The Swine Influenza Virus (SIV) would have to rank as one of the greatest market risks at this time. The risks posed are that this virus could be far more contagious than any other. We don't just have to worry about the communicability of the current strain, but the possibility that a more virulent strain will develop over time. I would also suggest to you a degree of inevitability exists with respect to pandemics. The longer that we defer a pandemic, the more virulent the forthcoming attack will be on humans, or at least some humans who have not been vacinated. I would therefore encourage everyone to get vaccinated for influenza. Of course that is not going to immune your investments from being stung. Even precious metals and related mining stocks will come under attack I believe because any threat posed is 'deflationary', and there is technical downside to the precious metals market. Lets consider the risks:
1. The mere threat of SIV is an intangible, which means that there will be a gradual escalation of concern about the issue as evidence grows, and the signs of threat become more apparent. Intangibility has two sides to it, it can place it off your radar screen (as an investor) or it can mean the downside is not well understood. In this first stage, the former is the more prevalent.
2. Actual fear of a pandemic will result in people not going out for entertainment, they will stop spending, they will reduce their level of economic activity and just save, maintaining the simplest lifestyle. The result will be greater levels of unemployment. We are therefore going to see a further contraction in the global economy and asset price deflation.
3. The paradox is that the healthy, working people who are contributing the most to economic activity are the ones who stand the greatest possibility of dying. For this reason, if these people have high savings, you might see them taking 'voluntarily redundancy'.
My belief is that if this SIV outbreak is not contained it could well cause a depression. It would be the equivalent of people losing confidence in the banking system. In fact it will start bank failures. It might even precipitate a run on the banks, and even stating as much could cause a run on the banks.
For this reason, I would be inclined to convert all investments to cash. Certainly I would be selling all derivatives at this stage, including precious metal based derivatives. The banking system is under threat. Pay off your house, stock your house with tin food, non-perishable processed foods (e.g. fruit & nut bars), cereal, long life milk, etc.
Law and order will not be as strong as it might otherwise be. There will be police voluntarily retiring to avoid any threat to their families; whom will want to avoid the virus. There will be an escalation in desperation and criminal activity, whether its people stealing food, or ignoring quarantine orders. Such depends on the capacity of the government to anticipate the threat, and to contain the fear of those who are vulnerable.
If you are looking for someone to blame - look squarely at government and yourself. These events happen because humans all too often are prepared to subjugate their lives to governments, and renounce responsibility for thinking. There is no guarantee of these events unfolding. My belief is that they will because any system is only as strong as its weakest links, or its capacity to alienate itself. If I was in government I would be shutting borders and containing the problem, or better still taking order administration of airport hotels and creating a 5-day compulsory quarantine for travellers. Discretionary travel should be ended. The problem however is that - if this virus does not mutate soon - it could mutate any time in the future. It remains in the environment. The standards of animal husbandry need to be improved. Those countries which do not have high standards need to be isolated. The financial system is not in a condition where we can afford to have this threat lingering in the environment. I just want people to conclude at the end of the day that governments are evil! They are reckless, short term, self-indulgent losers who cannot be trusted....so why do you grant their system of administration. In coming months I will be outlining an alternative.
I expect stocks will sink back to their previous lows. Its possible that the market will go even lower if too many people die. At the end of the day I don't see this happening because I think it is relatively easy to overcome any outbreak. We live in an era of preserve foods. We need only isolate (or effectively quarantine) everyone in their homes for 5-days, and any threat should be over. The question is - will the government be able to coordinate that. I think there is room for confidence. There is also the possibility of having a practice run, as SIV might not be as virulent as other strains.
I posed some time ago the premise that the bird flu posed this type of threat to the economy. For the next 4 years the global economy is going to be hanging on a knife edge. When you are smoking that joint, if you are thinking nightmares, this is one scenario I would avoid contemplating. It is manageable, I just have so little confidence in government.
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Andrew Sheldon
www.sheldonthinks.com
The Nikkei-225 has reached an important resistance. It is my belief that the global central banks will continue to print money, so we can expect global equity markets to keep rising for the time being. For this reason I see the Nikkei probably rising to 12,500 resistance before being overwhelmed by inflation concerns. In the short run inflation tends to look good on balance sheets, however eventually it eats into consumer confidence and results in more job losses.
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