Many readers have asked me about how the US market can be making new highs when the Wuhan virus is raging through China and represents a clear an present danger, and yet the US stock party has continued.
Of note is that the stock markets of China have started to reflect the magnitude of this event but even they have been arrested by state intervention, until the next wave of reality hits. In America, the massive and sustained repro buying program in the US stock market has without a doubt kept the US market driving to its recent highs, and at the same time maintaining a sense of euphoria in America which has resisted any fears that the Wuhan virus could have very serious impacts globally and including America.
Interestingly there are precedents in market history whereby major events loom obviously on the horizon with markets keeping their rose-colored glasses on, right up to the moment of disaster. The British Bond market pricing into WW 1 is just such an example. They stayed steady right up until the day war was declared, despite it being almost inevitable, and then the next day they opened and dropped 50%. So much for efficient markets theory! However, by applying Murrin Market Theory, the left-brained body of the market, which in today's imbalanced beta investment environment is probably about 95%, is happy to carry on with everyday life. Whilst the right-brained minority who were genetically coded to look for danger and who are the natural Alpha producers have picked up the threat and are very concerned and have turned bearish, the stock market has until now, been completely outgunned. But like a ball thrown into the air, at its apex gravity always takes hold. I believe that the US stock market is at its Apex and only now will it start to see the magnitude of the global demand slump, caused by first China shutting down its manufacturing base and economy, and then followed by huge supply chain knock-on effects. This process will ultimately bring about a massive manufacturing substitution in the West and hasten the West/East separation I have been describing prior to the advent of the trade war.
Looking at the progression of the Wuhan Virus, there are a number of issues of note that continue to support our concerns that the Virus is a global magnitude event (Certainly the World bank's disaster bonds think so!)that will stop China in its tracks and spread to other counties worldwide sending the world into a deep recession.
1. The suppression of Doctor Li Wenilang by the Chinese authorities in December is of great concern.
a. At best it shows the embedded danger of a closed society and its inability to recognise and adapt to impending danger.
b. But more importantly, the question has to be asked why would the authorities suppress a viral outbreak? The only answer is that the authorities knew that the virus had originated in one of its weapons labs and tried to suppress it.
c. The next point of note is that Dr Li was 34 when he died, as such we can conclude that this virus does not just attack the old as claimed, but also the young and fit.
d. That Dr Li would have received the very best treatment and he yet he still died.
e. That Dr Li was aware of the deadly nature of the disease and would have taken all measures possible to prevent contagion, and yet he still caught it
f. That Dr Li was diagnosed only this month, posing the question that the incubation period could be longer than two weeks, as one would assume that with time his protective protocols would have got better over time and that he was most likely to catch it during the first contact back in December
2. The Official reported stats show some concerning patterns
a. The infection rate doubles every four days.
b. The claimed death rate is around 2%. However we question that because the infection rate curve is at least three weeks ahead of the death curve ( 20 days), whilst the infection curve has been rising at the rate of 100% per four days, that places the infection rate 300% ahead of the death rate suggesting that the real death rate is much higher possibly in the 6-10% range. Indeed reports from Wuhan have reported death rates increasing to above 4%
c. The ratio of death to recovery suggests that once the illness takes hold, it takes considerable time and care to nurse victims to good health. This suggests that enormous medical resources will be required as people fall sick, to nurse them to health and when the health care saturation point is reached, death rates will rise. The concerns with the spread of disease to Africa and India personify this pattern
3. The un-official leaking out stats are truly alarming
a. There will be a delay between testing and results of say 4 days
b. There are many reports of deaths that have not been recorded to be caused by the Virus
c. Many people will be sick and in isolation, not daring to notify the authorities. In Shanghai, this has been made illegal and no doubt the trend will spread countrywide.
d. Whatever numbers for the epidemic the Chinese state has, will not be released for at least a week, to allow them to try and control the PR story and reduce panic.
e. Thus we assume the official stats are at least ten days old and even then could underestimate the real stats. This would, as of Sunday, put the real numbers at 10 times those reported which is consistent from individual reports on the ground.
4. The Failure of Quarantine measures in China and Globally
a. The attempts to get China back to work and into production will inevitably fail, as all it has and will do is to further spread the virus. Our conclusion is that the whole of China will have to go into lock down.
b. The vast quarantine measures in China will mix normal flue victims with infected patients, increasing the spread. The continuing build-up of the conversion of stadiums and sports halls to mass quarantine and care facilities demonstrates the ongoing severity of the crisis.
c. The rumours that have come out of China mention uncertainty as to how the virus is spread, and indeed the image of street de-contamination attests to a degree of confusion. One answer could be that its incubation period is longer than we currently suspect.
d. Meanwhile for those quarantined on a cruise ship in HK and off Japan, one can only sympathise, as they share the same air-conditioning units and the ships are very probably going to spread the infection. Such measures show how concerned the Chinese and Japanese government really are at this stage.
e. Globally we fear that the measures to protect against Chinese travellers spreading the disease have been put in place too late. But most importantly the real danger will come from western travellers that have recently visited business, communications and leisure hubs such as Singapore and Bangkok and mixed with infected Chinese and unknowingly.To then travel home and infect swaths of tertiary victims. The delay in the symptoms is such that the health services will always be one later behind the spreading front of the disease. The Brighton case in the UK is just such an example. Sadly very few Governments will be prepared to lock down their nations in time to prevent this process so a repeat of China Nightmare globally.is now all but inevitable
5. The economic impact - 5 months of the pandemic expanding.
a. Stage 1- The shut down of the Chinese economy is almost complete depriving the world of 17% of its GDP
b. Stage 2- The shortage of parts and equipment will shut down plants across the world further reducing global production
c. Stage 3- The infection will spread to other nations generating secondary infection clusters, locking down international travel first from China and then from Asia and then worldwide. However, I fear that even such measures might be imposed too late, as demonstrated by the third UK victim who has visited Asia and not China as have numerous others globally
d. Stage 4- Other nations will have to impose internal lock downs shutting down their economies
e. Stage 5- The introduction of an effective vaccine on a global scale after 3-5 months that could take months to make and distribute.
Our conclusion is that although the western markets have had their rose-tinted glasses on, with their gaze fixed on the US equity bubble, the Wuhan virus will be the catalyst that turns the markets potentially very sharply to the downside. For any who doubt that this is possible, please have close look at Tesla's stock chart, with its shorts squeeze driven peak, made only a few days back.
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