NOTE FROM THE EDITOR
Dear readers:
The coronavirus news without doubt has taken the central stage worldwide. It putting governments on their knees begging for a prompt solution to stop the spread of the disease or most world economies could collapse – and their governments.
And we don’t know if every most of the information we’ve been getting from the mainstream media, independent news sources, and social media gossips are telling us the truth – or if they really know what the real truth is. But one thing is for sure, as Tyler Durden says it in his article below, this is a serious stuff since the economic instability of our nation is at play. – Marvin Ramírez.
by Tyler Durden
Fri, 02/28/2020 – With California reporting late on Friday that a second coronavirus case of “unknown origin” has been uncovered, prompting Santa Claria’s Health Department to caution that “now is the time to prepare for the possibility of widespread community transmission” echoing similar warnings from the CDC, the Trump administration’s response to what now appears an inevitable surge in US-based coronavirus cases is becoming an increasingly politicized topic, and not without justification: after all, it is hardly a secret that Trump’s favorite “job approval” barometer has been the stock market – which hit an all time high as recently as last week – and it is also hardly a secret that Trump hardly wishes to inspire a stock market panic by disclosing the full extent and severity of any potential domestic epidemic (which ironically, aligns Trump ideologically with China, which is now willing to sacrifice its population in the pursuit of restarting the Chinese economy).
Yet the more Trump, or various domestic institutions, appears evasive over the full extent of the corona crisis inside the US, the more markets get hit. Worse, the longer Trump avoids addressing the potential domestic epidemic, the more likely it is that the market crash that saw stocks plunge this week at the fastest rate since the financial crisis, will persist.
This brings us to an absolutely spot-on observation made by Bank of America’s rates strategist Ralf Preusser, who explains why for Trump, and US stocks, it may only get worse, before it gets even worse. That reason is that markets now seem to be taking the view that authorities – i.e., Trump – face an impossible trade-off:
– On one hand, they can adopt the Draconian quarantine measures seen in China and trigger a global recession as worldwide economic activity grinds to a halt
– Or, they can risk a pandemic by failing to take more aggressive action on Covid-19, also resulting in a global recession
China initially tried the first only to watch its economy grind to a halt, and then flipped in pursuit of the second option (while covering up the full extent of the ongoing coronavirus crisis within its borders) in hopes of rebooting the economy (the results of this diabolical approach are dismal at best as the following charts show), at least until the wave of new infections overruns the system and forces Beijing to once again “come clean”, while blaming it on a definition “glitch.”
Similar to China, the Trump administration realizes the “Catch-22” nature of the dilemma it is facing and is hoping to delay making a decision for as long as possible, knowing well that either choice could trip the US into a recession and with the November elections looming, a recessionary outcome could devastate Trump’s odds for reelection.
Of course, there will come a moment when even Trump will have to pick an approach, and if it is the first, the US economy would grind to a halt on short notice, similar to China, while the second will not only spark risks of an even greater epidemic over in the long run but trigger an aggressive popular response against Trump (one spearheaded by the resistance media), and which will paint the US President as the American version of Xi Jinping – one willing to sacrifice US citizens just to keep stock prices elevated.
While we wait to see which option in this Faustian bargain Trump picks, BofA writes that while it is hopeful that we are ” faced with a situation where the epidemic remains under control with clusters of outbreaks that are contained” even there it “cannot rule out recession risks given possible supply chain disruptions and the extent to which the global recovery is dependent on the consumer.”
Moreover, Preusser adds, “we need to acknowledge that even after recent corrections in risk assets (equities, credit, EM, periphery), allocations to risk remain meaningful and markets are short of hedges.” From that perspective, Bank of America warns that the “30-50% recession risks implied by the market do not seem extravagant to us.”
So is a recession looming, and when will we know? According to Preusser, “the question is to what extent next week’s data will incorporate this week’s deterioration in Covid-19.” One place that should give a sense of the supply disruptions is China PMIs, although this data has been notoriously massaged in the past. Separately, the US ISM print may show the sentiment effect of the China element of the outbreak, but would fail to reflect this week’s realization that the virus may be spreading meaningfully beyond Asia. Likewise the labor market report will be backward looking at this stage. Finally, German January factory orders and the details of the European PMI prints will not tell us much about the risks to the European recovery from the outbreak in Italy.
In short, the lack of any clear confirmation that the global economy is stalling may give Trump just the ammo to keep his head stuck in the sand, pretending there is no trouble and that only Powell is to blame for the market’s woes. The irony, of course, is that the longer Trump delays picking an approach, leading to what Bank of America calls a state of “Schrodinger’s Recession”…
… the more likely it is that a very real recession will be the inevitable outcome, and this week the stock market, whose discounting abilities have been crushed by the Fed’s central planning in the past decade but still function if just barely, finally realized that.
