Last week I issued a warning signal that the coronavirus outbreak would hit the markets and that it’s only a question of how bad it would get. Of course the powers that be are already throwing the kitchen sink at the problem, but informed investors know that the dam will break sooner or later.
If you’re reading this, then you probably already know that the Federal Reserve will buy up government-issued bonds as a desperate stopgap measure. You surely also are aware that the Chinese government will underreport the numbers of COVID-19 infections and deaths.
Those are all a given, but it goes much deeper than that. Back in June of 2017, few people were paying attention when the World Bank issued its first-ever “pandemic bonds” promising to “provide more than $500 million to cover developing countries against the risk of pandemic outbreaks over the next five years.”
The majority of that $500 million is risk premium which would need to be paid out in case of a pandemic. Specifically, “The total amount of risk transferred to the market through the bonds and derivatives is $425 million.” At the time, World Bank Group President Jim Yong Kim gleefully boasted, “This creates an entirely new market for pandemic risk insurance.”
It must have seemed foolproof at the time, as the SARS and West African Ebola epidemics were contained before erupting into full-blown global pandemics. Perhaps that’s why the World Bank thought it was great news that the bond issuance “was oversubscribed by 200%.”
Oh, and by the way, the World Bank also mentioned in a footnote that “There was an additional $105 million size done in the derivatives market” and – if you can believe it – the listed “covered perils” happen to be “Flu, Coronavirus.”
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Since you might not have the leisure time available to peruse the 386-page prospectus for the “pandemic bonds,” I’ll save you some time and home in on the most interesting passage. Of particular interest is the stipulation under the “Coronavirus Payout Conditions” which states that “the Total Confirmed Death Amount” must be “greater than or equal to 2,500” per “Eligible Event.”
There’s also a World Health Organization connection here, as the “Payout Conditions” include that “the Reporting Source has published a WHO Report in connection with the relevant Eligible Event with a WHO Report Date that falls within the Reporting Window relating to Eligible Event Period.”
And so, the World Health Organization has a very strong motivation not to fully report the number of coronavirus-related deaths. If one country’s outbreak leads to more than 2,500 deaths, this would count as an “Eligible Event” (i.e., a pandemic) and the “Payout Conditions” would be triggered.
The World Bank doesn’t want to have to transfer all of those funds to virus-embattled countries – but they won’t tell you that because they have an image to uphold. Instead, it’s easier to just fudge the numbers like the Fed and the Chinese government have been doing.
So don’t expect the World Health Organization to admit that this is a pandemic anytime soon. The World Bank took their chances by issuing those bonds and they’ll have to sweat it out for a while in hopes of containment – or at least, a successful cover-up.
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