Chinese coronavirus shutdown on par with oil shock of the 70s | Supply side shock dynamics leading to a Lehman/Minsky moment

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by hello-world-foo-bar

China is the manufacturing floor of the world. And it has shut down.

In effect, it has caused global supply chains to sputter, and eventually stop as inventory stockpile empty.

In a world of lean on demand inventory management, inventory levels are tight.

Hence, when supply start to run out, companies no longer can meet end demand. Nor struggling businesses fund liabilities from cash flow.

Shadow banking will collapse in india and china, unless those central banks open the money house.

But here lies the rub, IF the coronavirus is a true pandemic, government need to maintain the quarantine, or else they have bigger problems down the road. So the supply shock persists. Money hose will have little effect unless it grows exponentially like the virus. Which leads to other issues.

So, if it does become a pandemic, the effect will be as bad as the lehman collapse because liquidity will dry up leading to a solvency crisis.

The CLO bomb is loaded.

This is not the base case but the worse case. However, tail risk increases exponentially every week the virus continue its geometric growth.

 

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