Blain’s Morning Porridge – Jan 31st 2020 – Virus and Recession
“Here is the instrument of cleansing, my brethren, and nothing quite cleanses like fire..”
Very short comment this morning. My main focus was the Letter to Europe I sent earlier, so I’ve kept the rest of the Porridge short and, well, not so sweet. Let’s put it this way. I think the market could be about to take a massive tumble. I feel it.
The Wuhan Coronavirus may or may not be a global killer. But it is now nailed on to trigger a global slowdown or recession. And that has profound consequences for Global Stock markets that already looked overbought and frothy.
Take a look at the news flow. It’s all about quarantine, hotels being shuttered across Asia, warnings given to staff to self-quarantine when they meet Chinese/Asian clients, and how the virus is showing up across the globe. It’s now a WHO International Public Health Emergency.
That news flow is only going to get worse.
The few cases the medical authorities have uncovered abroad are going to balloon in the next few weeks and it becomes apparent who widely the flu spread from Wuhan before it was locked down earlier this week. There is a strong possibility the next 10 days will see an explosion in cases. The effect will be more borders closed, flights stopped, and rising panic and concern.
The good news is the Wuhan flu doesn’t seem to have a particularly high mortality – it seems lower than the Spanish flu of 100 years or so ago which killed the young, fit and healthy. This disease seems most dangerous for the already infirm and elderly.
But the one thing that is absolutely clear is the economic effect. China is in lockdown. Asia will probably follow. It might be a few weeks till the low mortality rate persuades governments to reopen, or it might get worse as the disease spreads and multiplies.
We just don’t know how quickly that might happen, or just how dangerous the Wuhan coronavirus really is. Its uncertainty and markets hate uncertainty. But what we do know is the already predictable hit to global growth closing borders will have had. It means Q1 is going to see a massive economic impact. Go figure what that does to company earnings – and when the time to discount that is.
The US market is headed off in its own direction – rising as the rest of the globe gets to terms with the economic consequences of Wuhan Flu. Is it because the US believes its somehow immune, or that it can’t hurt them? Or maybe because that’s what the market chooses to believe despite the evidence. If the US is rising because the perception is the mortality rate on the flu is low and doesn’t matter – then they are wrong! Global Lockdown matters.
The timing isn’t good. I warned a few weeks ago – Global Meltup to Global Meltdown – that all we needed was a trigger for a massive reversal. Its looking more and more like the coronavirus could be it.
I don’t want to seem like a fearmonger.. but this could hit markets much more badly than the US market thinks.
Five Things To Read This Morning:
FT – My travels through a China in Lockdown
FT – Traders seek protection against falls in US stocks
BBerg – At Least Two-Thirds of China Economy To Stay Shut Next Week
BBerg – Commodity Traders Weigh Extended China Shutdown as Virus Spreads
WSJ – Coronavirus Spurs Fresh Fears About Growth in Emerging Markets
No Porridge early next week. I’m off skiing for a few days (actually combining Skiing and Yoga!) and then I’m off to Edinburgh where I’ll be taking part in a debate at Heriot-Watt University. I’ll be proposing that the failures of ultra-low interest rate policy and QE, and the massive income inequality pumping billions into financial assets, hasn’t worked. Instead, we should now try Helicopter Money, giving money direct to the masses to stimulate consumption, raise inflation, rebalance policy, and reverse the mistakes of the last years. I’ll report how it goes Friday next week.
(Any clients in Edinburgh – looks like I have some time free on Thursday!)
Out of time… and looking anxiously at markets.
Have a great weekend.
Bill Blain
Shard Capital