Supply Shock to Cause The Next Global Recession and The Fed Can’t Do Nothing About It.

This is it. The party is over. The world is now facing the gravest economic and social downturn in Modern Times. We are now entering a period of a global crisis that will change the world for a very long time to come. China has become a relevant player in the world supply chain, and production and demand problems in China are spread worldwide through direct and indirect channels.

The supply chain shock would be felt across the world. The European Union, The US, Japan, Canada, and all the major Asian countries would feel an immediate supply chain shock from China. The supply chain disruptions will become more prevalent in the weeks ahead as the warehouses are drying up. Lots of businesses, firms, and industry sectors shall drop in productivity, and some may become inoperable.

This is going to be a reset of the 1 in a billion type scenarios.

A perfect storm basically. What people don’t understand about this is that all supply chains will be destroyed. Ever had that one part you can’t get, and the entire machine becomes worthless? The chain (in this case, the global Chinese supply chain); Is only as strong as its weakest link. It doesn’t matter which link it is. If one breaks, the chain fails. This causes either a delay or the end of the chain. If the chain becomes fractured, (multiple breaks in the chain), then the time required to repair is extended, or the chain ends.

This can have extremely adverse effects on society. For years we have lived in fear of the paradigm that if our country, (pick one), loses, then another one will win. The disruption of the supply chain seems to ensure that all countries lose. I see that this is beginning its run in South Korea and Japan, too, and not only China. Those are the stories in the news. I am more troubled by the idea that it is making its run elsewheres as well, and we simply just are not seeing it yet. Price gouging will happen if production is impacted more than a month or two, and spare parts are unavailable to repair a car or industrial equipment used on a daily basis.

What happens when a car’s water pump fails, and the part is on back order for the next 2 to 4 months?
We already need to expand this analysis to see what impact a shutdown in Japan AND Korea is going to have on the world. It’s these secondary consequences that will cripple us. Who is responsible for putting all their eggs in one basket. No country ever in the history of human civilization has ever had its enemy as its biggest trading partner. That is until now. Congrats America, your evil greedy CEO’s who rob you blind and sent your jobs to China are so freekin stupid that they can’t even run their own businesses now. It’s going to hurt that’s for sure, but it is the wake-up call that Americans needed. If you hitch your wagon to a communist regime, bad stuff will eventually happen.

Putting money into Chinese investments was either very stupid, or it was treason. I never understood why we, the USA, ever started such a huge trade relationship with the Chinese. Relying on a country that has missiles pointed at us and plans to rule the world was stupid.

Who thought buying stuff from a totalitarian regime would not turn their people into slaves? And, how much technology did they gain from the West in the process. I think we can all see how they are applying it. Were we that stupid, or are we that greedy. Greed. Avarice. Gluttony. Big Market. Cheap Labor. You get the idea. Companies spent 30 years de-industrializing the US to exploit cheap foreign labor. It was bound to end horribly. I personally thought supply disruptions during World War III would get us. Never guessed it would be a pandemic. It’s recession time again. This business cycle has been a long one historically. I guess QE kept the boat afloat, but it’s now taking on water fast. The pandemic is going to give it an extra push down.

Remember this WORD. SUPPLY SHOCK. IT WILL BE WHAT WE WILL REMEMBER WHEN THE PANIC ends, AND WE WILL HAVE TO COUNT THE ECONOMIC CONSEQUENCES OF THE pandemic. IT WILL BE A RECESSION DIFFERENT FROM ALL THOSE WE HAVE ALREADY seen, WHICH started with A DECREASE IN CONSUMPTION.

THIS recession will be caused by the decrease in THE OFFER. AND EVEN THE CENTRAL BANKS CAN DO LITTLE. WHAT WILL WE DO WITH ALL the free MONEY IF THERE ARE NO PRODUCTS TO BUY?

The fallout from the ongoing epidemic is prompting several observers to issue new warnings about a possible full-fledged global recession. And economists fear that the turnaround will not resemble those experienced in recent times. The outbreak has already led companies to reduce their short-term expectations regarding turnover and has prompted analysts to revise their estimates for global growth downward. The specter of an economic downturn has declined rapidly on what many, just a month ago, considered healthy expansion.

Experts are now rushing to diagnose the overall economic risk associated with the pandemic and to identify the first areas in which it will materialize. Past recessions began following a drastic weakening of consumer spending, which forced companies to face a drop in turnover and triggered a dangerous vicious circle based on staff downsizing, slowing down the purchase of goods, and economic contraction.

The pressures on supply and demand can reinforce each other, putting central banks in a difficult position to relieve stress before it gets worse. What makes this pandemic unique is the fact that it is beginning to have repercussions on both the demand and supply sides. The so-called destruction of demand due to quarantine orders for China poses a serious short-term threat, Morgan Stanley analysts wrote in a statement last Friday, adding that consumer activity would drop sharply in the tourism sectors, entertainment and retail sales of physical items.

But the disruption of manufacturing activities “will have a much wider impact on the global economy through the spillover effects on global supply chains,” said the team led by Chetan Ahya, a chief economist at Morgan Stanley.

Supply shock analysis. The latest economic data from China indicate that supply problems in this country are far from over. The PMI manufacturing index in China fell to 35.7 points in February from 50 points in the previous month, marking the lowest level since 2004. Manufacturing activity has fallen to the minimum since this figure was recorded, leaving the companies whose production activity is concentrated in China, little hope of seeing a rebound in supply. A supply shock puts central banks in a difficult position as the epidemic intensifies.

The Federal Reserve may reduce its benchmark interest rate to encourage spending, but buying activity stimulated in this way does not contribute much to recover an economy when there is no inventory available. It doesn’t matter how much freshly printed money you put in your pocket if there are no shops open and if, even if there were, there would be no trucks available to deliver the goods to them. Nonetheless, markets continue to discount a 100% probability of a rate cut in March, according to the CME FedWatch Tool. Fed President Jerome Powell recalled this reasoning in a statement released on Friday, in which he stated that the central bank is open to the idea of ​​reducing rates if the epidemic poses a sufficiently serious threat. Goldman Sachs even went so far as to predict a possible 50 basis point cut by the Fed before its next meeting.

A rate cut could undoubtedly make some investors active on the stock markets breathe a sigh of relief, but a coronavirus vaccine is the only element that could improve sentiment in a sustainable and effective way wrote Seema Shah, chief Principal Global Investors strategist, in a post published on the company’s blog last Thursday.

Several biotech companies competed throughout the month of February to start trials on a range of vaccines and drugs that have proven effective and have seen their share price rise accordingly. A World Health Organization official said on February 24 that Gilead’s drug cocktail might be the best found so far to fight the epidemic, but the results of human tests conducted in China are not expected to arrive before April. Until a medical solution is made available, markets will remain stuck in a highly uncertain, let’s see a game, with an increased risk of recession worldwide.

THE BIG BRANDS: FROM STARBUCKS COFFEE TO HYATT HOTELS, FROM APPLE PHONES TO LOUIS VUITTON BAGS, GLOBAL CAPITALISM IS ON THE EDGE OF A DEEP CRISIS. This is THE MOST SERIOUS TEST FOR The GLOBALIZED ECONOMY THAT WE HAVE GIVEN FOR DISCOUNT SINCE THE 1990s.

The EPIDEMY is infecting big brands. From Starbucks cafes to Hyatt hotels, from Apple mobile phones to Louis Vuitton bags, global capitalism is on the verge of an unexpected, profound, and long-lasting crisis. The blame lies with COVID-19, but the virus is only a symptom of a serious malaise for the “era of globalization,” the period of economic expansion, commercial integration, and technological innovation that has characterized the last thirty years of our history.

Like the pandemic, which “originated” in a Wuhan animal market, anti-globalization disease started in China but quickly spread to the rest of the world. Starbucks, the American multinational that has convinced the Chinese to forget millennia of tradition and abandon tea, has sounded the alarm this week: sales in its bars in China will drop by half in the second quarter – a hit of about 400 million dollars. Hyatt took his own, confessing to investors that he lost 90% of reservations in China in February, and profits will suffer. And Nike and Adidas have also added their names to the long list of companies affected by the pandemic.

The big luxury brands are suffering even more. For years, China’s dizzying development has created millions and millions of new consumers with the taste, the money, and the desire to cloak up Made in Europe glitz. In 2018, this new horde of spenders disbursed € 100 billion to buy luxury goods, more than a third of the total. So keep an eye on companies such as Lvmh – the owner of the Louis Vuitton, Hennessy and Moet & Chandon brands – Tiffany and Capri, Michael Kors’ holding company, Versace Jimmy Choo. Without the yuan (and dollars) of the ladies and gentlemen of Shanghai and Beijing, it will be tough, very tough indeed.

The shares of these companies, and many others, are in free fall because investors are afraid, not so much of the present, but of a future that promises to be gloomy, uncertain, and dangerous. When I spoke to market participants this week, I felt fears and words (panic; capitulation; sell everything; run for cover) that I hadn’t heard since the 2008-2009 financial crisis. It is no coincidence that in the US, there is already talk of government aid, just like 12 years ago.

Obviously, it takes a broader view. Faced with a virus that has infected more than 100 thousand people, with a list of victims that is above 3400 and does not seem to stop, it does not matter if Tiffany sells fewer diamonds than last year. But this epidemy has the ability to disrupt billions of lives and bring about structural changes in the building of world capitalism.

When Apple, the company most loved by consumers, warns that the pandemic could cause an iPhone shortage, then we need to think about the consequences on corporate balance sheets but also on how ordinary people communicate every minute. The Wuhan market has produced not only a very serious health emergency but also the most severe test for the globalized, interconnected, and technologically advanced economy that we have taken for granted since the 1990s. We already know, unfortunately, that this virus kills people but will be lethal for globalization already besieged by populist politicians, social inequalities, and environmental disasters.

It takes courage to predict the end of an economic and cultural movement that has its origins in the Silk Road of 2000 years ago. But the responses of governments, entrepreneurs, investors – and us mere mortals with the iPhone – in the coming months will be fundamental in determining the future of a planet that, all of a sudden, feels very, very fragile.
We’re lucky we started a trade war before the pandemic started. That gave companies a head start in evaluating their dependence on China, specifically, and on handling supply chain disruptions more generally. If the virus is disruptive enough, it will still cause huge economic problems, but they will be substantially less catastrophic than they would have been if it had just been business as usual with China over the last few years. We’ll never know what the alternative would have been, but this could ultimately be the difference between a serious economic shock and an economic collapse that sent us back to the stone age.

ZOMBIE APOCALYPSE: 80 MILLION AMERICANS ON PSYCH MEDS. 80% OF US meds originate in China. Obscene profits weren’t enough for Big Pharma. The supply chain disruption that worries me the most is when fragile American women and soy boys cannot get their anxiety/depression/insomnia meds. The emotional meltdowns will be epic! If you haven’t stocked up, this is probably the best time to do it. If you are thinking about supplies, it’s probably a good time to go shopping. Once the shelves start to grow empty, you’ll know the supply chain shock is real. The survivors of this pandemic will need to learn how to live without China’s cheap labor.

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