Corona Virus Effects Seen On Stock Market

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.

Something Happening In China

Little introductory note. I actually began this post on Monday, 2/17/2020 but didn’t have time to finish it. Today the DOW went down by -166 pts and Apple announced a lower earnings projection due to decreased production and sales related to these conditions. So what I cover below is already proving out to be true. However it has only just begun.

In the last few weeks, China’s GDP has dropped precipitously. While the Corona Virus is clearly responsible for a portion of this, I am not convinced that this is the full explanation. Yet even if I am incorrect and this is solely due to the Corona Virus, the economic implications remain the same.

Coal consumption has dropped significantly during this time, as has oil usage and freight shipping. All combined indicates a serious decline in manufacturing and goods transportation.

Several banks in China seem close to collapse. However, those are primarily non-state banks.

China’s Finance Minister said they will not introduce an economic stimulus. They will reduce taxes and fees on small businesses and individuals but will not be taking the approach of The US Federal Reserve, which includes creating new currency out of thin air to bail out banks and large companies.

Basically, this means they will focus on their economy from the bottom up, which is a long term view to help their people, rather than the elite at the top of the chain.

This has other implications which western media is not going to focus on readily until they are forced to do so. These circumstances will absolutely cause inflation inside China. Though with the structure of their government and economy, they could impose price limits on critical goods and/or subsidize those goods for the benefit of the people. In short, China will focus first and foremost on internal economic well-being and the welfare of their citizens before even thinking about external considerations.

The downstream effect of dramatically reduced exports from China means that within weeks, store shelves in the US will run dry of some products and we will see rapid inflation as back stores of some items are depleted, especially perishable goods.

Electronics made for US companies in China will become in short supply quickly. It is entirely possible that rare earth mineral shipments will be suspended, which will all but cease even domestic production of many electronics products. This applies to other nations which are supplied by China yet the products sold in the US. Think memory and computer components from Korea and Japan.

As supplies dwindle, this will translate to not only inflation but layoffs in retail and manufacturing. Which means further layoffs in freight, such as trucking and shipping. Then layoffs in courier and mail services.

Steel and building supplies will see a delayed effect but we can expect to see increased prices on those goods this year at some point.

Decreased oil consumption will affect US oil production. Meaning we may see lower gas prices for a short time, until production is reduced. Meaning more layoffs.

As production decreases in China, we may expect to see decreasing stock prices on companies that rely heavily on China for their products. Such as Apple and Walmart. This could be the tipping point which sends the stock market into chaos and decline. Most of that depends on how the Federal Reserve responds. Sooner or later the Fed will no longer be able to compensate for all the private investors fleeing the market.

Some will claim that this is good news for US producers. That will only be true if these circumstances continue for an extended period. If it only lasts for weeks or even months, US manufacturing currently lacks the capacity to compensate for the reduction. Farming will take months to catch up. Some ranching will take months, other ranching will take years to catch up. If US companies invest to increase production and China then regains their capacity within the year, those domestic investments would be wasted and could result in massive losses. Companies would still revert to immediate production as opposed to spending large sums to increase capacity which would then require more highly paid US workers to maintain.

All of this means that any reduction in supply is likely to be for a period long enough to have definite economic impacts in the US.

My sincere suggestion is the prepare yourself now for some shortages in the way of dry foods and canned goods. The last things to see a reduction will be fresh produce and meats. However, those will see inflation as consumers shift their buying habits due to shortages of some items due to shortages.

Slightly ironic when you think about it.

If you rely on electronics and building supplies, stock up on spare parts and supplies now.

We are settling in for a rough ride for at least the next few months. Prepare yourself mentally and any other way you can.

What Really Happened With The Corona Virus In China

The World Health Organization is complimenting China for their massive response to the Corona virus as rate of infection decreases rapidly. So, let’s take a look at the facts involved here and what the implications are.

As of last report, the total of confirmed infected has remained less than 50,000 globally. The total deaths have been under 1000. If you round off the numbers, that is a mortality rate of 0.5%.

Compare that to the flu. In the US alone this season, there have been over 10,000 deaths and 180,000 hospitalized. That is the number hospitalized, not confirmed infections.

Quarantine. Yet China responded quickly and on a huge scale. They built an emergency hospital in 9 days with another opened days later. They implemented a quarantine and mobilized sanitizing equipment across Wuhan, China on a scale not seen in modern times in any country.

The result has been that, while productivity has decreased in China and the country has suffered the highest inflation rate in at least 8 years, the infection rate has declined. Those who have been infected are well or getting there and new cases have been slowed massively. In addition, a vaccine has been already developed and tested, ready for mass production.

What has happened here is that China has illustrated their capabilities to respond to a crisis. They have put FEMA in the US to shame. There was no need for private fundraising drives which are frequently riddled with later accusations of fraud. There was no argument by the Chinese people against providing aid to their fellow citizens.

However, there is more to this. What they illustrated clearly here was their ability to respond quickly and effectively to biological warfare. When you look at the morbidity and mortality rate of the Corona virus, the response was actually quite out of proportion. If the response were truly appropriate, then why has the US not been responding in kind to the far deadlier flu virus? Our public health services don’t even hand out free surgical masks, gloves and antibacterial soap to anyone requesting them.

Was this sending a message? Since China has responded in such a disproportional scale, it indicates knowledge. Obviously there is no way to verify this but an objective observation would tend to indicate that they have intelligence of a possible planned biological attack on their country. By mobilizing such a large scale and rapid response, this was a live drill and may have been a message meant to deter any such attempt. Who was the message intended for? That’s anyone’s guess and I will not venture to offer any assumption here.

A very different approach. Capitalist countries basically ignore epidemics and disasters. They even even attempt to profit from those events. Meanwhile, they waste huge sums of money staging relatively small scale mock drills to imagined attacks, disasters and epidemics. China instead used a real outbreak, reacted within days of the first signs, launched a huge response with live participants- citizens, police, medical personnel, civil service workers, construction workers and media. This was done in a calm and effective coordinated manner. No riots, no breakdown of social structure. Yes, some people have likely suffered financially but not beyond recovery in most cases. I expect the Chinese government to offer significant financial support to businesses and individuals hit hard by the quarantine.

While some parts of this can be construed as conspiracy theory, which I do not generally commit to, the fact that they have demonstrated their ability to respond to such an event is definitely sending a message. This less-than-extremely-lethal outbreak served as practice for their populace in ways no other country has demonstrated. It is questionable whether any other country, including the US, would have the ability and social will to act as quickly and decisively with this level of organization. In spite of US media trying to spin stories that China tried to cover this up, they publicly identified and announced the existence of the virus within days and moved instantly, kept the peace along the way and gave little concern to the economic cost while not seeking any form of profit. The same treatment was given to all financial levels with no preference. Something that the US could not even conceive of realistically. None of that is conspiracy theory.