Supply Shock and a Demand Shock Coming Up

Mish

Dual economic shocks are underway simultaneously. There are shortages of some things and lack of demand for others.

Rare Supply-Demand Shocks

Bloomberg has an excellent article on how the Global Economy Is Gripped by Rare Twin Supply-Demand Shock.

The coronavirus is delivering a one-two punch to the world economy, laying it low for months to come and forcing investors to reprice equities and bonds to account for lower company earnings.

From one side, the epidemic is hammering the capacity to produce goods as swathes of Chinese factories remain shuttered and workers housebound. That’s stopping production of goods there and depriving companies elsewhere of the materials they need for their own businesses.

With the virus no longer contained to China, increasingly worried consumers everywhere are reluctant to shop, travel or eat out. As a result, companies are likely not only to send workers home, but to cease hiring or investing -- worsening the hit to spending.

How the two shocks will reverberate has sparked some debate among economists, with Harvard University Professor Kenneth Rogoff writing this week that a 1970s style supply-shortage-induced inflation jolt can’t be ruled out. Others contend another round of weakening inflation is pending.

Some economists argue that what’s happened is mostly a supply side shock, others have highlighted the wallop to demand as well, to the degree that the distinction matters.

Slowest Since the Financial Crisis

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Inflationary or Deflationary?

In terms of prices it's a bit of both but mostly the latter.

There's a run on sanitizers, face masks, toilet paper ect. Prices on face masks, if you can find them, have gone up.

But that is dwarfed by the demand shock coming from lack of wages for not working, not traveling, not eating out etc.

The lost wages for 60 million people in China locked in will be a staggering hit alone.

That has also hit Italy. It will soon hit the US.

Next add in the fear from falling markets. People, especially boomers proud of their accounts (and buying cars like mad) will stop doing so.

It will be sudden.

Bad Timing

Stockpiling

Deflation Risk Rising

Another Reason to Avoid Stores - Deflationary

Hugely Deflationary - Weak Demand

This was the subject of a Twitter thread last week. I agreed with Robin Brooks' take and did so in advance but I cannot find the thread.

I did find this.

Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.

These are the important point all the inflationistas miss.

Mike "Mish" Shedlock

Comments (40)
No. 1-14
Tony Bennett
Tony Bennett

Good post.

Deflation in the cards. Falling asset prices + falling demand = "uh oh" for Federal Reserve.

...

"will stop doing so It will be sudden."

...

All along I felt when "it" finally happened, it would be a "light switch" moment. Business will pile on as CFOs have waited YEARS for a "kitchen sink" quarter ... or three ... to clean up the books.

SHOfan
SHOfan

I read yesterday that 200,000 flights had already been cancelled. Probably mostly overseas, so big plans. Trying to quantify that, if you estimate 200 passengers/flight at $500/ticket (probably low) that's $100,000 lost revenue per flight. Multiply by 200,000 is $20 billion dollars lost, just by the airlines industry, globally, in February.

Ted R
Ted R

Just look a the natural gas industry if you want to see commodity deflation. Natural gas prices are so low in the U.S. that virtually all natural gas drillers and producers are running a negative cash flow. Gas prices are lower than the cost of production. Factor into this equation that many natural gas drillers and producers can no longer borrow money to continue operating AND they will soon have to refinance their debt but almosty nobody wants their debt. Another example of debt deflation.

TumblingDice
TumblingDice

So the kicking the can down the road will stop.

And when that happens we will see major deflation.

KidHorn
KidHorn

Wonder when the FED will cut rates to 0 and open the discount window to everyone.

Bam_Man
Bam_Man

To be followed by a global currency crisis.

Which of the majors "goes to money heaven" first?

Indian Rupee is a good candidate.

MiTurn
MiTurn

Not to sound uncaring, but as a retired US history teacher this whole coronavirus pandemic and the subsequent economic impact are history in the making. Both of these events have the potential to be generation-defining, like the Spanish Flu and (not to sound extreme) the Great Depression. Fascinating. I stated this before, but it bears repeating: this is a slow-motion train wreck.

lol
lol

Think it was tough for Hop Sing toiling away at the Apple factory for $1.50hr. 12hrs a day 7 days a week,think what it's like now when everybody in the plant is got pneumonia ,or can barely breath from a collapsed lung.I'm sure instead of suicide nets,Apple will have crews to cart of the dead so as not to slow production!

crazyworld
crazyworld

My feeling is that, fault of having a remedy, we have not seen anything yet. Confinement measures are still very weak over here in Europe (as in US)
On the one hand we assist to an endemic lack of testing which allow case discovery numbers to explode suddenly because the severe cases needing hospitalisation draw the attention of the authorities when it is too late like in Wuhan, Italy, Iran, Korea.
On the other hand the measures to be taken for the confinement to have a strong damping effect on the speed of infection are economy and financial bubbles killers.
China is starting to reduce the confinement measures and the
results start coming the infection rate seem to flip back up.

Bam_Man
Bam_Man

China buys oil from Iran - in violation of US sanctions - and does not pay in Dollars.

Two big No-No's, which Uncle Scam does not like. Not one bit.

Both countries have massive, deadly outbreaks.

Just a co-incidence, I'm sure.

thimk
thimk

3 types of inflation , wages,asset,consumer goods/services . The bulk of America is more concerned with consumer good inflation. I mistakenly thought that covid-19 deal would cause consumer goods inflation because of lack of supply but that inflation might be suppressed or negated by lack of demand . Lowes today had whirlpool washers/dryers heavily discounted. just an observation .

AWC
AWC

Humm, sailing into a perfect storm,,,in uncharted waters? What could go wrong?

truthseeker
truthseeker

You know I resent the fact that there are a whole lot of people here who are awfully excited because they are long gold, bonds, and short stocks and crude oil. Check out Luke- 21: 9,10 and 11 necessary for some humility at the very least!


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