Yes, the world has been too complacent about the Coronavirus outbreak – I mean, let’s hope that this is less the case with mankind getting a grip on the pandemic but rather with regards to the views taken on the economic impact. It now turns out that too many over-optimistic V-shaped scenarios have been drawn by the pundits. China knows it will have to go back to work to catch this falling knife and avoid irreversible damage to its own economy, and the planet’s for that matter.
But it also means that a careful balance needs to be struck. The epidemic has far from subsided, the number of newly infected people is still concerning, and we have no idea as yet when the cases of fatalities will peak. If the previously volatile Chinese data are finally to be believed, the only consolation to be taken is that it appears the growth rate of the newly infected has plateaued and become regressive, which is historically an indicators for a health crisis to have peaked.
The problem is that the rest of the world’s anxiety has been heightened by the phenomenon of regional outbreaks away from China, such as in Korea and Italy. Essentially, doubts have now crept in whether we will be able to control the epidemic at all, or whether we might have to learn to live with it somehow going forward, much like China is perceived to be trying to find the balance between fighting the virus and calling an end to the strict prevention measures taken.
Markets have finally reacted to this much less optimistic prospect. It seems to gradually transpire what damage the economic shutdown in China has done and what it could mean for a world interconnected with supply chains if Korea and possibly Japan faced a similar fate in the near future. If Friday’s slump in shares was meant to be a yellow or amber alert, then Monday was certainly closer to the red zone. The investing world may still be under-risked under normal circumstances, but what does that mean now…?
And so, most warning signals are blinking hard. Stocks are selling off. It’s not the end of anything as yet, to be sure, but we have blatantly entered correction territory. Long Treasuries have rallied across the curve, with 10-year rates hitting its 4-year lows and 30-years even all-time lows! Gold is jumping from its already lofty height. We aren’t that far off the all-time high prices of 1,900 dollars per ounce when unprecedented quantitative easing by the Fed put the global fiat money system at risk.
Should we be surprised? No, not in the least. As this space had long argued even before the Coronavirus emerged, the Treasury market would continue to trade on a strong note for years to come and yields eventually break new lows. The reasoning was always founded in a weaker than perceived US economy, seeing through the mixed macro data of late, and structural shifts grounded in demographics and technological change. What we are seeing in the latest move is a mere amplification of things.
The forecast of a re-inverted yield curve as a harbinger of an economic stagnation/ recession to come has not materialised. There are two reasons for it. One, it may simply not be the time yet. As I laid out in a December
piece, the market is likely to follow a certain pattern of pre- and real inversions introducing economic downturns and sequential stock market corrections as previous occasions in 2000 and 2006 are a testament to.
And two, the Fed’s interbank intervention and growing fantasies about more than one rate cut in 2020 have been putting pressure on short-end yields and manufacturing the curve, sort of. By this measure of we could call it QE4 the 2/10-year rate differential bounced back from its late-summer mini-inversion to the 30s basis point territory. But as it happens, the curve is getting flatter again, just holding around the double digits, and it’s merely a matter of time.
Gold has also consistently been on this radar. Virus or not, the world’s central banks have long abolished their monetary normalisation efforts if they ever seriously embarked on them. The main reason why the gold price is spiking now is that the remaining doubters seem to be throwing in the towel and running for the hills. The central bank experimenting is poised to carry on, and if we were truly worried about the money system as we know it in 2011, what’s next…?
We haven’t seen the panic trade yet. A few more reports of Korean or Italian infection numbers surging, or another hotbed anywhere in the world opening up, and we will have outright fear taking over and very likely see it for sure. It will be then, however, when I believe we will find ourselves in a turf of serious overshooting and cooler heads to prevail. We may already have had a sense of such a scenario overnight when gold pulled back hard from its highs and the Yen re-strengthened in a normalisation of things.
In other words, the world will not go under, and neither will the Chinese economy, and there will be low-risk entry points presenting themselves in the near future, maybe more so for Chinese stocks than anywhere else. The West may still be scoffing at Beijing’s surveillance state, as it offends its values, but in an epidemic, China’s system has its advantages and is superior to the liberal counterpart. Be honest… who would you rather bet on to get a grip on the outbreak?
