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Strategic Global Intelligence Brief for April 15, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Retail Collapse
To the surprise of absolutely nobody, the most recent data on retail is miserable—a drop of 8.7%. That is catastrophic as compared to any other recessionary period and well in excess of anything the U.S. has experienced since the 1930s. There are two ways to look at this, however. This can either be seen as the crushing blow to the economy that it would appear to be, or it can be seen as an artificial response to an artificial recession. By now, most have taken to referring to this downturn as the "lockdown recession" as it has resulted from a governmental edict. It is not that consumers did not want to buy from the retailers—the retailers have been forcibly closed and 16 million people (at least) have lost their jobs. These figures will change when the lockdown ends—the question is one of timing.

Airlines Get $25 Billion in Aid
Perhaps the hardest-hit sector in the country has been the airline industry. The fact is that passenger numbers have fallen to near zero, which has robbed the airlines of all their income. Other businesses would simply have shut down until the lockdown was lifted, but airlines are required to continue flying or they lose their airport privileges. This has meant thousands of empty flights, but flights with crews and all the usual support people. The bailout is designed to help them pay these staff people and keep maintenance current. The deal includes everything from grants to loans to warrants. It will likely involve the government taking an equity stake in the companies (similar to what took place with the bailout of General Motors).

Power Struggle
The COVID-19 crisis is uncharted territory in almost every respect. It was unclear what entity would call the shots—the virus threat emerged and the impact was not initially national. At first, it seemed to be a state concern and only later expanded. Now, there are heated debates over a whole host of issues. Is the lockdown a federal or state mandate? Each state has handled the shutdowns as they see fit—schools closed in one and not another. The Trump team has asserted it has total control over these decisions, but governors point out these are responsibilities specifically allocated to the states by the Constitution. The result is a very chaotic and patchwork set of responses.

Short Items of Interest—Global Economy

Protocols Expected in the Restart Phase
If one looks at how other nations have been handling the economic restart, it is apparent that removing the lockdown will not be as simple as imposing it was. There will have to be protocols established and adhered to. These will vary with the business and the country, but some common themes are emerging. It is clear that testing will be mandatory and early-on that will take the form of examining people for signs of infection: taking their temperature and asking about their health. Social distancing will remain in place as workers will be kept as far apart as possible. There will also likely be restrictions applied to personal hygiene—requirements as far as hand washing and the use of antiviral products. Normal has changed and may never be as it once was.

Trump Administration Resists IMF
The International Monetary Fund (IMF) wants to expand the special drawing rights (SDRs) that emerging market nations can use to create additional liquidity. The SDRs are a way these countries can boost their budgets at a time when they will have to spend aggressively in response to the COVID-19 pressure. The U.S. is resisting the expansion for an unspecified reason, although in the past, the U.S. has objected to SDRs as the U.S. makes the biggest contribution to the system. There are other nations that have been reluctant to use SDRs as they are allocated according to voting power and thus tend to go to bigger nations. The U.S. has supported other emergency programs from the IMF, but these are smaller in scope than adding $1 trillion to the SDR system. The fear among some is that much of the aid money might be misallocated. That has long been an issue.

Shooting the Messenger
The latest decision by Trump as regards the COVID-19 pandemic has triggered another wave of global criticism. The statement suggested the U.S. will cut its support of the World Health Organization (WHO) as it is Trump's assertion the organization failed in its core mission and should be held accountable. To most people in the world, the WHO was just another of the international alphabet soup organizations until a couple of months ago. Now that COVID-19 has all but destroyed the global economy, it has become a household word but is still an organization people know little about.

Analysis: The World Health Organization is part of the United Nations and was established in 1948. It currently employs some 7,000 people in 150 countries and is headquartered in Geneva, Switzerland. Its mandate has been to promote public health. This has taken many forms over the years—from establishing clinics in the developing world to conducting research on communicable diseases such as COVID-19. The emphasis has always been on research, data collection and education. It is important to understand what the WHO is not.

The WHO does not have the power to mandate anything from any government. It can suggest and recommend and call attention to policies that it asserts are unhelpful, but it has no enforcement powers whatsoever. Most of the research activity it engages in is coordinated with national health organizations from the 150 nations where it operates. The U.S. has been a major contributor to the organization since its inception—now accounting for roughly 22% of the budget ($893 million).

The assertion made by Trump is that the WHO failed to hold China accountable as far as the spread of COVID-19 and that it failed to alert the world of the threat. In fact, the WHO was sounding the alarm regarding this viral threat as far back as October of 2019—before anyone really knew that COVID-19 existed. All that was known at that point was that the region around Wuhan and Hubei province was affected by some kind of viral outbreak. As this warning was being issued, the Chinese government moved to ban the WHO from the region and buried the warnings. We all know by this time that China sanctioned and silenced the doctors who had been trying to warn about the unnamed outbreak. The WHO called the world's attention to that effort and was subsequently blocked by the Chinese.

As COVID-19 exploded on the global scene, the WHO tried to coordinate a response and was a leading advocate for the social isolation policy that was adopted by most nations. The WHO has been pointed in its criticism of those nations that were slow to adopt this strategy. The Chinese came under sharp attack for the deliberate withholding of information and WHO personnel began to take control over reporting of new cases. There has been criticism of the U.K. for its slow pace and of Sweden for not engaging in lockdown. The U.S. has come under criticism for its slow response as the WHO asserts there was sufficient information to justify much earlier imposition of control. The WHO has also praised the U.S. for the response that eventually evolved.

Trump's assertion that funding will be cut is questionable as this is money that has been allocated by Congress and it is unclear whether the executive can block it.

US Declares Victory in Oil War
The "oil war" launched by Russia and OPEC a month ago was not unexpected although the timing might have been. The U.S. development of its oil shale resources through fracking reoriented the entire oil world as it suddenly made the U.S. one of the largest oil producers in the world. The long-held desire to become oil independent had been realized. This transition reduced the control that OPEC once enjoyed; there has been an effort to regain that authority ever since.

Analysis: The U.S. oil industry is still vulnerable because obtaining oil through fracking is not cheap—at least not as cheap as getting oil out of the ground in most of the OPEC states and in Russia. The U.S. needs per barrel prices at a minimum of $50 while many of the OPEC states can survive on $25 or $30. The decision to lower their prices and boost production was a move to pressure the U.S. The decision to take some 10 million barrels a day out of production has been hailed as the "biggest deal ever" by the U.S., but these cuts come after the boost in production that was staged in the last month. Production is just slightly less than it was before the oil war. This level of production is consistent with the dramatic reduction in demand due to the lockdown recession. The bottom line is that U.S. oil production is still expensive as compared to rivals around the world.

Ending the Lockdown Recession—What Has to Happen
The most intense conversation over the next few months will be over the question of whether the lockdown of the global economy was really worth it. The decision to shut down the majority of the businesses across the world was made as a means by which to prevent people from spreading the COVID-19 virus. The mantra has been "flattening the curve." The assertion is that infection rates would have been far higher without the mass quarantine. It may never be possible to prove the efficacy of this strategy as we simply can't know how many people might have been infected—although projection models can be pretty accurate. Another point of debate will be over whether the tradeoff was worth it even if the strategy prevented a certain number of deaths and illnesses. That argument will never be settled as it becomes intensely personal. The reality is that the lockdown strategy will have to be altered and that will focus attention on that tradeoff.

Analysis: What has to happen for the lockdown reduction to work? The assumption is that the economy will bounce back from the temporary shutdown, but for that to occur, there will have to be a number of conditions met. It will all come down to how much damage was done and whether the consumer and the business community will be willing and able to return to habits that existed before the shutdown. There will be three keys to a successful rebound.

The first and clearly the most important will be the return of the consumer. This is an economy that depends on the consumer for 80% of the GDP and 80% of jobs. This is why the economy crashed into recession instantly with the imposition of the lockdown. The consumer must come out of this quarantine with a vengeance—willing to resume old habits of spending, traveling and otherwise engaging in the economy. There will be two major inhibitions that will have to be overcome. The first is that millions of people have been thrown into severe financial distress as they have lost their jobs, lost their businesses and lost opportunities to engage in the economy altogether. They may not be in a position to spend much until they get their jobs back or otherwise replace that lost income.

The importance of attitude goes along with the return of the consumer. The focus of the government's message for the last two months has been fear. In order to get people to accept the restrictions of quarantine, the constant refrain was how deadly the virus is and how easily it can be acquired. "Don't leave your home, touch nothing and nobody, maintain 100% isolation 100% of the time or you will die." Now the message will be "the virus still exists; we still don't have a vaccine or effective treatments, but everybody can get back to their old habits anyway." Will people accept this assertion? Polls suggest that some will, but that the majority will remain wary for an extended period of time. A cautious and wary consumer is just as devastating to the economy as one in formal lockdown.

The second major development will be the resumption of normal business. To a significant degree this will have to come with the resumption of consumer habits, but in reality, these recoveries will have to be simultaneous. The consumer needs to get their job back and see their income recover. That means business has to rehire people. They will not be in a position to do that rehiring if the consumer is not spending—the economic version of Catch 22. The sectors most impacted by the lockdown stand to lose even more money if the customer is slow to return. Airlines do not make money flying 10 passengers, hotels do not make money with 10 guests and theme parks do not make money with 10 people on the rides. These are all businesses that have to offer a full set of services whether there are 10 people or several hundred. The airline will have pilots, flight attendants, gate agents, baggage handlers, mechanics and dozens of other workers whether the plane is empty or full. The costs are the costs. Business can offer resumption of service without a resumption of consumer demand for a very short time. Then it will have to consider a longer-term shutdown or retreat from the market.

The third key to an economic restart will be the recovery of other national economies. The U.S. needs to sell to other nations and it needs to buy from other nations. In a normal year, the U.S. GDP is dependent on exports for between 15% and 20% of the total. That is roughly $4 trillion in export earnings. The U.S. economy certainly can't thrive (or even survive) without it. In order for the U.S. economy to rebound from the lockdown recession, our trading partners have to survive their own lockdown recession. That means the U.S. needs recovery in Canada, Mexico, Europe, Japan, China and pretty much everywhere else. This will mean these nations will have to successfully end their lockdown, but it also means the U.S. will have to embrace global trade again. The tariffs and other restrictions that have been imposed under Trump will have to be set aside or abandoned altogether. Every nation in the world has been hammered by the lockdown and they will all be struggling to regain their footing. If the U.S. intends to sell to these nations, they will have to have money with which to buy what the U.S. is offering. If they can't sell to the U.S., they can't buy from the U.S. either. This will be very delicate balance as there will be many U.S. companies weakened severely by the lockdown and will crave protection from competition. At the same time, the consumer will need the bargains that come from imports. The balance in terms of trade has always been between what is good for domestic producers and the consumer. Right now, the needs of the consumer will have to take priority if there is going to be a recovery.

These are not going to be easy requirements to fulfill, but it is not impossible. The U.S. consumer is a very determined and resilient creature who wants to get back to the life they knew. The business community is equally determined and resilient and wants to get back to doing what they were established to do. People want to get back to work and they want to resume the activities they engaged in just a month or so ago. At this point, we simply have to hope that this desire overcomes the desire to remain cautious and fearful. Confidence is hard to find right now, but people have rallied back from periods of angst and concern before.

Coming to Grips with This Work at Home Thing
There has been a lot of conjecture regarding the wave of "work at home" mandates. For years, there has been an assertion that people would jump at the chance to do this. Now we are getting that opportunity. Thus far, the transition has not been all that smooth and polls are suggesting that many people are longing for the old days. It seems there are three issues.

The first is that home is not set up to be a workplace. There are too many distractions. There are kids and spouses and neighbors and pets and the refrigerator and the TV and so on. It is not easy to get everybody on the same page or to resist the impulse to take a break that lasts a little too long. The second issue is the isolation factor as people miss having an opportunity to hang with their work friends—Zoom doesn't cut it for those water cooler conversations.

Another issue is determining what a workday consists of. People are sending messages and video invitations at all hours and the expectation is that people are there to respond. I have had people requesting a webinar at 6:00am and 11:00pm. Really? I am now supposed to be working a 24-hour day, seven days a week? A message is sent and the expectation is that it will be answered immediately. In a normal work environment, people are in meetings or otherwise occupied, but not now.

The ultimate irony is that business has been emphasizing team building and cooperation for years. We are now in the least-team-friendly environment we have faced in decades.


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Monday, 25 May 2020