On 2/24/2020, the DOW declined by -1032 points. I don’t bother quoting a percentage, percentages don’t tell anything at all. Whole numbers give a much clearer picture.
The last two trading days last week the DOW had declined by -128 and -228.
This comes as production in China has been severely negatively impacted by the quarantine due to the Corona Virus.
A major problem here is that to date, the consumer market has not yet seen any immediate effects resulting from the disruption in the supply chain. There have been warnings issued by various banks and investment firms. However, as far as consumer products, as of right now we are still relying on products stocked in warehouses and the last shipments allowed out of China before the quarantine was imposed.
What is likely to be seen as immediate effects would be exports to China. While some orders to China will still be delivered because they were already en route, many of those shipments will sit idly at the docks for some time. Subsequent orders will be impacted more, depending on how perishable the goods involved are. Raw materials for durable goods and complete durable items will be most affected. Which means the impact on the US and other economies will not be completely evident for weeks or months.
The effects will be compounded when considering disposable income lost by Chinese consumers, which will result in curtailed spending for some time after the quarantine has been lifted. The Chinese government can provide for basic necessities but consumer goods will take a considerable impact.
Further downstream, one must consider other countries depend on raw materials and sub-assemblies that come from China, including ingredients for some processed foods. Eventually that part of the supply chain will be affected as well.
One may believe that we do not import enough food from China for survival to be a concern. The truth is that we import billions of tons of food from China annually. Yet the concern does not end there. Reduced supplies of durable consumer goods means decreased sales for retailers. Reduced sales means layoffs. This time on a broad scale impacting basically every industry. Reduced profits in the financial sector because of stock declines mean even the financial sector will be impacted. Reduced imports of medical supplies from China could eventually lead to reductions in available care to only truly essential medical care, leading to layoffs across the medical field. Mass layoffs across all industries result in a downward spiral in consumer spending and food insecurity.
In addition, as supplies are depleted, various countries will be competing for alternative sources to replace China, so it will not only be the US seeking alternative sources to purchase from.
All countries that export to China are suffering trade losses. This may not be immediately evident in the US yet, as it is not the agricultural season. This would be more evident currently in the Southern hemisphere. For the moment, this has the potential to reduce food prices because of overstock in the market. In the long term, that effect will stabilize for consumers while causing losses for agricultural producers.
One thing I find interesting. Oil and gas consumption has declined drastically in China during the quarantine. By logic, this should cause a decrease in gas prices because of a glut in the US domestic market. Instead, gas prices have increased over the last 7–10 days.
Keep in mind that the stock market decline is happening as the Federal Reserve continues bailing out the Repo Market, with very little room to reduce the core interest rate without imposing a negative interest rate. A negative interest rate has been used in other countries with no positive result. In the US at this time, attempting such a thing could have a significant angry social response.
At this point, the US economy is backed into a corner. The economic events in multiple countries combined with a $23 trillion debt and $1 trillion deficit, taxes too low on the wealthy and no maneuvering room on the interest rate while the Fed has been bailing out failing banking institutions means there is nothing remaining which can be manipulated to prevent the coming collapse of the stock market followed by the general economy. The only thing that can happen now are moments of treading water before sinking completely. Oil will not save the economy. It’s useless exporting vehicles when citizens in other countries cannot afford to buy them.
This collapse will happen concurrently across most of the world economy. It is without irony that the countries likely to weather this storm most effectively will be the countries the US has isolated and attacked via sanctions and trade wars. Call it karma. It’s very possible other nations that have been coerced by the US into maintaining sanctions on those countries will reverse course and begin trading with the sanctioned countries again.
The bad part is that the US government will concern themselves first and foremost with the condition of the wealthy and corporations in a continuation of the trickle-down theory, as they have for decades. It will take a mass public insurgency to make them change course and concern themselves with the public welfare.