I am writing this special Sunday edition MacroTourist because my financial twitter feed has erupted with virtual panic from the Chinese coronavirus situation.
I am not here to talk to you about R levels, or how many people have the virus. I have no special insight to offer you. Nope, the little I understand is about markets, not virus epidemiology.
If you recall a couple of weeks ago (January 20th – LET’S BE CAREFUL OUT THERE), I wrote a piece warning the markets were not taking this situation seriously enough.
Well, that is no longer the case.
As for whether this panic accelerates from here, again, I don’t have a clue. If someone tells you they know – they are wrong. We are dealing with human beings here. When fear grabs hold, it’s like a herd of wildebeests getting spooked from a shadow and stampeding 10 miles in the opposite direction.
At this point you are probably saying, “why the heck write a special piece if you aren’t going to give any insights into the situation?”
Glad you asked. The only thing I am confident of is that the response from the Chinese government will be massive, overwhelming and unprecedented.
We are already seeing announcements of monetary stimulus injection – “China Promises Cash and Support to Calm Financial Markets“:
China unveiled a raft of measures over the weekend to aid companies hit by the coronavirus outbreak and also shore up financial markets, which are bracing for a sell-off when trading re-starts on Monday.
The central bank will supply cash to money markets and banks were told to lend more and not call in loans to companies in Hubei and other affected regions. In addition, night trading sessions for futures were suspended, some share pledge contracts can be extended, and there was a relaxation of asset-management rules, which were forcing banks to remove implicit guarantees for trillions of dollars of investments.
The measures announced over the weekend were mostly targeted at the immediate problems facing the economy and markets and aren’t a large increase in stimulus, although that could change if the situation warrants. The viral epidemic has killed hundreds and sickened thousands and will also have a substantial economic impact, with a large part of the nation’s economy shut down at least through the end of this week in an attempt to stem the spread.
Policy makers will likely “focus on ensuring financial resources flow to the places needed for the ‘firefighting’ and keeping the broad policy environment supportive” during the early stage when immediate virus control is the priority, Goldman Sachs Group Inc. economists including Andrew Tilton wrote in a Friday report to clients. “Once the epidemic is brought under control, senior policy makers will likely shift their focus to the economy” to boost infrastructure and consumption, with the size of that dependent on the severity of the outbreak, they wrote.
Many pundits are saying this is not enough. Could be. Again, no clue.
But this is just the first round of monetary stimulus to stabilize markets.
Which then brings me to the next group of naysayers. This crowd believes you can’t stimulate an economy in quarantine. Yup. Completely agree. Fiscal stimulus doesn’t work when everyone is holed up in their apartment.
However, if you think the Chinese government will simply accept this collapse in economic activity and not do anything on the other side, that’s where we part ways.
The governments of the western world get worried when the economy falls off a cliff. Their natural reaction is to cut spending. They end up engaging in pro-cyclical fiscal restraint.
China will not have that problem. And in fact, they will have no qualms about getting even deeper into debt to stimulate their economy.
My guess is that they will resort to tried-and-true infrastructure spending. They will revert to what they know works. There will be no debates about whether they are burdening their future generations with debt. There will be no tea-party types telling them to stop spending because the budget is worsening.
Nope. The communist party will have only one mission. To get growth back. At any cost.
I was just chatting on twitter with my buddy Harris Kupperman who writes the popular Adventures in Capitalism Blog and he had this great line (which is typical for Harris – probably one of the funniest market guys out there):
Buy the periodic table. Couldn’t agree with you more Harris.
Listen, as I said, I have no clue if the panic stops tomorrow. My guess is that by the time it gets on the front page of the Economist, it’s time to think about taking the other side, but this is definitely 28 Days Later scary right now.
The easier trade is to watch for the monster bid coming in hard assets like commodities. I don’t know if it is on Monday, later in the week, or even next month. However, copper is down 12 days in a row – something that has never previously happened. Some of the economically sensitive commodities have already priced in a fair amount of economic weakness.
But above all else – do not underestimate the Chinese ability to stimulate their economy. It might not be long-run economically intelligent stimulus, but since when does that matter? It’s coming. And it will shock the world.