In this Issue
The Willy E. Coyote Moment: How COVID-19 Changes the World
-More Willy E. Coyote Moment!
-Uncertainties from COVID-19 are Likely to Prevail
-COVID’s Philippines Infection and the Impact to the Economy
-PSYEi in the Shadows of 1997 or 2008? Sy Group Index Weight Zoomed to 35.7%!
The Willy E. Coyote Moment: How COVID-19 Changes the World
Reading about claims by some stock tout that an end to the outbreak of COVID-19 would provide the investing public easy profits reminds me of the Wall Street Journal’s article “Beware of Wall Street's Armchair Epidemiologists”.
From our layman’s understanding, while COVID-19 has engendered a public health crisis on a global scale, many other factors have been contributing to it.
As I previously noted,
Aside from complexity, issues related to government responses, transmission channels (e.g. airborne or not?), detectability, availability of applicable testing kits, medical supplies and workers, quarantine centers, the number and the quality of public health centers, the monitoring, surveillance and control measures, the accuracy of disclosed cases, transparency of information, public awareness and precautionary measures, as well as, compliance with medical treatments, and many more, have influenced the rate and scale of dispersion of the coronavirus.
Batten Down the Hatches! Global Recession Ahead: The New Coronavirus Pushes China’s Economy to a Freefall! February 16, 2020
Aside from the multiplicative process from the disease itself, again, the other factors to watch are the degree and depth of the social and the political response to it and its impact on the economy.
For instance, to combat COVID's spread on allegedly less than 100,000 of infected people, the Xi government reportedly imposed a health gulag restricting movements of some 400 to 760 million people! One might like to ask why the overkill?
When some 5% to 10% of the global population have been immobilized, especially from the second-largest economy that depends heavily on the global supply chain, naturally, disruption on commercial activities on such a scale translates to serious economic consequences. Think of it, if 100 people produce USD 10 of output for a total of USD 1,000 representing the 'economy', all things equal, would a loss of 5 to 10 workers bring about “growth” or a deficit?
Such common-sense thinking hardly ever seems to sink into those pretending to use complex methods of analysis.
More Willy E. Coyote Moment!
But from my end, facing a world hocked to the eyeballs with debt, such massive displacement represents the tipping point: The Willy E. Coyote moment!
For China, the loss of commercial activities covering 28.5% to almost half of the population should cause an economic meltdown.
And that’s exactly what we are seeing now.
As Bloomberg’s Tracy Alloway tweeted, China’s manufacturing PMI drops to the lowest *ON RECORD*, coming in at 35.7 for February (below 50 marks a contraction). The non-manufacturing PMI was even worse, falling to 29.6.
China’s auto sales dropped by a staggering 83% covering February 17 to 23 reported the state-owned Global Times.
And because of its principal role in the global supply chain, many firms around the world have been shaken by the dislocations in China.
For instance, this stirring quote from a business leader by Econolib’s Alberto Mingardi points to a looming shortage in many products.
In this Wall Street Journal piece Joerg Wuttke, president of the European Union Chamber of Commerce in China and chief local representative for BASF SE.), comments that, “When the last ships reach our harbors in a week or 10 days, that will be it from China…Then you will see shortages on the shelves of Europe. The impact has not really been felt yet.”
Countries that dependent on China will likely function as the first-order impact. Included in it are production chains in the pharmaceutical industry.
From the CNN (February 28): On Tuesday, the FDA warned that these types of shortages could happen, and said it was monitoring the situation closely. The agency identified 20 drugs that either solely sourced their active pharmaceutical ingredients, or produced finished drug products, from or in China. The unnamed company that notified the FDA about a shortage said the problem is the result of an issue with the manufacturing of an active pharmaceutical ingredient used in the drug. Made in China: The US relies heavily on Chinese-made drug ingredients, medical devices and drugs that are used in humans and animals. As of 2018, China ranked second among countries that exported drugs and biologics to the US, and ranked first for medical devices, according to the FDA.
And the adverse impact ripples from the first order to the next and so forth. And the border closing approach to COVID-19 has brought to fore vulnerabilities of globalization.
Hence, COVID-19 is about to bring about massive changes in the global economic structure, it is on the path to accomplishing what the trade war was supposed to do: a resurgence in economic nationalism.
In the meantime, vestiges of globalization are being shredded apart. More countries are breaking business contracts by opting to declare a “force majeure”.
From China Daily (February 21) China has issued 3,325 force majeure certificates as of Friday to protect companies from legal damage arising from novel coronavirus epidemic, data released by the China Council for the Promotion of International Trade showed. A total of 97 trade promotional agencies and industry chambers have issued these certificates for Chinese exporters across various sectors, covering a total contract value of 270 billion yuan ($38.39 billion).
From Reuters (February 28) Companies can declare a “force majeure” over the coronavirus outbreak when dealing with contracts involving the country’s small-to-medium sized enterprises (SMEs), French Finance Minister Bruno Le Maire said on Friday… The term “force majeure” refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations.
From Reuters (February 18) Singapore construction firms are asking for advice about whether they have the option of invoking force majeure clauses in building contracts as the government turns away or quarantines Chinese labor to stop the spread of the coronavirus, lawyers told Reuters.
When a counterparty declares a force majeure, what would happen to the products and finances of a supplier/s, who used the Purchase Order to borrow money from banks to manufacture and ship? Who would absorb the losses? Would these not impair trust in business relations?
The continuing spread of COVID-19 worldwide won’t just disrupt international supply chains associated with China, but as noted above, the global supply and demand chains, as well as the domestic chains linked to them.
Uncertainties from COVID-19 are Likely to Prevail
In the interim, given the lack of understanding of the disease, its multiplicative process will likely continue, and its impact asymmetric, which should largely be dependent on many conditions enumerated above. That’s unless working vaccines can be developed soon enough.
Even the Philippines’ Department of Health admitted on a recent tweet: “Coronavirus is evolving. By the day, there is new information and new reports. For now, it is being studied. In any case, we are prepared. We have prepared long before because nothing is certain with this virus yet”
World authorities have expressed alarm over the possibilities of a disorderly domestic outbreak (reinforcing its Pandemic character):
February 29 The Hill: Washington Gov. Jay Inslee (D) declared a state of emergency in the state Saturday just hours after he announced the first death in the United States from the coronavirus. The declaration directs state agencies to use all resources necessary to prepare for and respond to an outbreak and allows the use of the Washington National Guard if necessary.
February 27 CNBC: World Health Organization officials warned that member nations need to prepare for COVID-19′s arrival after seven countries in the last day reported their first cases.
“No country should assume it won’t get cases. That could be a fatal mistake. This virus does not respect borders,” WHO’s top official said.
February 26 ABC: U.S. health officials issued a strong warning about novel coronavirus on Tuesday despite remarks from the Trump administration stating they have the situation under control. Until now, health officials said they'd hoped to prevent community spread in the United States. But following community transmissions in Italy, Iran and South Korea, health officials believe the virus may not be able to be contained at the border and that Americans should prepare for a "significant disruption."
February 27, France24: President Emmanuel Macron said Thursday that France was preparing for a jump in the number of coronavirus cases, adding "we are going to have to deal with it as best we can." "We are facing a crisis, an epidemic that is coming," Macron said while visiting staff at the La Pitie-Salpetriere hospital in Paris, where the first French person carrying the new coronavirus died Tuesday.
Rather than pretend to know where the trajectory of this pandemic is headed for, we’d look at the incidence curve.
And as Jim Bianco astutely observed, “The Chinese Government desperately wants everyone back at work ASAP. This is their risk now.” The risks of a second wave from a second wave, similar to the Spanish flu.
Global outbreaks have led to a feedback loop on China. Previously, the Chinese government complained about nations shutting borders with them. Now they are beginning to tighten the mobility noose on nations suffering outbreaks.
From SCMP: (February 27) China quarantines 63 Aeroflot passengers after traveller from Iran becomes its first imported coronavirus case.
CNBC’s Eunice Yoon: (February 27) Beijing starting to see #coronaviru cases imported back to #China. #Ningxia region reports case of patient who came from #Iran. Local officials say person traveled Feb 19 then went to Moscow, Shanghai, Lanzhou, Ningxia. Wore a mask. Authorities looking for close contacts.
And worst, inline with the broadening cracks in globalization, discrimination and racism have been rearing its ugly head.
And as much as uncertainties emerge, so will opportunities.
COVID’s Philippines Infection and the Impact to the Economy
In the Philippines, more than 400 Filipino crews from the ill-fated cruise ship Diamond Princess have been repatriated and quarantined in Tarlac. As discussed last week, All it takes is ONE error, probably from an undetected super spreader, similar to the UK and the South Korean experience.
A study presented by Kaiyuan Sun, a Postdoctoral Fellow; Infectious Disease Modeler; Network Scientist; Former PhD at MOBS lab @NUnetsi; Past trainee @CIDIDteam showed that infection rates at Diamond Princess have been steep at 17% (and has grown). And the infected had slightly more asymptomatic cases relative to the symptomatic cases.
13 of those quarantined have exhibited symptoms of COVID infection, which has probably moved the Department of Health to make a U-turn and convince the Department of Tourism to abort or postpone their Mall festivities campaign this March. As of this writing, all were tested negative. While this is good news, tests may not be accurate. Furthermore, as the study shows, perhaps, some of them could be asymptomatic carriers.
Given that the evacuees traveled in two planes, likely infection/s might have spread from there. And there may actual cases in the coming week/s. And again, the likelihood is that some of them may continue to exhibit no symptoms until their release.
Also, members of the flight crews that brought the crew home, who were not quarantined, could be sources of transmission. As in a case in the US, the lack of training and or inadequate protective equipment caused a local infection to a medical worker attending to the Wuhan evacuees.
To see how complacent locals will react to reports of domestic transmissions should be interesting.
Nevertheless, the economic impact from the COVID-19 has already surfaced.
PAL announced that it would lay off 300 employees. According to the Inquirer: (February 28) Flag carrier Philippine Airlines (PAL) on Friday announced it will lay off 300 workers due to revenue losses in the wake of the imposed travel ban in countries hit by the COVID-19 outbreak. “Under the program, PAL implemented a voluntary separation initiative for long-serving employees and a retrenchment process completed on February 28, resulting in the separation of about 300 ground-based administrative and management personnel,” a statement issued by PAL read.
Because of dependence on China, domestic output would slow too. From the South China Morning Post: (February 29) The Philippines also has not been spared a drop-off, with the total volume of containers from China falling by 62.5 per cent in the first 18 days of February. Christine Pardinas, president of the Supply Chain Management Association of the Philippines, told local media that a “good percentage” of the Philippines’ imported goods and raw materials came from China, and that there would be a significant
And so would demand for them.
Again, this would be the impact on the first order, or those directly affected. Like the epidemic, it should spread to its indirect linkages or chains across several industries.
COVID-19 will expose the underlying fragilities embedded from the big government bubble and the race-to-build- supply bubble.
PSYEi in the Shadows of 1997 or 2008? Sy Group Index Weight Zoomed to 35.7%!
Back to the stocks, Bloomberg’s “History’s Fastest Crash is the High Price for Unbridled Optimism” is an apt description of the current events (particularly stocks of the West).
While the natural reaction to crashes have been sharp bounces, the Willy E Coyote Moment suggests a scenario of “look out below” more than a bottom.
And while central banks can be expected to mount an aggressive rescue, monetary easing will not produce working vaccines, immunize people from COVID-19, immediately normalize broken supply chains or create instantaneously an alternative, replace all incomes lost, reopen factories, and provide workers to these in places experiencing lockdowns or a surge in virus, give confidence to people traumatized by the havoc created by it or by policies adapted on their community by their political leaders and more.
COVID-19 should prove to be a powerful countermeasure force against central bank panacea.
Yet one can expect the BSP to drastically cut rates, add to its RRR reduction, accelerate its QE and apply more relief from capital adequacy regulations.
Finally, the domestic index appears to be in a free fall, resonating with the declines of 2008 and 1997. Of course, the index has changed from the said periods, so the present cycle and the past can't be a pure apple-to-apple comparison.
The most important insight is that this week’s 7.9% plunge has only ballooned the Sy Group’s weightings to 35.7%! SM’s 16.5% weight is now larger than the 15.8% share of the last 15 issues. The top 5 issues now have 50.85% share!
Simply stated, the recent fall affected the broad universe but barely the Sy Group. Last week’s crash only compounds on the distortion of the index, which points to further deterioration over time.
