Coronavirus Attacking the Australian Economy: What Can We Do?

Dear Reader,

Global growth forecasts are being downgraded. Apple issued a profit warning. Others will follow suit.

And this is only after a few weeks of disruption.

No one is really panicking yet. Everyone is hopeful the situation is under control. Normal trading conditions are expected to resume in the coming weeks.

It’s hoped the wheels of globalisation will once again be turning. And, they need to.

Corporate debt levels have never been higher and credit quality this low.

Those holding high yield and junk bond debt should be feeling a tad nervous…but probably aren’t.

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Why?

On 11 February 2020, Fed Chair Jerome Powell gave this testimony to US Congress (emphasis added):

Some of the uncertainties around trade have diminished recently, but risks to the outlook remain…In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.’

Wink, wink. Nudge, nudge.

Fed is ready to inject its own ‘vaccine’

Powell wants to let you know that the Fed, if needed, is standing ready to inject its own ‘vaccine’ into the market…more QE and lower rates.

Don’t worry the Fed has your back.

But what if, contrary to what we’re being told, the coronavirus cannot be so easily contained?

What if the disruption to the global supply and demand chain continues for months?

Judging by market reactions, these ‘what ifs’ are being considered too seriously.

BBC produced the following chart comparing coronavirus with other recent respiratory syndromes.

On the surface, it appears the fatality rates (as a percentage) were far higher from SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome).

This chart feeds into the low mortality rate narrative.

Of those who contract coronavirus, only 2–3% die.


Money Morning

Source: BBC News

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This reporting is not accurate.

As we know from news reports, there’s a quarantine period of 14 days.

During that time, anyone diagnosed with coronavirus have been isolated for medical treatment.

Of those hospitalised, there are three categories…

  1. Some have been treated, given the all clear and discharged.
  2. Others (the majority) are still being treated. How many of these will be given the all clear is, as yet, unknown.
  3. And sadly, around 2000 have died.

For a more accurate reading on the actual mortality rate, Worldometers has divided up those officially diagnosed with coronavirus into two groups.

The people currently infected (still being treated) and those whose case has had an outcome.

The results make for interesting reading.

Virus appears to be more deadly than we’re being told

Based on ‘Cases with Outcomes’, the fatality rate is 12%…a far cry from the 2–3% mainstream media is reporting.


Money Morning

Source: Worldometers

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Of the 58,683 ‘currently infected’, over 12,000 are listed as ‘serious or critical’.

If the 12% mortality rate remains constant, then more than half those listed as ‘serious or critical’ would die.

We sincerely hope that’s not the case.

However, based on the data from ‘outcomes’ to date (and there’s still no vaccine), it’s a possibility that cannot be discounted.

Should that occur, what psychological impact will it have on people and in turn, the pressure on politicians to put in place measures to protect their citizens?


Money Morning

Source: Worldometers

[Click to open in a new window]

When you drill into the numbers, the coronavirus appears to be far more deadly than we’re being told.

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What else aren’t we being told?

According to Business Insider on 15 February 2020 (emphasis added):

A top White House official has suggested China is not being “honest with us” and has “motives” in how it shares information about the deadly coronavirus, as Beijing continues to face suspicion on the way it counts infection cases.’

What could those motives be?

This chart is a couple of years old, however, it illustrates the level of indebtedness of Corporate China.

Could this possibly be the reason why authorities are pressing for a resumption of ‘business as usual’?


Money Morning

Source: WolfStreet.com

[Click to open in a new window]

Since that chart was published, the situation for Corporate China has further deteriorated.

This warning from Moody’s was issued in December 2019…before the coronavirus…

Chinese corporate debt is the ‘biggest threat’ to the global economy, warned a Moody’s Analytics economist, who described such risks as a ‘very significant fault line.’

That followed similar comments by Fitch Ratings last week, which said that private companies in China have defaulted on their debts at a record pace this year.

“I would point to Chinese corporate debt as the biggest threat,” he [Moody’s Chief Economist Mark Zandi] said, adding that it’s growing very rapidly in China.

Zandi explained that many[Chinese] companies are struggling to deal with a slowdown in growth stemming from the trade war and other factors.’

CNBC, 17 December, 2019

How much of that debt is only days or weeks away from default? And should that start, how hard will it be to stop other dominoes from falling?

Where do China’s priorities lie ‘with the health of its people or the health of its economy?’

From Fortune magazine on 18 February 2020 (emphasis added):

China’s industrial complex is cautiously returning to work following a prolonged shut down that began with a four-day national holiday on January 25 but was extended for two weeks as China attempted to contain the spread of the deadly Covid-19.

Policymakers ordered factories back into action on February 10, wary that the prolonged hiatus would threaten China’s economic growth. However, more than a week later, production lines remain eerily silent as millions of workers under restricted movement due to a virus that has infected 73,000 and killed close to 2,000 struggle to get back to work.’

What if, in forcing people back to work, the virus gains fresh momentum and containment lines are broken?

According to Guggenheim Investments on 13 February, 2020 (emphasis added):

Coronavirus is much more deadly than SARS and if not contained threatens to become a global pandemic. For perspective, the last pandemic, the Spanish influenza of 1918, killed 50 million people around the world, or 3 percent of the global population.’

Is talk of a global pandemic by an investment institution an exaggerated claim?

These expert opinions lend a great deal of weight to the Guggenheim statement (emphasis added)…

I think it is likely we will see a global pandemic. If a pandemic happens, 40% to 70% of people world-wide are likely to be infected in the coming year. What proportion is asymptomatic [presenting no symptoms of disease], I can’t give a good number.’

Professor Marc Lipsitch
Professor of Epidemiology, Harvard School of Public Health
Head, Harvard Center Communicable Disease Dynamics
14 February, 2020

I think this virus is probably with us beyond this season, beyond this year, and I think eventually the virus will find a foothold and we’ll get community based transmission and you can start to think about it like seasonal flu. The only difference is we don’t understand this virus.’

Dr Robert Redfield, Director, US Centers
for Disease Control and Prevention
13 February, 2020

These are pretty serious statements from some serious people.

And why could this virus be with us for much longer than we’re being told to expect?

‘Even if there were a vaccine for coronavirus today, production would have to get to a scale to meet demand. We don’t just need the vaccines for the 60 thousand active cases already diagnosed, we would need enough for the expected exponential rise in the number of cases, which on the current trajectory soon will reach hundreds of thousands if not millions.’

Guggenheim Investments

These are the known red flags…

  1. The mortality rate is much higher than publicly stated.
  2. China has an obvious conflict of interest. If the truth is not being told, it’s probably because the news isn’t all that good.
  3. Expert opinion suggests this virus is not going away anytime soon and could, spread globally.

To date the markets have been saying ‘Red flags? What red flags?’.

It’s not just China that’s caught between a rock and a hard place…which ‘health’ choice do we make…economic or personal?

Do we sacrifice the well-being of some for the greater economic good?

The whole world is totally and utterly dependent upon the wheels of trade turning.

But at what risk to the virus crossing borders?

The pressures.

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.

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.

Regards


Signature
Vern Gowdie,
Editor, The Rum Rebellion


Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia. In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback. In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry. In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter. Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors. His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.


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