Little introductory note. I actually began this post on Monday, 2/17/2020 but didn’t have time to finish it. Today the DOW went down by -166 pts and Apple announced a lower earnings projection due to decreased production and sales related to these conditions. So what I cover below is already proving out to be true. However it has only just begun.
In the last few weeks, China’s GDP has dropped precipitously. While the Corona Virus is clearly responsible for a portion of this, I am not convinced that this is the full explanation. Yet even if I am incorrect and this is solely due to the Corona Virus, the economic implications remain the same.
Coal consumption has dropped significantly during this time, as has oil usage and freight shipping. All combined indicates a serious decline in manufacturing and goods transportation.
Several banks in China seem close to collapse. However, those are primarily non-state banks.
China’s Finance Minister said they will not introduce an economic stimulus. They will reduce taxes and fees on small businesses and individuals but will not be taking the approach of The US Federal Reserve, which includes creating new currency out of thin air to bail out banks and large companies.
Basically, this means they will focus on their economy from the bottom up, which is a long term view to help their people, rather than the elite at the top of the chain.
This has other implications which western media is not going to focus on readily until they are forced to do so. These circumstances will absolutely cause inflation inside China. Though with the structure of their government and economy, they could impose price limits on critical goods and/or subsidize those goods for the benefit of the people. In short, China will focus first and foremost on internal economic well-being and the welfare of their citizens before even thinking about external considerations.
The downstream effect of dramatically reduced exports from China means that within weeks, store shelves in the US will run dry of some products and we will see rapid inflation as back stores of some items are depleted, especially perishable goods.
Electronics made for US companies in China will become in short supply quickly. It is entirely possible that rare earth mineral shipments will be suspended, which will all but cease even domestic production of many electronics products. This applies to other nations which are supplied by China yet the products sold in the US. Think memory and computer components from Korea and Japan.
As supplies dwindle, this will translate to not only inflation but layoffs in retail and manufacturing. Which means further layoffs in freight, such as trucking and shipping. Then layoffs in courier and mail services.
Steel and building supplies will see a delayed effect but we can expect to see increased prices on those goods this year at some point.
Decreased oil consumption will affect US oil production. Meaning we may see lower gas prices for a short time, until production is reduced. Meaning more layoffs.
As production decreases in China, we may expect to see decreasing stock prices on companies that rely heavily on China for their products. Such as Apple and Walmart. This could be the tipping point which sends the stock market into chaos and decline. Most of that depends on how the Federal Reserve responds. Sooner or later the Fed will no longer be able to compensate for all the private investors fleeing the market.
Some will claim that this is good news for US producers. That will only be true if these circumstances continue for an extended period. If it only lasts for weeks or even months, US manufacturing currently lacks the capacity to compensate for the reduction. Farming will take months to catch up. Some ranching will take months, other ranching will take years to catch up. If US companies invest to increase production and China then regains their capacity within the year, those domestic investments would be wasted and could result in massive losses. Companies would still revert to immediate production as opposed to spending large sums to increase capacity which would then require more highly paid US workers to maintain.
All of this means that any reduction in supply is likely to be for a period long enough to have definite economic impacts in the US.
My sincere suggestion is the prepare yourself now for some shortages in the way of dry foods and canned goods. The last things to see a reduction will be fresh produce and meats. However, those will see inflation as consumers shift their buying habits due to shortages of some items due to shortages.
Slightly ironic when you think about it.
If you rely on electronics and building supplies, stock up on spare parts and supplies now.
We are settling in for a rough ride for at least the next few months. Prepare yourself mentally and any other way you can.