Coronavirus Data, Chinese Tourism and Supply Chains

Stocks retraced all of their losses last week since the coronavirus started to hit markets, but Treasuries only retraced a small portion of their gains and oil remained weak. That indicates to me that the rally in stocks was less about coronavirus being resolved and more about more bets on central bank support. I switched from being bullish last weekend to bearish now. This is not the time to buy the dip (unlike last weekend, which worked very well). Oil Didn't Buy Into the Bounce Garbage In, Garbage Out - The Problem With Existing Data Garbage in, garbage out is an important concept that warns against taking too seriously the results of any calculation or thesis based on low quality data. As of Sunday morning, the Johns Hopkins dashboard that I've been using states that there have been 37,592 confirmed cases with 814 deaths and 2,920 recoveries. It is tempting to use this data as being highly accurate -- 37,592 confirmed cases seems pretty accurate, as opposed to giving a range of 35,000 to 40,000 but do they really have such precise information? I suspect that the precision of the counts implies a much higher degree of certainty around the numbers than there actually is. Rather than trying to work with the data today, I'll highlight what I think the biggest risks are to using this data. Some simple questions that I don't think are being answered (or I haven't found where to look): Confirmed Cases Any estimate of how many might be infected and have not yet been tested? Any good estimate of suspected cases? Or at least those who have been tested and are awaiting results? How is it attributed to a specific country? By citizenship? Where they were when discovered? Where they likely caught it? I see lots of estimates of R0, a measure of the rate of infection that is critical to modelling, but given the quality of data we have, it seems like at worst a wild guess and at best something that has been fitted to what is potentially low-quality data. Deaths and Recoveries Deaths have been very steady around 2% of confirmed cases, but we don't know much about who is dying or when they are dying relative to becoming a confirmed case. It is similar for recoveries. While it is highly encouraging that recoveries are now outpacing deaths at almost 8% versus just over 2%, that still leaves 90% of confirmed cases sick. I see lots of estimates of the mortality rate, another measure critical to modelling the risk the virus poses. Many seem to be using 2% or so, which fits the current data, but seems extremely optimistic on the outcome of the remaining cases (I hope they are right as it would save a huge number of lives). How Much of China is in quarantine and how long will it last? There are many stories about the Lunar New Year holiday being extended yet again and the travel restrictions and quarantines still seem to be spreading or getting worse rather than better. The cruise ship quarantined in Japan The rapid rise in reported cases from this ship is alarming to me. While it is being argued that conditions are ripe for spreading the virus, it does make you question how accurate other measures are which seem to indicate a much slower spread. The response in China, in terms of number of doctors, spraying, spending and quarantining, seems encouraging and effective but also seems disproportionate to the level of the reported problems. I am hopeful that the good data is accurate, but I want to err on the side of caution now. Tourism and Travel According to Nielsen, overseas travel spending by Chinese tourists reached $261 billion in 2016 -- ranking first worldwide. That was an increase of 4.5% over 2015. This report does include trips to Hong Kong and Macao as foreign travel (which is debatable) but the top-10 destinations include Hong Kong, Japan, Macao, Thailand, South Korea, the U.S., Singapore, Taiwan, Australia and France. China outbound travel has been growing at a rapid rate. In 2003, when SARS hit, China GDP was about 4% of the global total -- since then it has climbed to 16%. My understanding is that the percentage of global tourism is even greater than China's share of global GDP now. Thwarting the ability of the nation with the largest outbound tourist spending to travel is likely to have a significant impact on the global economy and it will be orders of magnitude greater than what it was in 2003. It is too early to tell how long travel bans will be in place. If the spread is contained could travel restrictions be lifted early? Possibly, but for now I think that this is an underestimated issue for the global economy to deal with. Supply Chains There is no shortage of stories about potential supply chain disruption. I am sure that China will make every effort to support their most critical global customers. China is extremely commercial and will do what it can to ensure they don't lose their place as a global leader in production. Having said that, it is unclear even with that intention, what can be done given the quarantines and domestic travel restrictions. Away from the massive global companies they supply, there could be serious risk to small and medium sized companies that are more susceptible to supply shocks. Again, worth remembering that during SARS, which resulted in fewer deaths, China was 75% less important to the global economy than they are today. I am not generally a big fan of the Baltic Dry Index (I have a great story on how it was created and how little respect some of the creators have for it), but as Shakespeare said, the devil can cite Scripture for his purpose, so let's run with it. Baltic Dry Index Nears Record Low The Baltic Dry Index has declined more than 83% since it peaked in early September. While I don't think it is a particularly useful measure, it does tell us something and you will certainly see this widely circulated by the doomers in the coming days (if you haven't seen it already). Stay positioned for more risk off and stay safe!

Coronavirus Data, Chinese Tourism and Supply Chains

During SARS, China was 75% less important to the global economy than it is today.

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