Commentary: Paul Ebeling on Wall Street, Coronavirus Broke Globalism

Commentary: Paul Ebeling on Wall Street, Coronavirus Broke Globalism

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Just In: Southeast Asian stock markets inched higher Monday, tracking global equities that gained due to a slowdown in coronavirus-related deaths and new infections

Last Week’s US Stock Market View

Technical Analysis: The action in the major US stock indexes over the past few sessions was almost identical as large-cap stocks moved in the same percentages. The same was true with regards to the small caps and mid caps. All of them moved up to or near the 20-Day EMAs, worked laterally and then fell away Wednesday. Thursday, a bounce back to the 10-Day EMA, which saw the indexes recover roughly 35 to 50% of Wednesday’s fall.

This is a good course of bottom building action stretching out the process.

S&P 500, NAS Comp, DJIA: These 3 saw the same action letting them to rise back to the 10-Day EMA. While the S&P 500 and the DJIA rose on higher volume, the NAS Comp rose on lower volume. Note: these 3 indexes traded down from their recent high marks.

This will be a shortened trading week with major markets closed Friday in observance of the Good Friday, but expect coronavirus daily developments to take centerstage for investors.

President Trump and VP Pence See Signs US Coronavirus Outbreak Stabilizing, then Fading, Progress!

The Breaking Down of Globalism

Past cycles of globalisation have shown themselves vulnerable to sudden shocks.

The WWI brought the Victorian free-trade era to a halt. Trade picked up after the conflict, but the Y 1929 crash was followed by beggar-thy-neighbor tariffs and another violent contraction in world trade.

The fallout from the Lehman Brothers crisis damaged faith in globalisation.

The Covid-19 pandemic could well be a harder blow. A world that turns increasingly inward many/will look very different to the 1 we know.

Protectionist pressures tend to increase at times when economic growth weakens. After the Y 2008 financial crisis, several countries, including China, sought to bolster their own economies with subsidies for exporters. By the middle of the last decade, trade restrictions affected a greater share of world trade than in the 1930’s, according to Global Trade Alert.

In Y 2015, world trade volumes started to decline. Most trade restrictions at the time were below the radar. But since the arrival of Donald Trump to the White House, protectionism has become overt. Since early Y 2017, thousands of new trade distortions have been introduced. 

The US-China tariff war accounts for less than 25% of recent anti-trade measures. Still, President Trump’s preference for conducting policy on Twitter has taken a toll.

Last October, the International Monetary Fund (IMF) warned that tariffs and uncertainty about trade policy were discouraging new investment and dampening the prospects for the global economy. At this Key juncture for globalisation, a Black Swan in the name of Covid-19 emerged in Wuhan, PRC.

The coronavirus pandemic threatens globalization in several ways.

1st, it has exposed the fragility of cross-border supply chains. In recent years, producers have taken advantage of cheap dollar funding for trade credit to lengthen their supply chains, often incorporating several countries. These tend to be more efficient in terms of cost but are also more vulnerable. When Beijing tried to halt the spread of the epidemic in January, many Chinese factories were shuttered. Apple had problems sourcing parts for its iPhones. It soon became clear that many Western firms lacked an adequate understanding of their supply chains. Global trade links suddenly appeared to be as complex, interconnected and vulnerable to unexpected shocks as the financial world showed itself to be when the subprime crisis emerged.

The pandemic’s threat to world trade took a more insidious turn last month. In January, Beijing stopped the export of certain medical supplies, such as face masks, including those produced by foreign manufacturers.

As the coronavirus spread across Europe, export restrictions proliferated almost as fast as the virus itself.

Since the start of the year more than 50 governments have imposed export curbs on medical supplies, according to Global Trade Alert count.

Germany stopped the export of 240,000 masks to Switzerland.

France prevented Valmy from fulfilling its contract with Britain’s health service to supply millions of masks.

India, a major producer of generic medicines, imposed a range of export restrictions on medical supplies and drugs, including fever-reducer paracetamol.

The EU, which produces 50% the world’s ventilators, restricted their export. Of the world’s major economies only the United States and Australia have maintained free trade in medical supplies.

Beggar-thy-neighbor trade policies have become sicken-thy-neighbor.

Panicked reactions to the pandemic bring short-term relief at lasting cost.

Companies may be reluctant to invest for export markets if those markets are shut off at whim. More importantly, export bans foster bitterness between trading partners.

Deprived of medical supplies from Germany, Italy and Serbia turned to China for relief.

Medical export restrictions assist nationalists who argue in favor of self-sufficiency in manufacturing.

White House trade advisor Peter Navarro states that American dependence on China for Key medical supplies and drugs is a “wake-up call”. 

The Big Q: What might the world look like when the pandemic passes?

The Big A: Supply chains are likely to become shorter and stronger.

Cross-border manufacturing will take on a geopolitical aspect, as managers question whether production is located in trusted countries.

Already the US is moving repatriate manufacturing, especially in Key areas such as healthcare, as the age of multinational limited competition is coming to an end.

Takeover authorities will pay less attention to consumer prices when considering mergers and more attention to other matters, such as competition and security.

As China becomes the scapegoat for the pandemic it will no longer serve as the workshop of the world.

British politicians are already calling for a reassessment of their government’s decision to allow Huawei Technologies to provide G5 telecom equipment to the UK.

Some of the macro-economic consequences that follow a turn in the globalisation cycle are foreseeable.

The disinflationary forces unleashed by the era of free trade will come to a halt.

When trading links frayed at the close of the 19th Century, the great Victorian bond Bull market came to an end.

The current bond Bull market, nearly 40 yrs old, will be replaced by a multiyear Bear market. As interest rates rise, a higher discount rate will be applied stocks and houses, both will trade in the future at lower valuations.

No longer able to outsource manufacturing to the cheapest geographies, manufacturing costs will rise. Profits will decline and labor’s share of national income will rise. 

The geopolitical consequences of an end to globalization are more stressful. As the history of the 1930’s shows, the struggle for raw materials in a multi-polar world can become a casus belli or a cause for war.

For years, Beijing has been pursuing a 1930’s-style economic independence, tying up supplies of commodities from various African countries, and Venezuela, with loans from the China Development Bank.

Recently, Beijing’s Belt and Road Initiative has increased its number of client states. At the same time, the People’s Republic has reduced the share of foreign components in domestic manufacturing.

China may unwittingly have provided the catalyst for this health crisis, but as globalisation fails it will have a head start.

Have a healthy week, stay home!

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge. Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he it the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.