Bridgewater's Ray Dalio Thinks Coronavirus Fears Exaggerated; China Likely To Suffer Recession

Led by the NASDAQ's 1.13% rise, stocks on US indices ramped higher to open the week as fears of the spreading Wuhan Flu seemed diminished, at least in the Western Hemisphere.

Ray Dalio, founder of the world's biggest hedge fund, Bridgewater Associates, told an audience at a conference in Abu Dhabi on Monday that the impact from coronavirus (aka Wuhan Flu, WuFlu) is likely to be short-lived and won't have a lasting impact on the global economy.

Sorry, but Mr. Dalio sounds a little retarded here, telling people to be more concerned about wealth gaps and political gaps when most of China - the world's second-largest economy - has been shut down now for almost a month and will be for even longer. China is taking a huge gamble if they're going to send people back to work under these conditions, as the virus has yet to peak. All they'd need is an outbreak at an active factory and that would shut everything down for another month at least. Dalio is right to be concerned about gaps, like the ones in his thought process and the one between his ears. He's way off base here, probably talking this way to discourage a mass exodus out of his fund.

Dalio's fund lost money for the first time since 2000 last year, ironic, since US markets were up broadly, with the S&P sporting a 29% gain.

Let's try some math on Mr. Dalio's thesis. China is currently - how shall we put it - "screwed," which is probably the least-offensive descriptor. Consider that their GDP is probably going to come in at a zero at best for the first quarter of 2020, and probably come in as a negative number.

A third of the country is shut down and has been for more than two weeks, including all of Hubei province, a manufacturing hub. It's likely to remain that way for another month, with other cities and provinces falling under quarantine orders from now until April. That's going to put a severe dent in first quarter GDP. For instructional purposes, let's just say China's GDP for the first quarter of 2020 is going to be cut by a quarter, and that may be a generous assessment. That's a growth rate of -25%. Yes, that's right, minus twenty-five percent.

Let's assume they produce a miracle of some kind and get back to business in the second quarter. Will it be positive, compared to 2019. Unlikely, unless, as the Chinese are wont to do, they double and triple up production and totally kick butt. Let's give them a zero for the second quarter and an optimistic 5% gain in the third and 8% in the fourth, as they recover.

Add those up - -25, 0, +5, +8 - and you're still at -12, divided by four gives China a 2020 GDP growth rate of minus three percent (-3.0%). Again, that's just an example. Reality is likely to be worse than that. China will have a recession and a disruption of anywhere from two weeks to three months (maybe longer) in the global supply chain is going to produce adverse effects elsewhere. Some countries will be crushed, others just bruised, but, the overall picture is one with significant downside, not the roses and champagne scenario outlined by Ray Dalio.

Tracking other markets, crude oil futures continue their long descent as an outgrowth from reduced demand due to coronavirus in China. WTI crude fell below $50 per barrel on Monday. Despite renewed calls for production cuts from the OPEC+ nations, there seems to be little to stem the tide unless China gets a handle on their problem within days or weeks, a scenario that seems unlikely. If the virus spread in China is replicated elsewhere, oil, along with stocks and every other asset class, is likely to crater. Oil at anywhere from $45 to $35 a barrel is not out of the question.

Interest rates are also sounding an alarm, in deference to the sustained giddiness in stocks. The 10-year note dropped to 1.56% yield on Monday, just five basis points from its 2020 low of 1.51% (January 31), while the shortest-maturing bills all were higher, inverting the 1, 2, 3, and 6-month bills against the 10-year note. The 30-year bond is yielding 2.03%. Generally speaking, the yield curve is flat to inverted and looks like a complete, untamed disaster waiting to happen.

What looks to be a panacea for precious metals investors could be developing. Fear is rising, traders at JP Morgan Chase have been charged with rigging the gold and silver markets, and the effect from coronavirus is still unknown.

According to an article on FXStreet, not only have JP Morgan's traders been indicted, but the company itself is being probed, and the Justice Department is treating it as a criminal investigation, using RICO laws to investigate the bank as a criminal enterprise.

Coming days, weeks, and months appear to be headed toward more confusion, consternation, and discontent. The Democrat primary season is just heating up, and despite President Trump having just been cleared from impeachment by the Senate, there's little doubt Democrats in congress and even inside Trump's White House are still scheming against him.

Fed Chairman Powell is slated for a pair of engagements on Capitol Hill. On Tuesday, he will face the House Financial Services Committee and the Senate Banking Committees on Wednesday.

And, BTW, the words "retard" and "retarded" have been flagged in Yahoo Finance as unacceptable, despite one definition of the word retard is "to slow, delay." Peak Stupid has been achieved, again.

At the Close, Monday, February 10, 2020:
Dow Jones Industrial Average: 29,276.82, +174.31 (+0.60%)
NASDAQ: 9,628.39, +107.88 (+1.13%)
S&P 500: 3,352.09, +24.38 (+0.73%)
NYSE: 13,984.48, +52.56 (+0.38%)