I am sure that most of you have heard about Apple’s warning about not being able to meet sales projections this quarter because of the virus outbreak in China. It appears that this news has finally shed some light on how serious this situation is. It appears that even the US stock markets are paying attention- central bank “printing” or not.
I believe that unless this situation changes meaningfully (and shortly) the world is in for a nasty surprise. All of the supplies and goods that we have taken for granted for decades just may not be available for a while. Are YOU prepared for that?
I am not an expert on infectious diseases so I can’t comment on how widespread this may become or what danger it may pose for the rest of the world but I can see how it is affecting China economically and I can project that if it doesn’t come under control shortly the entire world may suffer.
Let’s remember that China accounts for over 20% of the world’s GDP. The fact that between 400 to 700 million people are quarantined suggests that demand for cars, gadgets and most things that are not necessities is likely almost non-existent in the cities that are in virtual lockdown.
In addition, China has become the world’s factory. They supply many parts needed to assemble goods not only in China but also in much of the rest of the world also. Factories have closed in Serbia and South Korea because of a lack of parts coming from China. GM has also issued a warning that it may have to halt some production here in the USA because of a lack of parts from China.
I guess we shouldn’t worry about our jobs- the central banks will “print” the money that we need right?
While they are at it maybe they can “print up” some antibiotics- most of which are manufactured in China too! See the hubris?
We may also want to keep in mind how much Chinese citizens spend across the globe as they travel. With travel bans and quarantines this activity has slowed to a crawl. Cruise ships with passengers from China are being repeatedly denied entry to ports. As a matter of fact, according to Bloomberg, there are containers of frozen meat that are sitting in Chinese ports because there is nobody available to unload and ship the merchandise. It appears to me that this is a PERFECT example of how the central banks have misled everyone into thinking that more faux currency is the answer to every problem. It is in a situation like this that they are exposed. They can conjure up any amount of “money” they want but if there is no economy to produce, move and consume goods we all starve to death.
If people are not allowed to, or are too fearful to go back to work, not only do gadgets not get made but food does not get produced and shipped, supplies run short and many panic. I read an article the other day about an armed robbery- for TOILET PAPER!
This situation may be the black swan that many have been anticipating- and I still call this a black swan because a month ago there was not a person I am aware of who could have foreseen this- save a few “leaders” in China who may have done far more damage than good in covering this up to start with.
Personally, I am still fearful that this may be used as an excuse for a collapsing economy even though the global economy- and here in the USA also-has been collapsing at an increasing rate for at least 14 months now. There always has to be a reason. It can’t be that the central banks cause booms and busts to transfer assets to themselves and their cronies at OUR expense. It is always something else.
PRIOR to this episode the Baltic Dry Index was collapsing already. This means that marine traffic was collapsing in 2019. It fell from 2500 in August of 2019 to near 1000 in December 2019- at that time I never heard of Covid 19. Most of copper’s collapse has taken place this year even though there was weakness last year. Oil is another bellweather commodity that is struggling- more now than in 2019 but weakness was apparent long before this virus was news. Oil and copper falling in price generally mean a slowing economy. Less demand = lower prices.
In the meantime, it is reported that net income for S&P 500 companies DROPPED 7.5% in 2019 if 5 companies are excluded. (Microsoft, Amazon, Google, Apple and Facebook). That means that the other 495 are contracting. It appears that of these 5 only Apple actually produces a tangible asset. I am also aware that a lot of earnings per share growth is because of share buybacks and not necessarily growth in the underlying businesses. By the way, those “Big 5” increased their share buybacks by 10.5% in 2019 while the other 495 saw a 32% decrease in their share buybacks.
Even Charlie Munger (Warren Buffet’s 96-year old partner) has weighed in on the financial shenanigans taking place. I have written in the past about “two sets of books”. One for you and Wall Street to see (greatly exaggerating results) and another set for the IRS. The set for the IRS comes with rules about if you lie you can go to jail so those numbers are likely a lot more realistic. Of course, the financial game shows ONLY tout the numbers they want you to know. Otherwise, how could it ALWAYS be time to buy?
Mr. Munger said in a CNBC interview “I don’t like when investment bankers talk about EBITDA. It’s ridiculous. Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you are a flake”. What I believe he is saying is that relying on the massaged numbers you are exposing yourself to far greater risk than you are likely aware of. This may be the reason why corporate insiders are selling heavily right now- they know the truth.
Some major headlines today- at least in the alternate media- Macy’s bonds get downgraded to junk.
Wal-Mart misses earnings guidance as Christmas was not as strong as expected (Gee who called that one!) HSBC cutting 35,000 jobs.
Pier One Imports files for bankruptcy. These and many other stories are reports from a period PRIOR to the virus outbreak.
In the meantime, the Fed and most other central banks are “printing” with reckless abandon. Just yesterday (Feb 18th) the Fed popped $88 billion into the markets. That has become a daily reality lately. This is being done to give the illusion of liquidity, keep the bond rates low (the illusion of solvency) and keep stocks propped up along with other assets like real estate (collateral) to keep the bank’s loan books looking healthier than they likely are. Don’t forget the report I did a few weeks ago when the banks reported earnings and the only growth in all the large banks was in their trading results. Loans, etc. were falling across the board.
It has been apparent to me since December 2018 that any attempt to normalize rates or stop propping up markets with “money from nowhere” that has no value until a real asset is purchased- and creates NO wealth for anyone other than those who “printed” it up in the first place, would lead to a collapse in stock prices and a spike in interest rates. This would lead to lower bond values and likely major losses in those assets also.
What do you think would happen to real estate prices if interest rates went back to anywhere near normal- let alone spiked like we saw in the early 1980s?
It appears that many others are starting to get the picture as even though the daily games to suppress gold and silver continue unabated- even as banks are being criminally charged – gold and silver have been rising meaningfully and I don’t think we have really seen anything yet. I believe the big moves will come when the “fiat frenzy” gets so far out of control (we are likely close) that people simply don’t trust the confetti (or computer blip) we have been using for money and more conjuring up cash out of nowhere makes the problem worse. The cure then becomes the disease.
Many will be wishing that they had tangible assets at that time rather than the paper promises of a bankrupt system. This China thing just may speed the process up- exponentially.
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