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February
05
2020

Are you prepared for the contagion?
Bill Holter

We have been harping on the question “are you prepared?” for years. We have asked if you were prepared financially, mentally, physically, and with your maker? The potential boogeyman as we suggested could come from anywhere or any angle but the end result would affect the economy and thus finance (credit) and would then spill over socially.

I have to admit, a “pandemic” was low on my list of possible sparks, but after thinking it through, a pandemic is a financial disaster. Yes it is a human disaster and many will die, but the odds of dying from the virus are and will remain quite low. The real problem is what the human response will be. I say this because we live in a world of just in time inventory AND production. We also live in a financial world with more debt and financial leverage (and thus monthly debt service) than ever before. So much so that even a small hiccup (which this does not appear to be) where business slows and contracts will be enough to quickly default some credits. The problem is not the initial defaults, rather, it is the “contagion” throughout the system because our world is so inter connected (globalism).

We saw this back in 2008 where one entity (Lehman) going down had the ability to torpedo the entire system if it were not for $10’s of trillions mobilized from the central banks. Remember, back then “liquidity” was shoved into the system so the banking system could withstand the shock of a small handful (but large) of upside down institutions. I would use the analogy that 2008 was a snapshot event which lead to the motion picture of what they called “recovery” …expansion never came. Today is different, because back then the central banks and sovereign treasuries had the ability to print/borrow in an effort to reflate …which they have continually done since then. Now, in a world with a debt to GDP ratio of 332%, who has the ability to step up and reflate?

That last question is a real BIGGIE! Why? Because the financial system AND the debt outstanding is far larger (maybe close to double) what it was in 2008 …do central banks even have the ability to forestall another 2008? Probably not but that is not the question in this instance because China and the coronavirus is not a snapshot in time, it IS the movie! By this I mean there are far more ramification than some bank with $ trillions in derivatives blowing up.

China is the largest trading partner/manufacturer in the world. 60 million quarantined people are not working from home, the factory floors are closed. Which means final products/components of all sorts are not being produced, shipped or delivered. Can you think of any ripple effects this might cause?

The next question is how long will this last? Are we already at peak infection spread or does it continue and expand for some time? I am not knowledgeable in this area so I will not speculate but it has already been a week++. My point is this, we are talking about real products not making it to market and the question is “time” because in a system levered as it is, “down time” is the arch enemy to a system requiring timely payments …because EVERYBODY OWES EVERYBODY ELSE!

From the human standpoint, China has already lost their pork stocks and look like they may also lose their chicken stock. As far as I can tell, grocery stores and markets in the affected areas have been picked clean and with quarantine, nothing in and nothing out is the situation. I don’t believe we are at the point where starvation is the grave problem but in a few more weeks, this will become the case.

Thinking from a US standpoint, the danger is a credit meltdown caused by contagion or even just a break in confidence. A credit seizure will be just as bad as a quarantine because nothing will “work”. I have told you we live in a world where everything runs on credit. Production, supply, shipping and distribution all depend on credit to be able to perform …not to mention buyers using credit because that’s all they have left to spend? Ask yourself, how many individuals or businesses can weather little or no cash flow for a month. Or two?? Or more???https://www.cnbc.com/2020/02/01/coronavirus-more-of-china-extend-shutdown-accounting-for-80percent-of-gdp.htmlOff topic a little, but how smart will all the corporations look who have levered their balance sheets to buyback stock? Would keeping larger cash balances maybe be better in this situation?

So we ask, are you ready for the contagion? Not so much from the virus but from credit markets seizing up? Do you really believe that without credit, your grocery store will magically stock their shelves each night from little elves growing apples to zucchini? Do you really believe your fuel supplier will come fill your diesel tank if you cannot pay or they cannot pay their supplier? How about water or electric utilities, will they still run without credit? Lots and lots more questions and any single one answered “no” means you will do without. Can you do without or have you prepared for the possibility …and for how long? We are not trying to scare you. We attempt to make you ask yourself questions because whether the corona virus is the spark or not, a very bad credit event is mathematically baked into the cake …because there is simply more credit outstanding than can ever be paid back!

Standing a fearful watch,

Bill Holter

Holter-Sinclair collaboration

Bill Holter writes and is partnered with Jim Sinclair at the newly formed Holter/Sinclair collaboration. Prior, he wrote for Miles Franklin from 2012-15. Bill worked as a retail stockbroker for 23 years, including 12 as a branch manager at A.G. Edwards. He left Wall Street in late 2006 to avoid potential liabilities related to management of paper assets as he foresaw the Great Financial crisis coming. In retirement he and his family moved to Costa Rica where he lived until 2011 when he moved back to the United States. He was a well-known contributor to the Gold Anti-Trust Action Committee (GATA) commentaries from 2007-present. Bill has retained a working relationship with Miles Franklin and can help with any of your precious metals needs including storage. He can be reached at [email protected]

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