Below are 3 "papers" I wrote for the folks at my work. We import products directly from Asia as well as having our domestic suppliers rely on China for components and finished goods. The Coronavirus is of great interest to all of us for business, humanitarian, and personal reasons. Below are "facts" as far as I could determine. I am NOT a medically trained person. This is NOT meant to be a scientific treatise on Covid-19. I have done extensive research through medical, healthcare, government, and scientific sites; so this IS meant to be as factual as I can make it as an informed layperson. Do your own fact checking and research if you have concerns.
If you want to follow these as I wrote them, the first is actually from 10 -12 days ago and is at the bottom. I added to these twice more with the date at the top.
Updated as of March 7th
Here are some additional facts and thoughts as of this
morning.
The numbers in China have continued to plateau. The new
“reported” cases there have slowed their growth dramatically with those that
have recovered growing much faster than new case. I noted the “reported” as an
adjective as there is a lot of distrust of and speculation regarding the
Chinese government’s straightforwardness – or lack thereof - with this disease.
There are some people that believe the Chinese outbreak to be underreported by
more than 100% or even more. The issue is, there is no way to know for sure.
The “good” news is most of the rest of the world’s numbers
should be valid. Although they do show growth – meteoric in some places – the
percentage of patients that succumb to the disease are not remarkably higher
with some rare exceptions like Iran and Italy. Thankfully, they are still the
outliers, however. South Korea has had a dramatic rise in cases, but the good
news is the death rate there is remarkably low. As of this morning – 7.041
confirmed cases reported with 44 deaths – my heart goes out to the 44 patients
and their families, but that is a very low percentage! Let’s hope it holds and
proves to be more typical than Italy with 4,646 confirmed with 197 deaths.
Some updates on the disease itself. The disease seems to be
very closely related to SARS. In fact, the International Committee on Taxonomy of Viruses
(the folks that normally name these things) gave it the “official” name of:
“SARS-CoV-2”. The World Health Organization did not like the name and the close
tie to SARS, so they are using the better reported: Covid-19.
There are two confirmed strains/mutations of the coronavirus
so far. One appears to be more virulent than the other. They are types L and S.
The S-type appears to be the “original” at least in humans. The L-type appears
more frequently (now that they are looking for it) so it is assumed to be more
easily spread.
How actual transmission occurs is still somewhat questionable
as far as surfaces, contact, etc. It is known that droplets formed from
coughing and sneezing that are taken up by an uninfected person can cause
infection, but the other sources are less certain due to lack of time to do
proper studies. There are reports of active viruses lasting for many, many days
on inanimate surfaces and reports of the virus not surviving long at all. So,
this is an open subject still. The other “fact” that I have seen enough to be
pretty sure of is that the droplets from an infected person are virulent for a
longer distance than those from a cold or even the flu. The “6 ft rule” seems
to be inadequate for this infection. It seems to be ½ again longer – the “9 ft
rule”.
On a vaccine, I found an article on a deep web search (I was
10 or 12 links in, so I am not sure even where I saw it) that reported that an
early attempt at a vaccine actually did not work and made a reinfection (if it
happened) more deadly. Again, I don’t want to spread rumor or panic, as when I
went back to find the details I was unable to locate it. However, vaccines for
viruses are not as easy or effective as those for bacterial-type diseases.
(hence the common cold still being around, as well as influenza still killing
hundreds of thousands annually!). That fact makes a vaccine probably useless
for at least this round of infection. If you look at Ebola and SARS, both of
those had a huge scientific effort to find a vaccine. The efforts have all but
stopped for two reasons. 1) the ineffectiveness of viral vaccines 2) the lack
of additional outbreaks – no money in it.
As for financial issues, the virus has caused a lot of what I
wrote about with my first report. Travel and tourism companies and stocks have
been decimated. One airline official in Europe compared this to 9-11 as far as
effect. Airlines, hotel companies, cruise lines, and the like have seen booking
drop to levels unseen by most of them. The impact goes well beyond travel and tourism,
however. Almost 150 companies (could be more, that figure is a few days old)
have issued warning statements about impact to earnings as required by publicly
traded companies. China is the manufacturing “heart” of the world today. Right
or wrong, like it or not, that is pretty indisputable. With the slowdown in
China and the unknown still surrounding the outbreak, almost every industry has
been or will be affected. Apple, Microsoft, Coca-Cola, McDonalds. YUM Brands
(KFC, Taco Bell, etc) and others have issued warnings. That is one reason the
stock market has “crashed”. These stalwarts have all issued warnings and it has
scared the pants off of investors, especially those that have only been in for
10 – 12 years and have NEVER faced a downturn of any magnitude or length.
Even with all the above, I still am of the opinion that the
reaction to this disease is worse than the disease.
Updated as of March 2nd
From the original I wrote 2/13 more facts have arisen. So
here is an update. This is my take from many sources.
If the numbers are to be believed, the outbreak in China
seems to have peaked. This weekend showed the first 24-hour period where the
number of recovered patients exceeded the new patients. That being said, there
are still a LOT of sick people in China along with travel bans, quarantines,
and other restrictions that keep things from returning to normal or anything
like that anytime soon. One article I read this morning from a financial writer
that has sources inside China, said that he was told that well over 50% of
Chinese workers were still unable to return to work for one reason or another.
The larger companies with resources (like Midea, Haier, etc) have people back
working their factories. The companies are doing a mixture of new hires and
returning workers so that theoretically they can start production back. The
issue is a lack of parts and materials to actually build products. A lot of
parts are manufactured in smaller facilities by smaller businesses. Even if
they are affiliated or partially owned by a large company, the do not have the
resources/money to get up and running. So, for China, it will be a long road to
get even close to full production. The writer I am quoting said it would take
at least two quarters in his estimation (from info he got from his sources).
The issue in China is the economy. Transportation has been
very limited. Food, raw materials, finished goods, and people have not moved
and a great displacement has occurred. When what is needed is available, it is
not where it needs to be. That alone is estimated to take the better part of a
month to get sorted out. In reality, China is sure to hit recession levels of
growth/retraction at least for a short while. That may not agree with what is
reported, but what is happening on the ground is almost certain to be a very
serious issue. With China being the world’s 2nd largest economy and
a large part of the growth of the world’s economy over the past 20 years, this
has serious repercussions for the rest of the world.
Now, for the rest of the world the outbreak does not appear
to be anywhere near as bad. There are pockets of growth in the numbers of
affected, but they are still relatively low compared to the numbers in China.
The most new cases are showing up in South Korea, Iran, and Italy. South Korea
is showing a much lower death rate versus China, a very good thing. Iran is
showing a MUCH higher death rate than China. The thought on that from what I
have read is that Iran’s lack of medical services outside of the major cities
is hitting them very hard. Italy is running right over 2% death rate, very
similar to China. That is a bit of a puzzle to health officials as Italy has a
fairly substantial health system.
As bad as all this is, the largest impact of this outbreak
is financial, not medical. Japan has only 275 cases as I write this, with no
deaths. However, it is expected that Japan will have growth in numbers due to
the proximity with China and the travel that occurred right up until the
quarantines started. The financial issues are what is the largest impact Japan
will have on the world. As one of the world’s largest economies (3rd
or 4th in the world depending on how it is rated) the impact is
going to be felt all over. Japan already had reported recession-rated numbers
for their economy for the 4th quarter of last year (-4% growth), so
the impact of this world slowdown will be felt there and exacerbated at the
same time by the weakness there.
With the number 2 economy suffering, and the number 3
economy in recession already, this does not bode well for the world economy.
The IMF and World Bank have both already lowered the world economic growth rate
for 2020 by almost 1% to 2.5%. That is considered recession level for the world
economy. Europe has been rattled by Brexit and now this disease, so the outlook
there is not good either. The odds of a world-wide recession are great. A lot
depends on how bad China gets along with the rest of Asia. If China suffers
greatly, it will drag Europe down (which may go anyway). That will impact the
US as well.
With North America being separated by an ocean and with very
good healthcare in most of the area, the impact directly here will somewhat be
mitigated. But, as all economies are linked now, the US will see a slowdown as
well. It remains to be seen how much, but it will probably be significant even
if the direct effect of the virus is mild here. The main issue here is attitude
and opinion. The news media has decided to use the virus to “get” Trump. So,
for the most part the coverage is very sensational, approaching irrational.
Unfortunately, as economies go perception and attitude have a GREAT affect. If
a large portion of the population and the news media are expecting a recession,
then the likelihood increases greatly. Based on what I have read, the growth
this year has already been downgraded by the Fed from right at 3% to just over
2%. That is as it stands today. Again, the world economy is very intertwined
and connected. As goes Asia and Europe, so goes the US. Fortunately, the US
economy has been quite strong. Some manufacturing has moved back to the US. If
raw materials and parts are available that will help greatly.
Bottom-line: the disease aspect looks better than it did a
week ago. The economic aspect looks worse in many ways.
__________________________________________________________________
My thoughts on the financial impact of the Coronavirus – now
officially named Covid-19, on the world economy as well as our business.
Overnight the infected numbers went from @41,000 to over
61,000. Now, this is supposedly mostly due to a “change in the way the numbers
are counted”, but it confirms what a lot of people have been thinking all
along: the infection rate is much higher than what has been reported.
Some general facts and thoughts:
In the scheme of things this virus is still a mere
statistical blip compared to Influenza. For example, in an average flu season 3
to 5 million serious cases (hospitalization or serious medical care needed) of
Flu are reported worldwide with almost 300,000 dying from complications caused
by it. Compared to well under 100,000 cases reported of Covid-19 infections and
1,500 deaths, you can see this is statistically nothing.
The fact that almost all the infections are currently in one
country (China), and the infections appear to not have reached a peak yet,
makes this much more impactful. For anyone to say what exact impacts this virus
outbreak will have on China’s economy and outlook short-term is still very
premature. With the interconnection of world manufacturing on Chinese input of
parts and components, it will be showing an immediate impact when stocks of
existing supplies are depleted. The lack of ability of the movement of goods
and people in China is having a tremendous impact today. However, I (taken from
lots of research and people that have opinions I trust) feel the long-term
impacts may be greater. The fact that it is something new and unknown also adds
to the impact. The fear of the unknown is powerful. Unfortunately, attitude and
perception fuels a lot of the what we do and how the world economy operates.
Currently @60 million Chinese are on “lockdown”. They are
quarantined individually or in a town/city that is under quarantine. There are
guessed to be another 100 million or more that are on de facto “lockdown”.
Their place of business is in a town/city that is under quarantine some other
outside factor relating to the widespread lockdown is preventing them from
going about their normal daily routines.
Some thoughts and predictions:
Once Covid-19 is contained it is thought that the Chinese
government, its people, and foreign businesses will undertake a deep assessment
of how to move forward. It is almost certain that contingency plans will be
developed to cope with future crises such as this outbreak. Even the SARS
outbreak did not cause mass quarantine, nor did it have a substantial impact on
the Chinese economy.
The same people that I referenced above that have opinions I
respect have been talking about China having a serious economic problem for
over a year. The effect of US tariffs and other regional and global economic
issues on the Chinese economy are thought to have been greatly downplayed by
the Chinese government/media. What is known is that Chinese growth has slowed
dramatically, even prior to this outbreak. The Chinese government, particularly
at the regional and local levels, has been funding the “growth” with
loans/debt. There have been many infrastructure investments that have been of
the “bridge to nowhere” variety. There are entire cities that have been built
that are ghost towns. Multilane highways are built that are not travelled. The
Chinese people want to live in the booming cities of China. The new cities and
highways that were meant to relieve some of the pressure on the mega-cities has
not slowed this migration, and are sitting unused for the most part. These
infrastructure spends have falsely inflated the Chinese economy and not added
to the “assets” of the country in any meaningful way.
The Chinese economy of modern times (since 1980) has grown
at a fantastic rate. The bottom was hit in 1990 at 3.9% reported GDP growth. By
the mid-90s (after WTO admission) it hit 12 – 14% and then averaged close to
10% growth until 2011 or 2012. Reported GDP growth was 6.1% for 2019. However,
look at the previous paragraph and realize that the Chinese government controls
and reports the figures autonomously, and you will probably assume, like a lot
of people, that the growth rate of late has been grossly overreported. The 6%
reported is thought to be as much as 100% overstated.
That being said, the growth has slowed, even by the numbers
being reported. The thought for this year, prior to the virus, was @5 – 6%
again. Now it is thought even if the outbreak has peaked and is contained it
may only be half that – reported (what will the real GDP growth rate be?). The
IMF pegs the world economic growth rate at @3% for 2019. China is the world’s
#2 economy. It is now projected that the world economic growth rate could drop
to 2.5% or lower. 2.5% is considered recession level growth to put it in
perspective.
Even though China is #2, why would China have such a large
impact on the world economy? China is now the largest (it varies between the US
and China monthly) user of crude oil. With the need for oil being cut
dramatically there, the price of oil (and profits for the oil companies and oil
producing countries) will drop (and has already). Now, low oil prices can be
good, but the bottom falling out is not good as the so much of the world’s
economy is oil based (sorry environmentalist, just a fact). China produces a
very large percentage of the parts used to build everything from automobiles to
appliances. It directly builds a very high percentage of small appliances, TVs
and TV components, and many, many other categories. If these factories do not
get back to normal soon, the world economy will suffer. China also contributes
greatly to the travel and tourism industries. They are and will experience a
great drop in revenue even with the state of things today. If the outbreak is
not handled, that industry could be in dire straits soon. A lot of the world,
including countries that have no other real industry, depends on tourism and
travel for their economy. China is a great importer and exporter of goods. If
their economic condition is not improved, the financial impact of this trade
will also cripple some smaller economies.
Now for the nightmare of Beijing: unrest. The Chinese
government has the same problem of any dictatorial type of government:
uprising. The Chinese people have learned to like, love, or at worst accept,
the control coming out of Beijing because they have had such growth. The
standard of living of all Chinese has improved dramatically over the past 30
years. A generation and more have seen their lives bettered by the great
domineering government. The weakness exposed by the Covid-19 virus is waking up
some of the people to the fact that the government cannot protect and care for
them in all areas. Combined with the general unrest for more control over their
lives by the youngest of citizens, as witnessed in the Hong Kong uprisings, the
population is a powder keg waiting to blow. The Chinese government, even with
the military, cannot effectively control an uprising and revolt by any large
percentage of the Chinese population. If the virus is not brought under control
soon, think of a city of millions of people that are under quarantine running
out of medical supplies, food, and other necessities. Like Hong Kong, but
instead of political motivation they would literally be fighting for their
lives. True life or death survival compared to political freedom; a true powder
keg/civil war type scenario.
Bottom-line:
If the Covid-19 outbreak has peaked and the spread to other
areas/countries does not occur, the Chinese economy is looking at a bad year
(maybe very bad). The world economy is looking at a recessionary couple of
quarters. If the virus outbreak has not peaked and/or it spreads outside of
China more: all bets are off. FYI, I am not a “doom & gloom” kind of guy. I
don’t mean a “Mad Max” scenario or anything that drastic. I am talking about a
recession of 2009 type or similar.
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