? Remember the broken window fallacy.
Most of this may seem to be China’s problem, but that’s shortsighted. For instance, Nissan, General Motors, Honda, Renault and Peugeot all have affected plants at ground zero, but Fiat just reported that it may have to shut down a plant in Europe due to lack of parts coming from China. Apart from multinational companies that are already taking damage, remember that China is now the world’s second-largest economy. If China’s GDP drops 2–3% this year and other economies slow as well, the impact on global GDP will be major.
This is a big deal.
The Return of Bad News Is Good News
Governments and their central banks, of course, are not just going to sit on their hands.
China has already announced additional economic stimulus plans to counter the economic effects of the outbreak.
I expect other countries will join them.
Remember that Europe was on the edge of zero growth last quarter (0.1% GDP growth). With rates already negative, I’m not sure what they’ll do next, but I am sure they will do something as the economic contagion becomes visible.
At the very least, this black-swan event cements the current easy-money regime in place for the next few quarters… and perhaps for the year.
And we know Mr. Market likes easy money.
So, while I confess it seems insane to me for markets to rally in the face of the still-unknown dimensions of the coronavirus outbreak, I wouldn’t count on them tanking, either. They could, if a true panic sets in… but then they could bounce right back when the central banks come riding in to the rescue.
And anticipation of this—bad news is good news—could actually cause markets to rally as fear spreads.
Some analysts also predict that US markets will rally as money flees Chinese and other more severely affected markets. So far, however, Asian, European, and US markets seem to be flashing red and green more or less in sync.
What I am sure of is that all this easy money—and the prospect of even more—is good for safe-haven assets like monetary metals. So is fear.
This whole situation looks like a near-ideal setup for gold and silver.
But…
Consider what happens if central banks overshoot.
What if they panic, injecting too much liquidity in response to something that turns out to be no worse than any other flu?
I’d argue that it’s highly likely that they will overdo it. It takes time for effect to follow stimulus. Usually months, sometimes years. That makes it probable that the powers that be will keep stimulating, easing, printing, etc., until they see the effects they want—by which time they will have overdone it.
If this happens, hold on to your hats.
Such debasement of the world’s currencies should send gold and silver well above previous all-time highs.
It could also boost industrial minerals—and all real assets in general.
And all of this could happen without a general stock market crash.
So let’s not get distracted by medical debates, apocalyptic warnings, or quick dismissals.
Set aside also the conventional wisdom that risk assets and safe-haven assets must move in opposite directions.
And forget about what “the world” should do about the virus itself. Most of us have no influence on that whatsoever.
What we can do is watch for the economic fallout of the outbreak and what’s being done in response.
And we need to be watching this now, because—whether it should or shouldn't—this could result in a major market turn in the nearest future.
Be ready to speculate accordingly.
Caveat emptor,
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