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Strategic Global Intelligence Brief for February 26, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Home Prices Ratcheting Up
The price of homes has been rising again—by 3.8% in 2019. In truth, the price of homes has been inching up consistently for years, but the pace quickened in the last year. The price hikes are varied with the highest being in the hottest markets (as one would expect), but even in those cities where there has been slower growth, the home prices are rising. Most of this is due to the fact that there is a consistent shortage of homes. That has been attributed to factors such as labor shortage, relatively cautious banks and zoning laws that have made expanded multi-family housing harder to launch.

No Trade Deal on the Horizon with India
The atmospherics were good for both Trump and Prime Minister Modi, but there was not much substance. The Bhartiya Janata Party made it mandatory for members to attend the rally and protests were strictly banned. Both leaders talked of the importance of becoming closer to one another, but there is a great deal that separates the two economies and both have been imposing restrictions on the other. Trump has castigated India for discriminating against U.S. companies (which they do), while Modi has attacked the U.S. for interfering with India's tech service exports (which the U.S. does). It will be a long time before these states find common ground that matters much to either state.

China Takes First Step
Since the signing of the "phase one" agreement between the U.S. and China, it has been something of a waiting game. Who would be the first to implement what was ostensibly agreed to? The Chinese now seem to have taken that first step by lowering the barriers against U.S. farm exports. There was speculation that China would act first and, in this arena, as it now has to make up for the massive loss of their hog population due to the swine flu epidemic last year. The next step should be the U.S. lowering some of the tariffs applied to Chinese goods. Now would be an ideal time as far as the global economy is concerned.

Short Items of Interest—Global Economy

Unusual Coalition Forming in Ireland
Normally, the center left and the center right in Ireland contest with one another for power, but neither is as strong as they would prefer to be. They are both worried about the rise of Sinn Fein—the political arm of the Irish Republican Army. Both Fianna Fail and Fine Gael want to blunt that rise as there is real fear that the "troubles" could erupt in Northern Ireland as the Brexit talks get heated. Ireland does not want to be divided by the formal border the Europeans are demanding.

Libya Ripped Apart by Proxy War
The prize is the oil and gas wealth of Libya plus a pivotal position in North Africa and the Middle East. On one side is the official government backed primarily by Turkey and on the other is a tribal warlord backed by Russia, Egypt and the UAE with France leaning their way. The civil war has all but halted oil production and has reduced the major cities to rubble fit only for snipers. The U.S. plays no role at all, while the rest of the region is preoccupied with their own conflicts. The Turks have been the most determined and have supplied troops as well as arms. The two sides control about a third of the country with regional factions controlling the rest.

Global Reaction to Weinstein Conviction
Even as the case against Harvey Weinstein was unfolding, there was confidence in some circles that he would escape with a minor penalty. After all, so it was thought, it was a matter of "he said, she said" and these women knew what they were getting into. That assumption has been shattered. Many corporate board rooms have been shaken as they are starting to understand they will have to alter a culture that tolerates exploitation, intimidation and bullying. The case was ultimately about more than sexual harassment—it was about the abuse of power and privilege. This behavior affects all employees and anybody else in a weak position.

Oil Sector in Crisis?
The investment community has been shunning energy stocks for a while now, but the latest trends are causing analysts to christen this period the "Pearl Harbor" of the energy sector. This is a reference to the fact that stock prices have not been this low for the energy companies since the attack on Pearl Harbor. There are many reasons for this dramatic plunge and these all have implications for the future of the sector. The U.S. has been reveling in the fact it has become the leading oil producer in the world again, but it seems that adding all that capacity has created a major problem in the oil world. The glut of available supply has rarely been this extensive. That has combined with a definite drop in demand, pushing crude oil prices as low as $56 a barrel. In this year alone, the price per barrel has fallen by 15% and the collapse is nowhere near complete. The oil world has been turned on its head by the development of shale oil deposits in the U.S. and elsewhere in the world, but there have been other developments this year that have had profound impact on the sector as well.

Analysis: The trouble that has plagued the sector for the past year or more has been the significant slowdown in the global economy and the impact on demand for oil. The consumption rates in Europe have tumbled and there has been far less demand from the Asian nations. Even the U.S. is consuming far less than it once did. Not all of this reduced demand is due to the economic issues as there have also been focused efforts to reduce dependence on fossil fuels. It is not that electric cars and other alternative fuels have taken large shares of the energy budget as yet, but the future is clear enough—more electrics and more alternatives as well as more reliance on mass transit.

The latest issue hammering the oil sector is the spread of the COVID-19 virus. The Chinese are the world's largest consumer of oil. They have now seen a virtual shutdown of their industrial sector and that has reduced their demand considerably. There is no sense that this will be coming back anytime soon; the betting is that it will get worse. As other nations start to react to the threat, their consumption and demand will dwindle as well.

The oil majors once spoke of peak supply. The analysts were all predicting a point in the near future when oil prices would top $200 a barrel. The assumption was that these prices would push alternate fuels and force people to change where they lived and worked. Now, the talk is of peak demand and oil prices sinking as low as $25 a barrel.

Fearing Fear Itself
The COVID-19 virus is serious and deadly—to a point. The mortality rate for the virus is 0.2% for anyone under the age of 40 as long as they do not have some degree of respiratory problem already. Then, the mortality rate "jumps" to 0.8%. For those over 80, the illness is more serious with mortality rates as high as 14.8%. In contrast, the mortality rate for the flu is 2% for the population as a whole and over 23% for those over 80. The flu hits children very hard and for some reason COVID-19 does not. The point of all this is that the flu kills upwards of 600,000 people every year and thus far COVID-19 has killed just over 2,000. Why then is this getting the attention and threatening to derail the global economy?

Analysis: The key to the panic is that flu is basically understood and there is knowledge as to how to deal with it. Vaccines are not perfect, but they work well. The medical community knows what it is dealing with. Thus far, the same can't be said for COVID-19. The economic impact can be attributed to an abundance of caution. The story is that regional authorities in the Wuhan area tried to keep the crisis to themselves. When it got out of control, the Beijing authorities stepped in dramatically. For all intents and purposes, the whole area was quarantined. That meant an abrupt end to the supply chains originating in that area. It now seems the disease has peaked in China, but has spread to other nations in the meantime. This has triggered some draconian reactions. The business impact has been almost entirely due to the efforts to contain and control. These efforts are likely to remain extreme as no government wants to appear less than focused on this threat

Will COVID-19 Affect Central Bank Policy?
The central bankers met just a week or so ago. There was generally consensus that global economic growth was stable enough—if not all that impressive. There was no sense that any sort of radical change was expected, but that was all before the COVID-19 crisis emerged. Now, there is intense speculation regarding what banks may have to do if the global economy stalls out. The primary problem is there is very little these banks can actually do should the need arise.

Analysis: Throughout the last few years, there have been consistent warnings from the hawks at these central banks. They have warned about encouraging inflation and have worried about the impact of too much cheap money. However, the most consistent fear has been they would lack the ammunition needed to address a serious downturn. The interest rates are already at record lows and reducing them will not have a major impact on financing decisions. If the banks are required to engage in stimulus efforts to counter the advance of the virus, it is not clear how they would accomplish this.

Europe Faces Multitude of Crisis Situations in 2020
As the year started, the news coming out of the U.S. had been better than expected. There had been a significant number of economists who were expecting recessionary conditions, but the consumer continues to power ahead and the economy is holding its own. The news from Europe has not been nearly as encouraging. With every passing week, there seems to be another crisis unfolding. The latest blow has come from the advance of the COVID-19 virus in Italy and its appearance in other European states. This has already hammered a weak Italian economy. Most expect the country to be flirting with recession by the end of the year. The EU budget battle was already getting heated. The Italian crisis has made this conversation that much worse as Italy will certainly not be able to meet the budget demands currently set by the EU.

Analysis: But wait—there's more. There are three political battles that will have a direct bearing on the economic situation in Europe this year and into the future. The Germans are in a state of political transition; one that has no clear outcome in sight. Angela Merkel will be leaving office as Chancellor and has already resigned as head of the Christian Democrat Union (CDU) Party. It was assumed that her successor would be Annegret Kramp-Karrenbauer, but after several bad decisions, she has stepped down as head of the CDU and out of the running. The current favorite is Armin Laschet as he has been able to bridge some of the gap in the CDU between the hardline conservatives and the moderates that supported Merkel. He has also made common cause with Jens Spahn, the health minister. The decision by Spahn to ally with Laschet seems to be driven by his desire to block the other conservative contender—Friedrich Merz. This puts Merkel's ally in position to lead the party and become Chancellor, but it also opens the door wider for the rise of the right-wing AfD (Alternative fur Deutschland).

Meanwhile, there is the Brexit discussion. That has started out more than antagonistic. Prime Minister Boris Johnson has been belligerent and demanding as he seems to continue to play to his domestic audience, but this is not playing at all well with the European negotiator who is now asserting that the EU will alter nothing in an effort to make things easier on the U.K. This is going to be a bitter battle. Estimates are that Britain will hit a prolonged and deep recession. The EU will also be experiencing very slow growth.

The reaction to COVID-19 is also preoccupying the EU. The Chinese example has many worried about what comes next. The disease may have been contained in China, but it has taken draconian moves. Factories were shut down, travel prohibited, crowds were not allowed and public events were banned. Whole cities of millions of people were placed in quarantine enforced by the police and military. Can Europe (and for that matter, the U.S.) do the same? Analysts doubt this very seriously. That means a wider exposure, and as a result, more deaths and more money spent on treatment.

What Would 'Extreme Preparedness' Look Like?
As the World Health Organization has examined the reaction of the Chinese government to the COVID-19 outbreak, it has been issuing both praise and criticism. The critique has been based on the slow release of information at the start of the outbreak. The praise has come for the efforts since then. If the current response is the preferred means by which to counter the spread, what does this mean for the rest of the world?

Analysis: There have been three facets of the Chinese effort. The first has been to isolate and contain those who have been exposed or might have been exposed. This has meant the medical detention of thousands of people. They have been rounded up and placed in strict quarantine for as long as two-to-three weeks. If such measures were to be applied in the U.S. or elsewhere, the disruption to people's lives will be extreme. The second facet has been to shut down workplaces, schools and any other place where people would gather in groups. This has resulted in a decline of at least half a percent in Chinese growth and the threat is not yet over. The third facet has been to ban travel and any sort of public gathering—even going so far as to cancel the massive meeting of the Communist Party.

The Centers for Disease Control and Prevention and other groups are now warning people in the U.S. to be prepared should these measures be required here. Contemplate a situation where schools are shut down, factories and offices idled, gatherings banned, travel banned and people isolated and quarantined for extended periods of time. The economic impact alone would be devastating.

There is already widespread hostility being expressed towards people of Asian descent in the U.S. If the situation worsens, this kind of behavior will increase. The panic on Wall Street is reflecting a general sense of unease. The impact of the issue has not yet started to show up in much of the economic data, but there are still very few cases in the U.S. to react to.

Might as Well Beat This to Death
It seems all the headlines are saying nothing other than the world is coming to an end as a result of the COVID-19 virus. I really do not wish to make light of the threat or to dismiss the concerns, but there appears to be a great deal of needless drama and overreaction. The mortality rate is far lower than it is from flu, but that stops few from panic. I suppose the only real course of action for the majority of us is to employ common sense reactions.

It starts with all those usual precautions we should all be taking. Washing hands and avoiding contact with stuff that could be harboring the virus. It also means paying attention to one's health. If people feel bad, they have to be responsible enough not to drag their illness out for all to partake of. I don't want somebody's case of COVID-19, but I don't want their cold or flu either. I have to confess I am more concerned than some given my line of work. In the coming weeks, I am in 19 cities speaking to hundreds of people. To get there, I will have flown at least 50 flights on those giant petri dishes in the sky. I hope sick people don't get on that plane or attend those meetings. I will be wiping lots of stuff down as I ramble. I will not abandon my duties, but if I get sick, I can assure you I will refrain from soldiering on. I have never delivered a talk wearing a hazmat suit, but I suppose there is always a first time.

SARS Cases Data
The world is now in the grips of a near panic over the spread of the COVID-19 virus. This is not the first time such a threat has emerged and it will doubtless not be the last. At the start of the century, there was the SARS outbreak—a disease that is very similar to what the world is dealing with now. The intensity of the outbreak faded as the world health community reacted and the threat ended within a few months. Is this the same pattern COVID-19 will follow?

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Monday, 30 March 2020