ANALYSIS: Covid-19 is self-evidently beyond the point of meaningful containment for the world as a whole.
Virologists and infectious disease experts have known for three weeks that this was highly probable, and certainly not a mere tail-risk as suggested by equity market pricing. We are now there.
The global economy may be heading for some sort of "sudden stop" in supply chains, trade flows and tourism, more akin to the outbreak of the First World War than the Lehman or dotcom crises.
The bond market is already signalling a downward lurch into global deflation. Yields on 10-year US Treasuries have fallen to all-time lows. Evercore ISI says zero yields are coming into "plausible" range.
The question is whether this will be a short-sharp episode followed by a V-shaped recovery in the second quarter (priced by stocks), or a slower elongated "U-shaped" recovery (priced by the dollar, Swiss franc and safe-haven bonds), or a Spanish cedilla (priced by almost nobody) as real fear of central bank impotence starts to take hold in the markets for the first time.
This is surely more like the Spanish flu of 1918 than anything we are used to. The Chinese data suggest that roughly 14 per cent of those infected over the age of 80 are dying.
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The latest tracking data (unreliable, but the best we have) is that the mortality rate is 4.0 per cent in Wuhan, 2.8 per cent in Hubei and 0.8 per cent in other regions of China, though all figures are creeping up as slow deaths hit the data. The average morbidity of flu annually is 0.1 per cent; Covid-19 is an order of far greater magnitude.
Equity markets are essentially "looking through" the Covid-19 saga. The "Fed put" lives on in the collective mind. Fund managers have become so reflexively certain that there will always be a central bank rescue whatever happens, that they will continue to buy the dips into the teeth of almost any storm.
But this is a risky proposition. Monetary stimulus is useless against a genuine supply shock because the transmission channels are blocked and demand for fresh credit collapses.
The authorities can suspend tax payments for firms, or strong-arm state banks into rolling over debts, as China is already doing. Yet this is much harder in the West, and is strictly forbidden in the EU. In any case such measures do not stimulate: they limit damage.
Nor can fiscal expansion do much when chunks of the economy are closed. China's Baidu migration index shows that 72 per cent of travellers and migrant workers have not returned to the 15 largest cities since the lunar new year. Nomura says journeys on the Guangzhou metro are still down 85 per cent. Coal use at six key power plants - a proxy for industry - is down 47 per cent. Obviously the economy cannot function in these circumstances.
Capital Economics expects Chinese output to contract by 10 per cent (annualised) in the first quarter based on proxy measures - not the massaged official data, which will look OK. The Chinese government claims that the manufacturing region of Zhejiang is almost back to normal but the latest data from the State Grid show that power use in the industrial sector is still down 32 per cent even there.
Xi Jinping is clearly alarmed and has issued orders to restart production come what may, but this means relaxing the fight against Covid-19.
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It is not believable that people are going back to work and at the same time that the spread of the virus is being contained dramatically outside Hubei.
Since the Communist Party has launched a propaganda blitz and is using totalitarian methods to suppress media reporting, we are groping in the dark. Nothing can be taken at face value.
The danger in any case is that the coronavirus epidemic not only spreads to Europe and the US but also that it lasts long enough to set in motion a contractionary chain-reaction, ending in a worldwide deflationary bust.
The Federal Reserve's ex-chief economist, David Wilcox, told me recently that this would be the nightmare come true. "I am seriously worried about the Fed's policy space if the next recession is deep and nasty," he said.
"The Fed could do a whole boatload of QE and might just scoot by with enough counter-cyclical punch if it is an average recession, but it would be in deep trouble if it is any worse, like an artillery that has spent its shells before the job is done. The European Central Bank is clearly in much worse shape, and so is the Bank of Japan," he said.
Well, quite. The ECB can do almost nothing to arrest such a process unless it calls in "helicopters" and prints money to fund public spending, which would violate the Lisbon treaty and would not happen until matters were already desperate, if at all.
The ECB's policy rate is already minus 0.5 per cent and at the "reversal" threshold where cuts do more harm than good. Nor can it gain any traction by pulling down long yields when the entire gamut of core-EMU bonds out to 10 years' maturity is already trading below zero. This is what the monetary dead end looks like.
Italy is certainly in the eye of the storm. It was in recession or very close before Covid-19 hit. The shock of seeing 12 Italian hotpots and 50,000 people in Wuhan-style lockdown has been sobering, as has been the cancellation of the Venice Carnival, and Rome's emergency decree suspending civil liberties and mobilising the army.
The hotspot regions of Lombardy and the Veneto account for a third of its GDP and half of its exports. Its public debt ratio is about to blow through 140 per cent of GDP.
However, we are all in the eye of the storm. What is happening in Italy today will probably be happening soon enough in France, Germany, Britain and the whole of Europe.