The Coronavirus Outbreak Looks Far More Serious Than SARS

By: TradeSmith Research Team

3 weeks ago | News

As of this writing on Friday, Feb. 7,  markets are catching up to the coronavirus outbreak — but investor awareness is still far behind. The situation could be far more serious than most realize.

“Dow drops 200 points,” a CNBC headline reads, “on concern coronavirus will dramatically slow China’s economy.”

The odds that China’s economy will “dramatically slow” are virtually 100% now. It would take a miracle to prove otherwise.

The Chinese government has effectively shut down large sections of the country. In at least six Chinese cities, citizens are reportedly confined to their homes — allowed to leave just once every three days.

Factories and schools are closed. Transport hubs are empty. According to the New York Times — in other words not some crazy rumor mill — the government is reportedly rounding up citizens and sending them to “mass quarantine camps.”

In Wuhan, where the outbreak began, “wartime conditions” are in effect. The following is a quote from Sun Chunlan, a government official managing conditions on the ground in Wuhan:

“Set up a 24-hour duty system. During these wartime conditions, there must be no deserters, or they will be nailed to the pillar of historical shame forever.”

How many people have been infected by the coronavirus — and how many will ultimately get it?

The frightening answer is, “We have no idea.”

The official reporting out of China, as of this writing, says more than 30,000 have contracted the virus — but that number could be totally bogus. Even if the Chinese government is being honest in its reporting, the tally is still meaningless.

We don’t know how many are hiding out in their homes for fear of being sent to a quarantine camp or how many have it but don’t know it, because symptoms aren’t visible in the incubation period.

Markets originally seemed to assume the coronavirus would be like SARS in 2002-2003 — a burst of anxiety and then a quick recovery, with total infection rates topping out at 100,000 or so.

That estimate could be off by multiple orders of magnitude. Because we don’t know the actual transmission rate of coronavirus, or how many people have it, or how far the virus spread, the actual number of infected all told could be a million. Or ten million. Or more.

The same goes for the coronavirus death rate, which has climbed to 636 as of this writing. What is the actual death rate within China? What will the final tally be? We don’t know. But as with the infection rate, it could ultimately be an order of magnitude, or multiple orders of magnitude, larger than what many expect.

While the Dow’s reaction has been relatively mild, energy and commodity markets have gone into freefall. The price charts for crude oil and copper look appropriate not just for slowdown or recession, but a full-on global depression. This is the impact of China’s economy shutting down.

Then, too, the real question is how other countries respond. Within China, authorities and citizens are entering a state of panic, with good reason. So what happens if the panic response also migrates?

The markets are now facing “headline risk” — the psychological transmission of fear, or even panic, via newspaper headlines, as coronavirus impacts spread well beyond China’s borders.

Cruise ships are a case in point. A cruise ship docked in Yokohama, Japan, has been placed on two-week quarantine with 3,700 people on board. Another cruise ship with 3,600 passengers has been quarantined in Hong Kong.

A third ship, the Anthem of the Seas, docked in the United States via Bayonne, New Jersey, with passengers being screened Friday morning. Footage was recorded of other passengers leaving the ship on stretchers, reports the BBC. 

In perhaps the most dramatic and emotion-stirring news of all, a 33-year-old doctor in Wuhan has died from the coronavirus. The news roiled China because the doctor, Li Wenliang, was one of the first to sound a warning about the outbreak — and the government suppressed him.

Another wild card is the manner in which Western governments respond, and what kind of ripple effect an extreme response would have on the public. If the United States or Germany or the UK were to decide to aggressively escalate quarantine protocols, public fear could reach a tipping point.

It’s still not clear what this means for U.S. equities (barring the energy sector, which has been utterly destroyed). That is because the worse the picture becomes, the greater the odds of stimulus countermeasures from the Federal Reserve — in the form of new interest rate cuts, or another round of quantitative easing in a new and potent form, or both.

The weighting of that possibility — a “here comes the cavalry” type rescue from the Fed — could be why the U.S. indexes are down only modestly, rather than sharply, as the coronavirus picture darkens.

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