My paranoia is about the paranoia.  I am not too worried about the coronavirus itself.  I am worried about panic from the coronavirus, including government reactions to it in order to appear to be doing something.  This is the type of thing where governments can get away with tyranny to a greater degree than normal.

Stocks fell really hard this week.  Gold went up at first, but then fell really hard.  Bonds did well, as interest rates went down.  The 10-year yield hit an all-time low.  There are also strong bets that the Fed will lower its target rate at the next meeting in March.  It is almost certain we will see a 25 basis point (.25%) reduction, but it could be 50 basis points.

The almost-universal opinion is that stocks fell hard because of the coronavirus.  It makes sense to a certain degree. The Chinese are a major supplier of goods, so there will be some disruptions in business.

Nationalists will make the argument that this is a good example of why we (Americans) need more independence and less reliance (trade) with foreign nations.

I do not agree with this argument for several reasons.  First, supply disruptions could just as easily happen within a country.  If iPhones were all produced in Los Angeles, then an earthquake could shut down production.  If they were produced in Miami, a hurricane could disrupt production for a while.  There could be a pandemic in any American city.  One could think of many examples.

Second, the free market will take care of this issue if it is allowed to function.  If supply chains shut down for long enough in China, then businesses aren’t just going to sit there and throw up their collective hands and do nothing.  They will find other suppliers.  They will likely have to pay a little more than what they had been paying, but things will adjust as long as prices are allowed to function.

Even as an advocate of the free market, it surprises me how fast businesses and industries can make major adjustments.  The profit motive (or the motive of limiting losses) is powerful.

I do want to explore just how much of this dive in stocks is due to the coronavirus.  The Dow sank over 3,500 points in one week. All of the major indexes experienced a correction in the matter of a week, meaning they lost at least 10%. This is quite extraordinary.

So here is my question.

What if the Coronavirus Goes Away in the Next Few Weeks?

Spring is coming soon in the northern hemisphere.  I am not sure why such a big deal is being made of this particular virus. It is contended that the flu kills far more people annually.

I think the flu statistics are not quite accurate.  A lot of the deaths attributed to the flu are for people who were already unhealthy.  They are people who had compromised immune systems.  We don’t know how many of them would have died in a short time frame without the flu.

The coronavirus does not seem to be much different.  They are citing an approximate 2% death rate, but we don’t know how many cases have gone unreported.  It seems that most of the deaths are with people who already had health issues.  Admittedly, it is hard to say if the Chinese government is overstating or understating the problem.

Anyway, there is a decent chance that the virus will slow down and mostly go away over the next couple of months.  Maybe it will be even sooner.  I really don’t know for sure, and I don’t think anyone else does either. That uncertainty has rattled fear into people, which includes investors.

But let’s just say, hypothetically, that the virus mostly goes away over the next several weeks. Who thinks that stocks are going to gain back everything that was just lost this past week?  Is the Dow going to be going to near 30,000 again in a short amount of time?

I know my answer to this question.  I don’t think stocks are going to recover any time soon.  I see this as the beginning of a recession.  Everyone can blame a virus all they want, but it won’t change the reality.  The bond market is sending a strong signal of a recession.  The stock market just finally caught up with the bond market a little this past week.

I have said that my theme for 2020 will be about the massive stock market bubble.  It is now a little less of a bubble than it was a week ago.

I have been reading some forums where, as typical, you get some people saying that stocks just went on sale.  In other words, this is an opportunity to buy lower than it was the previous week.

To be sure, I would rather buy now than have bought a week ago.  But it is crazy to think that now is a good time to buy stocks. We will see bouncing around and high volatility, so there is potential money to be made in day trading. But these people are not talking about day trading.

Stocks could easily go down 50% from here.  They could go down 70%.  We probably aren’t going to continue to see drops of over 10% on a weekly basis, but we could easily see massive drops over the course of several months. It is going to take a lot less time to take the air out of the bubble than it did to inflate the bubble.

I am sticking with the permanent portfolio as a core.  Even that did poorly this past week, but it certainly wasn’t as painful as being heavy in stocks.

Aside from the permanent portfolio, I think it is good to do what is almost always wise in a recession where there is little concern for imminent price inflation.  It is best to save in cash and bonds.  It is best to pay down debt if that is possible.

This is not the end of the fall in stocks.  I think the coronavirus is only one piece of the puzzle.  That was a trigger event, but I don’t think it is the main event.  The bond market is telling us this is a recession.