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Strategic Global Intelligence Brief for May 13, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Barkin Thinks We Are Near Bottom
The latest statement from Richmond Fed CEO and President Thomas Barkin, suggests there is a light at the end of the proverbial tunnel. He is of the opinion the economy has hit the worst and is now set for a recovery, but he is quick to point out there are plenty of unanswered questions. The recovery is based on the assumption that states continue to open business and that consumers are ready to return. These are both big "ifs." There will be wide disparity between states, which will affect the pace of the rebound. There are decidedly mixed messages coming from authorities—which of these assertions will carry the most weight with the consumer. Barkin is something of a hawk when it comes to Fed policy. That has generally meant he has favored more attention to the threat of inflation long term.

More Stimulus on the Way?
There is another plan developing in Congress that would throw an additional $3 trillion into the stimulus hopper. That would create a stimulus outflow of close to $7 trillion. This creates a whole host of policy issues. The debt and deficit issue has been obviously set aside in this crisis, but that hardly means it has gone away. The bigger issue at the moment is whether a stimulus like this will have much impact. That seems to depend on whether the business community opens up. Right now, there is a lot of money circulating, but there is no place for it to go. The consumer spends close to 70% of discretionary income on services; these have been affected by the lockdown. If the additional money coincides with opening business, it has a better chance of providing a real stimulus.

Questioning What We Are Paying For
Schools at all levels are starting to face decisions regarding what they plan to do in a few months. Most are waiting to see what the summer brings, but some have already decided to remain closed—California's state colleges will remain virtual. That is creating an issue for those who are expected to continue paying for something they no longer receive. The tuition paid to universities is expensive. If all the student gets is an excuse to use Google, there will be rethinking. There are subscribers to cable TV that question why they are paying for sports channels that are reduced to playing games that took place 20 years ago. Taxes paid to support parks and institutions that are no longer accessible have been getting resistance as well.

Short Items of Interest—Global Economy

German Politics Upended by COVID-19
The German electorate is facing a quandary. The most-trusted and popular leader is Angela Merkel, but she has already declared she will not be running for Chancellor again and has stepped away from leading the Christian Democrats. She had anointed Annegret Kramp-Karrenbauer, but that didn't take and the race to succeed was thrown open. Until a few weeks ago, the favorite was Armin Laschet, but he has not impressed the population with strong leadership skills in a crisis. That has allowed Bavaria's Markus Soder to emerge as the front runner with his tough approach to the virus and the shutdown.

China Fights Back
Chinese diplomats have been changing their approach dramatically in response to attacks from Trump and other world leaders who have been laying the blame on China for the COVID-19 pandemic. There have been counter assertions that the U.S. created the pandemic to hurt China. There have also been demands that nations praise China if they expect to get medical shipments. Countries that threaten economic penalties against China are getting threats in return. The mood of the country has turned highly nationalistic and hostile to the rest of the world.

Global Opinion Turns Against President Trump, Prime Minister Johnson and President Xi
Polls in most of the Asian and European nations have suggested the populations have been somewhat supportive of their own leaders, but have been scathing when it comes to leaders in the U.S., U.K. and China.

Most Vulnerable Nations Now Getting Hit the Hardest
The COVID-19 virus took the world by surprise and it continues to do so. It is not as if the world had never dealt with a viral outbreak before; various versions of a coronavirus have been around for decades. The problem from the start has been that COVID-19 is especially virulent—rivaled only by the measles in terms of its contagion. It is also a disease that very often leaves people with mild symptoms or none at all. It takes two weeks to incubate, so millions of people become unwitting carriers and infect millions more. It has progressed from its epicenter in China to the rest of Asia and then to Europe and North America. The virus impact has started to fade perceptibly in Asia and Europe. It shows signs of abating in the U.S., but that is not the case in Latin America, Africa, South Asia and in other parts of the developing world. Latin America seems to be hitting its worst period as the U.S. and other nations have started to see some progress.

Analysis: The same patterns are emerging in Latin America as have appeared in other parts of the world. It spreads faster in urban areas with tightly packed populations than in the countryside. It has affected the elderly and those that have preexisting medical conditions. The virus has exploded through these nations because there is a great deal of congestion in the cities, there is a large elderly population and there is a very large number of people with compromised health. The death toll has been high and infection rates are high as well.

To make matters worse, these nations lack even a fraction of the resources available in Europe, the U.S. or even China. The worry in the U.S. and Europe was that hospitals would be overwhelmed, but that is a given in Latin America. The medical community was in crisis from the very start. There is not enough of anything—respirators are rare and even simple masks are impossible to obtain. The reaction of the governments in the region often border on the criminal. Both Brazil's Jair Bolsonaro and Nicaragua's Daniel Ortega have been dubbed charter members of the "Ostrich Alliance" as they have ignored the threat altogether. There has been no policy applied in Brazil or Nicaragua as far as isolation or lockdown. These leaders have even been denying that anybody has died from the disease. Other leaders in the region have not been in denial, but they have been unable to do much to protect the population. Their efforts at containment have been stunningly ineffectual. The majority of the population remains unaware of what is expected of them. This has especially been the case in the poor neighborhoods that crowd the larger cities.

Many of the nations in the region have not engaged in lockdowns, or at least not effective ones, so this has not affected their economies to the degree it has affected those in Asia, Europe and the U.S. The economic impact has been just as devastating but indirect. The business community is losing its workforce as people become sick and others elect to self-quarantine. These are states that depend on exports to survive; the slowdown in the global economy has been severe. The levels of exports have tumbled by as much as 70%. That has left most of these nations with savaged budgets.

If this region is to survive the viral outbreak, it will be due to the impact of herd immunity. That will take considerable time and will require the infection of around 70% of the population. These nations have long been the hardest hit when it comes to disease outbreaks. There are many more deaths from the flu in a given year than in any of the developed nations.

More US Pressure on China
It has always been difficult to discern what the U.S. policy toward China is—even before the COVID-19 outbreak. It has now become almost impossible. Over the past four years, China has been both a whipping boy responsible for all the ills of the world and a nation the U.S. thinks it can work with on key economic and political issues. Trump rails against China and asserts that talks are proceeding nicely in the same breath. This radical difference in approach from one minute to the next seems to be rooted in the positions of Trump's advisors and who has had access to him last.

Analysis: The anti-China faction is led by Trump's Director of Trade and Manufacturing Policy Peter Navarro, an economist who has been attacking China for years. His arguments are rooted in China's behavior towards the world economic system. It is an uncomfortable combination of authoritarian state capitalism and extreme nationalism. It has certainly posed a threat to the U.S. and global economy over the years. On the other side of the debate are advisors such as Director of the U.S. National Economic Council Larry Kudlow and Treasury Secretary Steve Mnuchin who acknowledge the challenges presented by China, but also accept the fact that China is the second-largest economy in the world. It can't be ignored and ostracized—especially not now. The world needs a Chinese recovery, but it also needs a China that learns to play by the rules. That is not an easy balance to obtain.

How Goes the May Rebound Thus Far?
Over the course of the last several weeks, there has been a fairly consistent assertion that there would be a reliable pattern to the pandemic response. The first set of assertions indicated the U.S. would see peak rates of infection throughout the country in the month of April. That has turned out to be the case—at least for the most part. The most heavily hit states reported that fatality rates were down even as infection rates continued to increase. The challenge as far as measuring the spread has been the slow pace of testing. As the number of tests have started to increase, there have been more people identified as infected. Many of them have been people with mild versions and limited symptoms. Even the fatality numbers have been complicated, as in the beginning many people with COVID-19 were not identified. Their deaths were attributed to other factors. Now there are those who have died from other causes that have been identified as COVID-19 victims. The next pattern to watch is the reopening. The assertion has been that much of the business community will be allowed to resume activity this month.

Analysis: Opinions and assertions differ radically as regards the end of the lockdown. Those who emphasize dealing with the virus insist it is too soon to end the policies that shut down the economy. They expect there will be a resurgence of the virus as people come into contact with one another. They have urged the lockdown extend for many more weeks and in some cases months. There have been calls from some in the medical community to extend the lockdown for at least another year or until a vaccine has been developed and widely distributed. Needless to say, this position is not favored by those that are concerned about the economy. Even extending the lockdown through the summer would guarantee the worst depression in U.S. history and the likely loss of over 60 million jobs. The economic carnage would be near permanent.

The advocates for ending the lockdown, or at least winding it down, are well aware that this policy will result in the spread of the virus, but they are weighing the damage caused by the lockdown with the damage caused by the virus. At the start of the pandemic response, the logic behind the lockdown was to avoid overwhelming the hospital system. There is no cure for the COVID-19 virus as yet and no vaccine. Medical care is limited to treating the disease so that the patient has a chance to fight it off. The average length of a hospital stay has been five to six days. The assessment of the medical system now is that there is sufficient capacity to handle the outbreak in all but the hardest-hit communities. Fatality rates have declined; the majority of these victims have been in the high-risk categories. This is not a defeated viral outbreak, but it can be argued that it is under control in most areas.

This crisis has always been about immensely difficult trade-off decisions. Given the paucity of testing, the inability to track those who might be infected, the lack of effective treatments and the lack of a vaccine, there are no viable alternatives to containment efforts. That translates into mass lockdowns. These were never intended to last forever as it was patently obvious what these shutdowns would do to the global economy. The challenge is that any decision made at this stage carries extreme risk. If the lockdown is ended too soon there will be more outbreaks, more infections and more fatalities. If the lockdown is not ended soon, enough the state of the world economy will deteriorate to the point that recovery will be next to impossible. That results in everything from thousands of failed businesses, millions of lost jobs and deprivation on an immense scale.

Has the Economy Bottomed Out?
The lockdown recession has lasted for over two months and has done immense damage to the global economy. There has been nothing but pure bad news coming from every data release. It is absolutely certain that Q2 of 2020 will mark the lowest point in modern economic history. The real question at this stage is whether this is the worst the economy will see. There are basically two schools of thought on this subject.

Analysis: The more optimistic assessment holds that the economy has reached its low point and will start to head back up. This is based on the fact this has been an imposed recession, the reaction to the decision to contain the virus. Once that containment is lifted, the business community will resume its activity, consumers will return to their previous patterns and the damage will slowly be repaired. There is a lot of variability as far as when this recovery takes place, but the optimists see it occurring over the next few months.

The pessimists assert that the lockdown will not be lifted as expected and that many states and cities will move to reimpose the restrictions if there are signs of another outbreak. This will crush business that had survived up to this point as they will have started to spend money again in anticipation of opening and will discover they have to close again. Consumers will be confused as to what is open and under what conditions. That will limit their ability to resume their old habits.

The bottom line is that people will be waiting to hear what the authorities say. If there is an opening that is full of gloom and doom and assertions that it is still unsafe to resume previous patterns, the consumer will continue to isolate. If the message is that it is safe to reengage as long as basic precautions are taken, there is a real opportunity for a resumption of old patterns. At this point, the reopening message has been decidedly bleak. The assertion seems to be that business is opening but it shouldn't. "If you want to take your life in your hands, go ahead." This is not the kind of message that is going to inspire the consumer to go out to shop, eat at restaurants and the like. That is not a message that allows much of an economic recovery.

It's a Pet's World
There has been much written about the impact social isolation has been having on people—bored kids, lonely elders, crazed extroverts and smug introverts. There are also our pets. This experience has been changing them as well. I have already noted the exhausted dogs being dragged around the neighborhood by people desperate for an excuse to leave the house. But there has been more adjustment involved.

My stepson has a young dog that now assumes that he should be home all the time. Even if he steps out to mow the lawn or make a quick run to the store, the pup goes nuts and starts to tear things up (his favorite target right now is the remote for the TV and other electronics). My cats have now established a routine that I am to adhere to. I get a rather insistent chorus when that schedule is violated. Evenings are now devoted to some escapist TV. Scoot expects lap time to be sacrosanct. The old man (20-year-old Sven) now slumps in my wife's arms like a baby and essentially incapacitates her.

When we go outside to work in the yard, we find them all clustered at the back door with puzzled looks. Apparently in cat time we abandoned them for weeks. Seamus has developed new skills during this period. Now that the back porch is open for business, he has found he can catch skinks and has been proudly bringing them to us. The cats have been confused by the fact that their servants have been around so much, but as long as we don't interrupt the 23 hours of napping, we are tolerated.

Latin America Faces Coronavirus Hit
There is an expectation of severe economic damage in Latin America as a result of the pandemic. The issue is not only the domestic impact, but what all of this means to the export-dependent economies of the region. The collapse of oil prices alone has gutted economies such as that of Venezuela, Ecuador and Brazil.

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Monday, 25 May 2020