Saturday, February 15, 2020

The Markets Are Foolishly Discounting the Economic Impact of the Coronavirus

At the end of the trading session on Wednesday, February 13th, the markets were jumping with joy, celebrating the fact that for the first time since the coronavirus crisis began, things were beginning to turn around, with new infection cases dropping off in a significant way.

Unfortunately, less than 24 hours later, this hope would be completely and utterly shattered, as reality returned and China's health authorities reported 15,152 new confirmed cases of the novel coronavirus infection, plus an additional 254 new deaths.

This should of sent the markets lower, but in this upside down world that we live in, in which the markets can seemingly only go up, the markets shrugged off this spike in new deaths and cases, moving once again to new highs.


(Chart via google charts)

This massive 15,000 increase in new cases is apparently largely to do with revisions by the Chinese health authorities, in which they changed their guidelines in regards to the coronavirus, Shine.cn reports;

"In line with the latest version of the diagnosis and treatment scheme released by the NHC, suspected cases in Hubei with pneumonia-related computerized tomography (CT) scan results are identified as clinically diagnosed cases, said Mi, explaining why the confirmed COVID-19 cases soared on Wednesday.

The diagnosis criteria revision, which only applies to Hubei, was made to give clinically diagnosed patients in the province timely and standard treatment to further improve the recovery rate, according to the NHC."

However, this just confirms many peoples suspicions that the numbers coming out of China are largely being downplayed, whether maliciously, or simply due to the fact that they are overburdened by this crisis, due to just how large scale that it truly is, overwhelming their medical infrastructure in the process.

The coronavirus is often compared to the last major outbreak, SARS, which at the time had huge ramifications for the markets, causing a major correction as fear spread across the globe.

The coronavirus, with these latest figures taken into account, now surpasses the SARS outbreak by leaps and bounds, both in the spread at which it is spreading and the raw number of cases.

Already the SARS outbreak would of been in decline, slowly down in its spread, however, the coronavirus shows no signs of doing so with these latest figures taken into account.

(Chart source, worldometers.info)

Still, the markets continue to whistle a happy tune, comfortable in the fact that the Federal Reserve and others central banksters around the globe will throw oodles of money at the problem, if the need does arise. 

In fact, Fed Chairman Powell stated just this week, that they would intervene in the next recession, combating it aggressively with additional quantitative easing.

The problem is, is that interest rates are already at laughably low levels, standing at just 1.5%, while prior to the 2008 crisis, rates stood at over 5%. 

There simply is not much room to cut, meaning that the Fed will need to rev the printing presses up to full capacity, throwing money at the markets and ballooning their already bloated balance sheet.

(Charts via goldprice.org)

The only market that seems to have any sense of sanity are precious metals, which continue to hold strong and move incrementally higher as the threat of the coronavirus spreads and some smart money seeks the protection of safe haven assets.

Already, companies that rely on China for many of their parts in manufacturing and products that they sell are reporting issues due to the impact that the coronavirus is having on that country, which continues to suffer under heavy quarantine conditions, bringing their economy to a standstill.

Additionally, if the virus continues to spread to other countries in a meaningful way, people are going to become fearful, limiting travel and trips out to only what is required. Exasperating the economic problem even further.

This is going to have a rippling effect, that I believe is not yet being priced into the markets, of which is very likely going have its day of reckoning very soon, as more and more major companies begin to report the impacts that these supply restraints are having on their bottom line.

Expect a major correction in the near future if this virus is not swiftly brought to an end in the coming weeks, expect gold bullion to continue to move higher, expect volatility.

- As first seen on the Sprott Money Blog