No matter how many times Donald Trump clicks his platform-boosted heels the Coronavirus will not go back to Kansas or a Chinese food market. Science and reality now have the upper hand as Covid-19 goes global and takes a tragic human toll. Beyond the tragic fatalities from the virus, the uncertainty surrounding its infection rates and pressures on healthcare systems has created fear at the very highest levels.

The G-7 nations are planning an emergency conference call today as containment measures threaten to cripple global economic activity.  Already, shipping container traffic into the West Coast of the US is down 25%, tourist traffic into France is estimated to be 40% below average, airlines are cutting capacity everywhere and Apple’s manufacturing facilities in China are operating at just 25% staffing levels. Central banks across the globe are signaling financial support and the G-7 call is a recognition that this is probably the biggest shock to the global economy since the GFC in 2008-2009.

As with all shocks, the global economy and financial markets will recover in time. However, like the virus itself, financial stress does have a habit of exposing activities and policies which have, to date, been untested or have escaped more forensic scrutiny.  As Warren Buffett has said, “It’s only when the tide goes out that you learn who’s been swimming naked”.  With the benefit of experience from previous financial crises we would advise readers to watch the following closely as the curtain of normality is pulled back:

  1. Peak China: Irrespective of how history reviews the actions of Chinese authorities in containing Covid-19, the almost total shut down of the Middle Kingdom’s manufacturing base will prompt serious review in multi-national C-suites. The era of concentrating one’s manufacturing assets in one region/country is over. Expect the likes of Vietnam, Albania, Mexico, Colombia and Indonesia to benefit from likely diversification of manufacturing activities.
  2. Zombie Apocalypse: Ultra-low interest rates have helped weak franchises stay afloat as banks avoid painful loan write-downs. Given many healthy franchises will need financial support, banks might finally have to cut loose the zombie companies and save those with a genuine future.
  3. Governing the Gig Economy: The explosion of task-based contract work through digital platforms has created an army of independent workers in the services sector. This independence is a double-edged sword. In a public health emergency, one wonders, particularly in transport based services, whether governance is strong enough at a corporate level to ensure compliance with safety guidelines. Expect increased regulation in the future of gig work which is now firmly embedded in nearly all economies. For illustration, 36% of US workers are involved in the gig economy through primary or secondary jobs.
  4. CEO Health: We have written in a previous article how Churchill advised never to waste a good crisis. A large spike in CEO departures is already underway as Covid-19 is used as a convenient curtain to camouflage structural challenges facing certain sectors.
  5. Financial Fraud: Enron was a TMT crisis reveal; Bernie Madoff and multiple banks were our GFC gifts of the gab and gruesome. Whither Covid-19? Readers won’t have to wait too long we fear as cashflow and credit stalls.
  6. Panic Platforms: Markets have experienced furious gyrations over the past week. There have been repeated warnings over the years that liquidity won’t be sufficient to handle customer requests to redeem/sell/buy in high volume scenarios ie panic. Spare a thought for clients of the Robinhood investment platform for retail traders which seized up yesterday. Never good to miss out on a 5% up day. Even worse if, as speculated, the website shut down due to coders missing out the Leap Year 29th
  7. Ghoulish Globalisation: Sadly, China is at the epicentre of the storm and ultimately consumers in the West facing product shortages will only encourage the likes of Trump and Boris to “take back control” and make steel, coal and toilet roll great again. Expect a further wrongly-informed electoral retreat from globalism and additional delusional nationalism.
  8.  Sub-Prime Oil: If we recall the GFC crisis there’s usually one sector that kicks off the financial domino chain of credit implosions. In 2008 “The Big Short” was the sub-prime mortgage sector in the US which killed off Merrill Lynch, Bear Stearns, Lehman Brothers, Washington Mutual and Countrywide. The sector we are watching most closely right now is the shale oil producers in the US. The sector has binged on junk bonds at very low-interest rates and is already struggling to generate positive cash flow. The oil & gas production sector, loved by Trump, accounts for a very large portion of junk bond indices so any sharp falls in these benchmarks will be a red flag that a demand shock (oil price drop) is going to trigger plenty of Chapter 11 filings and very ugly write-downs at large US banks.
  9. Balance Sheet Supremacy: Critical to understanding the financial threat of Covid-19 is that this is both a supply (chain) and demand (spend) shock. Hence the G-7 emergency call. This writer’s experience of the financial world’s army of equities analysts is that they spend the vast majority of their time trying to forecast earnings with almost no benefit to investors and abysmally fail to understand the company balance sheet dynamics of a sharp reduction in revenues. Great analysts (very few) and great companies(many in Ireland with huge GFC experience) will prosper post-crisis with fewer competitors and enhanced credibility.
  10. Politics Meets Facts: Death doesn’t do “spin”. Funerals and ICU units are real and the statistics will rebuff the most egregious exponents of science denial. It is very possible Covid-19 will be the death knell of the Trump presidency as the US grapples with the structural problems of so many outside the support net of government. No sick pay, no insurance, no education and no information could cause a far higher death toll per capita than other “developed” countries. Katrina and New Orleans destroyed Bush; thoughts and prayers won’t save Mike Pence or the President.

 

If there is a single long term positive of a challenging Covid-19 crisis it must be the hope that science and facts reveal poor actors, incompetence and dangerous misinformation. Sadly, the human costs could be far higher than a digitally informed world would have hoped….

                “Some people without brains do an awful lot of talking, don’t you think?” 

                                                                                                 – Scarecrow in The Wizard of Oz.

 

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