The Coronavirus Could Be the Least of Your Worries

Tuesday, 28 January 2020
Adelaide, Australia
By Bernd Struben

The odds of creating long-term wealth from the share market at its current level are so infinitesimally small you’ll need a high-powered microscope to see them.’

Vern Gowdie

Even if you did your best to unplug over the long Australia Day weekend, you likely couldn’t escape the news coming out of China.

Yes, I’m talking about the coronavirus. And the sharp sell-off in global stocks it’s causing.

The virus apparently made the leap from animal to human in the Chinese city of Wuhan. There are now some 3,000 confirmed cases in mainland China, with more than 80 deaths. And the virus is spreading internationally.

That’s certainly cause for concern. As is the impact on Australia’s tourism and retail markets with Chinese travellers told to stay home.

But to put matters into some kind of perspective, 7 News tells us the 2017 influenza season killed 1,163 people in Australia alone.

Of course, it’s early days for this new coronavirus. We can only hope prompt detection and containment efforts will keep it in check.

And as investors have more time to digest the alarming contagion headlines, the sharp market sell-off is likely to abate. Or even reverse as bargain hunters step in. In fact, the futures markets for the major US indices are already showing a rebound for Tuesday’s trading (overnight our time).

But even if the best case scenario unfolds, the coronavirus outbreak is a good reminder that your portfolio should be prepared for the worst.

Have stop-losses in place so you’ll automatically sell out of a stock if it drops below a certain price.

Don’t buy overpriced stocks based on the latest hot tip you read in the mainstream press.

Always stick to the buy-up-to prices when our editors include those with their stock recommendations.

Never invest more than you can afford to lose.

And don’t go all in on stocks. Atop some fixed interest asset like bonds, most of our editors recommend you hold 10%…or more…of your wealth in gold. And at least that much in cash.

Over at our free daily e-letter, The Rum Rebellion, Vern Gowdie takes that caution a big step further.

[Ed note: You can follow Vern — alongside co-editors Greg Canavan and Matt Hibbard — six days per week in The Rum Rebellion. This is a free service. To sign up, click here.]

If you already subscribe to The Rum Rebellion or Vern’s paid service, The Gowdie Letter, you’ll know Vern recommends steering well clear of stocks. That’s because he’s convinced the new record highs we’ve recently hit are based not on strong earnings or economic fundamentals, but on ‘phantom growth’.

Meaning growth that’s driven almost entirely by debt. A formula even the most bullish analysts admit is unsustainable.

As our debt pile has ballooned so has the price of our stocks. In fact, according to JPMorgan, the ASX now has the most expensive blue chip stocks of any developed market.

From The Australian Financial Review:

‘[JP Morgan’s] analysis, which is based on a one-year forward price-to-earnings measure, shows that the S&P/ASX 200 Index excluding financials and materials is trading at a 37.9 per cent premium to the global developed markets index.’

And this is while US markets are trading right near their record highs.

These are the kinds of numbers that have Vern sounding the alarm. A warning that’s especially urgent for Aussies looking to retire within the next decade.

With that in mind, Vern’s put together a series of free videos outlining why he believes the ASX could see 65% of its value wiped off this year. He also reveals what he thinks will be the most likely trigger to launch the next financial meltdown. Along with some sound advice on steps you can take to protect your retirement savings during the panic selling.

If you subscribe to The Rum Rebellion you’ve likely been sent links to the video instalments.

If not, you can find the full video series here. Again, you can access them all for free.

Now, to those slumping markets…


Overnight, the Dow Jones Industrial Average closed down 453.93 points, or 1.57%.

The S&P 500 closed down 51.84 points, or 1.57%.

In Europe the Euro Stoxx 50 index closed down 101.32 points, or 2.68%. Meanwhile, the FTSE 100 lost 2.29%, and Germany’s DAX closed down 371.91 points, or 2.74%.

In Asian markets Japan’s Nikkei 225 is down 193.09 points, or 0.83%. China’s CSI 300 is down 3.10%.

The S&P/ASX 200 is down 103.44 points, or 1.46%.

Energy markets remain under pressure from excess crude supplies. Pressure now exacerbated by fears of falling demand due to the coronavirus. West Texas Intermediate crude oil is US$52.95 per barrel. Brent crude is US$59.32 per barrel. (More on oil below…)

Turning to gold, the yellow metal is trading for US$1,580.91 (AU$2,338.28) per troy ounce. Silver is US$18.09 (AU$26.76) per troy ounce.

Bitcoin spent the long Australia Day weekend rallying back towards US$9,000. One bitcoin is worth US$8,920.02.

The Aussie dollar is worth 67.61 US cents.

If it looks like oil…

Getting back to crude…

Last Tuesday I noted that West Texas Intermediate crude oil (WTI) had slipped 4.0% year-to-date. Putting it down 6.7% from its 6 January peak.

At that time WTI was trading for US$58.71 per barrel. And I wrote that, ‘with most US shale producers profitable at prices above US$50 per barrel, crude looks to be 15-20% overpriced in today’s markets, by my metrics.’

At the current price (US$52.95 per barrel) WTI has already plummeted 9.8% since I penned that on 21 January. As you can see on the chart below, WTI’s now down 16.4% since 6 January.


chart image
Source: Bloomberg
Click to enlarge


But even after that big pullback, crude could easily slip another 10% from here.

That has very little to do with demand and very much to do with supply. Lots and lots of ready supply.

The shale revolution still underway in the US is one of the primary drivers of that abundance. A revolution that’s already seen the US pump record amounts of crude to become an oil exporter. But it’s not just the US. Russia comes in a close third (after the US and Saudi Arabia) in its oil output.

Now as you may know, Russia is the plus part of OPEC+. And the cartel recently agreed to extend its output cuts through the end of March. You may also know that agreeing to output cuts and actually abiding by them are two very different things.

As I’ve written here before, the incentive to cheat amongst the cartel members is big. Millions of dollars per day big. And the Russians appear to be engaged in a costly game of semantics with their OPEC partners.

As Bloomberg reports:

Russia’s oil production surged to a five-month high in January following a new agreement to apply OPEC+ output cuts only to the country’s crude, not its condensate.’

In case you’re not aware, ‘condensate’ refers to oil that condenses into liquid form from gas. Something you’ll see with fracking high pressure wells. However — and here’s the catch for OPEC — once the gas condenses into liquid it’s hard to distinguish condensate from regular liquid crude.

Whether the Russians are technically cheating or not is debatable. What’s not is the surge in their overall oil production.

Even if OPEC+ agrees to extend the current cuts throughout 2020, the global supply glut isn’t going away, so I still expect prices to fall another 10% from here. If the cartel’s agreement lapses at the end of May, crude could fall much further.

Something to keep in mind if you hold any major oil producers in your portfolio.