Communist Viruses III

The US stock market fell by about 19% last week, representing a decline in value of about $3.6 trillion – or a little more than $11,000 for every living American. Another way of looking at the numbers is that last week’s decline was about $1.2 billion dollars for each of the worldwide total of 2,941 people who, as of this morning, are reported to have died from the Wuhan Coronavirus – and that $1.2-billion-per-decedent figure doesn’t include the similar declines in European and Asian markets caused by fears about the same disease.

But that the markets’ precipitous declines are wildly out of proportion with the number of people who have died from the new virus – after all, in an ordinary year, 50,000 or more Americans die from the flu without causing any impact on the markets – doesn’t mean that investors are necessarily wrong to be sharply marking down the value of their securities. Stocks are valued based on expectations about the future, and the unknown risks relating to the new virus have seriously worsened prospects for the global economy.

The world’s second largest economy – China’s – largely ground to a halt in an effort to stop the spread of the disease. The world’s stock markets crashed when it became clear that in spite of quarantines affecting hundreds of millions in China, the virus has spread to many countries and may now become a true global pandemic. The markets’ declines represent an all-too-rational fear that international trade in – and even the production of – vital goods may largely freeze as a result of the world’s ongoing efforts to stop the disease’s spread.

If the virus’s spread can’t be stopped and no cure or vaccine is found, the numbers of dead from the virus would be expected to grow exponentially – and, entirely apart from the butcher’s bill, the economic devastation from foregone production and trade would be incalculable. The hope is for a quick, comparatively happy ending to this horror story, of course, but the markets rightly fear that to a greater or lesser extent, the economic fire that has already been lit will not burn out quickly, and may leave smoldering ashes.  

Do you think that if a cure for the virus were found tomorrow international trade would go back to the status quo ante? I don’t. Not even close.

Oh, sure, people in China – and now Milan, also recently hard hit and quarantined – would go back to work. Factories would fill again; supply chains would begin to unclog. But attitudes about international trade – particularly with China – would be different. They will be different, whether the Wuhan Coronavirus is stopped sooner or, God forbid, later.

***

Ever since Nixon went to China, western business elites have been dazzled by the opportunities in China. 1.4 billion potential buyers for their products. Low cost manufacturing. Huge growth. China looked like a sure bet to become the world’s most important economy in the next decade, set to replace an American economy that looked fully mature and increasingly beset by social problems.

Suddenly, China isn’t looking so good. Forget about a quarter or two of lost growth (assuming that the virus will be stopped in that timeframe, one way or another) – that’s not the issue: China has ceased looking like the place to be.

Already last year, China’s government had bared its ugly side by imprisoning a million or so Uighurs, doing its best to squelch Hong Kong’s democratic system and bullying its neighbors with aggressive military and territorial moves. It preceded and followed these overtly coercive acts with widespread industrial espionage, only recently acknowledged, and then it completely mishandled the outbreak of the new Coronavirus, allowing it to germinate in the same conditions that had fostered SARS, and then to grow to the point at which it couldn’t be contained in Wuhan, or even in China – all in the interest of secrecy.

***  

One of the most fundamental concerns about the new virus (both from a scientific standpoint and from the perspective of the markets) is entirely attributable to the inherently dangerous character of the Chinese government: nobody trusts the statistics. Is that number – 2,941 dead – accurate? Is it true that roughly 83,000 people have the disease? Or are these numbers reflective of the Chinese government’s desire to present an image that the disease is coming under control (at least in China) and “only” 2%-3% fatal? Nobody outside the Chinese Communist Party’s hierarchy knows for sure.

China’s systemic culture of secrecy/information control has allowed rumors – and fears – about the virus to flourish. When the state controls the dissemination of all information, it can be expected to speak only in its own perceived interest. Others are left guessing as to what the facts really are.

China isn’t a benign, safe place to do business, just like Akron, only cheaper and vastly bigger. The mask so beloved of our business elites (“Xi isn’t a dictator” – Michael Bloomberg) has fallen off; Xi is a dictator, and the state he rules is a very dangerous place – for its own citizens, for its neighbors, and even for those who choose to do business there.

So now we know. And even under the best of circumstances, we’ll have to change our behavior accordingly.

The markets are adjusting to that reality.

M.H. Johnston

One comment to Communist Viruses III

  • Vivian Wadlin  says:

    Makes one look around for the businesses in the US that will take over what was China’s supply chain… Cash is king right now as everyone noodles that around.

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