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Strategic Global Intelligence Brief for June 19, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Pandemic Battles
As the lockdown slowly recedes, there has been a new phase of viral response. It promises to be even more contentious and controversial than what has gone before. The aim is now to open the economy, but with restrictions that supposedly slow the outbreak. The danger is that analysts expect failure on both counts. The lockdown is not lifting as hoped—thousands of businesses remain shuttered and there has only been a trickle of returning jobs. The confident assertion of recovery in the third quarter is shaky now. The opening has allowed the virus to spread again; every state is seeing higher numbers. The upshot is an economy that remains weak at the same time that the virus continues to wreak havoc. That ultimate trade-off decision has yet to be made. It is thus far hard to determine when this would take place.

Trade Issues Still Being Dealt With
It is hard to remember this far back, but it was not that long ago that trade discussions between the U.S. and China dominated the headlines. These talks did not end and there has continued to be conversation over the issue of "phase one." The fact is China and the U.S. have rarely been as antagonistic towards one another as they are now. This has not stopped the trade debate however. China has just made another concession that is designed to placate Trump. The Chinese have agreed to buy even more farm output from the U.S. as Beijing assumes that Trump wants something that he can present to the farm community in the U.S. as a victory. It is also important to note that China needs this food if it is to recover from the impact of the swine flu outbreak of last year as well as COVID-19 this year.

Campaigns and Crowds
There is a crucial moment approaching on the U.S. political calendar. This is the summer before a presidential election when campaigns kick into high gear. That means TV ads and all manner of efforts to present the message candidates seek to impart. It also means lots of public events and rallies as candidates for thousands of offices seek support. In the current environment, there are still bans on assemblies of more than a handful of people. So, how are these to be held? There will one of two reactions. They will either be canceled and replaced with something else or the risks will be ignored and events will be held anyway. If there is a significant wave of new infections in the coming months, these events will likely be a contributing factor.

Short Items of Interest—Global Economy

Worries Mount Over US-China Conflict
There is an old adage: When the elephants fight, it is the mice that suffer. The U.S. and China edge ever closer to open conflict. That worries countries that have been dependent to some degree on both. This has been a particular problem in Africa. The leaders there are calling for the two nations to stop dragging their nations into the confrontation. The problem is that China is refusing aid to nations that take help from the U.S. and the U.S. has been refusing to work with African states that have relations with China.

Nordic Interaction at a Standstill
There was a major difference of opinion among Scandinavian states when it came to reacting to the COVID-19 threat. Denmark, Norway and Finland locked down aggressively and Sweden did not. The Swedish fatality and infection rates have been higher than those of their neighbors however. That has caused these countries to essentially shut down interaction across the border. It is almost impossible to move from one to the other. Sweden's rates have been worse than in the other Nordic states, but not as bad as those in Spain, Italy or the U.K. The Dutch locked down and their rates are nearly the same as Sweden's. The decision by state epidemiologist Andres Tegnell has come under severe criticism in Sweden as well as from outside. He has now admitted that some lockdown might have been in order, but he still insists that herd immunity will protect the Swedes from that second wave impact that many think will appear later in the year.

Australia Under Cyberattack
In the last few days, Australia has been under a severe and well-organized cyberattack that has gone after government entities, corporations, medical organizations and the security establishment. It has been a coordinated attack; the kind that can only be launched by a nation. Prime Minister Scott Morrison has asserted that his security services have identified the attacker, but he has elected not to call out the culprit at this time. The attack has been spreading malware and stealing data. It has compromised many institutions thus far. The cost of dealing with the attack will be in the billions of dollars.

Analysis: There is very little doubt among security analysts regarding which nation is behind this assault. The Chinese had warned Australia there would be repercussions when the Morrison government threatened to sue China over the way they handled the COVID-19 crisis. The Chinese were furious and promised retribution. They had assumed that a country as dependent on China trade as Australia would avoid confronting them, but there is no love lost between the Morrison government and China. The critique of China has been blunt. China has apparently decided to attack Australia as a warning to any other nation that dares criticize Beijing.

Debt Payments Falter
The numbers are nothing short of staggering. Well over 100 million people in the U.S. have skipped debt payments since the start of the lockdown recession. That this comes as a surprise to anyone is the most shocking part of this development. The average American has over $38,000 in debt and two of every ten use between 50% and 100% of their monthly income to pay on that debt. The Gen-Z and young millennials average around $22,000 in debt, older millennials hold $42,000, Gen-Xers are at $39,000 and Boomers are at $36,000. This is the highest debt level held by consumers ever. The majority of that debt is through credit cards, but mortgages, car loans, student loans and personal loans contribute significantly as well. Given that the median income is $59,039, there is not a great deal of financial resiliency in the average American household. When some 50 million people are thrown out of work and thousands of businesses are forced to close, the result should have been very predictable. People have simply stopped paying their debts. The most common actions have included missed student loan payments. Right behind this has been credit card payments, car loans and mortgage payments.

Analysis: There are now some 79 million student loans in deferment. That number grew by 18 million in one month. There are 7.3 million auto loans in deferment and mortgages have seen a similar surge in missed payments. The stimulus plan called for student loans to be deferred and there are provisions allowing mortgage payments to be paused for up to a year. Credit card companies are trying to work with those that can't pay their balances, but all of the debt holders are indicating they can't continue these efforts indefinitely. At some point and soon—they need to be paid.

The implications of this debt crisis could not be more severe. The average consumer has been running up debt levels for decades. Nearly everyone now lives very close to the edge financially. Any interruption in their income pushes them into crisis immediately. In the months to come, people will be facing severe consequences—everything from repossession to eviction. Credit ratings will be crushed. The credit card companies are struggling with who to grant credit to and expect to raise their rates to cover all the losses from those unable to pay. The fact is those issuing debt will be pulling back sharply. That will cascade through every segment of the economy. The person unable to acquire debt is unable to buy a home, buy a car or any other big-ticket item. They will not be able to engage in the kind of consumer behavior they once did. That hampers the ability of the business community to rebound from the recession. The recovery from the lockdown has always been rooted in the ability of the consumer to resume their old habits. This will be impossible to do with this kind of debt burden.

Even if there is a dramatic increase in employment, the debt issue will be a factor for months to come as it will take a long time to dig out of that hole. The majority of the jobs lost have been in the low-wage service sector. These are by far the most vulnerable people when it comes to debt. The lifting of the lockdown has been uneven and halting. There continues to be talk of re-imposing that lockdown in the coming months. Every day the lockdown is extended means fewer jobs added. The threat of another shutdown inhibits hiring further as companies are unsure about their future and resist adding employees they might have to fire again later.

Beyond the issues faced by the consumer, there are the creditors who are not getting what is owed them. Their activity is severely restrained as they will have far less money to lend or credit to offer. Their businesses will suffer as their income dries up and they will soon be laying people off as well. The deferred payments will likely evolve into massive collection efforts and declarations of bankruptcy. The near shutdown of credit at the business and personal levels will result.

Will 'Main Street Lending Program' Succeed?
The plan developed by the Fed and Treasury was revamped and restarted last week, but there are still many critics that assert demand will be weak as there are too many restrictions and flaws. The aim of the initiative was to address a gap in the existing set of programs designed to protect business from the ravages of the lockdown. There are thousands of companies that were deemed too large to engage with the Payment Protection Program (PPP), but are too small to engage with the corporate debt market. The report from two former Fed economists suggests that changes need to be made before the effort works as intended. One of those engaged in that assessment is Nellie Liang—once a candidate to become a permanent member of the Fed's Board of Governors.

Analysis: Among the changes they suggest is longer terms—right now principal payments can be delayed for only two years. They want varying rates so lower-risk companies can be streamlined through the process and they suggest allowing smaller loans. The limit had been lowered to $250,000 from $500,000, but they feel even smaller amounts need to be considered. They suggest that riskier loans be considered with the proviso that banks would hold a bigger stake in the loan. They further assert bank fees be expanded so that there is more of an incentive for them to engage in the program.

The challenge is that a large number of mid-market companies are locked out of the programs that were created to protect business from the lockdown. These are the companies that often provide the majority of jobs in the country and are critical to the survival of the community. As they have been crushed by the enforced shutdown, they have not been able to keep employees and are not paying taxes to the city or state.

Pushback on Remote Working
There was an initial surge of support from employees when business began to encourage working from home on a regular basis. What was not to like. No more hours spent in traffic on that daily commute, no more pesky dress codes and no more annoying coworkers to distract. It was simple enough—do the job you know how to do and do it in your own time. The only thing that mattered was the outcome. If you did the report in the middle of the night so you could play with the kids during the day—who was to know. For the last few months, the working world has become increasingly familiar with the home/work routine of virtual meetings and constant electronic communications. Now there is some pushback emerging as the system has its own set of issues and concerns.

Analysis: There are essentially four sets of concerns emerging as people deal with the lack of an office environment. One of them is the lack of a schedule. In the old system, one showed up for work at a designated time and left at a designated time. This doesn't mean that people didn't work overtime or take work home on occasion, but it was not the norm. Now there are few barriers and people are getting messages from their boss at the crack of dawn and the middle of the night. There is no "safe" time when one can assume that they are off the clock. That has been contributing to burn out.

The second set of challenges affects the supervisors. In the old system, they had an opportunity to check on the progress of a project or assignment casually. They could drop by an office or cube and check in. They could call quick meetings of a project team and get some feedback in an hour or less. Now they have two options and neither are preferred. They can wait until delivery to know if the project is as it should be and risk the possibility it is far from what was expected, or they can require constant updates via email and virtual meetings. If a supervisor has a significant number of people reporting to them, it is likely they will spend the bulk of their day in these meetings and be left with little time to work on their other tasks. Supervisors are complaining that their days are running close to 12 or 15 hours.

The third issue is office paranoia. Times are tense and many companies are in trouble financially. Employees know this full well and they are well aware that people are being laid off. They are isolated at home and have no access to the "grapevine." The old office environment may have been full of gossip and rumor, but it allowed people to have some sense of what is going on. Now, they can only sit alone and wonder. Most people will automatically assume the worst. There has been a significant increase in people's stress levels.

Finally, there is the hit taken in terms of teamwork and the building of any kind of corporate culture. This has been especially detrimental to the new hire. They know nobody at work and have no idea who they can ask questions of. People have no sense of what other people are doing as they can only see what they are working on. It is the parable of the blind men and the elephant as each person has hold of a different part and none see the whole picture.

The bottom line is that some aspects of the work at home transition will certainly stay, but the assumption that there will be no return to the traditional office environment is likely premature. There are too many advantages to having people working together to abandon the concept.

The Great Narrowing
It seems that it is hard to truly understand another person's perspective on much of anything. We each have our own worldview and our own set of experiences. These shape the way we look at the world. Men can't really understand what women experience and neither can women understand what men go through. To be honest we can't even understand a person who looks and acts just like us. We don't know what tragedies they have endured or what joys they experience. This is why we have to accept what they feel and what they tell us as real—it is for them regardless of what we might conclude. The only way we learn to accept one another is to listen and accept what we hear.

Today, that has become harder than ever as we try to cope with the implications of a pandemic. We rarely leave our homes now—not even to work. We stand as far from people as we can and we wear masks that obscure our faces. We don't go to events anymore. As a result, we steadily become more and more isolated and cut off from others. We don't see people anymore. That allows for bias, prejudice and stereotyping to have more of an opportunity to flourish. There will be lasting damage from this pandemic and the response to it. High on this list of unwanted changes will be our inability to see and understand other people.

Non-Housing Consumer Debt
The levels of consumer debt have been rising fast for the last few years. There was a period around the time of the 2008 recession when people began to try getting control of their debt. That didn't last very long and it has been ever burgeoning since. The crisis comes when suddenly there is no way to keep servicing that debt. That crisis has been imposed by the lockdown recession of 2020.


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Friday, 23 October 2020