Coronavirus and credit—a perfect storm?

This was clearly a risk on week once again as stocks and commodities rose. The only hint at “risk off” was a rise in the price of gold. It really is a world that makes little or no sense to your editor, with equities completely detached from the real economy. And there is honestly a real possibility of a global pandemic from the Coronavirus. With tens of millions of Chinese citizens forced to stay in their homes and with major cities operating at half speed or no speed at all, in the second-most important economy in the world, why would stocks not be discounting a recession or worse?

Clearly a scenario of rising prices and a declining dollar that Michael Oliver’s work was pointing to is on hold for the moment, given the crash in commodity prices related to what is most surely a recession starting in China due in large part to the Coronavirus. A counter trend rally in the dollar (MSA Momentum chart on your left) does make some sense as the U.S. so far is not bothered by the virus. But it may also be true that gold’s rise this week even as the dollar rose is sniffing out trouble ahead.

Which brings me to Alasdair Macleod’s latest weekly article titled, “Coronavirus and credit—a perfect storm.” Alasdair is scheduled to come on my show on February 25 to discuss this article. With the country owning the world’s reserve currency seeing its budget deficit rise dramatically at the top of a business cycle and with a global economy most certainly heading toward negative territory in real terms if not according to government statistics, how can we not expect trillions upon trillions of new dollars to be created by an expansion of the Fed’s balance sheet? And why would that not result in a weaker dollar?

It will lead to a weaker dollar according to Lyn Alden. She says “watch the Federal Reserve balance sheet.” Since January (purple vertical lines), the Fed stopped growing its balance sheet and the dollar got stronger on the index vs. weaker when it expanded.