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Coronavirus Economic Impact Thread


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Don't want to get too sensationalist, but could this be the black swan that collapses the 'everything bubble'?! The 'factory of the world' has effectively shut down. Interesting indeed.

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speaking to a local guy I know,saying local engineering firm in Leicester of a decent size has put production staff on short time of around 32 hours per week due to parts shortages.

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57 minutes ago, Bkkandrew said:

Long meeting with an aviation client today. A real eye opener. Airline carnage, airline leasing carnage. Cathay Pacific reported as close to collapse. Grounded planes everywhere. Flights that are actually still going are at 20-25% load only.

25,000 pilots laid off. Airlines matching shipping container prices to attract business.
Assist backed finance close to melting point. Oil futures threatening to collapse $300Tr of derivatives. 

So many hidden consequences. Where is CGNAO?

Looks useful for this thread. What do you mean by futures collapse? No takers for actual deliveries? 

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Just now, reformed nice guy said:

https://fortune.com/2020/02/21/fortune-1000-coronavirus-china-supply-chain-impact/

Lots of big firms are reporting suspected supply chain issues.

If the worlds supply chains are falling to pieces, then this could be a economic disaster (the first in peace time?) that cannot be solved by money printing!

 

Their just in time distribution model was bound to fail at some point. 

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1 hour ago, One percent said:

Their just in time distribution model was bound to fail at some point. 

Yes. But that point was meant to be Brexit. I bet they are really pissed off with this unexpected development.

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9 hours ago, Bear Hug said:

Looks useful for this thread. What do you mean by futures collapse? No takers for actual deliveries? 

Reduction in physical demand for airlines alone was quoted at 4M barrels a day. Then there is transport within China. Then there is stopped industry.

Even here, this time of year there would be 1GW of gensets sunning supplementing the grid. Not needed, as load 30-40% down.

Petrodollar system cannot operate when demand drops off a cliff (and Greta gets what she wants!!). Thus the derivatives that follow.

Pattern repeated in Aluminium and Copper, with force majeure being cited as cancellation reasons for contracts that would normally be regarded as rock solid on the demand side.

Let’s see.

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46 minutes ago, Bkkandrew said:

Reduction in physical demand for airlines alone was quoted at 4M barrels a day. Then there is transport within China. Then there is stopped industry.

Even here, this time of year there would be 1GW of gensets sunning supplementing the grid. Not needed, as load 30-40% down.

Petrodollar system cannot operate when demand drops off a cliff (and Greta gets what she wants!!). Thus the derivatives that follow.

Pattern repeated in Aluminium and Copper, with force majeure being cited as cancellation reasons for contracts that would normally be regarded as rock solid on the demand side.

Let’s see.

Thanks, there is a lot to think about. And no one other than few Internet sites and forums appears to consider how bad this could get.

There isn't much benefit in anti-Greta contrarian position of buying oil stocks, when there is a crash in demand. 

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I keep on thinking what sector wouldn't get smashed down when everyone is quarantined at home (other than gold miners) .

Telecoms? More watching TV and broadband use when working from home. 

Any bussinesses that produce food locally? Not really investable easily probably. 

Software/online entertainment? 

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19 minutes ago, Bear Hug said:

I keep on thinking what sector wouldn't get smashed down when everyone is quarantined at home (other than gold miners) .

Telecoms? More watching TV and broadband use when working from home. 

Any bussinesses that produce food locally? Not really investable easily probably. 

Software/online entertainment? 

Porn.

I also predict a baby boom in about 9-12 month's time.

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12 hours ago, One percent said:

Their just in time distribution model was bound to fail at some point. 

It may be a while off but 3D printing is surely the future of manufacturing. We won't be buying tat from China when we can print it at home. Though it will also solve supply chain issues by removing large parts of the supply chain. B|

First 3D printed car is already here:

https://www.topgear.com/car-news/geneva-motor-show-2020/czinger-21c-1233bhp-3d-printed-hypercar

 

Worth investing in 3D printer manufacturers and whatever 'inks' they use?

 

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https://www.reuters.com/article/us-china-health-southkorea-samsung-elec/samsung-electronics-confirms-coronavirus-case-at-phone-factory-complex-in-south-korea-idUSKCN20G0CG

For a long time we have been in a wasteful environment where there is an over supply of almost everything. Maybe this is a good thing. 

Would supply constraints increase the prices? Or will demand drop once everyone panics and stops buying crap every other day? 

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2 hours ago, BoSon said:

It may be a while off but 3D printing is surely the future of manufacturing. We won't be buying tat from China when we can print it at home. Though it will also solve supply chain issues by removing large parts of the supply chain. B|

First 3D printed car is already here:

https://www.topgear.com/car-news/geneva-motor-show-2020/czinger-21c-1233bhp-3d-printed-hypercar

 

Worth investing in 3D printer manufacturers and whatever 'inks' they use?

 

Still limited to a certain degree -plastic print is slow and lacks easy/cheap full multicolour print so say figurine printing not quite there - could imagine a licensed range. Toys have been increasingly virtualised, this could see much more growth - rather than having a physical toy, boardgames just chuck it on phones/pads/TV, forget the physical version altogether if supply chain/cost makes them less desirable.

Some innovative metal casting/sintering type technologies, small high priced pieces/assemblies a potential growth area, need to be much cheaper than current systems now to be ubiquitous and replace normal casting, machining, parts supply for anything commodity. There's also mixed medium tech - say laying down fibre/carbon fibre stands with a print medium, one of and short run shells/car bodies and alike might be a market, plus concrete printing for custom house build.  

2 hours ago, Bear Hug said:

I keep on thinking what sector wouldn't get smashed down when everyone is quarantined at home (other than gold miners) .

Telecoms? More watching TV and broadband use when working from home. 

Any bussinesses that produce food locally? Not really investable easily probably. 

Software/online entertainment? 

Anything that could be virtualised and so doesn't need to be manufactured / shipped should benefit.

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This is going to have an impact wider and deeper than most of us could imagine.

Our best friends run a logistics business. 30 trucks going round Europe supporting concerts, festivals, industry fairs etc.

I pointed out to Mrs Flight over dinner that they are probably fucked. 

The penny dropped.

 

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30 minutes ago, Wight Flight said:

This is going to have an impact wider and deeper than most of us could imagine.

Our best friends run a logistics business. 30 trucks going round Europe supporting concerts, festivals, industry fairs etc.

I pointed out to Mrs Flight over dinner that they are probably fucked. 

The penny dropped.

 

Governments will eventually offer interest free loans (or even payments) to companies that are overly affected.  The question is whether a given company will last long enough to be able to get to that point.

[IMO they'll also support larger companies vs smaller ones, by a multitude of means.]

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10 hours ago, Wight Flight said:

This is going to have an impact wider and deeper than most of us could imagine.

Our best friends run a logistics business. 30 trucks going round Europe supporting concerts, festivals, industry fairs etc.

I pointed out to Mrs Flight over dinner that they are probably fucked. 

The penny dropped.

 

Insurance specific for those classes of business event cancellation which include business interruption, weather related issues, non attendance of key performers etc had specific exclusions added when SARS first popped on the scene in 2003, it was seen as a risk likely to cause total loss and not something the insurance industry wanted to cover at all.

9 hours ago, dgul said:

Governments will eventually offer interest free loans (or even payments) to companies that are overly affected.  The question is whether a given company will last long enough to be able to get to that point.

[IMO they'll also support larger companies vs smaller ones, by a multitude of means.]

Saw quote that 85% of Chinese small companies likely in that bracket over the next 3 months.

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Paul Hodges ticks both debt deflation/dollar crunch boxes and corona

https://www.icis.com/chemicals-and-the-economy/2020/02/coronavirus-epidemic-makes-global-debt-crisis-now-almost-certain/

'Beijing has a population of 21.5 million, but you wouldn’t know it from this BBC video from last Thursday.  Normally busy streets and transport systems are eerily empty, with food deliveries often the main traffic on the roads.

It’s the same picture in industry, with the Baidu Migration Index reporting only 26% of migrant workers had returned to work across 19 sample cities by 19 February, compared with 101% a year earlier.

The position is even worse in Hubei province, the most important industrial manufacturing province in the country, as this South China Morning Post video, also from last Thursday, confirms.

“Choked off from suppliers, workers, and logistics networks, China’s manufacturing base is facing a multitude of unprecedented challenges, as coronavirus containment efforts hamper factories’ efforts to reopen. 

“Many of those that have been granted permission to resume operations face critical shortages of staff, with huge swathes of China still under lockdown and some local workers afraid to leave their homes. Others cannot access the materials needed to make their products, and even if they could, the shutdown of shops and marketplaces around China means demand has been sapped. 

“Those who manage to assail the challenges, meanwhile, have found that trucking, shipping and freight services are thin on the ground, as China’s famed logistical machine also struggles to find workers and navigate provincial border checkpoints that have popped up across the country.”

Cash-flow is also drying up at thousands of companies, large and small.  It is now a month since the emergency began. Bloomberg reports, for example, that the Hainan provincial government is in talks to takeover HNA’s $143bn airline to property development business empire.

THE LOCKDOWN CONTINUES TO HAVE MAJOR IMPACT ON THE ECONOMY
It would be nice to believe that the epidemic will have no impact on China’s economy. But common sense tells us this can’t be true. We just have to ask ourselves 5 obvious questions.  What would happen to:

  1. Our own country’s economy, if our capital and a major manufacturing base shutdown for a month?
  2. Businesses, large and small, if orders stopped and transport was severely disrupted?
  3. Imports and exports, if critical shipping schedules and flights were cancelled?
  4. Cash-flow, if the above happened and we still had to pay interest bills on debt?
  5. Supply chains, if workers at one or more partners couldn’t get to work for a month?

South Korea’s president Moon-Jae has given the obvious answer as the Financial Times reports:

“We should take all possible measures we can think of” to support the economy, Mr Moon told a cabinet meeting on Tuesday. “The current situation is more serious than we thought . . . we need to take emergency steps in this time of emergency.”

Data.png

Of course, ‘this time may be different’. But common sense tells us that China’s economy is under enormous pressure today. The charts above highlight the range of areas that are affected:

  • Property sales are down 79%, with Evergrande offering 22% discounts through March
  • Construction is 25% of GDP, with Fitch identifying 6 developers with high risk of default
  • Ports are often at a standstill – and many shippers have simply stopped calling at Chinese ports
  • Car sales collapsed by 92% in the world’s largest auto market in the first two weeks of February

5 LIKELY IMPACTS FROM THE LOCKDOWN
1. Domestic sales.  Thousands of stores have been shut since the epidemic began, and people are understandably too scared to venture out – even if this was allowed. So we must assume most areas of domestic consumption are being hit.

2. Imports for manufacturing. Chemicals are an excellent guide to the overall position, as the charts show based on Trade Data Monitor data. Given the shipping problems, large volumes of cancelled imports must now be sitting in suppliers’ tanks and warehouses, waiting to find a new market

TDM.png

3. Exports as part of supply chains. Apple’s profit warning highlights how even major companies have been caught out, as they cannot obtain the component supplies on which their global sales depend. Car and electronics companies are probably most at risk, and we will no doubt see more profit warnings as companies realise inventory is running short

4. Domestic suppliers. There is little data available about the virus’ impact on smaller Chinese companies. But presumably many have already gone bust, especially if they were unlucky enough to be in the centre of the downturn, such as those in Hubei and Wuhan

5. Oil and currency markets.  Caixin reports that Chinese refinery runs are at just 10mbd, compared to an average 13mbd in 2019:

“The deepening run cuts belie optimism that the impact of the epidemic may have peaked, a sentiment that’s helped spur a recovery in oil prices over the last week and a half. Many people are still trapped in their homes and unable to go to work, while curbs on travel have pummeled demand for transport fuels.”

Currency markets are also realising the worst may yet be to come.  Companies such as HNA have been major borrowers in the offshore dollar market – hoping to take advantage of low US interest rates. But as we have seen many times before, when the currency starts to fall, those debts quickly become impossible to service.

A GLOBAL DEBT CRISIS SEEMS ALMOST INEVITABLE
Observers such as myself have warned about this problem for years.  Earlier this month, an international G20 task force of currency experts warned:

“Central banks have lost control of global liquidity. The dollarised international financial system has become treacherously unstable and vulnerable to a sudden reversal in capital flows.  A decade of ultra-low interest rates and quantitative easing has flooded the globe with highly unstable forms of funding denominated in dollars, with no guarantor standing behind them. Glaring currency and maturity mismatches have accumulated.

“This structure is prone to an abrupt “dollar crunch” should borrowers in China, east Asia, emerging markets, or even parts of Europe suddenly start scrambling for scarce US currency to repay bonds and loans in a crisis.”

Central banks and governments either didn’t realise the risks or, more likely, simply hoped the problem would only hit once they had left the job.  But today, this “dollar crunch” may well be about to arrive:

  • After a brief rally, the Rmb has gone back below Rmb 7: US$ 1
  • This will make it even more impossible for many companies to repay their dollar loans

Many western pension funds felt forced to rush into the offshore dollar market in a ‘search for yield’. Zero rate interest policies meant they couldn’t get the level of yield they needed to fund future pensions in ‘safer’ markets at home. And employers weren’t willing to fill the gap, as this would have hit their earnings and share prices.

Unfortunately, as I noted 18 months ago, Ernest Hemingway’s The Sun also Rises probably describes the end-game we have entered:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

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