By now everyone should have understood, that the coronavirus – or Covid-19 as it is called nowadays – is not just the flu. There is a lot of news coverage on this topic and it is therefore not necessary to provide more information on current infection rates and how the virus is rapidly spreading around the globe. Instead we will point out how the inactivity, incompetence and misinformation of authorities has contributed to the fast proliferation of the disease and why this will have severe ramifications for the global economy. We will also provide an overview of how you can prepare adequately for the crisis, that is very likely to unfold.

 

The response of governments and the WHO to the coronavirus

At first, China’s government was very slow to respond to the virus. It tried to cover up the whole affair by reprimanding several doctors, not to post false information on the internet. Well, their “fake news” turned out to be true and the government had to revert to very drastic measures, such as quarantining whole cities with tens of millions of people affected. Nonetheless, Chinese authorities continued their disinformation campaign, by reporting infection and death numbers which hardly anyone – including their own citizens – believed. For instance, it is alleged that the real infection numbers in Shandong province are 1.4 to 52 times higher than the reported once. We can’t verify this specific report, but there are plenty of others. A higher infection and mortality rate than officially reported, would also be more in line with the truly draconian measures, that the Chinese government has implemented.

Over the past few days official infection rates in China have been slowing. However, the numbers probably don’t reflect reality, but rather result from the government’s desperate struggle to get people back to work. Chinese authorities have obviously decided to value the economy higher than people’s lives. But whatever they do, they face a lose-lose situation. If full production is not resumed quickly, then the economy will most likely suffer a meltdown of epic proportions. On the other hand, if people are forced brought back to work, Chinas cramped offices, factories and dormitories will ensure the accelerated spread of the virus.

Governments around the world were also slow in responding. Instead of immediately shutting down most or all China flights and taking other appropriate measures, business was allowed to continue, as if there was no Covid-19. The installation of temperature checks at airports was sufficient for some politicians to boast, that everything was under full control. Authorities obviously did not bother, that people carrying the virus could infect others without showing any symptoms.

The story of the cruise ship Diamond Princess, whose 3,700 passengers and crew were confined to the vessel for over 14 days at the port of Yokohama, provides an excellent example of blatant government failure. First the quarantine was carried out in a “completely chaotic” way, as Dr. Iwata, an infectious disease professor at Kobe University, pointed out: “The cruise ship was completely inadequate in terms of the infection control …. There was no distinction between the green zone, which is free of infection, and the red zone, which is potentially contaminated by the virus ….. I’m very scared of getting the infection myself.”

It does not come as a surprise that the ship became a breeding ground for the virus and that up till now, over 700 people got infected including 2 Japanese health workers who were dispatched to the vessel. But government incompetence got even worse. When it was decided to end the quarantine for all those not infected, 23 passengers left the vessel without a valid coronavirus test.

But not only the Japanese authorities messed up big. The USA decided to bring 382 Diamond Princess passengers back on 2 charter flights. At the last minute it was discovered, that 14 had tested positive for the coronavirus. As USA Today reports: “Rather than sending them to quarantine, officials split them up and put seven of the passengers on each plane.” Ouch!

The performance of the World Health Organization (WHO) was also dismal. On January 30, the “Second meeting of the International Health Regulations (2005) Emergency Committee regarding the outbreak of novel coronavirus (2019-nCoV)” issued a statement with the following unashamed flattering of the Chinese government: “The Committee welcomed the leadership and political commitment of the very highest levels of Chinese government, their commitment to transparency, and the efforts made to investigate and contain the current outbreak.”

The statement went on to inform, that “the outbreak now meets the criteria for a Public Health Emergency of International Concern”. Nevertheless “The Committee does not recommend any travel or trade restriction based on the current information available.” And with regard to China it recommended: “Conduct exit screening at international airports and ports, with the aim of early detection of symptomatic travelers for further evaluation and treatment, while minimizing interference with international traffic.” Political and financial considerations were obviously more important, than the health of the global population. Instead of starting real coordination among governments to restrict international travel, initiating mass production and global distribution of test equipment, protective clothing as well as urgently needed medicine, the WHO missed a golden opportunity to contain the virus. Who needs such an organization?

It comes as no surprise, that the WHO has continued to downplay the virus. As recently as February 24 its Director General Dr. Tedros Ghebreyesus said in a conference call with reporters, that COVID-19 is not spreading in an uncontained way, but instead “what we are seeing are epidemics in different parts of the world”. It certainly requires a lot of courage, to make such claims despite overwhelming evidence to the contrary.

The response of governments and the WHO is fully in line with their behavior during previous crisis. It just confirms two important findings, that history has taught us:

  1. Never trust official information. Instead do your own research by using alternative news sources
  2. Don’t expect governments and international organizations to necessarily act in your best interest. It is better to rely on yourself to protect your family

The economic effects  

Several large cities in China have been shut down completely. Others are experiencing strongly reduced business activities. Many workers have been unable to return back to work after the Spring Festival and increased government regulations inhibit normal production. Energy consumption, rail and road transport as well as container and shipping demand are down significantly. It is obvious that the coronavirus has already caused havoc to the Chinese economy. Due to heavy debts or low liquidity, many small and medium-sized companies will run out of cash very soon. Bigger companies also face insolvency, if the situation does not improve soon. For more detailed information, please read here:

The situation is dire, but governments, the media and analysts continue to downplay the potentially devastating economic implications of the coronavirus. A Bloomberg article dated February 4 and updated February 19, asserts, that “China’s gross domestic product will grow 4% in the first quarter, according to the median of 18 forecasts from Jan. 31 or later”. The lowest analyst forecast came from Standard Chartered, that expected 2.8% growth in its February 19 report. Berenbank Bank, on the other hand, still forecasted 6% growth on February 7.

In view of what has happened in China in January and at the beginning of February, such statements are unbelievable. Using some critical thinking and basic mathematics, it is easy to show, that the Chinese economy will almost certainly contract in the first quarter.

First, Q1 this year will only have 69 working days, compared to 70 days last year (Saturdays, that are normal production days in most of China, are included in this count. The fact that this February has 29 calender days instead of 28, is offset by the coronavirus-related holiday extension this year, that added two working days). Daily production would therefore have to be 1.4% higher than last year, just to achieve the same GDP.

Second, this year’s Spring Festival holiday was in January, whereas last year it was in February. Consequently, this January had 7 working days less than the same month last year. The resulting underproduction must be offset in February. Unfortunately, as outlined above, February has seen very low business activity in China. This was easily foreseeable at the beginning of this month, when most analysts made their forecasts.

Assuming a production rate of 80% compared to “normal” production in February and 100% in March, which is a very optimistic scenario, we arrive at a negative growth rate of -3.2% for Q1. To achieve the forecasted 4% growth, the production rate for March would have to go up to 118%, which is unrealistic. If we assume a production rate of 60% in February and 80% in March, which might still be optimistic, the economy will contract by -18.3% in the first quarter.

Irrespective of the facts, analysts continued to insist on their growth story and Bloomberg distributed this information uncommented. Analysts working for the big banks and reporters working for Bloomberg are certainly no idiots. They are smart, well-educated and must have realized, that their numbers didn’t match with reality. However, they still published them, because they get paid to maintain the “all is well” narrative. In addition, they don’t want to be too far off, when China reports the official GDP figures for the first quarter. And we will not be surprised, if the official numbers show low positive growth. Never trust a statistic, that you have not manipulated yourself.

The effect on other economies around the globe is also downplayed by analysts and politicians. U.S. President Trump posted on Twitter on February 24: “The Coronavirus is very much under control in the USA …. Stock Market starting to look very good to me!”. And Germany’s Economic Minister Altmaier stated on the same day: “We expect that it can of course have a slight impact on the global economy”.

Unfortunately, the reality looks very different. Over the past three decades, many companies have outsourced part or all of their production to China. If production there is disrupted, this will affect production in other parts of the world and eventually limit the number of finished products available for sale. In its paper “Coronavirus COVID-19 Crisis Response” , consulting firm McKinsey provides a good overview of the sectors, that will be most heavily affected.

Be aware that this just gives a rough idea. Today’s supply chains are highly complex and involve many layers. To produce a specific good often requires ingredients or mounting parts sourced from several industries, countries and suppliers. Those suppliers in turn source from various industries, countries and suppliers. One missing part can bring production to a standstill and this will have a ripple effect on the production lines of other companies. Unfortunately, most sourcing managers only have incomplete information about their complete supply chain and may be in for some ugly surprises.

Several companies in the automotive, smartphone and electronics industry have already halted production at some of their plants. Many others will follow. There is a time lag, but as companies have reduced their inventory over the years to save costs, time is running out. Jon Moeller, COO of Proctor & Gamble, recently remarked: “We access 387 suppliers in China that ship to us globally more than 9,000 different materials, impacting approximately 17,600 different finished product items ….  each of these suppliers faces their own challenges in resuming operations.” Be prepared to see some empty shelves in your local supermarket, drugstore, and electronics shop in the not too far future. And while official inflation may remain low, prices of essential goods are likely to soar.

Companies that don’t produce won’t sell. To survive they will reduce investment and purchasing budgets, slash administrative expenses, ask for “voluntary” salary reductions or lay off staff. This will impact sales of other companies and also reduce consumer demand. A vicious downward cycle is triggered. At first only a few companies will become insolvent. Their suppliers will have to write-off their receivables, their banks their loans and their employees will become unemployed. This will cause more companies to go bust, and once this happens, others will follow.

If the global economy was healthy, we might be able to deal with the coronavirus challenge. But Covid-19 is thrusting into an economy that has already been failing. Governments, companies and households in most countries are heavily indebted. Central banks have reduced interest rates close to or even below zero, and other monetary experiments such as Quantitative Easing have created a bubble in the price of stocks, bonds and real estate. Most entities are out of ammunition to effectively fight the imminent downturn.

We can only hope that the coronavirus can be contained quickly. However, at this stage it appears more likely that one domino will fall after the other. First, we will see increased company insolvencies and a crash of the stock, bond and real estate market. Then banks and insurance companies will be in severe trouble. Some will be “bailed out” by governments, others will get involuntarily “bailed in” by its customers (respective bank regulations are already in place in Europe and the USA). The middle class will get decimated and supply shortages as well as sky-rocketing prices for many essential goods will cause severe hardship to large parts of the population.

 

How to prepare?

We don’t pretend to know the future, but the current situation is in our opinion very serious. Governments around the world have failed to take decisive measures to contain the virus and get ready to successfully deal with a rapid spread in their country. The time window to prepare for a potentially devastating pandemic and a global depression is closing. You either act now, or you will be too late.

 

Personal preparation

We are certainly no “preppers” and don’t want to spread panic. But under the current conditions it appears necessary to make some preparations, even if they turn out to be unnecessary in the future (that’s why you spend a lot of money on health, accident, fire and other insurance). It makes sense to get enough water, food, medicine, face masks, disinfectants, soap, protective clothing and other normal household goods (e.g. personal hygiene and healthcare products, cosmetics, toilet paper, detergent, batteries, etc.) to survive at 6-8 weeks without having to purchase additional supply. Please keep in mind that electricity and water supply might be cut off and this should be considered when compiling your shopping list. If you think this is nuts, look at what is currently happening in Wuhan and many other cities in China.

If you don’t need your excess supply, because the crisis will be less severe in your area, you can consume it gradually within the next year. This is a lot better than standing repeatedly in front of empty shelves and having to live without essential items for extended periods. Try to buy face masks in Hong Kong, Seoul, Singapore or Bangkok today, and you will understand what we mean.

Based on the elevated infection risk of Covid-19, it is advisable not to travel, to avoid cramped public transportation and mass gatherings, and to stay at home as much as possible. Personal meetings can be replaced by video calls and instead of going to the office, work should be done at home whenever possible. You should also consider using a face mask when going outside or meeting strangers, and washing or disinfecting your hands more often than usual.

This is just a rough overview. There are other websites that provide much more detailed and better information. If you are unsure, check them out.

 

Portfolio preparation

We have previously written about a suitable crisis portfolio and suggest that you take the time to read the whole article under the following link: https://livebeyondborders.com/2019/12/28/crisis-portfolio/. No additional measures are necessary due to the coronavirus. However, if you have just started your portfolio adjustment, consider to speed up the whole process. Get rid of risky life insurance policies and bonds as well as overhyped stocks (but not stocks with long-term potential acquired at a reasonable price). Ensure that you have at least some physical gold and silver in safe storage outside of the banking system. An investment in established cryptos such as Bitcoin is riskier, but – due to its specific features – might be a life savior in times of crisis. Established crypto currencies also have the potential to appreciate a lot, if the current fiat currency system fails. Finally, it might be wise to diversify more among custodians and internationally, as we have outlined here.

 

The situation is serious, but we are not close to the end of the world. It is still possible that measures will be found, to contain the spread of the virus and lessen its economic repercussions. Never underestimate human ingenuity in times of crisis. The worst thing you can do right now is panicking. Curtail your emotions, do a proper analysis of your personal situation, develop a rational plan, and then act decisively. Hope for the best, but ensure that you are prepared for the worst-case scenario.

Disclaimer: The above is for informational purposes only. It is not an offer or advice to buy or sell any products or services. LBB and its owner do not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

 

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