Since January 22 large areas of China have been in lock down to try and limit the spreading of a new influenza virus. The rest of the world rapidly followed suit and proceeded to halt ground air and sea transport to/from China effectively sealing off the world’s largest trading nation. Across Asia fear spread and severely curtailed the lunar new year holidays, the most important season of the year for household consumption. The ripple effects of the health emergency will continue to affect businesses globally and the situation is unlikely to change until the public is reassured regarding the seriousness of the disease and/or a vaccine is developed.

The jury is still out as really how dangerous the new virus is. As the number of infected may be largely understated, the actual mortality rate may end up being very close to regular flu which, according to some sources, kills a few hundred thousand people every year. It may therefore eventually turn out that that the response to the crisis did more damage than the infection itself.

The knock-on effect on the global economy is going to be severe. Asia represents approximately 65% of global growth with China alone accounting for 40%. Granted that the state of the global economy has been feeble to start with as the impact of recent monetary and fiscal stimuli already started to wane. Q4 2019 Gdp data shows 0.1% growth in Europe with Italy & France’s economies actually contracting respectively -0.3 and -0.1%. The US at 2.1% is only deceivingly better as 95% of growth was contributed by net exports, a function of the Sino-US trade discussions, and government spending rather than the more structural and sustainable consumption and investments.

The first quarter Gdp figures this year are likely to be worse as prefigured by the re-inversion of the yield curve and the collapse of commodity prices. The problem is that a global recession is a risk the economy cannot take in light of a stock of global debt now at a record 355% of global Gdp. It is therefore all but sure that policy makers will continue to do “whatever it takes” to prevent a downturn that may trigger a chain of credit events of epic proportions.

This time around however, standard monetary easing may not do as the unique situation created by the virus and the structural weakness of the global economy will require more forceful measure to reflate the economy and backstop possible catastrophic decline of asset prices. The latter would expose the “zombified” side of the global economy that has kept alive feeding on easy credit rather than on any economic merit and trigger the proverbial domino-effect of counter-party failures. A combination of fiscal and monetary policy should be expected as the former will inject liquidity directly into the economy rather than going through the banking system while the latter will ensure “financial stability”, in central bank-speak the code word for “propping up asset prices”.

Markets have already started to front run the inevitable and the 10 years US Treasury rate is approaching the recent lows. The July 8 2016 all-time low of 1.36% is only 15 bps away and it would not be surprising to see new lows should the Fed deliver 1 or 2 rate cuts this year. An event that markets see as most likely. While bond investors have once again reasons to celebrate, there will probably be some goodies for equity owners as well. New, abundant liquidity will support multiple expansion as investors FOMO into MAGA (MSFT, AMZN, GOOG, AAPL), four stocks now worth $4 trillion or more than the entire stock market cap of France & Germany.

Occam’s Razor principle should once again serve investors well: while markets may get jarring for the next few weeks, the dip is likely to be short and perhaps buy-able as a new wave of government intervention will need to put a floor to asset prices and possibly ignite yet another rally regardless of already high valuations and poor fundamentals.

While participants should “make hay while the sun shines” they should also bear in mind that each round of intervention brings the endgame of currency debasement closer. As more astute investors feast on skyrocketing US treasuries or a rebound of tech giants, it may also be good to remember that gold and bitcoin, both the inverse of governments’ irresponsible policies, continue to rise as a quiet admonition that even the best party, at some point, has to end.

This article was originally published on LinkedIn

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