Are we about to have a recession? My wife, who just got back from a trip to Poland, asked me that question a few minutes after she got settled. When she's not running one of our restaurants, she works in real estate and we're looking at a house. She was stunned: The mortgage rates are back to 3%.
"It's that's darned coronavirus isn't it?" she said. "It's going to stop everything."
I said no, that's just not true. The economy's too strong.
But then I hedged, because I knew that the gauge she looks at, mortgage rates, are priced off of Treasuries and the 10-year Treasury is an absurdly low 1.5%. That rate does say recession. The bond market is gigantic. It simply can't be that wrong. I know that we have fabulous employment. Loan growth was pretty good as the banks said when they reported. Nevertheless, I can't afford to ignore the bonds. Only fools do that.
We have only a handful of coronavirus patients here. We only have one documented case of person-to-person transmission, and that's from spouse to spouse. The Secretary of Health and Human Services, Alex Azar, who has been captaining the U.S. efforts to prevent the spread of the disease was incredibly reassuring in comparing the illness to others he has fought. There was a sense, in fact, that perhaps we are far too worried about it given the precautions he's taking.
But the more I thought about it, the more I thought that perhaps the secretary was too glib. The illness, given its two-week incubation, can't be detected.
But the more I thought about it, the more I thought that perhaps the secretary was too glib. The illness, given its two-week incubation, can't be detected. We have screening by temperature when people arrive here, but you can have the illness and not have temperature. We are still allowing about 8,000 people from China to fly here. We haven't stopped these flights, exposing our own workers at our own airlines to those who are sick, but don't know it, or worse, those who do know it and would rather not be treated by China' suboptimal health care system. Put simply, the U.S. is a better place to get sick that Wuhan or any other Chinese city. Secretary Azar says we are monitoring those who arrive here. Wouldn't it be a good idea to have to screen fewer people?
Russia has shut its borders. A lot of country-owned airlines are suspending flights. If we are advising people not to go to China why would we accept anyone to come from China here? Why are we courting trouble?
Could this epidemic play out like Ebola, where someone died here causing the market to plummet -- although it's important to point out that a week later the market had, at last, bottomed.
I'd like to think it could, but I want to plumb the depths of what could be causing the 10-year Treasury to yield so little.
First, China is a gigantic part of the world's economy. When you start talking about cordoning it off because of health care concerns, you can push this growth engine down to growth in the low-single digits vs. the 5% to 7% we could expect. When you consider the tariffs on $375 billion in goods to our country and the number of companies pulling out of China to avoid the duties, you have the makings of a very fragile economy. That's going to impact the rest of the world in a very negative way. Throw in supply disruptions and you could have an economic disaster.
What would that mean to Nike (NKE) , to Starbucks (SBUX) , to Apple (AAPL) ? Starbucks has already said it has closed half of its stores in China and investors have been fleeing the stock in droves. How can DuPont de Nemours (DD) and 3M (MMM) , somewhat dependent upon China for growth, recover from their disappointing quarters? China's a millstone. What would it mean to all of the big car companies that sell into China, particularly the German companies? China wouldn't just be exporting the coronavirus, it could be exporting a severe slowdown. Europe depends on China for a huge part of its growth and China's just not going to be able to keep pace as it would have before the outbreak.
Second, we are starting to see scary cracks in our own economy. Take travel. Right now 6,000 people are stranded in a Carnival Cruise (CCL) ship off the coast of Italy because of a suspected case of coronavirus. The stock is down a couple of bucks and has been weak. I don't see how it can bottom in this environment. It's reasonable to believe that air traffic will be curtailed, too, given that passengers will be concerned that the plane could be a gigantic incubator. There wouldn't be such a run on masks -- mine won't come until Feb. 10 -- if people weren't concerned about close quarters, although the mask is really only good for the stricken, so they won't spread it.
This U.S. air travel worry could be premature. On Thursday, CNBC's Phil LeBeau was asked if there is any decline in travel in the U.S. because of the virus, and he answered a definitive, No. That's reassuring. But we have to be thinking about what could occur, not what is happening. When will this fear spread to malls, to restaurants, to any gathering place? I would say the moment someone dies from this here, these places could be ghost towns.
Third, the stocks are telling us that a recession could be on the horizon. When a stock like Mondelez International (MDLZ) , the snack company, flies up on a decent quarter and Coca-Cola's (COKE) numbers are good enough to move the needle, you have to ask yourself how much is that a prediction of a slowdown. I think that their businesses are good. But the tailwind is the world economy.
Fourth. anything related to any commodities is, quite simple, rolling over if not crashing. Oil demand has slackened and oil can't rally in that scenario. Last night Royal Dutch (RDS.A) (RDS.B) , one of the better companies in the sector, severely disappointed and curtailed its buyback. Exxon's (XOM) stock is down 8% this year alone and it has a 5% yield and no one seems enticed. Freeport McMoran (FCX) , the giant mineral company, has seen its stock fall 16% this year. Copper's been down for 11 straight days. That's just recession plain and simple.
Of course, there are some companies signaling the opposite. Apple sales are incredibly strong. So are Microsoft's (MSFT) . Tesla's (TSLA) , extraordinary. But the economically sensitive semis like Micron (MU) and Skyworks Solutions (SWKS) are really getting killed. They shouldn't if everything is hunky-dory.
Now, here's the truth about this slowdown. There are only a handful of companies that really reported weaker quarters. Most have been good and some were excellent. If we get this coronavirus under control, if it could run its course, if we could just get some certainty that China's got something, anything, to try to stop it, you could see a magnificent rally not unlike we saw after ebola was blunted a few years ago. I think it would be ill-advised to do much more than reposition out of oil and oil-related stocks, because their balance sheets often are not what I would like to see. I think we will get through this with some nicks, perhaps accentuated by a win by U.S. Sen. Bernie Sanders in Iowa, because, Bernie, alas, is about as left wing -- and anti-wealth -- as you can get. We will get this under control.
Oh, and how about some perspective. My wife, Lisa, flew from Krakow, Poland, after attending a funeral of a good friend. On her plane were dozens of survivors of Auschwitz, the Nazi concentration camp. They had commemorated the 75th anniversary of its liberation. She met and talked to many, including a woman who was born in the camp shortly before the liberation. Yep, a hidden baby who lived, a reminder of a real triumph that puts everything in perspective.