Strategic Global Intelligence Brief for April 22 , 2020
By Chris Kuehl, Ph.D., NACM Economist
Short Items of Interest—US Economy
Will Next Injection Be the Last?
It is likely there will be a continued need past this latest injection of stimulus funds. The Senate approved another $500 billion; this measure is expected to make it out of Congress this week. Will that be enough? It all depends on how quickly the lockdown is lifted and how quickly consumers elect to return to their old habits. The assumption is there will still be distress to worry about through the bulk of the year, but there comes a point of diminishing returns. The debt and the deficit get bigger by the day. There has been no discussion regarding how this will be dealt with in the future. That is because there are only two ways—more revenue and less spending. Nobody is talking about either one in the face of this crisis, but they will have to eventually.
Collapse of the Service Economy
The Trump decision to block immigration has been ostensibly made to limit the spread of the virus. The data has not supported the notion that COVID-19 has come from that immigrant community, but it is also obvious these migrants are not immune and can either catch the virus or spread it—just like everybody else. The economic issue is that dozens of industries are utterly dependent on this migratory labor. They will be hard pressed to meet demand. Nowhere will this be more obvious than in food production. The estimate now is that up to 25% of crops will go unharvested as there will be too few people to work in the fields. At a time when food shortages are starting to crop up, this will add to the concerns among food processors, grocers and the public as a whole.
Oil Market Volatility
If one seeks any more evidence as to the uncontrolled panic that has gripped the oil markets, they need look no further than the bounce back in the price per barrel marked earlier in the day. The rise of 24% in the price per barrel only took it up to $14, but the recovery was based on a completely unrelated statement from the White House. Trump ordered that any Iranian ship that threatened U.S. warships be destroyed. To begin with, that has always been the order in place and through multiple presidencies. Secondly, the Iranians have nothing whatsoever to do with the collapse in oil prices—this is a pure demand issue.
Short Items of Interest—Global Economy
Retirement Communities at Epicenter of COVID-19 Worldwide
From the start of the viral outbreak, it has been clear which sectors of the population have been at most risk. That has been reiterated in every nation that has been keeping track of the disease. The fatality rate for people under the age of 50 has stabilized at about 1.7% per million, while the rate for those over 65 has risen to around 11.2%. These numbers do change as people are reclassified, however. Initially, there were deaths not attributed to COVID-19 that should have been. Even now, there are deaths not related to the virus that get added to the total—especially in a global setting.
Politics as Usual in a Crisis
It would be assumed that a crisis of this magnitude would cause the politics of confrontation to ease, but in most nations it has been just the opposite as rival parties and factions seek to blame the other and score political points. The sitting governments have tried to urge unity, but most have been ignored as their opponents seek an opportunity to discredit them. The constant battles have undermined confidence and will certainly make the lifting of the lockdown much harder and less effective.
Worst Hit Sector
The airline industry will be the hardest hit by far. This has been due to the lack of business, but also due to the regulations that have required the airlines to keep flying empty planes if they intend to keep their airport privileges. It is estimated that 92% of international flights are completely empty and roughly 65% of domestic flights have not a single passenger on board.
Extreme Reactions Increase Globally
The pandemic has altered life around the world and so has the reaction to that pandemic. It has become obvious that patience has evaporated in many communities as the frustration over social isolation and mounting death tolls continues. In India, the government has been forced to issue strict punishments for people who attack doctors and other medical personnel. In parts of Asia, mobs have stormed testing centers and there have been hijackings of medical equipment. In the U.S. and Europe, there have been demonstrations by people demanding the lockdown end; some of these have become confrontational. There have been plenty of examples of personal stress exploding into violence.
Analysis: In those areas where disruption and frustration has been less of an issue, there appear to be three important factors at work. The first is trust in the authorities. If there is a common message presented and the population accepts that message, there appears to be willingness to wait out the crisis. In those nations where there are dozens of contradictory messages and where people are very skeptical of the political leadership, there has been considerably less cooperation. A related factor is rooted in national culture. There are populations that tend to follow instructions better than others or which have a tendency to think more of the whole society than of the individual. Many of the Asian states have more of a group culture than nations in Europe or the U.S. It has been pointed out over the years that Japan (for example) has a "shame" culture while the U.S. (for example) has a "guilt" culture. In Japan, it is the opinion of one's neighbors and society as a whole that governs actions and, in the U.S., it is more a matter of personal guilt. In Japan, people adhere to the social isolation strictures because society demands it—in the U.S. it is a matter of personal responsibility and preference.
Focus on the 'Three Ts'
From the beginning of the "lockdown recession," it was obvious that at some point the restrictions would have to be lifted. Nobody was laboring under the impression that shutting down the global economy was something that could be extended for very long. This was clearly a miserable example of being between a rock and a hard place. No aggressive and coordinated response to the COVID-19 virus would mean millions of infections and tens of thousands of deaths, but a lengthy shutdown of the global economy would cost thousands of lives as well. Rebooting the economy by removing the restrictions has always been an integral part of the plan, but the details of that process have been murky. In essence, it comes down the "three Ts"—testing, tracing and treatment.
Analysis: There has been controversy from the start. Given that this is a new virus with characteristics that were unknown, there were no effective tests to deploy at the start. The emphasis from the beginning was on trying to find out who had the disease. That proved to be illusive as the vast majority of those affected had mild symptoms or no symptoms at all. They did not seek medical care. Given the long incubation time for the virus, these people spread the virus far and wide without knowing they were doing so.
There have been tests that show if people have it and tests that show if people have ever had it. Every nation has struggled to deploy them. Even as nations have frantically tried to keep pace with the need to test, it has been challenging. There are still wide gaps between countries. There are over a dozen countries that have tested more than 20,000 per million population and some that have very high numbers (Luxembourg has tested over 55,000 per million and Iceland is at 129,000 per million). Many of these countries are small and that plays a role in testing. Another 30 or so have testing numbers between 10,000 and 20,000 per million. The U.S. has tested just over 12,000 per million, Canada is just over 15,000, Russia is at 15,000 as well. The bottom line is that health authorities would like to see a significant boost in testing for every nation. All of these numbers come from a compilation of data from the CDC, WHO, national health ministries and a number of private sector testing facilities. One nation where the data has been illusive has been China as the government has continued to block the release of information.
A bigger issue and a far more controversial issue has been tracing. There is a branch of the CDC called the Epidemiological Intelligence Service. It is charged with tracking the outbreaks of disease worldwide. This agency has 160 people who have been covering the world. They have all been brought back to the U.S. to engage in "contact tracing." The goal is to determine who is capable of spreading the virus and who has had contact with infected people. This has been done through the use of cell phone GPS in some nations and intense questioning in others. To note that this has been a concern of those protective of privacy would be an understatement.
Finally, there is the issue of treatment. It is universally assumed that people will tolerate illness—even serious illness—if the chances of fatality are significantly reduced. The situation at this point is that treatment options are limited and the vulnerable population remains at high risk. Thus far, there has not been an effective option, but there are several under investigation.
The ultimate end to the threat will come when a vaccine is developed and distributed. That still appears to be some months away. The most promising news has come from the Germans. BioNTech has been given approval to start human clinical trials on 200 volunteers. If these tests are successful, the vaccines might be available in the next two to three months. There are similar trials underway in the U.S. and Japan. They are on a similar timeline.
Congress Extends Assistance
At the time Congress passed the initial $2.2 trillion assistance package, it was assumed that it would not be the last such effort. The "lockdown recession" shut off a $20 trillion economy. It is going to take a lot more than $2.2 trillion to offset the damage. The assumption was there would be more aid delivered as needed. The hope has been that recovery would start in May and that further assistance would be limited, but for now, there will be another injection aimed at keeping small business intact while the reboot is under discussion. The additional $500 billion authorized by the Senate will likely pass the House in the next few days and be available by week's end.
Analysis: The assistance is stop-gap at best, but that has been the intent. This is still not a "normal" recession in the sense that its end depends on lifting restrictions imposed by government. Previous recessions emerged due to long-standing economic issues such as financial sector collapse (2008 recession) or massive sector collapse (dot.com bubble bursting). It was not clear what it would take to get the economy to rebound back then. This time it is clear what it will take to get a rebound—ending the lockdown. That means government aid is designed to get business through a defined period. Once the reboot starts, the need will rapidly diminish, or at least it will be determined that some sectors will be able to recover on their own.
Saga of an Inelastic Good
It is time to cast your thoughts back to that beloved Econ 101 class of yesteryear. Those golden days of studying guns and butter and equilibrium points. That was when you learned that oil was the ultimate example of an inelastic good. This meant that consumption of oil and gasoline had little or nothing to do with the price of the commodity. Of course, we all complain when the pump price goes up and we have all cheered when the price goes down, but we change our consumption habits very little. We drive to work and shop and attend school or events. The airlines fly their routes whether the plane is full or not, trucks, trains and ships deliver their loads according to demand for these goods not according to price of fuel. We don't decide to quit our jobs or even cancel a vacation trip because the price of gas went up. The price per barrel of oil has utterly collapsed. It has fallen to levels not seen since the turn of the century, and price has had nothing to do with it.
Analysis: The global economy is shut down—universally. This is not an issue affecting only a certain sub-sector of the global community. Thus, the reactions have been universal. Demand for oil has collapsed as there are far fewer cars on the road, far fewer trucks and planes and ships and a major reduction in all of the activity that involved the consumption of oil. This dearth of demand came on top of an oil war launched by Saudi Arabia and Russia designed to put pressure on U.S. oil production. It seems their timing could not have been worse as now they are starting to suffer as much as the U.S. The price per barrel on the oil market is too low for any nation to make any money. Additional production is utterly pointless at this juncture. There is no demand for it and there is no longer any place to store it. The world's tanker fleets are stalled off shore serving as nothing more than floating storage containers.
Given the fact oil is an inelastic good, there is a pattern emerging that is utterly predictable. In a period of no demand, the price has fallen to the point that production will cease. The next phase emerges when that demand starts to return. If we assume some version of a May reboot, the oil producers will have only recently started to shut down their operations. The first phase of recovered demand will focus on consuming the oil that has been stored. The second phase will be consuming new production. If the shutdown of oil operations has not lasted too long, the return to normal operations will not be too expensive, but with every week this recovery is delayed, the costs will rise. The upshot is that oil prices will rise—the only question is how far they will go and how fast. The scenarios range from a return to the $50 to $70 barrel level that dominated at the start of the year to a really bleak assumption that prices will rocket to the $100 to $125 range (and maybe higher). It all depends on how fast demand recovers and how much of current production has been shut down.
How Much Will Change?
My friends and colleagues seem to fall into two very broad categories. There are those who are convinced that everything we once knew has vanished forever. We will never go back to work in an office, sports will never have crowds again, restaurants will only have drive-up windows and dating will only take place via a megaphone and a 10-foot pole. The other half think everything snaps back to normal and we soon forget this even happened. I seem to be in the middle as I can see that some of my habits may be forever altered, but others may be salvageable.
One big question for me is whether the speaker's circuit will ever be the same. Every single talk that was scheduled for March, April, May and June has been canceled. Many have been replaced by the virtual meeting and the webinar. Is this the shape of the future? I have to hope not. It is not that I do not appreciate the opportunity to sit at my desk and deliver information—I have done dozens of these already and have more on the calendar. The problem is that I am weary of talking to a wall. I like seeing people, talking to people, learning from people, making new friends and seeing long-time colleagues and compatriots. I suspect that many feel the same way and want to go back to the personal contact. When will that be safe again? What will constitute safe? My assumption is that some of these meetings will fire up later this summer and fall, but who knows under what conditions. I am left wondering how one is expected to wear a tie with a hazmat suit.