Coronavirus Slams Chinese Economy

This post Coronavirus Slams Chinese Economy appeared first on Daily Reckoning.

How bad is the coronavirus pandemic in China? It’s worse than the Chinese government knows and worse than the world believes.

Here are the official statistics on the coronavirus (technically COVID-19) as of today: There are 75,685 confirmed infections worldwide, with 98% of that total in China alone. Of those cases, 82.5% are in the single province of Hubei, mostly centered in the city of Wuhan, with 11 million residents.

Of the over 75,000 worldwide cases, there have been 2,236 deaths; that’s a mortality rate of roughly 2.5%. If a 2.5% mortality rate sounds low, it’s not. That’s roughly comparable to the Spanish flu pandemic of 1919–20 that killed 50 million people by some estimates.

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Coronavirus has reached pandemic proportions in China. Over 60 million people are locked down, which means they cannot leave their homes except once every three days to buy groceries. Streets are empty, stores are closed, trains and planes are not operating. The Chinese economy is slowly grinding to a halt.

While the disease has been predominately centered in China, and Wuhan in particular, there have been significant outbreaks in Singapore (58 cases), Hong Kong (56 cases), Thailand (33 cases) and Japan (29 cases including one fatality). Approximately 218 cases have been identified among those trapped on cruise ships where all passengers are under quarantine. Fifteen cases have been identified in the United States.

These statistics barely scratch the surface of what is happening with coronavirus in China. There is good reason to believe that the actual incidence of the virus may be five–10 times the official numbers.

Tencent (a popular internet search and social media platform in China) reported on Feb. 1, 2020, that actual infections were 154,000 and deaths from the disease were 24,589. (A screenshot of the Tencent release is shown below; source: Taiwan News).

The infection figure was approximately 10 times what the official figure was on the same date.

The death toll was more than 300 times the official figure. Applying this death toll to total infections gives a fatality rate of 16%, which is over seven times the official fatality rate.

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There is no reason for a high-profile platform such as Tencent either to fabricate data or incite panic. It is reasonable to conclude that these figures are close to actual data. The Tencent posting was suppressed by the Chinese government within minutes of what may have been an accidental release of accurate data.

The preeminent U.K. medical journal The Lancet also published an article on Jan. 31, 2020, using hard data (city populations, incidence of travel, estimated transmissibility, etc.) and a reliable SEIR model (susceptible, exposed, infected, resistant).

That article estimated total infections of 75,815 in Wuhan as of Jan. 25. That figure is 17 times the official figure of 4,400 available on Jan. 27. The multiple of the estimate by The Lancet to the official figure is roughly in line with the multiple of the Tencent release to official data five days later.

Using either The Lancet or Tencent as a baseline suggests that the official infection and death rates are grossly understated.

Anecdotal evidence is consistent with the view that official data are materially understated.

Many bodies have been picked up off the streets and sent for cremation without blood samples or autopsies. It is highly likely that these victims died from coronavirus but are not included in official counts because no tests were performed.

Authorities are running out of body bags and refrigerated trucks, so bodies are simply being wrapped in plastic sheets and hauled away in ordinary vans.

A shortage of face masks, latex gloves and testing kits has also emerged. This means that doctors and medical personnel are highly susceptible to infection. It also means that patients who complain of fever and difficulty breathing are sent away because officials have no way to test them for coronavirus.

These developments simultaneously inflate the number of infected and deflate the official count.

The story gets worse. Wuhan, the city that is ground zero for coronavirus infections, is also the location of the sole bioweapons laboratory for the Chinese military and Chinese Communist Party.

One of the scientists at the laboratory is Zhengli Shi, a virologist. Shi formerly worked at a laboratory at the University of North Carolina, where he engineered a hypervirulent bat-based coronavirus that bears a striking resemblance to the COVID-19 coronavirus, including gene sequences not found in nature.

These linkages at least suggest that the outbreak of the coronavirus in Wuhan may be linked to an accidental release of the virus from the biological weapons laboratory located there.

If this thesis is correct, the coronavirus may be difficult to contain with vaccines or drug therapies since it would have been engineered to be highly resistant to such treatments.

What impact will the coronavirus pandemic have on the Chinese economy and global supply chains, especially in the technology sector?

Right now my models are telling me that the impact of coronavirus on the Chinese economy is orders of magnitude greater than most analysts estimate. In fact, the Chinese economy, second largest in the world, may be grinding to a halt.

The following excerpt from an article by Ambrose Evans-Pritchard in The Telegraph on Feb. 12, 2020, tells the tale:

Property sales in 30 big cities released every day… have collapsed to zero and have yet to show a flicker of life.

Property is a slow-burn issue compared to ruptured manufacturing supply chains, but by March it will start to bite for developers with dollar debts on Hong Kong’s funding market. Companies deemed “stressed” (borrowing costs above 15%) have to repay $2.1 billion of offshore dollar notes next month. Standard & Poor’s says they rely on a constant flow of sales to cover past debts.

Some 25 provinces and municipalities were supposed to go back to work this week but this clashed head on with virus control measures. Companies may not reopen plants unless they can track the exact movements and medical data of each worker and comply with a 14-day quarantine period where necessary (we now learn the incubation may in fact be 24 days). Officials dare not be lenient after Xi Jinping’s latest tirade.

The Guangzhou authorities have ordered plants to remain closed until early March in large parts of the city with warnings of ferocious penalties. Apple supplier Foxconn has yet to restart its core iPhone plants in Zhengzhou and Shenzhen. Just 10% of its workers have turned up. Caixin reports that Foxconn may wait until March before restarting.

Meanwhile the near complete shutdown of Shanghai’s manufacturing hub in Songjiang belied early claims that 70% of plants were going back to work.

This article contains valuable vignettes of what is happening in China, but they barely scratch the surface. An even bigger story is the extent to which the disruption in China from coronavirus is not only slowing the Chinese economy but is also disrupting global supply chains and slowing output around the world.

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This chart prepared by the Johns Hopkins University based on official data provided by China and other nations shows the total number of confirmed cases of coronavirus infection as of Feb. 14, 2020 (orange line). Wall Street was encouraged by a prior update that showed 44,700 confirmed cases. Then cases increased by over 15,000 in a single update. The resulting near-vertical slope of the graph blew up Wall Street wishful thinking and triggered a downdraft in stock markets worldwide. As of Feb. 15, confirmed cases had increased to 64,447. The pandemic is far from under control and spreading quickly.

Production shutdowns in China are reducing exports of high-tech inputs from South Korea, Japan and Germany. Likewise, the extreme reductions in exports from China (due to plant closures) are hurting sales by European and U.S. distributors and retail outlets.

Independent of production and sales bottlenecks, there are massive transportation bottlenecks as vessels and crews are quarantined or refuse to enter Chinese ports at all.

The tech sector may be the hardest hit of all. In addition to coronavirus disruption, the U.S. Department of Justice last week indicted China’s largest telecommunications device and network provider, Huawei, on racketeering charges.

The Pentagon also reversed a prior determination and agreed that the Commerce Department can put Huawei on an export control list, which prohibits sales of processors and other high-tech components to Huawei by U.S. firms.

These measures are certain to invite retaliation by China against U.S. firms in the tech supply chain.

This story isn’t going away anytime soon.

Regards,

Jim Rickards
for The Daily Reckoning

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Not Over by a Long Shot

This post Not Over by a Long Shot appeared first on Daily Reckoning.

Are you tired of hearing about the coronavirus? Well, you shouldn’t be because it’s a serious situation with global consequences.

Markets have been following the spread of the coronavirus (COVID-19) closely for good reason.

The Chinese economy, second largest in the world, is shutting down in stages. In affected areas, streets are empty, stores are closed, planes and trains are not running.

Over 60 million people are “locked down,” which means they are confined to their homes and can only leave once every three days to buy groceries (if they can find any due to hoarding).

The effects go far beyond China because of global supply chains. If Chinese factories are closed, they are not buying components from South Korea, Japan and Germany. Likewise, if Chinese factories are closed, they cannot supply finished goods to U.S. buyers.

The result is that factories and sales are also slowing in developed economies.

Still, markets are taking a measured view. Some epidemic models showed the disease would peak in April 2020 and tail off quickly from there.

The other assumption was that any dip in the Chinese economy would be made up later in the year so that the total impact would be minimal when viewed on an annual basis.

All of those assumptions were blown-up in a matter of minutes in the late evening of Wednesday, Feb. 12.

In a single update, 14,840 new infections were reported, moving the total from 45,000 to about 60,000 cases.

This did not mean that 14,840 people were infected in one day.

It meant that China suddenly became more transparent and decided to include existing cases using more valid diagnostic criteria.

But the change did move the official statistics closer to the amount shown in a leak on Tencent (that showed about 150,000 infections) and a Lancet (a preeminent medical journal) model-based input that also estimated about 150,000 cases.

Officially, China has reported 118 new deaths, bringing the number of (official) deaths nationwide to at 2,236.

China has also reported 1,109 new confirmed cases, dramatically up from 349 cases the previous day.

And now, for the third time in eight days and the second time in 24 hours, Chinese officials made changes to how they count coronavirus cases.

When asked if he thought the virus will be contained, World Health Organization director Tedros Adhanom Ghebreyesus said, “The window of opportunity is narrowing, so we need to act quickly before it closes completely.”

The bottom line is that the disease is worse than Wall Street believed, the economic damage is greater and it will take longer to get the disease under control. Stock prices fell after the news was reported.

As more bad news dribbles out, that stock price adjustment has further to fall.

Regards,

Jim Rickards
for The Daily Reckoning

The post Not Over by a Long Shot appeared first on Daily Reckoning.

“Mandate of Heaven” in Jeopardy

This post “Mandate of Heaven” in Jeopardy appeared first on Daily Reckoning.

The U.S. markets are closed today for Presidents Day. If you have the day off, I hope you’re enjoying your long weekend.

But one event is taking center stage in the world that affects not only basic survival for millions of people, but the health of the global economy overall.

Of course, I’m talking about the coronavirus outbreak currently playing out before our eyes in China.

China’s economy was slowing substantially before the outbreak of the highly contagious and deadly virus last fall. This slowing was the predictable result of excessive debt levels, Trump’s retaliation in the trade wars, and China’s encounter with what development economists call the “middle-income trap.”

Developing economies can grow at double-digit rates as they move from low-income (about $3,000 annual per capita income) to middle-income (about $10,000 annual per capita income).

The main requirements are limits on corruption, a large pool of available labor, and an attractive legal environment for foreign direct investment. Once investment is used for infrastructure and labor is mobilized, large-scale basic manufacturing can commence.

This powers growth and the accumulation of hard currency reserves from export earnings.

The difficulty begins when an economy tries to move from middle-income to high-income (about $18,000 annual per capita income). That move requires more than cheap labor and infrastructure investment. It requires applied technology to produce high-value added products.

Only Taiwan, South Korea and Singapore have made this transition, (excluding Japan after World War II, and oil-exporting nations).

This explains why China has been so focused on stealing U.S. intellectual property.

Trump has been closing that avenue. China cannot generate the needed technology through its own R&D. China is stuck in the middle-income trap and a slowdown in growth is the inevitable result.

The story gets worse for China.

As of Friday, the total reported number of people infected by the coronavirus was 64,435. And the death toll was up to 1,383, including three people outside of China.

Those figures are official statistics released by China and other countries around the world where the virus has spread.

However, there is substantial medical, anecdotal, and model-based evidence that the actual infection rate and death rate may be ten to twenty times higher than those official statistics.

Over 60 million Chinese in several major cities are under “lock-down” where individuals are confined to their homes and may only leave once every three days to buy groceries.

Streets are empty, stores are closed, trains and planes are not moving, and factories are shut. The Chinese economy is slowly grinding to a halt.

This not only affects China’s economy as a whole, but the contagion filters down into individual companies that are dependent on China both for supply chain inputs and final sales.

And it will have a rippling effect on the U.S. economy also. This story has a long way to run.

Regards,

Jim Rickards
for The Daily Reckoning

The post “Mandate of Heaven” in Jeopardy appeared first on Daily Reckoning.

Weekend Show – Sat 1 Feb, 2020

Hour 1 – Treasuries and Precious Metals a Long Term Perspective
Full First Hour

On this weekend’s show I start off by recapping the new of the week and increased volatility in all markets. We then switch focus to the metals sector and an update from Great Bear Resources.

I hope everyone who is going to watch enjoys the Super Bowl! Go 9ers!

  • Segment 1 – Marc Chandler, Managing Partner at Bannockburn Global ForEx kicks off the show with comments on the big drop in yield and the implications when the Chinese markets open next week. WE also look ahead to major data next week and the next round of central bank meetings.
  • Segment 2 – We shift our focus to the precious metals with Doc. We discuss the gold and GDX charts as well as a quick comment on Skeena Resources.
  • Segment 3 – Sean Brodrick, Analyst at Weiss Ratings looks past the recent black swan events to what he thinks are the more significant long term drivers for the precious metals. We also discuss palladium and copper.
  • Segment 4 – Great Bear Resources (TSX.V:GBR & OTCQX:GTBDF) released news on Friday regarding the 2% NSR on the Dixie Project and the Company spin-out. Chris Taylor, President and CEO joins me to provide some more details on the new Company as well as the exploration strategy for this year.

Exclusive Company Interviews This Week


Marc Chandler
Doc
Sean Brodrick
Chris Taylor – Great Bear Resources

Chris Temple from The National Investor – Mon 12 Aug, 2019

Just How Likely Is China To Break Off and Set Up A Major World Divide For Trade?

Chris Temple, Founder of The National Investor joins me today for a wide ranging discussion on how the trade war is pushing China into signing it’s own trade deals. This would set up a completely different world in terms of trade, banking, and currencies. Some of the topics discussed are the possibility of a Petro-Yuan and comparing the banking systems in China, Europe, and the US.

I will be traveling the rest of today so posting will light.

Click here to visit Chris’s site and take advantage of his flash sale for new and current subscribers.

Volatility Holds the Key to Markets in 2019

This post Volatility Holds the Key to Markets in 2019 appeared first on Daily Reckoning.

Over the last two weeks, after making good on the four-rate interest hike of 2018, Fed Chairman, Jerome Powell, became more dovish to start 2019.

His change in tone is worth considering because of his historical stance on reducing the amount of artificial stimulus coming from the Fed. Last week, after the required five-year holding period for Fed transcripts were up, we got a glimpse into Powell’s thoughts from 2013, before he was Chairman.

Powell tried to persuade then-Chairman, Ben Bernanke, to reduce the Fed’s stimulus, even though it would lead to greater near-term market volatility. That was when the third round of the Fed’s asset-buying program (QE3) was in full swing. The Fed was purchasing an estimated $85 billion per month mix of Treasuries and mortgage-backed securities.

To indicate that the Fed wouldn’t buy bonds forever, Bernanke floated the idea of slowing down its program, or “tapering,” at some non-defined future date.

Powell, on the other hand, believed the market needed a specific “road map” of the Fed’s intentions. He said that he wasn’t “concerned about a little bit of volatility” though he was “concerned that there may be more than that here.”

Indeed, once Bernanke publicly announced the possibility of the Fed’s bond-buying program slowing down, the market tanked, in a response that became known as a “taper tantrum.” As a result, Bernanke backed off the tapering idea.

Fear of more taper tantrums kept the Fed in check after that. The Fed ultimately waited until it had raised rates sufficiently, before starting to cut the size of its balance sheet. But now Powell is the Chairman. And it seems that he is much less comfortable with volatility than he was under Bernanke, as his most recent remarks indicate.

But it certainly wouldn’t be the first time a Fed chairman has modified his views when he was in control. Alan Greenspan, for example, was a staunch advocate of the gold standard when he was younger (and as presented in Foreign Affairs). But once he was Fed head, suddenly he thought a gold standard wasn’t such a hot idea after all. Go figure.

In the case of Jerome Powell, his new sensitivity to volatility means the Fed will be watching the markets for high volatility that causes sell-offs, even if also espousing their “data driven” mentality. And that he is prepared to act should that happen by backing off the Fed’s current forecast for reducing its balance sheet.

I’ve argued before that the Fed isn’t reducing its balance sheet as aggressively as it would have you believe. And I certainly expect it to dial back even more so in light of the recent volatility.

The reason is obvious.

The main catalyst for the bull market that surfaced over the past 10 years since the financial crisis in 2008 was stimulus that was fueled by the Fed and other leading central banks. This money acted as an artificial stimulant or “drug” to financial asset prices.

The world’s leading central banks have been following the Fed’s lead in withdrawing liquidity. And even though global liquidity really began drying up late last year to a minimal degree relative to its size, it should come as no surprise that markets have threw a tantrum.

Since early October, we’ve seen a lot of price volatility, with several hundred-point daily swings in the markets becoming the norm. Powell calmed the waters with his dovish comments on January 4 and the following week as well. But make no mistake, the waters are still choppy.

Many on Wall Street expect to see more volatility ahead and are forecasting that 2019 will be rocky for the stock market. But others on Wall Street are, in direct contrast, forecasting a continued bull market.

That’s the other driver of volatility — clashing opinions and wildly divergent market forecasts. We haven’t had much volatility in recent years because nearly everyone was on the same side of the bet. That’s all changed now.

To add to the market turmoil, the federal government shutdown has now officially entered its fourth week. It is now the longest shutdown on record. But the shutdown also has real economic ramifications outside of the DC beltway.

First, in a climate where the expansion of business activity is already slowing down, the shutdown is causing economists to further lower first-quarter GDP estimates. That puts a lid on expansion and hiring plans for both psychological and actual risk reasons.

More than 800,000 federal workers have missed paychecks, which means less money to pay bills and purchase goods and services that contribute to the American economy. But that’s not the only problem, although it might seem far more important, especially to those missing paychecks.

From an information standpoint, the state of the economy is tough to predict without data produced by agencies like the Department of Commerce. For instance, farmers, already hurting from trade wars, won’t be able to get key data on figures like monthly international shipments to plan crop schedules.

Then there’s the Federal Reserve itself. Whether you think it should or not be setting interest rates at all, the Fed determines interest rates while considering factors such as market volatility, slowing economic figures and trade wars. The best way to do that is to access real data. Now, business conditions will be hard to gauge accurately if reports aren’t available due to the shutdown.

That means the shutdown will stoke volatility in the markets until an agreement is reached. And when that will be is anybody’s guess right now. No real progress has been made and there doesn’t appear to be an end in sight.

But this week, the markets will be getting new information to digest. The release of fourth-quarter earnings reports will begin with big banks. These will provide more insight into how companies performed during the year-end volatility in 2018.

The corporate earnings outlook on Wall Street is fairly negative. Companies have been managing expectations downward. Apple, for instance, chopped its forecasted revenue figures last month, citing the slowdown in China’s economic growth as a reason for less iPhone sales. Apple stock lost about 10% on the day of the announcement, taking the overall market down with it.

Analysts are now estimating fourth quarter profit growth of 14.5% for the S&P 500 companies. That’s down from the 20.1% they forecast at the start of the quarter. But that could actually be a good thing for share prices.

The lower the bar, the greater the possibility it can be exceeded. There’s more upside potential in that case, in other words. That means if earnings begin to outperform prior forecasts next week, it could very well lift the markets. This tension of negative and positives factors will foster a see-saw of a quarter in the markets mixed with volatility, so being aware and nimble will be the best strategy.

But the volatility could present a great trading opportunity. Wall Street knows that it doesn’t matter if information is positive or negative — there are still ways to profit from the right information.

Something called the Cboe Volatility Index (VIX) is widely considered a “fear gauge.” That’s because it’s supposed to reflect what swings in the S&P 500 index could be over the next month.

The VIX computes its levels based on outstanding options contracts which are supposed to indicate the price that investors, or speculators, are willing to pay for protection against their positions going bad.

Currently, the VIX should be higher than it is. It recently spiked, but then settled down much lower than what the real volatility of the S&P has been this past month.

Usually, options tend to over-price volatility. That’s because people buy options in order to place bets on the future, or to protect themselves from wild swings in share prices. The less certain they are, the more they are willing to pay for that protection.

Yet, right now, the cost of protection is cheap. That’s like your health insurance premium all of a sudden dropping just when you catch a major illness. It doesn’t quite make sense.

That means that while fourth-quarter earnings season reports are emerging, it’s a good time to take advantage of buying these cheap options. Buying them on certain companies can protect you against adverse swings in share prices due to earnings announcements. It’s a form of portfolio insurance. And again, it’s relatively cheap.

That’s one pivotal key to being a great investor — accessing information. Sure, the more insights and information you have, the more overwhelming it can seem. However, if you can stay focused, your portfolio will thank you.

Regards,

Nomi Prins
for The Daily Reckoning

The post Volatility Holds the Key to Markets in 2019 appeared first on Daily Reckoning.