Wall Street is Foolishly Discounting the Economic Impact of the Coronavirus. - Nathan McDonald (Feb 14, 2020)

February 14, 2020

At the end of the trading session on Wednesday, February 13^th, the markets were jumping with joy, celebrating the fact that for the first time since the coronavirus crisis began, things were beginning to turn around, with new infection cases dropping off in a significant way.

Unfortunately, less than 24 hours later, this hope would be completely and utterly shattered. Reality returned and China's health authorities reported 15,152 new confirmed cases of the novel coronavirus infection, plus 254 new deaths.

This should have sent the markets lower, but in this upside down world that we live in, the markets shrugged off this spike in new deaths and cases, moving once again to new highs.

(Chart via google charts )

This massive 15,000 increase in new cases is apparently largely to do with revisions by the Chinese health authorities, in which they changed their guidelines in regards to the coronavirus, Shine.cn reports;

"In line with the latest version of the diagnosis and treatment scheme released by the NHC, suspected cases in Hubei with pneumonia-related computerized tomography (CT) scan results are identified as clinically diagnosed cases, said Mi, explaining why the confirmed COVID-19 cases soared on Wednesday.

The diagnosis criteria revision, which only applies to Hubei, was made to give clinically diagnosed patients in the province timely and standard treatment to further improve the recovery rate, according to the NHC."

However, this just confirms many peoples’ suspicions that the numbers coming out of China are largely being downplayed, whether it’s maliciously, or simply because they are overburdened by just how large it truly is, overwhelming their medical infrastructure in the process.

The coronavirus is often compared to the last major outbreak, SARS, which had huge ramifications for the markets, causing a major correction as fear spread across the globe.

The coronavirus has now surpassed the SARS outbreak by leaps and bounds, both in the rate at which it is spreading and the total number of cases.

Already, the SARS outbreak would have been in decline, slowing down in its spread; however, the coronavirus shows no signs of doing so with the latest figures taken into account.

(Chart source, worldometers.info)

The markets, however, continue to whistle a happy tune, comfortable in the fact that the Federal Reserve and other central banks around the globe will throw oodles of money at the problem, if the need does arise.

In fact, Fed Chairman Powell stated just this week that they would intervene in the next recession, combating it aggressively with additional quantitative easing.

The problem is, that interest rates are already at laughably low levels, standing at just 1.5%, while prior to the 2008 crisis, rates stood at over 5%.

There simply is not much room to cut. The Fed will need to rev the printing presses up to full capacity, throwing money at the markets and ballooning their already bloated balance sheet.

(Charts via goldprice.org)

The only market that seems to have any sense of sanity are precious metals, which continue to hold strong and move incrementally higher as the threat of the coronavirus spreads and some smart money seeks the protection of safe haven assets.

Already, companies that rely on China for many of their parts in manufacturing and products are reporting issues due to the coronavirus, which is bringing their economy to a standstill.

If the virus continues to spread to other countries, people are going to become fearful, limiting travel and trips out to only what is required, which will exasperate the economic problem even further.

This is going to have a rippling effect, which I believe is not yet being priced into the markets, as more and more major companies begin to report the impacts that these supply restraints are having on their bottom line.

Expect a major correction in the near future if the virus is not swiftly brought to an end in the coming weeks, expect gold bullion to continue to move higher, expect volatility.