In light of how much exposure the topic has received and in light of the fact that the effects of a pandemic (from the far more systemically serious coronavirus/covid-19 to the less problematic bird flu or anything else) most definitely go well beyond the medical dimension (with the economic one also being in the spotlight), it makes sense to cover this topic in a calm, level-headed manner.
From a human life perspective, the spread of any virus is most definitely a tragedy and right from the beginning of an article which covers this topic, it needs to be made clear that empathy must prevail, with there being a fine line between an analytical approach (which we will be attempting as of this point) and cynicism.
However, in light of the fact that we focus primarily on the economic dimension here at ChinaFund.com, crunching numbers and a wide range of comparisons are inevitable. Numbers which help us understand why governments from all over the world were not prepared enough and why China itself tried to sweep the problem under the rug initially. Simply put, it all boils down to the fact that:
- Politicians and citizens alike were quick to shrug it all off as “it’s just the flu”
- Past virus threats which alarmed the population ended up not having devastating results after drawing the line, so it was tempting to assume that this time around, the same principle would be valid… it was not
These two reasons explain rather well why the coronavirus was able to fly under the proverbial radar despite the fact hat countries had what seemed to be ample time to prepare. To better understand why individuals were so quick to shrug the coronavirus off as a mere flu, let us look at some flu-related numbers. While the flu tends to be considered very unpleasant but mostly harmless, we need to understand that it actually causes many deaths worldwide each and every year.
This depends on the country as well as how it chooses to gather data.
For example, according to data provided by the US Centers for Disease Control and Prevention, there have been 6,600 to 17,000 influenza-related deaths in the United States since the first of October 2019.
In China, numbers seem to be suspiciously low, with for example 2018 data revealing 700,000 flu cases and just 144 deaths. This is attributable to the fact that in China, a death is only considered flu-related if it was caused directly by the flu. However, many deaths are caused by complications such as pneumonia and those are not included in the equation by the Chinese authorities, being considered indirectly caused by the flu. Still, even with that in mind, the 2019 trend can be considered worrisome, with China registering over 600,000 flu cases and 143 deaths in the month of January 2019 alone, a number which went all the way to 1.77 million later in 2019 and exceeded the grand total of the previous 4 years.
Again, the line of thinking of the average decision maker revolved around the fact that in their view, the world was dealing with something not that much more serious than the flu.
What we here at ChinaFund.com need to understand is that from an economic perspective however, the medical dimension doesn’t really matter as much or, to put it differently, the market doesn’t care who was “right” and who wasn’t. Markets can be remarkably fickle, panicking when panic isn’t warranted or on the contrary, shrugging off very serious problems, at least initially. For example, if we are let’s say in the middle of a bull run and investors all around the world are sustainably optimistic, a pandemic-related panic might cause nothing more than a mere blip on the higher timeframe charts.
However, what if the opposite is true?
What if markets are close to the end of a major bull run, severely over-extended and over-leveraged, just waiting for that final drop that fills the glass and triggers a major sell-off? In such cases, whether we are referring to a pandemic scare or any other interpretable factor, violent market sell-offs are not to be discounted.
As such, in most cases, economic threats that have to do with pandemics are for the most part in the realm of emotion. At the end of the day, even if a certain pandemic is nowhere near serious enough to be disastrous from a medical or humanitarian perspective (which was definitely not the case with the covid-19, as we now know), it may very well prove to be just enough to trigger a major sell-off which marks the end of a bull market or the beginning of a bear market.
From a short-term perspective, we all know what happened, with a major sell-off being triggered all over the world and frightened investors switching from “risk-on” to “risk-off” mode.
It remains to be seen what will happen next in the coronavirus equation and what the longer-term implications will prove to be. We would like to make it clear that no matter what kind of a picture statistical facts tend to paint, a “never say never” prudential attitude with respect to potentially asymmetric threats is always recommended. Prudence correlated with moderation would be a wise combination, in our view.
It is worth pointing out that, in our opinion (the ChinaFund.com team), the worldwide economy is much more vulnerable than even today’s “discounted” asset prices indicate. In an international (rather than just strictly Chinese) landscape where economy after economy (including the Chinese one) is over-dependent on excessively easy financing (to the point of negative interest rates, quantitative easing and the list could go on and on), we believe it is paramount to understand that unlike with previous scenarios, we are no longer looking at just one bubble which has been overly inflated.
At this point, the worldwide economy is sitting on a wide range of bubbles across many completely different asset classes, from grossly over-priced bonds to irrationally exuberant stock markets. Each bubble, in and of itself, is more than dangerous enough to bring about potentially catastrophic effects and in aggregate, it would be the understatement of the (21st) century to merely use “dangerous” and various synonyms.
The bottom line is this: regardless of what ultimately ends up pricking them, it would be the #1 mistake of your career as an investor or trader to ignore the current situation. Should you be in need of assistance when it comes to wrapping your head around the many intricacies of our bubble-laden worldwide economy, the ChinaFund.com team is only one message or email away.