STOCK MARKET COLLAPSE! Coronavirus Creating Worries of an Economic "Black Swan" - financialanalysis


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Monday, February 3, 2020

STOCK MARKET COLLAPSE! Coronavirus Creating Worries of an Economic "Black Swan"

The quickly-spreading coronavirus is understandably causing worry in the markets.
Originating in Wuhan, China, the virus moved from animals to humans at a local food market. Since then, it has since spread to other parts of China and beyond.
Jim Rickards compares this virus with a potential economic “contagion” that can result as the concern over the virus turns into panic and causes distress.
He describes the “panic” as already happening in China, only a couple of weeks after the virus began to spread, and asks a crucial question:
The disease is causing financial panic in China at a time when it can least afford it. GDP growth has hit a wall and investors have curtailed new investment. Could it unleash a global financial panic that ultimately results in a lockdown of the banking system?
The Federal Reserve, which completed its most-recent Federal Open Market Committee meeting on Wednesday, doesn’t appear to be too concerned with Rickards’ question at the moment. In their official statement following the meeting, it only mentioned keeping track of “global developments” and “readings on financial and international developments”.
But it’s quite possible that Fed Chairman Jerome Powell will have to change his tune in the months to come. After all, he has already created a QE “monster” for the markets to deal with. Piling potential ripple effects of the coronavirus on top of that could result in an absolute disaster for the economy.
Jim Rickards thinks one reason things could still take a turn for the worse is that there is still quite a bit of time for the virus to impact the economy, saying, “This is the type of catalyst that could take a year to build.”
The “Black Swan” that Could Blow a Hole in the U.S. Economy
Writing on Forbes, Senior Contributor Jack Kelly paints an even more disturbing picture.
According to his piece, “A black swan event is a term used on Wall Street that refers to a rare and unpredictable occurrence that is beyond what is expected and has severe consequences.”
There are two ways the coronavirus could qualify as a black swan event. One is how rare and unpredictable this new virus is, which is fairly obvious.
But more importantly, it comes at a time when other market signals are already pointing to a potential recession in the U.S.
So this virus certainly is “beyond what is expected” and could potentially have “severe consequences” economically, including the possibility of a full banking system lockdown, which Rickards alluded to.
To illustrate the immediate potential impact a “black swan” like the coronavirus could have on any economy, Kelly highlights at least five impacts already beginning to take place in China’s economy: The virus started around the Chinese Lunar New Year, which is known as the country’s biggest travel period. Global stock and bond markets have been hit by mounting worries. Investors are afraid of how this will play out. Employees returning from impacted areas are being told not to show up to work.
International commerce will slow down.
China and neighboring countries are shutting down restaurants, hotels, resorts and other businesses that may spread the virus.
Kelly adds, “It’s reasonable to believe that for the near-term period of time, stocks will fall in value, hiring will temporarily slow down, new corporate initiatives will be placed on hold and the overall business climate will be fearful.”
Keep in mind that all of this economic chaos is happening within two weeks of the World Health Organization (WHO) announcement that the virus was spreading in China at a faster pace.
Imagine if Rickards is right, and the economic catalyst takes a full year to develop even further. Then imagine what could happen if this virus spread more prominently in the U.S.?
Best to Hope for the best but Prepare for the Worst
The situation surrounding this potential “black swan” and the resulting economic impacts will both continue to develop over the coming year. It’s safe to assume it will result in plenty of uncertainty (and possibly panic) in the markets.
But you don’t have to let a volatile market hit your retirement the way it did to millions of people during our last recession. The best time to prepare is now.
Having a diversified retirement plan with assets known for their protection during uncertain times is a strategic way to diversify your nest egg. Precious metals like gold and silver could prevent your retirement savings from suffering the consequences if this situation takes a turn for the worse. Coronavirus Is 'Probably Nothing', But "It's Possibly Everything" For Global Markets
In 1349, when Black Death was ravaging Europe, many of the day’s best and brightest banded together in pursuit of a common cure.  They had little choice.  Black Death was rapidly spreading across the continent.  Nothing could stop it.
Boils were lanced with precision.  Blood was let with vigor.  But there was no escape from the plague’s instant death.  It was efficient.  It was relentless.  People would go to bed at night perfectly healthy; by morning, they’d wake up perfectly dead.
Then, at the exact moment of maximum death and despair, flagellants came to the rescue.  Processions marched to and fro, seeking relief through forcefully whipping themselves in public displays of self-mutilation.  According to the History Channel:
“Some upper-class men joined processions of flagellants that traveled from town to town and engaged in public displays of penance and punishment: They would beat themselves and one another with heavy leather straps studded with sharp pieces of metal while the townspeople looked on.
“For 33 1/2 days, the flagellants repeated this ritual three times a day. Then they would move on to the next town and begin the process over again.”
This may seem strange, weird, and, quite frankly, a bit nuts.  But something miraculous happened.  The Black Death epidemic soon exhausted itself.  The flagellants saved Europe from the mid-14th century onslaught of Black Death.
Or did they?
Probably Nothing, Possibly Everything
To be clear, flagellants had no influence on the eventual relenting of Black Death.  Remember, correlation does not imply causation.  Post hoc ergo propter hoc – “after this, therefore because of this” – or simply the post hoc fallacy, recognizes that just because one event happened to follow another, doesn’t mean the initial event caused the later event to occur.
The example of flagellants stopping the plague is absurd.  Still, we present it to underscore several points:
(1) Humans are often irrational, especially during times of crisis, and
(2) Mis-assigning causation is a common appeal to ignorance, especially when it comes to modern day economics analysis.
One popular tactic of central planners, for example, is to point to an economic statistic – like low unemployment – and self-adulate for maneuvering it down.  Does pumping fake money into credit markets somehow create jobs?  Does pumping fake money into credit markets somehow create wealth and prosperity?
Similarly, when the yield curve inverts and the economy stalls, central planners always scratch for a convenient culprit.  Last fall, when the economy slipped, the trade war with China was to blame.  Now it’s the Chinese coronavirus.  Jeffrey P. Snider, at Alhambra Investments, offers the following insight:
“The mainstream needs to blame something and given how convenient the timing between ‘protectionism’ and the ‘unexpected’ appearance of this globally synchronized downturn should the latter flame back up again, having never really been extinguished, China easily provides the next scapegoat (wouldn’t it be ironic if the virus was found to have jumped from goats to humans?)”
At this point, it’s still too early to tell.  China’s coronavirus, like past outbreaks of the bird flu or SARS,  is probably nothing.  But it’s possibly everything.
How Xi Jinping will Save the World from Coronavirus
You see, every bubble eventually finds its pin.  Perhaps coronavirus is the pin that the twin stock and bond market bubbles have elegantly eluded over the last decade.  If not, it should be.
By this, coronavirus would not be the cause of a bear market and economic recession.  It would merely mark a coincidental turning point.  One that could have been marked by a whole host of potential triggers over the course of many years.
The experience of the last decade, however, is that the coronavirus is probably nothing.  Certainly, if central banks are being called on to save us from melting glaciers, a determined central bank can paper over coronavirus, right?
Indeed, complacency still reigns.  The question, at the moment, is not whether the stock market bubble is bursting.  But, rather, should you buy the dip?
The repeat lessons of the past decade are that you should definitely buy the dip.  The yield curve may be inverting for the first time since October.  But if this is a signal the Fed will be pumping more fake money, maybe, once again, it’s bullish for the S&P 500.
In the meantime, one thing is crystal clear.  China’s lunar new year holiday has been ruined.  And Xi Jinping, China’s paramount leader, is mad.  He also recently distilled the coronavirus challenge down to a bite sized nugget:
“The epidemic is a devil.  We cannot let the devil hide.”
Should this escalate to full pandemic, Mr. Xi will be compelled to join a procession of flagellants in Beijing; he’ll flog himself silly to rid the world of the coronavirus.
This has worked before.  It’ll work again.

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