The covid-19 virus, or coronavirus, has risen lately again in the news cycle, and so has its perceived risk, causing the markets to jitter a little bit, and I wanted to speculate a little more on this, and share some thoughts.
Recently, on 2020-02-18, I spoke with my father about risking 1% of your total portfolio in a short hedge, with a 5% stop on the SPY, or QQQ, with no target, on betting that the markets were oversimplifying the risk associated with the virus. This trade can also be done with futures. The target is undetermined, until the full risk of the virus is known.
The cause of the virus is pinpointed from Wuhan, China, and has strains or genetic code of potentially man-made nature, or a biological weapon that could have leaked out of the Institute of Virology, probably off of the shoe of a post doc in the facility. The reality is we won’t know, or the governments won’t disclose the full genetic makeup of the virus, even though it has been scanned with an electron microscope.
As of now it has spread outside China, after a failed cover-up, in a communist run government, to places like S. Korea, Iran, and now the USA. As it spreads outside of China to more transparent democracies, the full extent of the effects of the virus will be better understood. The rate of infection is probably around an R^0 of 5 (meaning 1 person spreads it to 5, similar to polio’s R^0 value).
My guess is this virus was cooked up in a lab, or a strange hybrid of bat and pig strains or some variation that was in their wet market in Wuhan. This is also eerily similar to a great movie directed by Steven Soderberg, Contagion, a 2011 feature film.
It seems inevitable now that the virus will be a pandemic. I believe accepting the fact that it will now spread worldwide is important and realistic. How will we handle the virus if it spreads to India? We cannot, it will become unstoppable, or a pandemic.
Now that we know it is probably beyond the government’s power to contain the spread, what are the outcomes?
The 1918, Spanish flu, a historical reference.
After the horrors of WWI, people were once again battered by a fatal, yet not often discussed, worldwide pandemic, called the 1918 Spanish Flu.
It probably originated in a pig farm in Kansas, or a hospital camp in Etaples, France.
The Spanish Flu went around the world twice, once in its first wave, then mutated to a much deadlier virus in a second wave, killing approximately 1% to 5.6% of the entire globe’s population. Every time historians do research on this topic, or gather more data, the death toll seems to rise, now at approximately 50 million people.
This version of the flu the patient often did not die from the flu itself but an overreaction by a strong immune system, or cytokine storm. Like with the Spanish Flu, this virus killed young (babies), ages 4 and younger, and older people, 55+. The mutated form of this virus in the 2nd wave killed young people due to the over-reaction by the immune system, or the way I understand it, snot, mucus and flem build-up in the lungs, making it hard to impossible to breathe. Bacterial infection was another fatal symptom.
Again, like in the sham hospitals that China is building in Wuhan, we see similar “bed” structures to the ones of the Spanish Flu.
The correlations are remarkable.
Also the Spanish flu effected poor countries the worst with much higher fatalities rates. Iran was hit especially hard potentially 1:5 people died. While in the USA less than 0.60% died with 28% infected rated.
Keep in mind this was the worst pandemic reference in over a century that I think can be used for a historical comparison. If it is a biological weapon, it could be worse, as we will know more about the virus as time goes on.
Biological sciences, anti-viral understanding, are incomparable to what they were 100+ years ago, and chances are a vaccine will be developed in months (if not within 2 years), with a “lot of dead monkeys.”
Connected world, and the future
The world is more connected that ever, aruguably more so than in 1918, speed of travel, and speed of trade being much faster, with huge innovations in logistics. Global trade will lock up, as we see whole sections of China get locked down in quarantine; we will probably see more governments do these emergency measures. This will cause whole sectors of the global to crash, albeit temporarily. But this will most likely only last 1-2 years as a worst case scenario. Life, and the world, will go on; humanity will progress.
Daily life as of this blog date, is unaffected, and no one I know personally has the virus, traffic is high, coffee at Scooters tastes great, and the Zombies have not risen from the grave.
Food prices will most likely go up, as they have already in China. Young or middle age rural farmers could prosper, as they will be isolated from large centers where a virus can spread. Unfortunately, the average age of a farmer is older (worldwide, and in the USA), and will be more susceptible to the virus, and this could push food prices up even higher.
If trade locks up, it will be deflationary, and most all prices will go down. Central banks will inevitable open their same ole playbook and print a ton of money to stop the slowdown, especially with the election coming up. The amount of money could be higher than any QE before, they will desperately try to counteract the deflation. This probably won’t work.
Markets could enter a bear market, but it could be complicated by massive QE (money printing) policies. After the response by the central banks, and the passing of the virus, we could see a resurgence in the economy, and this could be when hyperinflation could occur due to all the fiat money creation, in conjuction with a resurgent economy.
America will probably go on quarantine, similar to China, and like in the film, Contagion. This will cause a slowdown, and deflation.
Shorting the market now would be premature, until earnings turn as described in the SPXEPS strategy. Earnings will confirm the economic and trade lockup, and cause the big money investors to bail, and this could cause more unintended consequences and unforeseen risks that could emerge in a NIRP and ZIRP economy. But taking a small hedge position would be wise, as stated earlier with a 5% stop above the recent high, risking only 1% of total portfolio.
There is a potential for a great buying opportunity as well, as the virus and its effects will most likely last 1-2 years based on the Spanish Flu.
The larger scary question is, can the virus push a low-interest, highly leveraged economy over the point-of-no-return. Is this the push needed to cause the next crisis? Too early to say at this time, in my opinion, but earnings will confirm it, as it has done since 1980.