by hoseex999
Tl;dr : Shortage are happening everywhere for both individuals and businesses, things are bad.
May have liquidity problems for many businesses =banks loans default=Financial problems again
Just buy puts on anything except health care, funeral, tech, you wouldn’t have that much money on buying so much puts anyway.
SPY 3/9 275, SPY 3/11 $260 puts
Ok Autists, I share an article about the supply chains problemas in China last week which you could find at the resource section, I previously said that the article haven’t even accounted about a potential outbreak may lead to Europe and US factories being shutdown causing a longer supply chain shortage.
I originally estimate that there might be shut downs not earlier than Mid March, now look at Italy and a 14 mil region already got shut down and we are not even at Mid March yet.
Ports in LA has been half empty since Mar 3, a twitter post says that usually there are 5 trains a day out of there, now down to 32. Usually has 16,000 trucks in the port, that’s down by half.
You think shit is real but things should get back normal in Mid March and china should be pumping those industrial goods now? Dead Wrong.
China could only make low to semi mid tier tech grade items, since factories are reopen back around Early March they could still use those stored inventory from Jan. But if you want to assemble an more high tech stuff like Iphone you would need parts from at least from Germany,Switzerland, Japan, US and Chinese components take a look at the pic to get an idea here:max_bytes(150000):strip_icc():format(webp)/Lifewire_Where_Is_The_Iphone_Made_1999503_V2-345d781fed0b48909b2fc5c6b52ff325.png) , but factories from everywhere is closing/got infected/needs quarantine at an unprecedented rate.
Here are some examples:
Japan Has shut down its F35 factory in Mar 4 (An italy factory also shutdown too) here
Korea car factory shut down here
Samsung Wants to move its factories to Vietnam for making parts for its smartphone, but it turns out that A London-Hanoi flight has caused the beer virus to spread in Vietnam right now, things are not looking good. here and here
The last supply chain shock to the globe was from the earthquake that hit Japan in 2011, so most CEOs who wants to cut costs and pump their stock price has already switch to JIT and the earthquake was just a single country shock, and nobody expect a bloody global supply chain collapse since there isn’t one before in history.
Currently most companies across the globe are facing the problem of not having inventory since the Chinese factories shut down in late Jan as most only runs on 15-30 day inventory.
While a report says that A total of 78 million Chinese migrant rural workers have already returned to work, accounting for 60% of the total who left for home for the Chinese New Year holiday here.
But Chinese companies are still mostly producing from inventory left from Jan, as they just open back their factories and ordering new supplies would take at least one weeks for factories and Hubei is still in shutdown, there are also reports about reopening factories but no one is working and they just turn on the equipment as to satisfy the electricity quotas set by the officials here
People with beer virus suddenly falls down and the factory got shut down vid
I predict that China may get back to 50% production capacity for things that doesn’t need external exports in late March – Early April.
Did I even talk about the second wave of disruption coming to Chinese factories? here
So, you may say Shit is bad but those air freight could transport shit to other countries fast, right?
Maybe, the air freight market is now being infected with WSB virus and the price is as volatile as the VIX index, the price also seems to be doubled. pic here
Also, Sea freights which consists of 90% of global freight trade would take like a month for transporting stuff.
Most factories in Europe and US would wait to April – early May (which they are mostly run out of inventory for 1-3 months) for Cargo ship to arrive to the ports, and they could finally get their long waited inventory. Cheers Right? No Again
Also,Remember there is no more spaghetti due to lock down?
Wuhan is still in lock down since late Jan and still haven’t been reopen yet.
Let’s assume that things are better in Italy and it would take a month to reopen back, but what would happen to nearby regions and countries like in southern Italy,Germany, France,Switzerland? If the rate of increase continues as the expected projection, it seems that they would also be in lock down and those lock down would never could be as effective as in china.
So even northern Italy reopens in a month it would still impossible to reopen business since other nearby regions would be likely in their own lock down as well.
This is due to the fact the virus spread faster than any flu virus we have seen before which is at around 2.2-2.68 rate, this is higher than the h1n1 flu of 1.46, and the beer virus is likely more deadly as the Spanish Flu (but maybe due to much higher old population than any time in history), you could look about the comparison here (thanks for the covid dd post)
This is like an endless feedback loop and until a cure or a vaccine comes out(which should take more than a year), things would mostly get worse.
Conclusion:
So you could see how bad the supply chain problem is , the collapse of the supply chain would cause many business to shut down and debts defaults for both consumer and businesses.
Europe and Japan are already in negative rates, they are already not profitable and lower rates would likely to cause the banks unable to profit from business services and cause a financial collapse again.
You could see my other DD post talking the liquidity problem , if you are interested on supply chain problems you could follow r/supplychain for further updates (Both posts are attached below at the resources part)
I think I’m done writing DD posts for a while, I write this because there ins’t much about supply chains discussion on WSB, but I think my 2 DD should give a whole picture on what problems we are facing.
Edit: hey_ross says about the shale oil debt is gonna explode due to the amount of debt, which is true:
A.because the supply chains are collapsing and factories/China won’t need that much oil, two months for like 50% drop of oil demand could already lower the oil price ;
B.The shale oil industry just got 911 by the Russians and the Saudis and they are unable to be break even below 50, now the price is just 30 so a 40% decline of revenue for those shale oil companies pic
C. Shale oil was already having problems since 2018 and has around 200 billion debts.
As of the end of 2018, so this number is a little bit old, we’ve spent about $1 trillion in U.S. oil shale and we’ve returned about $700 billion to the companies in the form of cash flow for a whopping, negative 38% cash-on-cash return, The total return to shareholders in the sector in the last decade was effectively zero here
Edit 2: Someone says the fundamentals remain and my post is just fear.
The Fundamentals as of now are Northern Italy just got quarantine with a 14 mil population,Industries are stopping and labour,materials could not flow freely.
The Industrial Triangle of Italy just got quarantine,The quarantine will take over the Italian economic zones. About a third of the national gross domestic product (GDP) comes from the regions of Lombardy and Veneto. According to the financial service company Moody’s, Italy’s GDP will decrease by 0.5 percent this year. www.aljazeera.com/news/2020/03/italy-quarantines-quarter-population-fight-coronavirus-200308071832617.html
And can you tell me when will it go back to normal? You can’t because nobody knows. The Fundamentals just got changed until it resumes to normal where labor/materials could flow freely again and thus volatility will remain which is bad for business.
Resource Section:
The Supply chain article in last week: www.reddit.com/r/wallstreetbets/comments/fbpiqa/it_seems_supply_chains_for_many_companies_are/
Empty Ports:
Where Is the iPhone Made?:
www.lifewire.com/where-is-the-iphone-made-1999503
Volatile market sparks call for review of how air freight capacity is traded:
theloadstar.com/volatile-market-sparks-call-for-review-of-how-air-freight-capacity-is-traded/
Freight transport:
en.wikipedia.org/wiki/Freight_transport
My post about the potential outcome:
www.reddit.com/r/wallstreetbets/comments/fezfqi/the_ultimate_collapse_of_the_modern_financial/
r/supplychain Status Update:
www.reddit.com/r/supplychain/comments/few230/covid19_update_saturday_7th_march/
Breakeven Oil Prices Underscore Shale’s Impact on the Market:
www.dallasfed.org/research/economics/2019/0521
Music I’m listening while writing this mess: some weird music
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.