A Second Wave Means a Second Market Crash
Looks like Aussie stocks are set to bounce higher this morning.
US markets were up overnight. Nothing like ignoring the economic reality unfolding to prolong the market gains just a little longer…
The stock market enthusiasm may end sooner rather than later. As Jim points out today, markets and investors aren’t prepared for a ‘second wave’, which could bring an even stronger strain of the virus.
Does that mean it’s time to swap your stocks for cash and gold?
Read on for more.
Until next time,
The Pandemic Is Just Getting Started…
It’s great that the rate of increase in the infection caseload from the pandemic is going down. (It’s going up in particular localities, but it’s going down in the US as a whole.)
It’s great that the daily increase in fatalities is going down also. Little by little the lockdown is winding down and the country’s businesses and group venues are beginning to reopen. That’s all good news.
But don’t mistake that progress for the end of the pandemic. It’s far from over.
First of all, this is a global pandemic, not one confined to a few countries.
Brazil is suffering badly at the moment.
The problem is that despite border closures and flight cancellations, the virus still finds ways to spread.
So, there’s no assurance that the Brazilian or Chilean, or other outbreaks, won’t circle back to the US.
Then, as described by CNBC last week, there are local or regional outbreaks in the US in places like California, Arizona, and Florida that may be later in the timeline than the lethal outbreaks in New York and New Jersey, but are just as dangerous and have potential to spread much further.
Finally, there is the threat of a second wave of the virus.
This is more than just a continuation of the first wave; it’s almost a new virus that comes from mutation and recombination and can strike with much greater lethality than the first wave, to the point that survivors of the first wave with antibodies are not protected from the second wave.
The economy is reopening, and some activities are slowly getting back to normal, but investors should not discount the continuing impact of the virus and must bear in mind that even as the economy revives, it will never be the same.
A second wave means a second market crash
You’re hearing a lot about a ‘second wave’ of coronavirus infections these days.
This is based on reports of increased infections and slightly higher fatalities in certain states, mainly California, Florida, Texas, and a few others.
The reports are true, and the situation should be taken seriously, although these infection rates are not nearly as high as what we saw in New York and New Jersey during late March and April — when the disease was at its worst.
The ‘second wave’ is creating concern among investors and is part of the reason stocks have had some bad days lately, despite the strong rally in May and June. Still, it’s important to understand that what we’re seeing is not a real second wave.
It’s more of an extended spread of the first wave (including the ‘Italian strain’, a mutation that seems to have occurred after the virus travelled from Wuhan to Milan).
The Italian strain is more lethal than the original strain.
This may explain why New York was so much harder hit than Seattle and Los Angeles, at least initially: because New York picked up the Italian strain from Europe while the West Coast got the Wuhan strain straight from China.
The virus hits different locations at different times and each location must suffer through its own 8–10-week rise and fall in infections before the disease is somewhat under control. It may be the West Coast and Texas are in a late stage of the first wave because of a late arrival of the Italian strain.
None of this is a true second wave.
The second wave comes after a gap of about six months (so, from June to December 2020) and results from a mutation or recombination of RNA/DNA, that is practically like a new virus and is much more lethal.
The second wave of the Spanish flu (October 1918) was far more deadly than the first wave (March 1918).
A second wave is not guaranteed to happen, although there is real cause for concern based on past pandemics. Let’s pray it doesn’t happen.
What is clear is that countries and markets are still not prepared if a second wave emerges.
It’s too soon to jump back in the pool as far as stocks are concerned.
A large cash allocation is a good way to hedge your bets until we get an ‘all clear’ (if we do) early in 2021.
Cold War Two
Long before the virus hit, it was common knowledge that the China–US relationship was on the rocks.
Despite the famous ‘Phase One’ trade deal from earlier this year, not much has changed.
China has not lived up to its obligations to purchase more US agricultural output (especially soybeans).
The progress on a so-called ‘Phase Two’ deal involving theft of intellectual property and unfair limitations on US investment in China is not showing much progress, if any.
China was clearly at fault in the coronavirus pandemic.
There are competing views on whether the virus was leaked accidentally from a Wuhan government virus laboratory, or it jumped from animals to humans naturally in one of the notorious ‘wet markets’ that sell bats and pangolins (something like an anteater), which are slaughtered on the spot.
Either way, China clearly covered up the outbreak and allowed Chinese to travel to the US and Europe by the hundreds of thousands to spread the disease before other countries took defensive measures.
This has led to a legal theory that China can be sued for damages, which run into the trillions of dollars, in a US court, and plaintiffs can seize China’s holdings of US Treasury notes to collect any damages awarded. It doesn’t get more tense than that.
But maybe it does.
Trump is now threatening a complete ‘decoupling’ of the US-China relationship. In its most extreme form, this could mean no investment by China in the US, no purchases of Chinese goods, disrupted supply chains, no Chinese students in US schools, and more.
Perhaps relations might be limited to purchases of commodities and not much else.
That’s not as far-fetched as it sounds.
The US had almost no economic relations with the former Soviet Union until the late stages of the Cold War, except for sales of wheat.
Investors can prepare for Cold War Two by unwinding their allocations in Chinese stocks now before the curtain drops.
All the best,