China's $244 Billion 'Easy Money' Cure
Don't panic!... The 'Wuhan virus' is still spreading... China's $244 billion 'easy money' cure... We're not surprised... The Fed is at it again, too... What does all this mean for U.S. stocks?... A critical day for the 'Melt Up' is coming...
If somebody yells, 'Don't panic!'... what are you tempted to do?
Panic.
It's like the "pink elephant" story that psychologists like to use...
When's the last time you thought of a pink elephant?
Never.
But then, try not to think about a pink elephant... and you can't get it off your mind.
This is technically called the "ironic mental process"... And doctors say stress worsens its effect. The lesson is supposed to teach us that it's counterproductive to suppress anxiety-producing and depressing thoughts...
Well, that's happening for us with the coronavirus outbreak in China today...
At least 24,000 Chinese citizens (and counting) have become infected with the "Wuhan virus," a previously unknown strain of flu-like coronavirus... primarily in one province in China. And nearly 500 people have died, 99% of them in China. The virus has also killed two people outside the mainland... And at least 25 countries have confirmed cases.
At the same time, Chinese government officials have been urging calm as they try to contain the spread of the virus and ask for help to find effective treatment...
For instance, speaking primarily to other nations that China – the world's second-largest economy – does business with, Chinese foreign ministry spokesperson Hua Chunying said last week...
We hope relevant countries will make reasonable, calm, and fact-based judgments and responses.
She also then criticized the U.S. for banning travel to China and evacuating Americans from Wuhan. Chunying argued that the moves were an overreaction and "could only create and spread fear, setting a bad example for others." Nine other countries put in place a similar travel ban.
But by Monday, senior members of the Communist Party of China admitted "shortcomings and deficiencies" in the country's response.
Moreover, President Xi Jinping declared "a people's war of prevention" against the epidemic on Monday. He threatened punishment for anyone deemed to be neglecting their duties as control efforts ramped up.
Along those lines...
We've seen a video of Chinese police officers arresting a woman for refusing to wear a mask...
It happened in a supermarket. The woman was taken to a hospital and tested negative for the coronavirus. You can see a screenshot of the troubling scene below...
And we saw another clip of a pair of officers locking a family in their own house.
So much for not panicking.
The point is, in China, it seems like a lot of people are on edge...
Government leaders want to limit the impact of the coronavirus... both in the number of people who get sick and – as a result of that – its economy... which impacts the rest of the world.
Things like airline travel bans, a closed Disney (DIS) theme park in Shanghai, and Apple (AAPL) halting its operations in China aren't good developments for anyone relying on the money made from all these things...
So naturally, when the Chinese markets reopened on Monday after the Lunar New Year holiday, the stock movement in the country reflected the worries tied to the virus over the past few weeks.
The benchmark Shanghai Composite Index fell nearly 8% on Monday... But in the two trading days since then, it's now up about 3%.
So what gives?
For more, we turn to our colleagues who follow China closer than anyone else we know...
We're talking about Dr. Steve Sjuggerud and his research team.
And today, they agree with the Chinese government's wishes...
As Steve and his Asia-based analyst Brian Tycangco told True Wealth and True Wealth Opportunities: China subscribers on Monday, it's not time to panic. They reminded subscribers to pay close attention to their trailing stops in the short term... and also to keep the long-term investing picture in mind.
Longtime Digest readers know all about Steve's experience in China. Meanwhile, Brian has been a stock broker at a large Asian trading house... an equities analyst for a major European investment bank... and editor and chief investment strategist for one of the longest-running Asian investment newsletters in the world.
Brian wrote the following on Monday, which Steve said he agreed with 100%...
One thing I've learned from investing in China so long is that what's happening today isn't going to last forever. And when it passes, it will likely open up some of the most attractive investment opportunities we've seen in nearly 20 years.
That's how long it's been since China last had a major outbreak of a similar illness. SARS was deadly... much more deadly than today's coronavirus. Yet a year after the SARS outbreak began, the markets ended up higher than they were before.
This time won't be any different, Brian said. In fact, he believes it could even lead to a much more powerful recovery...
Remember, before all this came to light, China had the best-performing stock market in the world. Moreover, its financial sector is opening up to the rest of the world in serious ways... and at a much faster pace than anyone outside of China had expected.
Hundreds of billions of dollars in pension money can now freely flow into Chinese stocks. And thanks to the Stock Connect programs – which weren't there during the SARS outbreak – it's easier than ever for foreigners to invest in Chinese stocks.
In sum, nothing has changed in our China investing thesis. The coronavirus will have a short-term impact. But investors who overreact today will be the real losers in the biggest growth story of the decade.
In the meantime, it looks like China will do everything it can to prevent a full-blown economic crisis...
As it turns out, a virus can even dictate central bank policy...
As DailyWealth Trader editors Ben Morris and Drew McConnell shared with their subscribers yesterday morning, China has resolved to use "easy money" policies to ease the impact of the virus on its economy...
China's government is likely doing what it can to contain the new virus. But for this sort of outbreak, it doesn't have a "script." It's improvising.
Managing the economy, though, is a different story. China has plenty of experience and clear ideas on how to bolster the economy. And yesterday, it began doing so...
Over the past couple of days, China's central bank – the People's Bank of China ("PBOC") – has pumped $243.7 billion into the country's financial system. For perspective, the $172 billion stimulus package China introduced on Monday alone is bigger than bitcoin's total market cap.
The PBOC also acted to strengthen its currency, the yuan, by adjusting its "reference rate" to the U.S. dollar. And as Ben and Drew noted, this is probably just the start...
You can bet that China's efforts to prop up its economy and markets won't stop here. They likely won't stop until the situation with coronavirus is more or less under control.
We can't say we're surprised China has turned to 'easy money' to temper the coronavirus fallout...
This is what central banks do nowadays... They keep things going up and up, no matter what's happening in reality.
Earlier today, World Health Organization director Tedros Adhanom Ghebreyesus said the following about the way the world handles disease outbreaks. But we couldn't help but notice that it could also apply to monetary policy...
For too long, the world has operated on a cycle of panic and neglect. We throw money at an outbreak, and when it's over, we forget about it and do nothing to prevent the next one.
In the U.S., the Federal Reserve is at it again...
Last week, Fed Chairman Jerome Powell indicated that the central bank may cut interest rates again in an effort to boost inflation – which remains under the Fed's 2% target.
In December, the Fed's favored inflation measure, the Core Personal Consumption Expenditures ("PCE") Price Index – which measures prices on products that consumers buy – only rose 1.6% year over year.
In relative terms, that's significant. It's almost 25% below the central bank's 2% goal (which it has only surpassed twice in the eight years since the Fed stated its target in 2012)...
Meanwhile, the more popular U.S. gross domestic product ("GDP") was up only 2.3% in 2019, after a 2.9% gain in 2018.
These numbers might seem miniscule to people on Main Street...
But they mean a lot to the folks who follow them closely.
Interest rates are the Fed's No. 1 tool for dealing with inflation...
When inflation is rising, the central bank raises rates to offset it and strengthen the value of the U.S. dollar. And when inflation falls, central banks can do the opposite and lower rates... therefore, weakening the value of the dollar.
As Stansberry NewsWire editor C. Scott Garliss wrote in our free DailyWealth e-letter yesterday...
At the end of the day, "easy money" central bank policy isn't going anywhere soon.
Whether that's good or bad in the long term remains to be seen. But in the short term, low rates mean less competition for stocks – folks will keep putting money in the stock market for a chance at a higher yield.
A secondary tool at the Fed's disposal is simply buying up assets, also known as "balance sheet expansion."
Since September, the Fed has bought U.S. Treasury bills at a rate of $60 billion per month. We haven't seen a pace like that since "quantitative easing" was all the rage.
The same stuff continues in Europe... The European Central Bank asked its governors to come up with new ideas to boost inflation, maintain price stability, and grow jobs.
And when it comes to China's easy-money policies of the past few days, as Scott told us in a conversation yesterday... "They're going to be doing it for a long time."
So what does this all mean for U.S. stocks – and more specifically, Steve's 'Melt Up' thesis?
"It seems like no matter the negative headlines, stocks continue pushing higher."
Steve wrote that sentence in an issue of DailyWealth last month. And even amid the recent Wuhan virus outbreak, the statement still rings true today... In fact, the benchmark S&P 500 Index has already regained its losses from its previous highs two weeks ago.
And easy-money policies – like interest rate cuts and liquidity injections from the most powerful central banks in the world – only throw rocket fuel on the Melt Up in U.S. stocks.
We might be reaching the late innings of this historic bull market, but the gains are accelerating. Steve notes that this is what happened in the late 1990s during the run-up to the dot-com peak.
Of course, a brutal bust followed the dot-com bubble... And the Fed is up to some of the same tricks again today. But most important, smart investors who followed the market higher – and got out at a good time – made a killing.
That's exactly what Steve says can happen again this time...
In fact, he believes the Melt Up is about to hit a dramatic turn. And it could be the final shot for a lot of people to make the type of money they need to retire.
On February 12, at 8 p.m. Eastern time, Steve will take part in a special online event to show you exactly how you can cash in on this shift. And for everyone who shows up for the broadcast, he'll reveal what he believes to be the No. 1 stock to own during the Melt Up.
It's 100% free to attend. We only ask that you reserve your spot. Click here to get started.
New 52-week highs (as of 2/4/20): AllianceBernstein (AB), Amazon (AMZN), Becton Dickinson (BDX), Blackstone Mortgage Trust (BXMT), CBRE Group (CBRE), Dolby Laboratories (DLB), DocuSign (DOCU), Hannon Armstrong Sustainable Infrastructure Capital (HASI), Ingersoll Rand (IR), Johnson & Johnson (JNJ), Microsoft (MSFT), ResMed (RMD), ProShares Ultra Technology Fund (ROM), Sea Limited (SE), Splunk (SPLK), The Trade Desk (TTD), and W.R. Berkley (WRB).
A quiet mailbag today. What are your thoughts on the markets? As always, e-mail us at feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
February 5, 2020