The novel (COVID-19) coronavirus that swept through China is on the cusp of turning into a global pandemic, putting major pressure on global manufacturing—especially through disruption on the global supply chain—and, now, the much larger services sector as consumers cut back on travel, hotels, dining and large events.
Today, the Dow experienced its worst day since 2008 by sinking more than 2,000 points or 7.7%. The S&P 500 was also down by 7.6%, with such a massive sell-off that circuit breakers were triggered earlier this morning putting a halt to trading for 15 minutes.
This is a legitimate "black swan" event and markets are reacting in full panic mode to this surprise, Jim Puplava told listeners in a special Financial Sense Newshour podcast update.
From Good to Bad Overnight
At the beginning of 2020, economic prospects were strong and indications were it would be smooth sailing this year. Nothing was obviously wrong, but a black swan in the form of this novel coronavirus came along and kicked markets in the teeth.
The perception now is that this coronavirus is unstoppable, and that we have to wait for it to run its course. The question at this point is how bad the panic becomes and what the ensuing damage to the economy looks like, Puplava stated.
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The largest impact we’ve seen so far is disruption to the global supply chain. The U.S. gets about 20 percent of its intermediate goods and a large portion of its drugs and vaccines from China. Right now, China is running at only about 50 percent capacity, which means that shortages will likely be felt in a matter of weeks if they don't begin ramping up production soon.
“The good news is, [when it comes to trade dislocations from the global supply chain getting disrupted] it will have the least impact on the U.S. because exports and imports only account for about 13 percent of U.S. GDP,” Puplava said. “However, we have to watch what this does to the mind frame of consumers. … This is an epidemic. … Even some retailers are starting to see some of the impact. People are maybe reluctant to spend as much time in public. … Economists are already talking about first-quarter GDP, saying that we may see a 1 percent print in the U.S.”
QE on the Way
The Federal Reserve's next scheduled meeting is March 17-18, and the probability of two or three rate cuts have risen substantially over the last few weeks. We saw an emergency 50-basis point cut earlier this week, and more are probably on the way.
As of March 9, the Fed fund futures market is predicting a 72% probability of another 50-basis point cut on March 18, which would bring the Fed funds rate to 0.25-0.50%. Looking out to their next meeting in April, the futures market is currently pricing in a 51% probability that the Fed cuts rates all the way back down to 0%.
Additionally, at some point this year, we’re probably going to see quantitative easing. Bond markets are confirming that this is the case, Puplava stated. We’ve already seen the 10-year Treasury note yield fall below 1 percent, and rates may be headed to negative territory.
10-year Treasury yield hits new all-time low of 0.318% amid historic flight to bonds (CNBC)
The benchmark 10-year Treasury yield resumed its historic slide on Monday as investors continued to punish risk assets like stocks in favor of the safety of bonds between an all-out oil price war and contagion fears surrounding the coronavirus.
The yield on the benchmark U.S. 10-year Treasury briefly touched an all-time low of 0.318% in overnight trading, adding another 30 basis points to an unprecedented fall in the key interest rate. That rate was above 1.5% as recently as mid-February.
The 10-year yield, in particular, holds outsized importance in the U.S. economy for its use as a benchmark for mortgage rates and auto loans. The 30-year Treasury yield also hit a record low of 0.702%, breaching the 1% threshold for the first time in history.
However, even coordinated action from the world’s central banks may not be able to fix this problem, Puplava noted, because we are looking at supply chain disruption, and ultimately he expects a global reorientation of the supply chain.
This shift is likely to be sustained, he noted, and it will effectively be permanent. Puplava expects this realignment to play out over the next decade or so.
“That's why we're calling this the coming age of chaos and disorder over the next decade,” Puplava said. “This is something that monetary policy is not suited for. It's more suited for a financial-type crisis Black Swan than it is a production- and supply-type Black Swan, which is what we're seeing with this coronavirus. … One of the biggest things that's going to change is what happens on the manufacturing front in the next 10 years.”
Three Factors Driving Realignment
The global supply chain disruption and reorientation that Puplava sees coming is not only a function of what is happening with the novel coronavirus sweeping the globe. Rather, he pointed to three factors that will drive what he sees as the inevitable changes coming to the global supply chain and the world economy.
The coronavirus is the first factor at play here, acting to accelerate global supply chain realignment. It is important to understand that we are looking at a global growth slowdown, being driven by reduced demand from China, and also the massive supply chain disruption we are witnessing in real time.
With the world’s second largest economy operating at 50 percent capacity, the knock-on effects have become immediately obvious. Globalization has left us with a situation where most companies around the globe are operating with just-in-time inventories.
Consumer demand and tourism are also already being impacted. Hotels, restaurants, retailers and a wide variety of businesses besides these are probably going to feel the impact.
All of this is occurring during a period of reverse globalization, as indicated by President Trump’s tariffs. This second factor was already pushing realignment away from China, even before the virus hit.
The third factor at play is the U.S. realignment away from policing world trade, Puplava noted. This will force governments around the world to reorient their budgets, and we could see export-dependent countries such as Japan and Germany begin to rebuild their navies to ensure global trade.
“These are the three forces that are reorienting the global supply chain and it's going to be permanent,” Puplava said. “It will probably take place throughout this next decade. … The coronavirus is a supply chain reorientation accelerator. … In periods like this, we look for opportunities, whether it's buying bonds that funds are dumping at steep discounts, or it's blue chip stocks that pay dividends of 4 to 8 percent. Stay the course, have a plan and stick to it. … In the end, how your investments behave is much less important than how you behave. The last thing you want to do is react emotionally.”
By Ethan D. Mizer