The Problem Isn't the Corona Virus Per Se

[Zhong Lu + 845]

The problem with the markets right now is people are afraid of how other people will react to the corona virus.  They're afraid others are going to sell, so they sell first.  

[El Nikko + 2,145]

5 minutes ago, Zhong Lu said:

The problem with the markets right now is people are afraid of how other people will react to the corona virus.  They're afraid others are going to sell, so they sell first.  

They are probably also afraid of the effects on supply shortage after Chinese factories have been shut down for so long, I would imagine that is the real threat and not a few people getting a bit sick.

[wrs + 893]

For now I am less concerned about the corona virus than I am the knock on effects of interrupted cash flow to many, many entities that will not be able to make their rent or payrolls or debt payments.  This kind of interruption can definitely cause a problem with the worldwide debtberg.  Keeping that thing serviced has kept everyone in the world working flat out to feed the debt monster.  Now that it's not getting fed enough, the outcome is likely to be spectacularly bad, everywhere.

Edited March 7, 2020 by wrs

[0R0 + 6,251]

34 minutes ago, wrs said:

For now I am less concerned about the corona virus than I am the knock on effects of interrupted cash flow to many, many entities that will not be able to make their rent or payrolls or debt payments.  This kind of interruption can definitely cause a problem with the worldwide debtberg.  Keeping that thing serviced has kept everyone in the world working flat out to feed the debt monster.  Now that it's not getting fed enough, the outcome is likely to be spectacularly bad, everywhere.

That is the big point. That is why credit spreads are breaking out.

Why repos are breaking down and the Fed's $100 Bil daily overnight and term repos are oversubscribed by 40%. The physical economy is immediately and directly mirrored in the Financial system. All the work in progress, stuff on ships, orders and contracts have a financial component. The delays in supply are directly reflected in the need to extend credit duration from the normal 90 day to 180 day. That is immediately reflected in the money markets and demand for same day cash (100% reserved) and thus in repos, both local and international and in currency swaps for international trade and finance. Much of it had been from Chinese institutions in Q3 and Q4 after Baoshang Bank went belly up, and panic reigned in the China interbank market. The policy response was bail ins, meaning that nobody of size can hold their cash inside the banking system in China. So they are looking at wherever else they can park their cash. The Eurodollar money market system is likely where they are trying to go, but SAFE (China forex regulator) is standing in the way. In any case, that means that demand for dollars is very high in the Chinese system and the best way to raise it is to repo treasuries and other AAA assets.

The supply chain delays are not only increasing short term funding duration but also volume as inventories are growing to assure future supplies are available rather than just in time. 

Long term credit demand will grow as soon as activity is resumed as China is now deemed radioactive for business and has to be avoided at all cost. Every Pharma company is looking to source from India and the USMCA geography to duplicate Chinese pharma precursors production. Electronic and mechanical parts production are going to rush out of China to be duplicated around the planet in regional supply chains rather than global ones. Assembly work is going to move out of China FAST. Flextronics is not going to continue making Apple products for the global market in China. Only China production for the Chinese market will remain. 

Trade insurance costs with China will be a higher hurdle than any advantage China offers in labor or regulatory costs. 

Now it only remains to be seen how China deals with the internal financial pressures it has created and are now growing in large leaps as the country was mostly offline for a whole month and recovery is still slower than people expected. The big test is whether the provinces that scheduled business to return online on Mar. 10 actually manage to run. 

Next up is whether new orders show up. They were down far more than production was on the PMI reports both official and from IHS Markit and Caixin. Only 24% were showing increased orders. 

I am surprised that China is directing its SPR accumulation as aggressively as it has since their forex position is not strong enough. Even with investment flows from forced inclusion of China in MSCI (Morgan Stanley) and Bloomberg indices, there is no reason to expect sufficient dollar inflows with the export machine creaking and orders down sharply after only mildly going positive in Dec and being weak for the whole preceding year.

 

 

[0R0 + 6,251]

There is also a problem of inverted price structure trends as Buy price PMI remains well ahead of PMI PPI or sell prices. 

 

Meaning that their manufacturing margins are being compressed with 44.1% down from 49% in Jan reporting better sell prices while 51.4% down from 53.8% are reporting higher input costs (buy prices). 

I wonder if China manufacturing will remain cash flow positive at all. 

[Gerry Maddoux + 3,627]

2 hours ago, wrs said:

For now I am less concerned about the corona virus than I am the knock on effects of interrupted cash flow to many, many entities that will not be able to make their rent or payrolls or debt payments.  This kind of interruption can definitely cause a problem with the worldwide debtberg.  Keeping that thing serviced has kept everyone in the world working flat out to feed the debt monster.  Now that it's not getting fed enough, the outcome is likely to be spectacularly bad, everywhere.

I agree completely. How do you see this ending?

I'll offer my own view: President Trump already leaned on the Federal Reserve to drop rates. He'll lean harder. If we don't go negative, making the debt service a flatline just above zero, he'll simply replace Powell with someone who will, and not only that but will also buy equities through the Federal Reserve. That's coming in the next two months. And Trump doesn't really give a damn about what's happening in the rest of the world, not that I blame him. 

We need to end ties with China immediately. As in the next three months. Give massive rewards to those in the US who will build the middle-man factories. The hell with China, they've sent us one too many coronaviruses! Any Chinese who want to come over here, and can get here, let them come in if they pass the Ellis Island tests: not sick with anything communicable. I actually like the Chinese that I know, just not the communist leaders.

Make us a nation unto ourselves, indivisible, just like the pledge says. Well, okay, maybe let California leave and become the land built of many islands colliding from the drift. Subsidize the hard hit industries, just like we do the farmers. Give them interest-free loans--we're just about there anyhow. 

Let's just go on being America, okay? Land of the free. We'll take your huddled masses, as long as they haven't tried to kill us off by either coronavirus or shrapnel. Well, that pretty well limits our immigration policies, so there you go . . . all is good. 

[El Nikko + 2,145]

What I would like to know is is there any likelyhood of a financial collapse? Certain websites love to go on about all the time.

Is there any possiblility of another 2008? If not then a recession no matter how painful can only be a good thing to straighten out the stock market etc.

Working in the oil industry, I can already see this is going to be yet another bad year for work but we do have a few small/medium sized clients who are still drilling and maybe making the best of cheap services.

[wrs + 893]

1 hour ago, El Nikko said:

What I would like to know is is there any likelyhood of a financial collapse? Certain websites love to go on about all the time.

Is there any possiblility of another 2008? If not then a recession no matter how painful can only be a good thing to straighten out the stock market etc.

Working in the oil industry, I can already see this is going to be yet another bad year for work but we do have a few small/medium sized clients who are still drilling and maybe making the best of cheap services.

I think it's better than 50%, like 60-40 but I hope I am being pessimistic.  It really depends on how bad we get hit here in the US. 

[wrs + 893]

1 hour ago, Gerry Maddoux said:

I agree completely. How do you see this ending?

 

Not well.  It's going to slow a lot of things down and even if there aren't a lot of people sick in the US, the medicine will be as bad as the disease.  By that I mean all the precautions against the spread of the disease will just kill big parts of the economy and that may cause a financial debacle because of extreme leverage in most sectors of the economy, particularly the consumer.

[0R0 + 6,251]

2 hours ago, wrs said:

Not well.  It's going to slow a lot of things down and even if there aren't a lot of people sick in the US, the medicine will be as bad as the disease.  By that I mean all the precautions against the spread of the disease will just kill big parts of the economy and that may cause a financial debacle because of extreme leverage in most sectors of the economy, particularly the consumer.

The US consumer is far less leveraged than they were in 2008. It is corporations that are in trouble, particularly our darling oil companies. We talk incessantly of Shale oil Fiasco, but ignore what it means for the financial system, when a large chunk of credit goes bust. The biggest chunk of credit growth in the US was corporate and particularly energy and Federal debt.

Debt/GDP has not gotten any worse, and our Debt/M2, or ability to cover debt with available cash is still stretched despite improving substantially. The Fed has not cured the problem of being tight for 40 years with a couple of years' worth of low level money printing. China's M2 is double that of the US at current exchange rates, and triple it in relation to GDP. Yet the Fed has to be dragged kicking and screaming to address liquidity problems its legacy has created. 

US finance is less fragile than in 2008. Global finance is much worse, particularly China. You can see the household debt in the big picture at the bottom as it has fallen in the US (violet) and risen in China (black) as fractions of GDP. You can see that China is continuing to lever up in the top red line, and that M2 is a large chunk of it (brighter red line). This is without counting the huge leverage in the off the books  credit from the shadow banking boom period 2016-17. 

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Edited March 8, 2020 by 0R0

[Zhong Lu + 845]

Afraid I bought UCO too early.  Heading to hills.