Market Watch - March 30, 2020

Do Not Panic
Terrific Long-Term Benefit to U.S. Economy

We could not have had a more unfortunate set of circumstances disrupt our economy than coronavirus popping up. Not only was our economy on a roll, but in anticipation of great earnings, the stock market was on a roll. The country was getting ready for elections in November. And then in early February, it became obvious that the coronavirus could get out of control and create unmitigated havoc.

As painful as this is, the good news is “it will run its course”, and all will be fine again.

Question: How can everything be fine again, when airports are empty, no traffic on the Long Island Expressway, shopping centers, beaches, movie theaters, restaurants are shut down, people are being laid off, and nobody is shopping, placing the country in a position of drastically reduced cash flowing through the economy?
Answer: There is another side of the coin: even though the market has gone down, one owns the same percentage of the company that was owned before the coronavirus, and so far dividend income has not changed. Prior to coronavirus our economy had more cash than ever before in history, and cash shortages are what cause depressions. Finally, the market always returns to its high. This disruption, as uncomfortable as it is, will be something the country gets through and comes out of stronger than ever before.

Question: Please help make sense of this. How can the U.S. economy come out of this stronger than ever, and better off because of this catastrophe?
Answer: Many of our leaders have been warning us about the volume of business we do with China in high tech businesses and pharmaceuticals. China has confronted us on the South China Sea with their navy and air forces; they have threatened to cut off the supply of pharmaceuticals to Americans and bragged about it in the press “to show Americans that our withholding of drugs could kill thousands”; and there are over 1000 pending FBI investigations on Chinese espionage. In fact, China is a much more deadly enemy than Russia ever was. In view of this, it appears Congress is finally awake and will take action to move products that are critical to the defense of America, away from Chinese production.

Question: We had more than 40-years of a cold war with Russia in which this country was upset and scared a significant portion of that time. How can a statement be made that China is more dangerous than Russia ever was?
Answer: Russia has a declining population of 144 million. China has 10 times the population. Warfare now is going to be won by nations with the greatest IT capabilities, which requires intelligent people. The top 25% of the intelligent people in China would yield a population of 350 million, 30 million more than the entire U.S. population. The top 25% of intelligent Americans is only 80 million people. When we were at great odds with Russia, 40-years ago, the IT world barely existed, and wars were fought with hardware. This nation, almost double the population of Russia during that time, could out-produce Russia. While there was an element of significant danger during the cold war with the Russians, there was not nearly the risk to our way of life that exists with the development of materialistic, and territorially ambitious, Chinese leadership. The Chinese can mass produce military hardware pari pasu with the U.S. That hardware will be deployed by “soldiers with joysticks”, whose training will be colleges, not soldiers highly trained in marksmanship and hand to hand combat. Our presumed 80 million most intelligent citizens are outnumbered more than 4 to 1 by the Chinese “upper crust” of intelligence.

Question: The Chinese economy has grown tremendously the last 20 years. With growth like that, won’t they bury the United States sometime in the next few decades?
Answer: Notice the chart and China’s position in the Top Eight Economies in the World twenty years ago. They were number seven. Today China is the number two economy behind the U.S., the Chinese economy doing 2/3 of the GDP of the U.S.

While this looks impressive, the Chinese GDP per capita is very, very low. China is a host of mal-investment. As they have lied about everything else, they lie about their GDP, too. Debt is plaguing local governments who borrowed heavily for infrastructure to help fuel the country’s red-hot growth. Now they must pay the bill. Tax money is insufficient to service the debt. $400 billion of bonds are due in the next two years. There is an untold amount of “unknown” and unpublished debt. Banks are on the verge of teetering completely, with the regional and smaller banks in serious trouble. And while debt has fueled China’s huge growth, along with U.S. factory orders, they must pay the piper for all the debt at a time they are going to continue to lose U.S. business. Other U.S. allies will leave Chinese production facilities, too, except for simple low-tech items to manufacture.

Finally, notice that India was not on the list of top eight economies 20 years ago, but that it is now the #6 number six economy in terms of size. Within five to ten years, India will pass the U. K., Germany and Japan and be the third largest economy in the world. Economists feel that Chinese production will be curtailed by companies preferring to build plants in India and other countries rather than China, an interesting development to follow.

Conclusion:

It’s a good probability this will be over sooner, rather than later, which is what the administration is planning. Some facts: In the U.S. over the last 10-years, hospitalizations for flu have ranged from 140,000 to 800,000 persons annually. Included are deaths that varied between 12,000 and 61,000 patients annually. The fatality rate for flu is .01%, and while we don’t know, it appears the mortality rate for the COVID-19 is between .01% and 1%, not the 3.4% WHO predicted. For example, the fatality rate for MERS and SARS was 34.4% and 9.5% respectively, and neither generated the commotion this virus has created. Swine Flu on Obama’s watch effected 60 million people with 12,000 deaths, far more serious than coronavirus so far.

At the end of the tunnel it is likely we will have a huge run up in the stock market. There is no reason for the market not to pass its former highs. After every one of these catastrophes in the past, the market always exceeds its former high. There is likely to be tremendous pent up demand after everybody being house bound for a while, coupled with all of that government cash to spend. We could come back into a market with strong corporate revenues that would lead to high corporate earnings. That would get the DJIA back to its former highs quickly, rather than being dragged out over a few years.

There is a high probability the virus will be under control by May and a painful memory by June. The stimulus package could be sufficient to plug the hole of the lost revenues and wages in the economy. When the bill was passed the DJIA was 22,000 points. When this administration took office in 2016 the market was 17,000, so even with this difficult time, we are 30% ahead in just three years. Let’s keep our fingers crossed that we emerge from this with an economy as strong as we had before, and let’s also hope our business leaders and politicians finally realize the dangers to our way of life, and to our economy by continued use of the Chinese to manufacture U.S. high tech and pharmaceutical goods.

The U.S. will emerge from this stronger than any other nation in the world, and we will be more competitive than ever. U.S. businesses were setting records prior to coronavirus. Look for that to resume.

Caveat Emptor.

George Rauch
March 30, 2020