The Black Bat Black Swan
Last night saw another sea of red on markets around the world. It seems EVERYTHING was sold as fear grips markets on multiple warnings the Coronavirus pandemic is going to be hard to contain. The World Health Organisation (WHO) warned the rest of the world is simply not ready for the virus spreading (as we have witnessed in Italy and the EU refusing to put controls in place) and a US Centers for Disease Control and Prevention (CDC) official conceding yesterday that a pandemic is now likely despite Trump tweeting that all is fine, nothing to see here…
What has some confused though is why gold corrected over this period whilst bonds continued to soar. Jim Rickards explained:
“On days like this, gold dips a bit. It's not because investors don't like gold. It's because weak hands need to raise cash to pay margin calls on stocks. Gold is liquid so they sell (mostly ETFs). At some point, it's a buying opportunity for strong hands who plan to stick around.”
We also have some pretty serious commercial short positions on the COMEX futures market that may have been stopped out as gold has risen so strongly.
The chart below paints a clear picture of how this year has played out with gold still the top performer despite that correction yesterday and last night. Gold is up over 7.5% in USD terms and our falling AUD means it’s up 15.5% year to date. Silver by comparison is up 1% and 8% respectively and so no surprise the GSR is back above an eye watering 90:1. This has many salivating at its prospects as mean reversion plays out as it sling shots past a bullish gold price. By comparison US shares are down around 5% and Aussie shares up 2.7%.
So strong are bonds that we have 30yr US Treasuries at record low yields and dipping below 1.8% and 10yr at a record low 1.3%. As a reminder, you don’t buy a 10 or 30 year debt note at that rate unless you think the world is going to get a lot worse and you expect a stronger bond price again.
CNN Money’s famous Greed & Fear Indicator tells the story of this dramatic turnaround from ‘the Fed has this’ to ‘the Fed’s not a vaccine’…
With the latest Roy Morgan Australian business survey revealing that 1 in 6 Australian businesses have been affected by the Coronavirus the reality is sinking in. Goldman Sachs discussed the implications on the global contagion via supply chain yesterday too:
“... however, risks are clearly skewed to the downside, with an increasing amount of companies suggesting potential production cuts should supply chain disruptions persist into Q2 or later. The supply chain effect is likely nonlinear with the length of the outbreak, as production is likely to remain largely unaffected until inventories run out, after which production may fall sharply.”
Back in 2012 FEASTA (The Foundation for the Economics of Stability) covered this succinctly:
“The final point is about black swans & brittle systems: The growing stress in our very complex globalised economy means it is much less resilient…. Thus a small shock or an unpredictable event could set in train a chain of events that could push the globalised economy over a tipping point, and into a process of negative feedback and collapse.”
We often speak of “Black Swans” that can’t be predicted but whose effects can be catastrophic. No one foresaw the creation of a new virus from a bat in Wuhan coming, but the above quote from 2012 foresaw the implications of something like this in our now globally interconnected and completely strung out world. This is not commonly called “The Everything Bubble” for no reason.
Gold’s dip is exactly as we saw before as the GFC played out as everyone sold everything to pay margin calls etc. But gold went on to double whilst shares halved by the time the GFC was ‘over’. That over is in inverted commas as all we’ve seen is more debt thrown at an unfixed problem born of too much debt. It was never over.