BitOoda Morning Report — Coronavirus Commentary

For our research note today I am thrilled to have Kathleen Kelley provide her perspective on the coronavirus outbreak. Kathleen is a former colleague of mine, an investor in BitOoda, and the founder of Queen Anne’s Gate — a macroeconomic and commodities boutique research firm. Kathleen has a tremendous amount of expertise in macroeconomic and commodities investing, if you would like to contact her I would be glad to facilitate an introduction. We’d like to thank Kathleen for crafting this research note and hope our readers find it insightful.

— Tim

As a friend of BitOoda and a provider of analysis on the fundamentals of macroeconomic and commodities investing, Tim Kelly has asked us to provide some perspectives on the current crisis. Feel free to reach out with any questions or comments.

The effects of the COV-19 virus continue to hammer economic data, with global forecasts being written down by most global agencies. The IMF is now predicting that global growth will fall below the growth rate in 2019 at 2.9%, a reduction of 0.5% from their most recent forecast. The IIF expects global growth to be only 1% in 2020, the lowest since the financial crisis. The impacts of the virus range from hits to travel and tourism, reduction in trade and disruptions of supply chains. Whether demand is postponed (consumer goods) or destroyed (air travel, conferences, events) depends on the sector and the length of time the virus spreads unimpeded.

We can all guess what the impact will be of a pandemic that lasts for multiple quarters. It wont be good. But assuming the virus spread is contained in Q2 there are some positives ahead on the macro side:

Prices in most commodities are falling alongside growth expectations, which will eventually be a positive for manufacturers as their costs come down . The Bloomberg commodity index (below) is the lowest since 1987.

Fiscal stimulus is most likely on its way, after monetary policy was adjusted this week in many countries (US, Canada, Australia). Negative yields around the world have driven investors to the US bond market, which used to yield above 1%, but now could potentially see nominal yields fall into negative territory as well.

The US Dollar will weaken as interest rates come down, which could also help commodity demand, as most commodities are denominated in dollars, and will become cheaper as the dollar falls.

However, studies show that this type of crisis is 80–90% behavioral, i.e. stimulus cannot effect consumer activity as it could in a traditional economic crisis. In a behavioral recession, demand will eventually come back stronger, as consumers have held back on activity and will make up for their self deprivation once the virus is no longer a risk.

So what’s an investor to do? The era of low nominal yields is not going away, but what will eventually change is the price outlook as lower prices will cut capital expenditure at the same time promoting demand. this will result in an inflationary shift in the next year, but because of external factors central banks will be hesitant to move. The dollar will remain unloved, as will other fiat currencies. Stores of value such as gold and Bitcoin will move higher alongside other hard assets. The timing of this regime change is unclear but the outcome is not.

Kathleen M. Kelley
kkelley@qagcapital.com

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