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The Real China Story

This post The Real China Story appeared first on Daily Reckoning.

With China grabbing all the negative headlines lately, I thought it would be a good idea to step back and look at the big picture, highlighting the great triumphs of this country.

Some of my readers worry that I am “soft” on China, too optimistic about the prospects for freedom there and unwary of the Chinese threat to the U.S.

As one reader recently wrote, “At the end of the day China is still a communist country” that “does not recognize the right to private property” and therefore can steal our intellectual property without any twinge of conscience.

I love this comment because it gets us right to the heart of things: Is China still a communist country?

Not: Does China have lots of politicians who ritually declare themselves communists? (It does.)

Or even a few who deep in their hearts still yearn for the good old days of Mao? (They exist.)

But is China a communist country, a nation of 1.4 billion people living under anything we would recognize as communism?

My answer is: “By their fruits, you shall know them.”

Let me explain…

Not Your Average “Communist” Country

What China has achieved over the past three decades could not have been accomplished by a communist nation.

My reader makes clear in the rest of his letter that he grasps the economic power and moral imperatives of capitalism. He knows that genuinely communist regimes have always and everywhere impoverished their people, that command and control economies fail miserably and murderously, destroying more wealth than they create.

Every long-standing communist regime has survived only by tolerating some free market activity, even if only the black markets that sprout up everywhere when real free markets are suppressed.

Yet here we have China, for several decades now the fastest-growing economy in the world and now the second-largest economy, and certainly the most innovative of any large economy. (Tiny Israel dominates the welterweights.)

Wealth That Cannot Be Stolen

Chinese insurance companies are bringing diagnostic tools powered by artificial intelligence (AI) to tiny Chinese medical clinics around the country, setting up same-day appointments with medical specialists in a country in which previously many people went a lifetime without ever meeting a real doctor.

Furthermore, the Chinese internet and social media companies combine every offering of Facebook, Google, Amazon, Spotify and more and do all of them better.

Are these conceivably the fruits of communism?

American politicians love to accuse China of stealing our technology. They attribute Chinese economic growth not to the growth of freedom but the rewards of larceny.

But as upholders of capitalist morality, they should know that in the hands of a thief, all gold turns to lead and all diamonds revert to the coal from which they came.

Technological leadership is not a static thing to be stolen and hoarded. Innovation can never be completed — or the innovators allowed to rest on their laurels — for the same reason innovation can never be planned: It always comes as a surprise.

The Chinese have surely benefited from the explosion of learning in the capitalist world sparked by the invention of the transistor at Bell Labs in 1947.

Yet all the crucial advances flowing from that moment have been thoroughly documented in prestigious journals and textbooks, debated in industry conferences open to the world and pitched by sales forces whose job is not to conceal technological advances but to reveal their wonders.

That interchange of ideas — and the furious competition it powered — was not a threat to American prosperity but rather its very source.

Now come the Chinese, suddenly more free than anyone of my generation ever expected. And because they are more free, because capitalism (and Christianity) are on the rise in China and communism in any genuine sense in general retreat, the Chinese have become powerful competitors — and great innovators.

And as innovators, the Chinese are a blessing to America, challenging American companies to adopt Chinese innovations and surpass them.

This sudden, astounding change in the plot of the story — China free and rich, rather than poor, enslaved and angry — is a blessing almost beyond imagining. China enriched will enrich America and the world.

Should we regret how much China has changed in three decades or pray that the change continues?

To me, the answer is clear.

But one dynamic to worry about with U.S.-China relations is the so-called “Thucydides trap.”

Beware the “Thucydides Trap”

That’s when an established power fears that a rival is gaining in power and will soon overtake it. War is often the result.

Among the earliest of historians, Thucydides wrote 2,500 years ago about the Peloponnesian War between Athens and Sparta and the events that finally doomed both of these powers.

Harvard’s Graham Allison sums up the concept: “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.”

He considers 16 instances over the last 500 years in which a hegemonic power such as the U.S. was confronted by a rising power such as China. War resulted 75% of the time.

In the case of Britain and the U.S. after World War II, no conflict erupted. Therefore, Allison has some hope that war avoidance is possible in this predicament. But he sees China and the U.S. on a collision course.

Chinese Influence Is Inevitable

In reality, Chinese influence in the South China Sea is as inevitable as U.S. influence in the Gulf of Mexico. To flaunt American naval power in the region is needlessly provocative and gratuitous.

Last year in the academic journal Humanitas, Villanova political science professor Lowell Gustafson explained the real “trap” depicted by Thucydides in his account of the Peloponnesian wars:

It may be that great powers do indeed desire to rule, but they learn to restrain themselves by accurate calculation of their own power and that of others. They do not engage in wishful thinking and grandiosity. Pluralism, not domination, is the proper end of power politics since power is always distributed to some degree. The trap that Thucydides worries about is not a rear-end collision, but that a great power deludes itself into seeking domination of all others.

Both China and the U.S. should take note.

Gustafson continues: “Graham Allison and American policymakers need to be as self-reflective about America as they are about the rise of China…

“If there is to be real American greatness, it needs to be drawn from the vision of an international system of free independent nations who peacefully trade with each other, learn from each other’s cultures and show restraint.”

My rule is that real threats to the U.S. come from failed states with nothing to lose, not from an ascendant country such as China with huge trading interests around the globe.

If we didn’t constantly harass the Chinese over their Uighur Islamist problem (over 1,000 incidents, 500 dead), they might well be our allies against real terrorist threats.

The best strategy for Americans is to support capitalist companies in China, not needless adventurism in the South China Sea.

I’m in China right now looking for investment opportunities — and innovations American companies can learn from.


George Gilder
for The Daily Reckoning

The post The Real China Story appeared first on Daily Reckoning.

“1984” Has Come to China

This post “1984” Has Come to China appeared first on Daily Reckoning.

You’re probably familiar with George Orwell’s classic dystopian novel Nineteen Eighty-Four; (it’s often published as 1984). It was written in 1948; the title comes from reversing the last two digits in 1948.

The novel describes a world of three global empires, Oceania, Eurasia and Eastasia, in a constant state of war.

Orwell created an original vocabulary for his book, much of which is in common, if sardonic, usage today. Terms such as Thought Police, Big Brother, doublethink, Newspeak and memory hole all come from Nineteen Eight-Four.

Orwell intended it as a warning about how certain countries might evolve in the aftermath of World War II and the beginning of the Cold War. He was certainly concerned about Stalinism, but his warnings applied to Western democracies also.

When the calendar year 1984 came and went, many breathed a sigh of relief that Orwell’s prophesy had not come true. But that sigh of relief was premature. Orwell’s nightmare society is here today in the form of Communist China…

China has most of the apparatus of the totalitarian societies described in Orwell’s book. China uses facial recognition software and ubiquitous digital surveillance to keep track of its citizens. The internet is censored and monitored. Real-life thought police will arrest you for expressing opinions opposed to the government or its policies.

Millions of Chinese have been arrested and sent to “reeducation” camps for brainwashing (the lucky ones) or involuntary organ removal without anesthetic (the unlucky ones who die in excruciating pain and are swiftly cremated as a result).

While these atrocities are not going to happen in the U.S. or what passes for the West these days, the less extreme aspects of China’s surveillance state could well be. And while you might not be arrested for expressing unpopular opinions or challenging prevailing dogmas (at least not yet), you could face other sanctions. You could even lose your job and find it nearly impossible to find another.

You can certainly be banned from social media…

Anything seems to go on social media (primarily Facebook, Twitter, Instagram, Snapchat, YouTube and a few other platforms) — unless you’re a conservative personality or politico. That’s where the censorship begins.

Many conservative social media participants have had their acco‌unts closed or suspended, not for threats or vulgarity but for criticism of “progressive” views (albeit criticism with some sharp edges).

Meanwhile, those with progressive views can say almost anything on social media, including the implicit endorsement of violence. But nothing happens.

Other conservatives report being the targets of “shadow banning.” That’s where your acco‌unt is open and seems to operate normally, but unbeknownst to you, much of the network is being blocked from seeing your posts and popular features such as “likes” and “retweets” are being truncated and not distributed.

It’s like being a pro athlete who finds out the stadium is empty and no tickets are being sold. That’s bad enough. But Twitter took the war on conservatives a step further.

Well, one of the most widely followed acco‌unts on Twitter is none other than Donald J. Trump’s, with 68 million followers. President Trump uses Twitter to announce policy initiatives and personnel changes and to offer pointed criticism of political opponents. It’s a major platform for him.

Last month Trump issued a tweet that identified the so-called “whistleblower” of the Ukraine phone call that led to his impeachment. That’s not as big a deal as it sounds because everyone in Washington knew who the whistleblower was (you can look his name up on the web), and he wasn’t even a real whistleblower because he didn’t meet statutory requirements.

Still, Twitter blocked Trump’s tweet. Twitter blamed a temporary system “outage,” but that claim was highly suspicious. Later, Trump’s tweet was restored, but the original acco‌unt that Trump linked to had been deleted. No one ever said that politics was fair.

But Twitter’s blatant interference in the election could have adverse consequences for the company in Trump’s second term.

And a few social media companies are now de facto censors, taking over the job from the government. Given their massive media footprint, they wield extraordinary influence over the American public.

They’re in essence becoming propaganda outfits.

It’s not just here of course. Canada, for example, is actively pursuing digital surveillance to track the activities of law-abiding citizens.

A report for the Bank of Canada says that financial information gathered from digital transaction records could be used for “sharing information with police and tax authorities.”

If all transactions are digital (including credit and debit cards), authorities can track your whereabouts, buying habits, restaurant choices and much more. They could also reveal your political orientation and personal associations.

It’s not difficult to imagine the police and tax authorities using that power to make life extremely difficult for those who criticize the government or sacred ideologies like “climate change.” If you think that sounds extreme, some have actually advocated jailing climate change “deniers.”

Do you think I’m making that up?

Well, the executive director of an outfit called Climate Hawks Vote said “Put officials who reject science in jail.”

The Nation also ran an article called, “Climate Denialism Is Literally Killing Us: The victims of Hurricane Harvey have a murderer — and it’s not the storm.”

“How long,” its author asked, “before we hold the ultimate authors of such climate catastrophes accountable for the miseries they inflict?”

And Robert F. Kennedy Jr. said the Koch brothers “should be in jail,” “with all the other war criminals.”

Well, David Koch has since died, so he’ll escape Kennedy’s justice.

But their “war crimes” consisted of funding organizations that question the climate change alarmism the media  is constantly feeding us.

But guess what? There’s plenty of hard scientific evidence that refutes the alarmist view. This article isn’t the venue to get into it, but the scientific case against climate alarmism is much stronger than the case for it.

But if you dissent against the official view, today’s tech censors will silence or marginalize you, no matter how valid your point.

The problem is, the trend is moving very quickly in this direction and it’s difficult to stop. And sophisticated surveillance technology to monitor citizens is already in place…

For example, cameras with the latest surveillance technology can spot and match millions of faces in real time with an accuracy rate of over 99%. They’re touted as anti-terrorism and anti-crime tools, which they certainly are.

But as Stalin’s ruthless secret police chief Lavrentiy Beria said, “Show me the man and I’ll show you the crime.” It’s easy to see that power being abused to target everyday citizens.

(By the way, Beria would ultimately prove his own point, as he was later arrested and executed for treason).

And actually, many people welcome intrusive surveillance technology on the grounds of convenience. As an example, look at microchipping, where people are injected with a small microchips beneath their skin. Microchipping has been associated with an Orwellian nightmare in which Big Brother constantly monitors your every move.

Well, over 4,000 Swedes have already happily volunteered to have it done.

In addition to acco‌unt information that negates the need to carry cash or credit cards to pay for goods, these chips can contain personal information. It’s all happened fairly quickly. Just a few years ago, the very idea of it would have sent chills down the spines of most people.

But that’s how fast Big Brother can go from nightmare to reality, and appear benign or even beneficial.

Big Brother’s on full display in China right now, but he could be on his way here before too long.


Jim Rickards
for The Daily Reckoning

The post “1984” Has Come to China appeared first on Daily Reckoning.


This post Bloodbath! appeared first on Daily Reckoning.

Here is the butcher’s bill:

The Dow Jones Industrial Average — down 1,031 points today…

The S&P 500 — down 112 points…

The Nasdaq Composite — down 355 points.

CNBC, by way of explanation:

Monday’s moves came as investors watch developments surrounding the coronavirus outbreak that was first reported in China but has spread rapidly in other countries especially South Korea and Italy, which reported a spike in the number of confirmed cases in recent days.

South Korea raised its coronavirus alert to the “highest level” over the weekend, with the latest spike in numbers bringing the total infected to more than 750 — making it the country with the most cases outside mainland China.

Meanwhile, outside of Asia, Italy has been the worst affected country so far, with more than 130 reported cases and three deaths.

Gold, meantime, was up nearly $30 today as investors fled for safety.

But late in the day someone — or something — jettisoned out some $3 billion of gold futures.

Thus, gold ended up gaining only $14 by closing whistle.

Who… or what… emptied all that paper gold into the market?

We do not know at this point. But we have put our top men on the case.

What about Treasuries? How did 10-year Treasury yields act today?

They dropped to 1.356% this afternoon — and so fell within hailing distance of their record lows. Only in July 2016 were 10-year yields lower, at 1.318%.

One more slip on the ladder… and “look out below.”

This is according to Mr. Ian Lyngen, BMO Capital’s director of U.S. rates strategy:

The most important number in the U.S. Treasury market has become 1.3180% — the all-time record-low yield mark set in the aftermath of Brexit. If that level is breached, look out below.

We will indeed — look out below, that is.

And what is this crossing our vision on a downward heading?

It is the 30-year Treasury yield.

The 30-year Treasury yield did plummet to record lows today — to an anorexic 1.814%.

Not in its entire history has the 30-year Treasury bond offered such a slender yield.

Impossible — but there you have it.

Have markets lost their nerve… or recovered covered their senses?

If they have lost their nerve, upcoming Federal Reserve easing will likely stiffen their spines.

We are supremely confident it is coming. In fact…

Former president of the Federal Reserve Bank of Minneapolis — Narayana Kocherlakota — presently urges his former mates to cut rates 25-50 basis points without delay.

They should not wait for their March meeting to “deal with this clear and pressing danger.”

We allow for the possibility…

With today’s whaling, both Dow Jones and S&P have handed back all their gains since Jan. 1.

And the worst of the bloodspill is not over, argues Opportunistic Trader CEO Larry Benedict:

“The second-largest economy in the world is completely shut down. People aren’t totally pricing that in. It seems like there’s much more to come.”

This fellow believes the stock market may be entering a 10–15% “correction.”

But the stock market is an ingenious device constructed to inflict the greatest suffering upon the most people within the least amount of time.

And so today it served its high and moral purpose.

The intelligent investor — says the shade of Benjamin Graham — “is a realist who sells to optimists and buys from pessimists.”

Lately the realists have been selling to the optimists. That is, selling to the lemmings…

Thus The Seattle Times informs us:

“Mom and Pop Are on Epic Stock Buying Spree With Free Trades.”

More from which:

Small investors are back. In a big way.

Their fingerprints are on Apple’s staggering rally. They piled into Tesla as it tripled, and turned speculative fliers like Virgin Galactic into some of the most heavily traded shares in the country…

U.S. households are turning more optimistic on the stock market. According to the latest sentiment reading from The Conference Board, the share of respondents expecting stocks to rise in the next year advanced to 43.1% in January, the highest since October 2018.

Online trading platforms that offer free trading have sugared the “deal”… and called the lemmings closer to the cliff.

The Times cites Sundial president Jason Goepfert:

When you take a bull market and juice it with zero commission trading, we can expect it to generate interest among retail acco‌unts. That, it did. Retail traders have become manic.

Few are manic today we hazard.

Buy when there’s blood in the streets, argues the old market wheeze.

Here is your chance.

Do you have the nerve?


Brian Maher
Managing editor, The Daily Reckoning

The post Bloodbath! appeared first on Daily Reckoning.

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.


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.


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.


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.


Jim Rickards
for The Daily Reckoning

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

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.


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.


Jim Rickards
for The Daily Reckoning

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

A Flood of Good News

This post A Flood of Good News appeared first on Daily Reckoning.

What are we to make of all the good news? Good news?

We learn by the United States Department of Labor that Americans were 1.8% more productive in 2019 than in 2018.

Here we have the greatest annual productivity gain since 2009.

We learn further that Americans’ real hourly wages (inflation-adjusted, that is) expanded 1.9% last year — the highest rate since 2015.

Meantime, Gallup informs us 59% of Americans feel more financially flush this year than last.

That is a record figure… nosing out the previous 58% from January 1999.

And a record 74% of American adults expect next year will find them in easier waters yet.

74% eclipses the previous 71% high from 1998.

Thus the American outlook is bright… and the spirit of gain is on the stretch.

More Good News?

Now what is this? Yet another sunshaft cracks through the overcast…

China has announced — unexpectedly — that it will slash tariffs on $75 billion of United States exports. Some, reportedly, as much as 50%.

And whispers swirl that researchers are nearing an antidote to the coronavirus.

China announced it will begin an experimental trial of the drug remdesivir. The New England Journal of Medicine reports the drug may offer at least limited salvation.

Reports MarketPulse:

It seems the world is nearing a cure for the coronavirus and that could mean markets may only need to price in only one bad quarter of data for China.


… the playbook remains once Wall Street is beyond the virus [and] risky assets will remain supported on central bank stimulus and the global growth rebound story.

We should not be surprised then that the stock market had itself a day at the races yesterday…

The Bulls Are Back in Charge

The Dow Jones ran up nearly 500 points by the closing whistle. The S&P went on a similar spree.

Both indexes extended their gains today.

The Dow Jones added 89 points; the S&P, 11. The Nasdaq took on 63 points of its own.

Gushes analyst Adam Crisafulli:

The bullish narrative that’s been driving stocks since late 2019 is firmly back in control of the tape after taking a brief pause during the final days of January.

Just so.

But let us draw a thick gray cloud across the sky… and patch the widening gap in the overcast.

We begin with United States productivity…

Show Us More

Productivity may have expanded 1.8% last year. Yet one swallow does not a summer make… as the phrase runs.

Productivity still goes far beneath the 2.1% average prevailing since the Second World War.

And the current expansion’s annual productivity gains?

They average a slender 1.3% altogether — thin, thin gruel.

We demand to see far more. But we may not see more…

Business investment remains depressed. And absent a sustained upward pressure, we have little reason to expect additional productivity gains.

Explain the gentlemen and ladies of Oxford Economics:

Productivity growth reached its fastest pace since 2010 last year, but we do not believe such performance will be sustained given lower domestic and global growth prospects.

But what about China’s newfound receptiveness to American wares? Should that not fill the sails of growth… and elevate the global outlook?

Have another guess, says Northman Trader’s Sven Henrich…

The Coronavirus Could Cut 2% From Global GDP

Look to the coronavirus. Henrich says the decision is a mere expression of Chinese desperation:

How long before people realize that China proactively capitulating on tariffs is a sign of how serious the economic impact of this [corona]virus situation actually is?

There may be sound justice here.

Goldman Sachs estimates the coronavirus’ compounding effects may hatchet global GDP 2% this quarter.

Zero Hedge, in summary of Goldman:

According to Goldman’s chief economist Jan Hatzius, the assumed hit to Chinese growth will directly subtract about 1% from global GDP growth in Q1. In addition, spillover effects to the rest of the world will take just under 1% off global growth, for a total hit of nearly 2% in the first quarter. The spillover effects consist of reduced exports to China (worth about 0.3%) and reduced spending by Chinese tourists abroad (worth about 0.6%).

But since we are the very soul of fairness, we must report that Goldman’s crackerjacks expect a full recovery.

Global growth will attain 3.25% by year’s end, they project — exceling last year’s 3.1%.

But what if they are wrong? What if this coronavirus is not so easily caged, conquered or killed?

“We’re Shadow Boxing”

The director of the World Health Organization — a certain Dr. Tedros Adhanom Ghebreyesus — warns against excessive zeal.

Put aside all rumors, he appears to say. No effective vaccinations or treatments yet exist.

“To put it bluntly,” says he, “we’re shadow boxing.” More:

“We don’t properly understand its transmissibility or severity… We need to bring this virus out into the light so we can attack it properly.”

Meantime, evidence mounts that China is vastly underreporting corona’s viral reach…

Our agents — for example — report hospitals in Wuhan are packed to suffocation, bursting with victims.

Neil Ferguson, disease modeler at Imperial College London, supports their claim:

There are likely to be many times more cases in Wuhan than officially confirmed. Clearly, the hospitals are overwhelmed.

We further understand the body-burners are busy — our men report pillars of smoke billowing constantly from the local crematoria.

But we must concede, our information comes secondhand. We are unable to confirm it.

We can confirm, however, the galloping confidence of Americans referenced above…

Irrational Exuberance

Let us briefly revisit the details:

Gallup informs us 59% of Americans feel more financially flush this year than last.

That is a record figure… nosing out the previous 58% from January 1999.

And a record 74% of American adults expect next year will find them in easier waters yet.

Seventy-four percent eclipses the previous 71% high from 1998.

Have you noticed the dates when Americans were last so exuberant?

That is correct — 1998 and 1999. Do you recall the subsequent events of 2000–02?

That too is correct. And the Nasdaq absorbed an 80% trouncing as they unfolded.

We suspect markets are in for similar roughhouse in the not-distant future. Next year? Perhaps in 2022?

We have no answer of course.

Nature Abhors Extremes

But stock valuations presently rise to heights truly obscene, heights never before equalled by certain measures.

That is, stocks are more expensive than ever by certain measures.

Nature abhors a vacuum, it is said. But nature also abhors extremes.

We suspect nature will iron out today’s extremes… and with great gusto.

Unfortunately, it will flatten the 59% of Americans who feel flush with cash, the 74% of Americans expecting easy waters ahead.

Again, we cannot say when.

But remember — nature abhors extremes. Remember also:

Nature bats last…


Brian Maher
Managing editor The Daily Reckoning

The post A Flood of Good News appeared first on Daily Reckoning.

China’s Collapse Has Only Begun

This post China’s Collapse Has Only Begun appeared first on Daily Reckoning.

The market bounced back today after Friday’s 600-point plunge in the Dow. But we haven’t heard the last of the coronavirus…

We’re still in a period of great uncertainty when it comes to the human and economic cost of the pandemic and the extent of the pandemic itself.

As I write, there are over 17,000 reported cases. Of those, 362 deaths have resulted and 487 people have recovered. The remaining roughly 16,200 cases are in various stages of treatment with uncertain outcomes.

Still, the 2% fatality exhibited so far is comparable to the Spanish flu pandemic of 1919–20, which ultimately killed an estimated 50 million victims.

Almost 99% of the reported cases are in China, with 62.5% of those Chinese cases in the vicinity of Wuhan, a major city of over 11 million people.

But the disease has spread (mostly through air travel from China or contact with Chinese travelers). There are 20 cases in Japan, 19 cases in Thailand and 18 cases in Singapore. The U.S. has 11 reported cases as of this morning.

It often takes laboratories six months or more to discover an effective cure or treatment for a virus of this type.

In the meantime, quarantine is the most effective approach. But how do you quarantine a city of 11 million, let alone a country of 1.3 billion people?

It’s very difficult to project growth rates. But if the virus stays on its current growth trajectory, more than 100 million people could be infected by the end of this month alone.

Many countries have banned arrivals from China and leading airlines have discontinued flights to China. That helps, but the virus continues to spread.

This all comes at a time that should be a period of great joy in China — the Lunar New Year. If you can imagine a two-week Christmas celebration, that’s about the magnitude of it.

While the long-term medical outcome is uncertain, the short-term economic damage is not. And China cannot afford a sustained economic setback.

China’s economy is already suffering extreme damage.

Their consumer economy has stalled as people stay home and avoid public transportation, stores and restaurants. The epicenter of the virus, Wuhan, is the capital of China’s Hubei province, a critical manufacturing center that represents 4% of Chinese GDP.

It now looks like a ghost town.




Many other major Chinese cities have been shut down, with no citizens allowed to leave and transportation systems closed.

Tourism is dead and many businesses are requiring that executives cancel trips to China until further notice.

This comes at a time when the Chinese economy was slowing anyway. And some economists project that China’s growth rate could drop two full percentage points this quarter. That would translate to roughly $62 billion in lost growth.

Meanwhile, Chinese stocks promptly crashed over 8% in a matter of minutes this morning, after being closed for a number of days.

Stimulus measures in the form of monetary ease are being tried. The People’s Bank of China (PBOC) says it will buy 1.2 trillion yuan ($173 billion) in short-term bonds to add liquidity to the financial system.

But the net amount of liquidity that will make it into the system is actually much lower.

According to PBOC data, over 1 trillion yuan ($22 billion) worth of other short-term bonds matured today. So the net amount of liquidity entering the system is actually significantly less than the raw number indicates.

And the stimulus is unlikely to work because of China’s sky-high debt levels. China’s debt-to-GDP ratio, for example, is about 310%, which is astonishing.

Research by economists Ken Rogoff and Carmen Reinhart persuasively demonstrates that once debt surpasses 90% of GDP, it is impossible to grow our way out of the debt. Again, China’s debt-to-GDP ratio is much, much higher.

Let’s hope the coronavirus is contained soon. Unfortunately, the damage to China’s economy is already happening and will persist even if the virus is soon under control.

And given China’s impact on the global economy, the rest of the world will suffer as a result.


Jim Rickards
for The Daily Reckoning

The post China’s Collapse Has Only Begun appeared first on Daily Reckoning.