Economically they used to say, “when America catches a cold the world catches the flu”.
At the moment because of the literal corona virus in China, the world is at risk of catching the economic flu.
Aside from the presidential election and the post Brexit trade negotiations (both of which are the long game for 2020 -being Nov and Dec respectively), the length of time that the world takes to adjust to the economic impact of the corona virus will be the story of significance in 2020.
First Up: The corona virus alone has put the Reserve Bank’s (RBA) interest cutting program
on (temporary) hold. (The Australian Wed Feb 5th: Philip Lowe)
That cutting program (while helping homeowners) has been less about them and more about an attempt by the RBA to lower the Australian Dollar, to support exports and national income.
The previous 3 rate cuts left the dollar hovering at 69c. The reaction to the corona virus has sent the dollar to 66.7c immediately.
Why is this happening and what does it mean for you?
We need to go back a year – in March 2019 the Bond Yield Curve inverted. Just stay technical with me for a bit. Usually if you lock your money away for 10 years (in govt bonds) the investor wants a higher rate of return than if they invest for 2 years.
If an investor decides to take a low rate over 10 years it is because they see bad times ahead and are taking the safety of govt bonds.
Financial markets (and central banks) interpret the Inverted Yield Curve as a significant sign of an impending recession. https://dashboards.trefis.com/no-login-required/evWYEyFQ/Inverted-Yield-Curve-IsRecession-Coming-In-Next-20-Months-?from=forbes
Since 1950 there have been 5 recessions and in each and every case the Yield Curve inverted between 12 months and 34 months from that event.
- What do governments and central banks do?
- What does the average person (this is called the market) do?
- What should you do – to both protect yourself and take advantage?
Central banks respond by immediately lowering interest rates to stimulate the economy (sounds like 2019).
Governments spend money – typically on government infrastructure (sounds like 2019).
The average person – with savings – gets a little tired of only receiving 0.2% to 2% – so they turn to the stock market which takes on a (long or short) last rush because dividend earnings are around 4%. The stock prices rise because people chase them, dividends don’t – because the companies aren’t earning more money. Hence dividend earnings fall to around 2%-3%. This is historically unsustainable no matter how much the market – called lemmings before they all run over the cliff – like to say: “but it’s different this time” (sounds like 2019).
The average person also turns to property because interest rates are low and hence loans cheaper (sounds like 2019).
Before we turn to what you should do – let me pause and digress.
The “party” stops, the “balloon” bursts – when an external event drags EVERYONE back to reality.
In 1973 it was the oil shock – Arab nations imposed an oil embargo – the house of cards came down.
In 1981 it was the Iran Energy Crisis.
In 1990 – the Middle East – again! – The Iraq war and yet another spike in the price of oil.
In 2001 it was the 9/11 crisis in New York.
In 2007 it was the subprime (call them dodgy USA loans) crisis.
In 2019 it might be the Corona Virus – but if it’s not the Corona Virus it could be something else.
The Corona Virus: Why is it different from any other Chinese version of the flu – medically I honestly have no idea – but here is what is undeniably factually different;
- China is the now the world’s second largest economy – fact.
- As of Jan 23: 15 cities and 50 million people are in quarantined lock down in China (Washington Post).
- The World Health Organisation (WHO) acknowledges this has never been tried before to contain a disease.
- China’s economy has weakened due to the US China trade war – this is WHY China and the US have just signed off on a truce and China is working so closely with the WHO.
- Countries are closing their borders to travel directly from China (USA, Australia, Russia, Singapore, Japan, NZ, Viet Nam…)
- A restaurant chain in Beijing – Xibei – with 400 restaurants has only 100 open for food delivery only, it has to pay 20,000 employees to “stay at home”.
- Apple!! Has closed all its Beijing stores for a week, so has McDonalds, Starbucks and KFC (China is 1/6th of Apples worldwide sales). https://www.marketwatch.com/story/apple-closes-stores-offices-in-china-over-virus-2020-02-02
The Corona Virus is already hurting the Chinese economy: https://www.reuters.com/article/us-china-economics-breakingviews-idUSKBN1ZY0PN
Is this the event that bursts the current stock market bubble?
When the Chinese stock market re-opened last Monday it immediately fell 8.3%.
Strangely the US stock market which had fallen 2% the previous Friday is picking up again – it is hard to see a logical reason other than funds finding flight to the USA.
The effects of the corona virus are expected to impact the Australian economy with significant falls in:
- Tourism from China – 100,000 people per month will not be coming while borders are closed to direct China flights.
- Higher Education – where a 25% fall in income is expected.
- Exports to China are likely to be affected by the internal China slowdown.
Let’s say either this event (or another) triggers a worldwide major correction on stock markets – how should you prepare?
- Firstly: history would suggest this is not the time to load up into the stock market. This is the period, that history might suggest, is when the lemmings approach the cliff.
- Secondly: history would suggest that central banks and governments will continue to keep interest rates low and increase spending to support the economy (and employment).
Interestingly while the luxury end of the housing market often suffers, the general housing market is resilient. (With the one exception of the last recession in the US where dodgy banks dishing out dodgy loans caused the recession – which created significant pain in the US housing market.)
So, what should you do?
- Economically – interest rates will NOT be going up anytime soon. With volatility in the stock market – housing is still the safest bet.
- So, if you want to buy your own home or use housing to invest – the time is right in 2020.
- Holiday at home – while the dollar is down you will get much more “bang for your buck” here. Specials will abound in post bushfire regions and those hit hardest by any slowdown in tourism from China.
As always if you would like advice specific to your own personal circumstances, please call or email anytime, it’s what I’m here for.
Just Ask Alan – Your online mortgage broker.