LAWRIE WILLIAMS: Second Black Swan drives equities and silver down. Gold holding its own.
The ‘black swan’ of the Ncov-19 virus had already been driving equities sharply downwards, but it was joined by a second over the past weekend. Saudi Arabia, the world’s largest oil exporter, and Russia, the world’s No.2, seemed to be embroiled in a dispute over global oil production with both vowing to open the oil taps in an attempt by the Saudis to force Russia to help stabilise prices by cutting production! As a consequence the Brent Crude price dived to a little over $30 a barrel, its lowest price for over 4 years. The price fall spooked already-vulnerable equities markets around the world leading to key U.S. equities indexes all opening around 7% down, following big falls in Asian and European markets, before recovering some of the lost ground.
The gold price soared to over $1,700 at one time, before coming back sharply and, as is its wont these days silver remained particularly weak with the Gold:Silver Ratio (the amount of silver it takes to purchase one ounce of gold) at one time rising to over 100 – around its all-time high and a demonstration of silver’s current and recent underperformance against its yellow sibling metal. The dollar index fell too and even bitcoin, which had been seeing a bit of a boost as some saw it too as a safe haven investment, also fell back. (As an aside we have little faith in the resilience of bitcoin – seeing it as kind of ‘Ponzi currency’ without history or backing.)
We have been warning for several weeks now that coronavirus fears could be the trigger that drives the world into recession and creates an equities bloodbath given that equity indexes are seen by many as unsustainably high anyway. Now the addition of an oil price shock makes this outcome almost a certainty unless Saudi Arabia and Russia can come to some kind of rapid compromise agreement to jointly cut production and stabilise prices. The U.S. markets are key to this, and with the almost criminal seeming lack of urgency in virus testing, perhaps aided and abetted by an Administration which did not seem to be taking the virus spread threat particularly seriously, one can expect to see a big uptick in virus incidences there over the next few weeks. Confirmed U.S. virus cases effectively doubled over the weekend and we would expect them to pass 1,000 this week and perhaps expand exponentially thereafter.
One of the problems, perhaps specific to the U.S. which does not have a blanket public health system like most European nations for example, is that people who might wish to be tested could be faced with covering the costs of tests themselves. Even those with some health insurance plans may have to pay the first $1,500 or so of any health expenses incurred. And those with no health insurance could also be faced with costs. This acts as a disincentive to submit oneself for testing even if one suspects one has contracted the virus and raises the likelihood of community infections. Yes, America has a hugely advanced health system - as long as one can afford it!
The overall death rate from the virus is uncertain as nobody knows how many virus cases go undiagnosed and unreported. But taking globally reported cases and reported deaths as per the daily tally kept by Johns Hopkins University in the U.S. there have been 111,363 confirmed cases worldwide to date and 3,892 deaths suggesting a death rate of around 3.5%. The death rate has been a lot higher in countries like Italy (around 5%) based on confirmed figures. President Trump has a ‘hunch’ that the real figure is less than 1%! Whatever the true figure it’s likely to exceed hugely the mortality rate for seasonal ‘flu with which the numbers are often compared by those wishing to play down the seriousness of the outbreak. Some doomsayers reckon that around 70% of the population could become infected, although China’s experience, where infections appear to be on the decline, casts considerable doubt on this suggestion.
Nonetheless, virus ‘panic’ is likely to grow and measures to control it will undoubtedly adversely affect national GDPs and a global recession seems more than likely. The Chinese situation alone will hugely affect the global supply chain for the current quarter, and possibly Q2 as well. Some of the most affected industry groups – like airlines, the aviation sector overall, tourism in general, the cruise liner industry, the tech sector, auto-makers etc. – will take much of the year to recover, and some may take even longer. The outlook is not positive.
Recession and a declining equities market are going to hit people hard. Possible safe havens like gold should benefit by at least mostly holding their value but the outlook is not so good for other precious metals which are far more industrial sector-dependent. All eyes will be on the U.S. Fed which is widely expected to make another base interest rate cut at next week’s FOMC meeting, if not before, in another attempt to stimulate markets, but if last week’s 50 basis point emergency cut is anything to go by, there’s no guarantee that this will work, except perhaps in helping boost the gold price which tends to benefit from lower interest rates. The world has never faced such a bleak financial outlook before and with the U.S. Fed, and other central banks having little or no ammunition left in their repertoire of economic stimulation left we are living in a very uncertain world. Let’s hope another ‘black swan’ does not materialise or we could really be in trouble!