Hedge Clippings | Friday 07 February, 2020

"Unknown unknowns"

The above (now famous) response by US Secretary of Defence, Donald Rumsfeld, to a journalist's question way back in 2002 regarding the presence of weapons of mass destruction in Iraq could well apply to the way the investment (and political) landscape has changed over the past 30 to 60 days given firstly the bushfires, and subsequently the outbreak of the coronavirus.

Some might argue that Australia's bushfires might not qualify as unknown unknowns, as there would have been some who predicted the extent and severity of the fires, without of course the benefit of hindsight which so many people seem to suddenly acquire when the opportunity arises.

The coronavirus, on the other hand, has not only come out of the blue, but the outcome at this stage is surely unknown, not only from a medical perspective, but also an economic one. Alternatively one could argue that the real "known known" is that the economic fallout is likely to be significant depending on the progression of the rate of infection.

And of course, the speed of progression is a "known unknown".

With a lockdown in China post lunar new year celebrations for the Year of the Rat (ironic that it was reportedly a live food market in China that was the source of the outbreak), Chinese industrial production is unknown, affecting both imports of raw materials and output of finished goods. Given that China has become the dominant supplier of so much of what the world consumes, how long before retailers' shelves are showing the signs?

What is better known is the damage to specific sectors in Australia - particularly tourism and education. Even then, the duration of the virus, or China's ability to control its spread, is a known unknown - as indicated by the now out of date statistics in Frazis Capital's insights article here, published earlier this week.

As is the effect on not only Australia's economy, and GDP, but that of the world at large.