swissaustrian
Member
- Joined
- Feb 21, 2011
- Messages
- 2,689
There is a lot of irrational hype and panic revolving around the global corona virus outbreak.
I own a high tech business that is very much entangled in international supply chains. I am missing rational and sober reporting on the economic impacts of the global corona virus outbreak.
So I am trying to collect and structure the available info. I would like to hear your input.
This was written on March 9th 2020.
1. Health framework
- The corona virus is apparently highly infectious, comparable to or even more than the regular flu.
- Mortality is slightly higher than the regular flu, although the overall numbers are still too small to be statistically reliable. Apparently mostly people with pre-existing conditions (lungs, heart) and high age (> 75) are at risk due to their already damaged immune system. Some numbers are here: https://www.worldometers.info/coronavirus/coronavirus-age-sex-demographics/
- Predictions about the overall expected spread vary widely. A rough average is more than a million dead globally. That would mean at least 50 million infected at 2% mortality.
- There are some scientific findings that indicate that corona might be engineered. I cannot evaluate them. Zerohedge was permanently banned from twitter over this reporting.
2. The government response: the perfect scapegoat
- The Chinese government has reacted like they are in the middle of a zombie apocalypse. Apparently some people are welded into their quarantined homes, been herded like cattle, been drone observed, been sprayed with toxic chemicals etc. It seems more like a convenient measure to mask their incompetence and already commencing economic downturn. Of course, the numbers coming out of China are completely unreliable and nobody knows what is really going on.
- Cruise ship quarantines have made things way worse.
- The US government has been largely driven by Trumps desire to keep the economy going. Testing started rather late. The CDC messed up their coordinative tasks.
- The Italian government has put 1/4 of their population under house arrest. Given that only elderly and already weak people are at risk of severe health consequences, this seems to be a complete overkill.
- The Swiss government has banned events over 1000 attendants.
- Some German state governments have forbidden testing of patients that did not have previously proven contact with an infected person. Hence the low the German numbers compared to other European countries.
3. The economic effects :bigpoo:
- Obviously every life is equally precious morally. Economically it is not. Since mostly elderly people are severely affected, the economic effects of deaths will be relatively small compared to other effects.
- Quarantines are causing massive disruptions in the regular operations of businesses. Employees must not show up to work, customers are not visiting/buying.
- Even before corona emerged, most economies around the globe have already been slowing down or in recession. Corona is like a supercharging catalyst for that trend.
- The oil producer price war is now another catalyst on top of that in some economic sectors and net energy producers like Iran, Canada, Australia. Other net energy importers will benefit somewhat, but the general economic slowdown will cause reduced energy demand as well. The US effects will probably limited to the shale oil sector which will be annihilated due to unprofitability and a massive debt load.
- We live in a global economy with highly complex multinational just in time supply chains. Any disruptions have immediate effects within days or weeks. This will cause shortages on the supply side that no central planner can foresee.
- On the demand side tourism, entertainment and by extension all non-essential industries will be quickly affected by social avoidance phenomena. Demand increases will occur in preparedness items, health services, personal protection and home delivery.
- Any negatively affected business will sooner or later feel a significant shrinkage of incoming orders and therefore cash flows will dry up. Depending on the health of their balance sheets (debt levels, interest costs etc.), they will survive that type of cash crunch or not. Unfortunately, the FED's (near) zero interest rate policy (ZIRP) over the last decade has caused enormous malinvestment (eg shale oil, tech unicorns) and allowed zombie companies to exist on the backbone of cheap debt and a continuous cash flow. Many publicly traded companies have funded share buybacks with debt issuances. This will come to bite them. If you own stocks, checks the debt and cash flow numbers of your holdings!
- The FED has reacted with an emergency rate cut of 50 bps and the market expects a return to ZIRP in the near future. Treasuries have made record lows,eg the 10year below 50 bps for the first time.
- This has sent the USD tanking, because foreign carry traders who invested in US debt securities due to comparatively high interest rates are selling their USD holdings and are buying back their own currency (EUR, JPY, CHF especially). Once those carry trades have been unwound, I expect the USD to strengthen again, because it is still the global reserve currency and crises cause USD shortages. There was already a USD shortage before corona hit, as indicated by the FED's massive repo operations since late 2019.
- As some commentators said: How would a rate cut mitigate health risks? It can’t and therefore it didn’t calm financial markets. It’s like asking market participants: how much money do you want for risking your life?
- As the real economy suffers unpredictable disruptions, derivatives (interest rates, foreign exchange, credit default swaps) are very hard to price and settle. Financial institutions will suffer massively.
- Gold has rallied massively, partially due to the USD weakness. On top of that there are negative real interest rates and just abstract fear/uncertainty. Be careful, though, COMEX positioning was very extremely overspeculative as of last week. This usually leads to sharp corrections. Silver has been dragged down by the prospect of lacking industrial demand. Bitcoin has not rallied, so much about a safe haven. Chinese money launders are apparently not working full time at the moment.
- Many are expecting a fiscal response by various governments. Tax breaks, subsidies to businesses that keep employees despite lack of orders, bailouts etc. The following industries/sectors are highly likely recipients:
-- Swing state industries (coal, auto, manufacturing generally). Trump needs those votes.
-- Financial companies. The financial sector in China is a prime candidate for a 2008 like implosion. The peg of the Hong Kong Dollar to the USD might also break. Kyle Bass has done great work on that: https://www.youtube.com/watch?v=nFHblUtKOhw
-- Health care and pharma, under the pretense of finding a cure and/or curing
-- Home delivery via drone might be subsidized due to its “cleanliness”. Jeff Bezos is ready for another fat government check for sure.
-- Tourism and entertainment, especially airlines
-- Defense, because some poor country will be invaded because of corona, mark my words.
What are your thoughts?
I own a high tech business that is very much entangled in international supply chains. I am missing rational and sober reporting on the economic impacts of the global corona virus outbreak.
So I am trying to collect and structure the available info. I would like to hear your input.
This was written on March 9th 2020.
1. Health framework
- The corona virus is apparently highly infectious, comparable to or even more than the regular flu.
- Mortality is slightly higher than the regular flu, although the overall numbers are still too small to be statistically reliable. Apparently mostly people with pre-existing conditions (lungs, heart) and high age (> 75) are at risk due to their already damaged immune system. Some numbers are here: https://www.worldometers.info/coronavirus/coronavirus-age-sex-demographics/
- Predictions about the overall expected spread vary widely. A rough average is more than a million dead globally. That would mean at least 50 million infected at 2% mortality.
- There are some scientific findings that indicate that corona might be engineered. I cannot evaluate them. Zerohedge was permanently banned from twitter over this reporting.
2. The government response: the perfect scapegoat
- The Chinese government has reacted like they are in the middle of a zombie apocalypse. Apparently some people are welded into their quarantined homes, been herded like cattle, been drone observed, been sprayed with toxic chemicals etc. It seems more like a convenient measure to mask their incompetence and already commencing economic downturn. Of course, the numbers coming out of China are completely unreliable and nobody knows what is really going on.
- Cruise ship quarantines have made things way worse.
- The US government has been largely driven by Trumps desire to keep the economy going. Testing started rather late. The CDC messed up their coordinative tasks.
- The Italian government has put 1/4 of their population under house arrest. Given that only elderly and already weak people are at risk of severe health consequences, this seems to be a complete overkill.
- The Swiss government has banned events over 1000 attendants.
- Some German state governments have forbidden testing of patients that did not have previously proven contact with an infected person. Hence the low the German numbers compared to other European countries.
3. The economic effects :bigpoo:
- Obviously every life is equally precious morally. Economically it is not. Since mostly elderly people are severely affected, the economic effects of deaths will be relatively small compared to other effects.
- Quarantines are causing massive disruptions in the regular operations of businesses. Employees must not show up to work, customers are not visiting/buying.
- Even before corona emerged, most economies around the globe have already been slowing down or in recession. Corona is like a supercharging catalyst for that trend.
- The oil producer price war is now another catalyst on top of that in some economic sectors and net energy producers like Iran, Canada, Australia. Other net energy importers will benefit somewhat, but the general economic slowdown will cause reduced energy demand as well. The US effects will probably limited to the shale oil sector which will be annihilated due to unprofitability and a massive debt load.
- We live in a global economy with highly complex multinational just in time supply chains. Any disruptions have immediate effects within days or weeks. This will cause shortages on the supply side that no central planner can foresee.
- On the demand side tourism, entertainment and by extension all non-essential industries will be quickly affected by social avoidance phenomena. Demand increases will occur in preparedness items, health services, personal protection and home delivery.
- Any negatively affected business will sooner or later feel a significant shrinkage of incoming orders and therefore cash flows will dry up. Depending on the health of their balance sheets (debt levels, interest costs etc.), they will survive that type of cash crunch or not. Unfortunately, the FED's (near) zero interest rate policy (ZIRP) over the last decade has caused enormous malinvestment (eg shale oil, tech unicorns) and allowed zombie companies to exist on the backbone of cheap debt and a continuous cash flow. Many publicly traded companies have funded share buybacks with debt issuances. This will come to bite them. If you own stocks, checks the debt and cash flow numbers of your holdings!
- The FED has reacted with an emergency rate cut of 50 bps and the market expects a return to ZIRP in the near future. Treasuries have made record lows,eg the 10year below 50 bps for the first time.
- This has sent the USD tanking, because foreign carry traders who invested in US debt securities due to comparatively high interest rates are selling their USD holdings and are buying back their own currency (EUR, JPY, CHF especially). Once those carry trades have been unwound, I expect the USD to strengthen again, because it is still the global reserve currency and crises cause USD shortages. There was already a USD shortage before corona hit, as indicated by the FED's massive repo operations since late 2019.
- As some commentators said: How would a rate cut mitigate health risks? It can’t and therefore it didn’t calm financial markets. It’s like asking market participants: how much money do you want for risking your life?
- As the real economy suffers unpredictable disruptions, derivatives (interest rates, foreign exchange, credit default swaps) are very hard to price and settle. Financial institutions will suffer massively.
- Gold has rallied massively, partially due to the USD weakness. On top of that there are negative real interest rates and just abstract fear/uncertainty. Be careful, though, COMEX positioning was very extremely overspeculative as of last week. This usually leads to sharp corrections. Silver has been dragged down by the prospect of lacking industrial demand. Bitcoin has not rallied, so much about a safe haven. Chinese money launders are apparently not working full time at the moment.
- Many are expecting a fiscal response by various governments. Tax breaks, subsidies to businesses that keep employees despite lack of orders, bailouts etc. The following industries/sectors are highly likely recipients:
-- Swing state industries (coal, auto, manufacturing generally). Trump needs those votes.
-- Financial companies. The financial sector in China is a prime candidate for a 2008 like implosion. The peg of the Hong Kong Dollar to the USD might also break. Kyle Bass has done great work on that: https://www.youtube.com/watch?v=nFHblUtKOhw
-- Health care and pharma, under the pretense of finding a cure and/or curing
-- Home delivery via drone might be subsidized due to its “cleanliness”. Jeff Bezos is ready for another fat government check for sure.
-- Tourism and entertainment, especially airlines
-- Defense, because some poor country will be invaded because of corona, mark my words.
What are your thoughts?
