Highly Unlikely…Yet Here We Are

Thursday, 20 February 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • Brace for impact

Last night my wife bought a pair of roundtrip airline tickets to Houston.

That’s where her family’s from. She tries to get back to Texas every year to see them.

The second ticket is for our daughter. They’re planning to fly out over the April school holidays. That’s one of the perks of being a teacher…my wife’s profession. You share the same long breaks with your kids.

Your humble editor will be holding down the fort here in South Australia.

Understandably they’re excited about the big trip. My daughter, six, already wanted me to get her suitcase from the shed.

But with the travel ban from China looking to be extended for at least a fourth week, I’ve begun to wonder what the international travel scene is going to look like in two months’ time.

In years past my wife sometimes flew to the US via Guangzhou, China. Bit circuitous. Also a bit easier on the pocketbook. That’s an obvious no go at the moment. So this year they’re going direct from Sydney to Houston.

But their trip isn’t until mid–April. And two months is a long time. Considering that only two months ago virtually no one in the world had heard of the coronavirus. Or COVID–19, if you prefer.

Which got me thinking, what if their trip gets cancelled? They’d be heartbroken. As would grandma, grandpa and the rest of the Texas clan.

Even worse, what if their trip goes ahead…but then they’re not allowed back into Australia?

What if Houston gets locked down like Hunan? Or all of Texas gets isolated like the province of Hubei?

Or maybe Houston’s still in the clear. Maybe it’s Melbourne that gets locked down. Or Adelaide. Maybe the rest of the world bans any travellers who’ve set foot Down Under.

Unlikely, you may say. Which, fortunately, as of today it is.

But then what would you have said if I’d asked you in December how likely it would be to see Australia ban all foreign travellers from China? Yes, even the 100,000 or so students studying at local schools.

What would you have said if asked about the odds of China imposing movement restrictions on some half a billion citizens, shuttering factories and ordering millions to stay in their homes?

Highly unlikely, I imagine.

Yet here we are.

More, after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 115.84 points, or 0.40%.

The S&P 500 closed up 15.86 points, or 0.47%.

In Europe the Euro Stoxx 50 index closed up 28.64 points, or 0.75%. Meanwhile, the FTSE 100 gained 1.02%, and Germany’s DAX closed up 107.81 points, or 0.79%.

In Asian markets Japan’s Nikkei 225 is up 92.61 points, or 0.40%. China’s CSI 300 is up 0.88%.

The S&P/ASX 200 is up 12.94 points, or 0.18%.

West Texas Intermediate crude oil is US$53.62 per barrel. Brent crude is US$59.12 per barrel.

Turning to gold, the yellow metal is trading for US$1,609.67 (AU$2,406.44) per troy ounce. Silver is US$18.40 (AU$27.50) per troy ounce.

Bitcoin’s volatility was on full display overnight. The world’s biggest crypto tumbled 5.7%. One bitcoin is worth US$9,612.01.

These kind of price swings are par for the course with cryptocurrencies. The overnight pullback doesn’t derail crypto expert Sam Volkering’s conviction that bitcoin — and a handful of other digital tokens — are at the cusp of a new super cycle.

Sam lays all his cards on the table in an exclusive interview with Publisher James Woodburn. You can watch that video — for free — right here.

In the world of fiat currencies, the Aussie dollar is worth 66.89 US cents.

Brace for impact

As you can see in the section above, global markets continue to blithely ignore the potential for massive disruptions from the coronavirus.

The ASX 200 closed for a new record high yesterday. And it’s on track to notch a fresh record high today.

Some of the exuberance comes with the reasonably solid earnings reports rolling in. That may be the only rational exuberance on display. Although many companies are already warning profits could take a hit in the quarter ahead due to disruptions from the virus.

Some of the exuberance is also based on optimism that the fallout from virus won’t be as bad as feared. That the damage will largely be contained within China. And that the spread may already be slowing.

I hope that’s the case. But I’ll label that one irrational exuberance.

The recent slowdown in new infection numbers appears more due to China’s National Health Commission raising the bar on when they’ll label patients as actually having the virus. CT scans indicating a very likely infection are now no longer included.

Now the vast majority of the almost 80,000 confirmed cases are still in Hubei. And the global spread has been slow. But spreading it is. And not even WHO’s top boffins can predict how bad it may get. Or even whether the fatality rate is 2%…or maybe 12%.

There are already 400 cases reported in Shanghai, outside the shuttered province of Hubei.

Iran reported its first two deaths from the disease. So has Hong Kong, where the US Center for Disease Control has issued a travel warning.

And Singapore has 81 confirmed cases.

It’s in Australia too, with two cases right here in SA.

Yet almost all the focus on the impact of COVID–19 remains based on how it will affect China.

Will its factories remain hamstrung?

Will the tech giants have access to the widgets they need to make their smart gadgets work?

Will Chinese ports remain open to Australia’s iron and coal exports?

Will Chinese tourists return to flood our shores with money?

The list of concerning questions is long. And it’s almost certain that China — the world’s second largest economy — is going to see its growth slow dramatically. As well as suffering the tragic loss of thousands of lives.

But few analysts or investors seem to be taking the possibility of similar drastic shutdowns occurring in other parts of the world — perhaps everywhere in the world — seriously.

Our own Vern Gowdie isn’t so complacent. He writes:

While confidence is maintained, the market remains immune to risks. However, if those red flags suddenly turn into distress flares for all the world to see, it’ll be too late for investors to remove their capital to the isolation of cash.

(For more on Vern’s complete market crash survival guide, go here.)

Most of what appears to be maintaining investor confidence, however, is blind faith in the world’s central banks backed by even more government stimulus.

Take Singapore, for example. As the AFR reports:

Singapore will run its biggest budget deficit since the global financial crisis as Prime Minister Lee Hsien Loong’s government pulls out all stops to stimulate an already slowing economy now operating in the shadow of immense uncertainty.

Singapore’s GDP growth forecast has been cut by a full percentage point.

In the words of Singapore’s Finance Minister Heng Swee Keat:

The duration and severity of this outbreak and the impact on the global economy are still unclear… We must be prepared for an economic impact that may be worse than we projected.’

The rest of the world’s leading central banks and governments are lining up with stimulus plans of their own.

China, where many companies are reporting they cannot afford to pay their employees, is leading the charge. But the Chinese government has its work cut out for it.

From Bloomberg:

China is planning to take over HNA Group Co. and sell off its airline assets after the coronavirus outbreak hit the indebted conglomerate’s ability to meet financial obligations.

Central banks and government bailouts have been the go–to saviour for equity investors since the 2008 financial meltdown. And investors are pinning their hopes on a replay here in 2020.

Are those hopes well founded? We turn back to Vern:

Revenues need to be generated to service record levels of debt (corporate, household and government) and to provide the earnings that support historically high share prices.

If those revenues do not materialise in the numbers needed, then the debt disease is likely to attack the economic heart.

Defaults. Bankruptcies. Home foreclosures. Nosediving share markets. Bank failures. Rising unemployment.

I sincerely doubt central banks have enough vaccine to fight a financial pandemic on that scale.

Where does this leave us?

Hope for the best. Prepare for the worst.

You can find out why…and how…Vern recommends your prepare for the worst case scenario here.

That’s all for today.

Be sure to check in with Port Phillip Insider tomorrow for the latest insights from Harry Dent’s lead analyst Selva Freigedo.

Then, on Monday, you’ll get the week’s top trading tips from veteran trader Murray Dawes.

I’ll be back with you next Tuesday.

Cheers,
Bernd