Dear Reader, It’s been another rough night on global stocks markets. US markets are still trading as I type, but let’s take a look at the scorecard so far… Dow Jones Industrials: Down 2.6% S&P 500: Down 2.4% NASDAQ: Down 2.1% German Dax: Down 1.9% Gold: Down 0.7% Brent crude: Down 3.1% When business cycles turn, it is usually slow. Central banks can see it coming. They can manipulate it. But when a black swan event like a deadly virus spreads throughout the world, the impact on economic growth is much more severe. It stops, dead in its tracks. At least it does for those countries where the fear of contagion is greatest. That’s China, obviously. But the virus is now in South Korea, Iran and Italy. The Australian reports: ‘European countries have upped their coronavirus preparations as a further four elderly Northern Italians died overnight and confirmed cases of the virus have now been detected in Croatia, Austria and Switzerland. ‘In Iran, the deputy health minister Iraj Harirchi tested positive for coronavirus, hours after he appeared on television wiping away sweat and coughing, to insist the Iranian government had the outbreak under control. Another Iranian parliamentarian, Mahmoud Sadeghi, is also suffering from the virus and said on Twitter: ‘My corona test is positive...I don’t have a lot of hope of continuing life in this world.’’’ As I said yesterday, it’s not the virus itself leading to this rapid slowdown. It’s the fear of contagion. People stop travelling, moving about, eating out etc. Less movement of people = less movement of goods and services = lower economic growth. Before I explain why stock markets are particularly vulnerable right now, let me give you a health tip. This may or may not be useful. All I can say is that I haven’t (touch wood) had a cold of any decent severity for years. And rightly or wrongly, I put it down to… Cold showers! By that I mean finishing a shower with a few minutes of cold water. It’s hard at first. Start with 10 seconds. The next day do 20 seconds. They day after do 30 seconds. Then it becomes easy. And invigorating. What’s the point? It strengthens your immune system. The idea is to put your body under a small amount of stress each day. It makes it stronger. Look it up. The health benefits are immense. Right then, let’s get back to the markets… There are a few reasons stocks are reacting so negatively to the spreading virus. Obviously, the expected hit to growth and earnings means there is a fundamental change to valuation models. The odds suggest that — as bad as it seems now — the virus will eventually be contained. Therefore, the earnings dip will be short lived. That means this pullback is a buying opportunity! But wait… This is happening at the tail end of the business cycle. It’s already been the longest expansion in US history. The bull market is also the longest in history. But this time, central bankers can’t avert a cyclical slowdown. They will try, but the impact on earnings from this virus fear will be real and perhaps much larger than expected. The other point to note is that the global economy is now more highly leveraged than it has ever been before. As at 30 June, 2019, total global debt totalled US$250 million, according to the International Institute of Finance. Meanwhile, the value of global equity markets was around US$85 trillion at the end of 2019, according to research from Deutsche Bank. That represents a leverage, or gearing ratio of 200%. During an upswing, that type of leverage works wonders on equity values. But leverage works both ways. Watch it go into reverse as company earnings come under pressure. Does this mean you should panic and get out of stocks altogether? The answer to that depends on your individual circumstances. I certainly know what Vern Gowdie’s answer is. Vern was urging you to panic weeks ago. It’s looking like a great call. It’s not an easy question to answer. I have a detailed report on it going out to subscribers of my advisory, Crisis & Opportunity, today. So I’m not going to divulge too much. But in short, I think the market does have a fair bit more downside to go in the months ahead. It won’t happen in a straight line though. There will be hope-fuelled rallies along the way. And there is always the chance that the spread of the virus slows and then stops. That will put a stop to the selling very quickly. In short, understand that you’re operating with very little certainty right now. While that’s always true in the markets, it is particularly true today. This virus could decimate the global economy, or it could be all over in a matter of months. This uncertainty is manifesting in lower stock prices, as it should. There will be rallies here and there, but investors will use them to get out of positions. I think you’re seeing the overall trend of the market starting to change. The top of this great bull market is in. Regards, | Greg Canavan, Editor, The Rum Rebellion |
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The Second Quantum Revolution? >> FULL STORY HERE | .......................................................................... Going to Hell in a Handcart By Bill Bonner ‘Stock Market starting to look very good to me!’ Donald J Trump Yesterday, we watched the screen. The Dow was down 850 points at 11 am. By noon, it had lost another 50 points. By 1 pm, it was down 1,000 points. Now it was getting peoples’ attention. By the close of the trading day, the market sell-off had become mainstream news. CNBC: ‘The Dow Jones Industrial Average closed down 1,031 points, or 3.55%, at 27,960. The S&P 500 slid 3.4% to finish at 3,225, while the Nasdaq Composite closed 3.7% lower at 9,221. ‘It was the Dow’s biggest point and percentage-point drop since February 2018. The Dow also gave up its gain for 2020. The S&P 500 also had its worst day in two years and wiped out its year-to-date gain. ‘“The second-largest economy in the world is completely shut down. People aren’t totally pricing that in,’ said Larry Benedict, the CEO of The Opportunistic Trader, adding a 10% to 15% correction in stocks may be starting. He also said some parts of the market, particularly large-cap tech stocks, appear to be over-owned. ‘It seems like there’s much more to come.”’ What will sink the US stock market, we don’t know. But something will. When it will happen, we don’t know that either. But some time it will. And then what? World of Doubt and Ignorance Thank God for ‘like’. ‘Is’ is okay for science, technology, and math and simple things, such as two plus two is four. But if you want to know why stock prices are falling…why you didn’t get a raise…why your wife is mad at you…or why the country is going to hell in a handcart, you need the comparative preposition, ‘like.’ Like is useful even for things you’ve never personally experienced. This morning, for example, you may feel like you are 90 years old. You know what that means, even if you’ve never been 90 years old. ‘Like’ is what connects us to the uncertain world we live in…a world of doubt and ignorance. It’s a world where we know next to nothing for sure. And yet, there are recurring patterns. Which is where ‘like’ comes in. ‘Like’ is how we recognise when it is getting cold…it feels like it. And how we know someone is being a complete jackass…because he acts like a complete jackass. It is when we know it is time to get out of the stock market or leave a party…because it feels like it’s time to go. This morning, we are looking at a lot of charts…and all show a familiar pattern. Lines bounce and bop…for months, years…and then, suddenly, drop in a straight line. Most of those charts come from the Far East… where we see everything seems to be dropping like a stone in a well. But the Far East is now the world’s largest economic bloc. And what happens there is not likely to stop at the Yangshan Deep Water Port Terminal. If it looks like a duck… There’s trouble afoot, in other words. And afloat. On cruise ships. And on freight ships. The coronavirus is no threat to the human race. It could run around the world, killing 2% of the population, and almost everything would still function as before. Two percent is marginal. On the Monday after the Super Bowl, for example, some 11% of the entire American labour force didn’t show up to work. But nobody wants to be one of the two-per-hundred who drop dead. So, they avoid public places. They call in sick from work. They don’t go shopping. The US economy only grows by about 2% per year. But that’s with all the switches on. Now, imagine the shopping malls are shuttered. Imagine there are no football games. Imagine that people refuse to go to work at all…or refuse to board an airplane… …What would happen to airline stocks? To retailers? To restaurant chains? Imagine that the whole economy is locked down, like much of China. Then what? Sales, profits, earnings — all collapse. Imports, exports…restaurants, movie theaters, bus stations — all empty out…airports, too. What you have then is not just a setback; it’s like a depression. CNN: ‘The coronavirus continues to spread, and there are signs that some of the world’s top economies could slide into recession as the outbreak compounds pre-existing weaknesses.’ It’s those ‘pre-existing weaknesses,’ that we’ve been writing about in these diaries. But the stock market is priced as though there were no weaknesses at all. Or to put it another way, there are so many pre-existing weaknesses that any infection is likely to be fatal. That it is what it was like in 2000…or what it was like in 2008. ‘Like’ is not as precise or as reliable as ‘is’. But in love, war, politics, and economics…it’s the best we can do. As the lawyers say, if it looks like a duck, if it waddles like a duck… and it quacks like a duck…dammit…it is a duck. Whether this is a duck, we don’t know. But we’ll keep the orange sauce at-the-ready. Stay tuned. Regards, | Bill Bonner, For The Rum Rebellion |
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