Friday, February 28, 2020

Stock Market Selloff—Not Coronavirus, But the Manufacturing Complex



Coronavirus looks to me like a trigger rather than a cause. Why would that be?

For one, a market within which stocks we once valued at 20 times earnings now trade at 300+ earnings and that’s not rational, but it has its own dynamics. The world is awash in money as that infamous 1% rake in all the cash on the table.

You can write a book about why that’s true—and I imagine many already have—but no matter who has it, cash has to find a home and the most convenient home is stocks. The US exchanges and the US dollar are also the safest currency and best regulated exchanges.

Voila—we’ve found the Yellow Brick Road and the Wizard of Oz is snugly ensconced behind his curtain.


But that doesn’t answer the trigger question. Why coronavirus? For two reasons.

First of all, it’s a possible pandemic that has its origins in China. Second, China happens to be the manufacturer of choice for the secondary parts producer of nearly every major product worldwide.

Think minor (but absolutely necessary) small gidgets and gadgets for Boeing, Rolls Royce, Airbus, major automakers, as well as manufacturers of everything from toasters to washing machines and clothing lines.

None of that happens without the gidgets and gadgets made elsewhere—and elsewhere today mostly means China.

The old days of Henry Ford are over. You’ve no doubt heard of just-in-time assembly lines, where the exact part in the exact color appears for assembly at the exact moment. That exact part is largely built elsewhere, whether it’s a wing for an Airbus or a rear fender for a Buick.

You see the problem, as plants close in China and elsewhere in the food-chain we call offshore production.

Essentially, if thousands or even millions of people die worldwide, the stock market doesn’t give a shit. The opioid crisis in America didn’t make a ripple where the elite meet to cheat.

We knock off about half a million people every year worldwide in ordinary flu deaths and no one notices or comments. It’s just the way things are. No one closes off air routes, cancels sports events, prevents shipping or locks down entire cities when that happens.

But when you can’t get the left-side manifolds for 10,000 engines that keep 10,000 cars from coming off the assembly line, I would suggest you have a problem. And Wall Street thinks that problem might amplify into ten million problems.

That’s the very strange thing about triggers…

… “For want of a nail, the shoe was lost; for want of the shoe, the horse was lost; for want of the horse, the rider was lost; for want of the rider, the battle was lost; for want of the battle, the kingdom was lost. And all from the want of a horseshoe nail.”

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