Tuesday, January 28, 2020

China Implosion: Lehman Moment

Historians will look back and say that the Corona Virus was the straw that broke the camel's back...

One off events rarely if ever crash markets. Even the Pearl Harbor attack - the quintessential black swan event - was a huge buying opportunity, as the U.S. economy was gearing up for war. 

It's economic conditions and positioning going into the event that really matters:

"Short-term stock market timers, on balance, have been extraordinarily bullish for a couple of months now. Even a few days of such excessive bullishness would normally lead to market weakness, much less a few months of such exuberance. So conditions were ripe for a pullback.

"...there has been no other three-month period since I started compiling the data in 2000 during which the average HSNSI level has been as high as it has been since October"

If it weren’t the coronavirus, in other words, something else would have been the straw breaking the camel’s back"

I 100% agree, however, I would add that the weak global economy in no way supported today's bullish sentiment. Therefore it was a combination of delusion, economic weakness, and now pandemic.

The combination creates the tipping point, similar to Lehman in 2008. The collapse of Bear Stearns, WaMu, CountryWide, Merrill Lynch, Fannie Mae, Freddy Mac, and AIG all preceded Lehman.

It was only a "black swan" event to people who watch South Park all day

"Markets are underestimating the potential fallout of the coronavirus outbreak, which could be a “Lehman-type” moment for the global economy, according to economic research firm AdMacro."

“A huge tranche of the urban population is shut down, a huge tranche of business, so a lot of Chinese companies are just going to have to declare force majeure and shut down orders.”

In a statement issued Monday, Perret-Green said the coronavirus outbreak represented a “Lehman-type moment tipping point” which could “tip the global economy into effective recession.”

I think we all see where I'm going with this:

As much as U.S. gamblers would like to ignore this virus and pretend it's merely a China problem. The fact remains that it's not under control:

"Raymond James health care policy analyst Chris Meekins said he suspects official Chinese statistics on coronavirus infections is “really a fraction” of those who actually have contracted the disease — in part because of the country’s established history of underreporting its public health crises."

“If China’s been reporting about 800 [infections] with 25 deaths, we think the number is probably 10 times that number in China right now because you had a number of misdiagnoses”

There have been two overnight Corona-related gaps in the past week. Each one has a similar retracement pattern as Skynet works overtime to fill the open gap:

Hong Kong returns from lunar New Year holiday tonight (Wednesday HK). Only to find that U.S. gamblers have been selling down their (cross-listed) stocks. I suggest there may be a few margin calls...

When you consider a market primed to implode due to "Fear of Missing Crash" FOMC melt-up mode, it doesn't take too much imagination to figure out how this all ends.

In the meantime, the order of the day has to be "BTFD"