Just your daily reminder that this is not the flu, sars, ebola, or really anything else we’ve seen in our lifetimes. At the risk of beating a dead horse here…. this is not being priced into markets right now. At all. And at the risk of sounding alarmist, I am going to put my neck out there and say that this thing is the inevitable shock that always seems to kick off a recession (get your remind me’s ready). With that said, it’s going to take a little bit of time before markets digest the supply shocks that are going to come through from China’s shutdown. And past that point, I really don’t think anybody is pricing in the fact that this is going to start to mandate shutdowns elsewhere away from China as it spreads.
The funny thing, is that from a data perspective, we actually were starting to get a mild recovery in the macro regime, suggesting the Fed may have actually engineered a sort of soft landing, at least for a short bit. Given, that soft landing would have been heavily stimulus and debt fueled, but, the means don’t matter in the short term, and that’s often how things go anyway. But this item is coming at a very very very bad time, and the economy just is not prepared to handle this even slightly. The markets obviously are not reflecting this right now for a variety of reasons, but markets aren’t always the great discounters people would believe.
I will say, we likely will see some sort of massive wave of additional stimulus, or at least an attempt at it. But the transmission mechanisms of getting said stimulus to the people who need it is going to cause this to falter when it’s needed most from my view.
Edit: For those who don’t understand the seriousness of this, here is a relevant quote from a highly respected authority – Mark Lipsitch, professor of epidemiology at Harvard.
“I think it is likely we’ll see a global pandemic,” said Mark Lipsitch, a professor of epidemiology at Harvard T.H. Chan School of Public Health. “If a pandemic happens, 40% to 70% of people world wide are likely to be infected in the coming year. What proportion of those will be symptomatic, I can’t give a good number.”
He comments on this directly at: twitter.com/mlipsitch/status/1228373884027592704
So look, is there a chance this will blow over? Sure. 100%, and I’m not an epidemiologist. But when leading epidemiologists collectively view this as being more likely to be a pandemic, yet markets are completely brushing this news off, I view that there is nothing being priced in here at all except perhaps stimulus. Even if there was only a 5% chance of the above scenario happening, I would expect markets to price in some of the massive risk that would be associated with this scenario, but that’s not happening.