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The Coronavirus Outlook & The Global Economy

We’re likely not looking at a full recession like 2008, but global economies will reset amid the coronavirus pandemic. 

The RMB took a 20% hit. The Chinese government put an 175 billion liquidity injection into the markets. (600 million RMB had been destroyed due to Coronavirus existing on the bills.)

The PBOC also injected 200 billion yuan into the market via medium-term lending facility (MLF) Monday, which was introduced in 2014 so commercial and policy banks could borrow from the central bank with securities as collateral.

You can see coronavirus’ impact in numbers at the Chinese box office, which took a $214 million hit due to coronavirus.

“Judging from the current situation, the film industry is not equipped to resume business yet, and we have not approved industry’s demands to resume business as of now,” said Chen Bei, deputy secretary general of the Beijing municipal government.’

Countries are now quarantining entire regions. China, the World Health Organization (WHO), and some leaders are praising China’s measures to lockdown 60 million people in Hubei, imposing strict quarantine and travel restrictions for hundreds of millions of citizens and foreigners. Italy has done the same. 

At present, the kill rate is about 1-3% or so, but there are likely many people now living with coronavirus who are unaware. 

The S&P 500 fell 12% to close February–– the fastest correction on record. Stocks were their most volatile since the 2011 panic over a feared U.S. debt default and European credit crisis. They’re trying to find a new normal for now. 

The range will tighten, volatility will mellow, and this consolidation will be welcomed. The VIX finished last week in the 40s, suggesting more volatility could lay ahead.

If we’re looking at an economic downturn, which doesn’t seem likely unless coronavirus gets out of hand (which could happen in the event of an outbreak amongst the homeless populations), the next thing to start worrying about is pension funds, sovereign wealth funds, and other large funds moving capital.

Where can traditional investments, including commodities and other hard assets, go in the event of a downturn? Look at muni bonds and municipal bonds, which smaller investors buy. Already, muni bonds yield next to nothing. American still buy them, anyway. Well, what happens when they cost you money to hold?

In the U.S., there were no escapes in stocks––same as 2008. International stock portfolios offered respite. 

10 mutual funds with the most exposure declined 11%, and nobody owns bear-market mutual funds.

In an economic downturn, bitcoin and cryptocurrencies will become more important than ever. Let’s use Brexit as an example. Many people pulled capital from the UK in favor of Bitcoin, which was then seen as  a hedge against pound sterling. 

“Bitcoin has rediscovered its mojo this year with multiple mini surges but a no-deal Brexit could see a massive and unprecedented breakout,” Nicholas Gregory, CEO of blockchain firm CommerceBlock, told The Independent.

We’ve encountered spikes and dips in Bitcoin as coronavirus has dominated headlines. Perhaps, it will again be seen as a safe haven. 

Gold will benefit from any prolonged economic slump, but in the short term it could have trouble catching a bid. Investors may sell gold in order to meet margin calls and offset losses elsewhere, according to Standard Chartered and reported by Kitco.

“Investor demand has more than offset physical-market weakness,” Standard Chartered said. “While gold has rallied amid both risk-on and risk-off episodes, gold could suffer from further profit-taking as gold is utilized to meet margin calls, as a liquid asset, amid sharp declines across equity markets. Barring near-term profit-taking, price risks remain to the upside.”

If the panic goes from toilet paper to stocks, which could happen if the coronavirus spirals out of control, there will be a scramble from those assets which for the past decade have performed well. 

There’s a question about what the longer term impacts to the economy are going to be, but those are totally dependent on how coronavirus plays out from here.  

In terms of coronavirus cases, we don’t have accurate numbers, and there’s a chance many more people already carry the virus and don’t know it. 

We don’t know what the geographic response might be. Will indigenous people suffer more, if they come into contact with COVID-19, for instance? 

The far bigger problem is a social-media fueled panic which disrupts supply chains not in toilet paper, but medical supplies. 

When it comes to social media, it’s not just a general panic being broadcast in real time. 

As it stands, the biggest damage from the COVID-19 scare is the disruption of supply chains, including medical supplies those with compromised immune systems may need should they be infected with coronavirus. But, if Dr. Drew’s assessment stands, then we aren’t looking at a full economic recession as the panic blows over. 

In order for another 2008, there needs to be a major market driver. And coronavirus might not impact things enough to be that hit. What sectors of the economy will be hurt most? Well, the United States isn’t looking at a food shortage. Consumer goods, on the other hand, will likely take the hit. 

If companies cannot bring Chinese goods to the U.S., because people are staying home and not working the docks, the American people will turn to replacement goods. Foreign markets and indices will hurt, and the U.S. will nominally reset. 

But, unless coronavirus becomes a full-blown epidemic in the US, we’re not looking at 2008 types of market crises.

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