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Strategic Global Intelligence Brief for May 27, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Will 'Work at Home' Extend?
There has been intense speculation regarding which changes in the way the economy operates will be permanent once the lockdown starts to end. Will there be attempts to preserve all this social isolation? Will there be new protocols as there were after the 9-11 attacks? One of the major changes has been the move towards working from home as opposed to the office. The evidence has been mixed thus far. In the beginning, the majority of employees favored the option of working from home, but that percentage has now dropped to roughly a third as people have come to miss the office environment. The interesting discovery is that lower-level workers want to stay at home more than the higher-level workers. The employers are also mixed as they find it far harder to supervise and direct people working at home.

Difference in Reaction
Two of the least reliable indicators of the economy are pointing in radically different directions. There have always been those who equate the performance of the stock market with the overall performance of the economy despite the fact that these two very frequently diverge. The motivation for investor activity is often not the economy at all. The other unreliable indicator is consumer confidence surveys as these very often react to very strange things and consumers can be notoriously fickle. Right now, they are pointing in very different directions. The markets are up and excited about the reopening of the global economy, but confidence levels are at low point not seen since the recession of 2008.

Oil Bloom Is Off the Rose
The global shutdown hammered the oil sector throughout the world. Demand evaporated as travel all but halted and the industrial community shut down operations. The fact that an oil war developed between the U.S. and a combination of OPEC and Russia at the start of the virus crisis did not help any either. The impact of the lockdown is easing a little, but recovery in the oil sector will take a while. The estimate is that investment in the U.S. shale business will be cut by more than half. When the U.S. does return to more normal consumption levels, it will also be importing a lot more oil than it was prior to the lockdown.

Short Items of Interest—Global Economy

Virus and Political Stability
In nation after nation, there has been a focus directed at the sitting government. Many leaders are coming up far short of expectations. There is now a sense that perhaps a dozen or more leaders are in danger of losing their jobs. Some of these will be voted out by people who have been disappointed in their response, but even autocrats are now at risk as the pressures have become too much for the population to bear. At the top of the list of the vulnerable are Jair Bolsonaro in Brazil, Nicholas Maduro in Venezuela and Alberto Fernandez in Argentina. It may not be long before one can add people like Daniel Ortega in Nicaragua and even Andres Manuel Lopez Obrador in Mexico. The virus is now hitting Latin American hard and there has been very little preparation for the onslaught. Both Brazil and Nicaragua have been dubbed part of the Ostrich Alliance for their unwillingness to even acknowledge the problem.

Home Antibody Tests Banned
Many in Europe have banned the distribution of home antibody tests as they have been proving to be very inaccurate. The tests are supposed to identify the existence of antibodies through a simple blood test, but the rate of false readings has been well over 50%. Just another quack cure or treatment—right up there with chloroquine.

UK Crisis Over Johnson's Advisors
It seems that what was considered required for the general population was not considered important by Prime Minister Boris Johnson's advisors. Several violated the quarantine rules repeatedly. This is coming back on Johnson—eroding his already weak position.

The Crisis Beyond the Crisis
Debts and deficits have been ramping up for many years; there has been no good reason for this pattern of profligacy. The reality is that every government, every company and every person might need to run a deficit and to go into debt for a period of time. There are emergencies that must be dealt with regardless of the cost. Nations face natural disasters, wars, economic calamities and (oh yeah) viral outbreaks. Business faces those emergencies as well and so do people. There are times that preparing for the future means incurring some debt now. These are all justifiable moments, but when debt is simply added to year after year for no apparent reason other than a lack of will, the result can be catastrophic. The world has hit a massive crisis that requires massive outlays of money. The lack of preparedness globally left no other alternative to a lockdown that has lasted the better part of three months and robbed every nation on the planet of the revenue needed to contend with the crisis. This has necessitated even more reliance on debt, which has been a major concern as far as the Europeans are concerned.

Analysis: It is expected that budget deficits will rise to over 8% this year. That far exceeds the limits the EU once tried to establish for the members. It was assumed that a budget deficit of 3% was excessive and unsustainable. Now, the region is looking at percentages that have not been seen since the 2008 recession. The aggregate government debt for the EU is set to rise from 86% of the collective GDP to over 100%. That begins to rival the debt the U.S. has managed to accumulate (115% of GDP at last estimate). These nations, however, lack the ability the U.S. has to shove the crisis down the road.

Every other nation in the world has to reconcile its balance of payments issue with its hard currency (its store of dollars). The U.S. has that same requirement, but it is the nation that essentially "prints" these dollars. The way that governments borrow is to sell bonds. The yield on these bonds will be determined by the market. In the aftermath of the 2008 recession, there were nations such as Greece, Spain, Italy and Portugal that were considered bad risks by the investment community. Their bonds carried high rates in order to attract anyone to buy them. The same process is manifesting now. The public debt in many of the southern-tier nations has been out of control for years and now threatens to reach crippling levels. Greece is nearing 200% of GDP, Italy is at 160% of GDP and Portugal is at 130%. In order to deal with the creditors who purchased their bonds, these nations will be facing massive debt service numbers. That is money that comes straight off the top of each year's spending. This has been an issue for the U.S. as well. Demand for treasuries has continued to be solid, but that means debt service is a bigger and bigger share of the federal budget every year. It now costs the U.S. around $400 billion a year. The entire defense budget is around $700 billion. When one adds the additional debt incurred by the reaction to the pandemic, the level of debt service comes very close to that total defense outlay.

The Danish vs. Swedish Experience
There has been a lot of attention focused on Sweden as it took a radically different approach to the pandemic. The assertion by its state epidemiologist was that it was far too late to do anything but rely on the eventual development of herd immunity. Thus, the decision was made to keep most of the nation open and unquarantined. The assertion was this would protect the country from the second-wave threat. The contrasting response to the virus was in Denmark. The decision to impose tight restrictions was made before any other nation in Europe. These shutdown orders were among the strictest. This resulted in a lower death rate than most—88 per million. Germany is at 101 per million and Spain is at 580 per million. Sweden has a rate of 418. Clearly, the experience in Denmark has been better than many others, but the test will come as the economy opens up. That is taking place now.

Analysis: The opening for business has been pretty aggressive and there have been relatively few restrictions. Public places are open, restrictions on crowds have been minimal and service establishments have been allowed to behave normally, although people are still urged to practice safe distancing and have been urged to wear masks and wash their hands a lot. The way Denmark asserts it will prepare for the second wave is based on testing. The goal is to test 100% of the most vulnerable and 100% of those in the medical community with around 60% of the total population getting tested by the end of the summer. The Swedish approach is depending on herd immunity. Denmark depends on testing and specific quarantine protocols. The test for both nations will come in the next few months.

How Goes the May Rebound?
Since the start of the pandemic and the decision to impose an economic lockdown as the only means left by which to control the outbreak, it has been assumed that May would be the make or break month. There were references to the May rebound as early as February. As the shutdown recession took its toll, that mantra became more and more desperate and intense. For many companies, the facts were plain—they would not survive without some kind of recovery by May. The challenge has been that the virus never agreed to this timetable. There has always been an assumption that people would be eager to recover their former lives, but the question was whether they would be allowed to. That remains the critical question as business starts that slow process of recovery. What happens if the pandemic spreads quickly again once there is renewed contact? Will efforts to enforce isolation be renewed if there is an outbreak? These questions remain to be answered but, in the meantime, it has been possible to see the first stirrings of that May rebound.

Analysis: Real data to support the notion that business is returning will not be available for a few more weeks so most of the evidence for this rebound has been anecdotal, although there have been some tantalizing clues. Later this week, we will publish the latest Credit Managers' Index from the National Association of Credit Management, but I can't resist a little preview. The report was completed just a couple of days ago and the data was quite encouraging. After two straight months of extremely low readings, there was a dramatic recovery in a variety of the categories. This is an index modeled after the Purchasing Managers' Index and uses the same diffusion index so that anything over 50 suggests growth and numbers under 50 suggest contraction. In April, some of these categories fell as low as the 20s and 30s. This month, those readings bounced back up to the 40s. This is still short of the growth levels desired, but it is certainly a trend in the right direction. What makes this observation important is the nature of credit management. The average credit manager is not all that interested in how a debtor is doing right at the moment. Their interest is when that debtor is due to pay. They may have 30, 60, 90 or 120-day terms. The creditor wants to know what the debtor will be able to do when it is time to pay. They think into the future. The results of the latest index suggest they are getting a little more optimistic about that future. They are seeing more evidence of business ready to resume more normal operations.

There are also other signs of life popping up. The service industry is starting to adjust to the new rules and people are venturing out to get their hair done. Retailers that have been shuttered for weeks are seeing traffic again and, better yet, the people who are shopping are spending money. People are eating out again and there have been people out and about. Nobody yet knows how many or how much money is being spent. Airlines are reporting more people flying and hotels are getting guests again. Most of the manufacturers are back at it and so on. The challenge now is that data will be slow to catch up so we don't yet know how many people are getting their jobs back and how many businesses will be able to resume their old activity.

There is expected to be a loss to the majority of the business community of around 20% to 25%. It's essentially the loss of a quarter of the year's business activity. For some operations, there will be an opportunity to catch up through the rest of the year, but there are many sectors that will not have that option. The airlines, hotels, restaurants and service providers can' get those days and weeks back. They will have to hope they can survive the year on 75% of what they would normally see.

Both Advantage and Disadvantage
The coronavirus is different from many of the other viral diseases the world has faced. These differences have been both good and bad. The good part is that it is not as deadly as many that have afflicted the world—SARS, MERS, Ebola, Marburg and even some of the worst flu outbreaks. After months of more widespread testing, it is understood that some 60% of those who get infected are completely asymptomatic and never show any signs of illness at all. We now know that 98% of those who get the disease do not require any hospitalization. That is the good news. The bad news is that 60% of those that are carrying the disease are unaware they are infecting other people. This is the primary reason that there have been demands that people wear masks and try to stay away from others. Other diseases have manifested quickly and obviously. It has been far easier to separate the sick from those that aren't.

Analysis: At this juncture, there will be some decisions that must be made. The ideal situation would be adequate testing and a medical response proportionate to the threat. Once it is relatively easy to know who has the virus, the need to assume that everybody has it will be removed. That ends the need for masks and quarantine. Once the hospitals are prepared for the expected patient load, those that fall into the unlucky 2% of cases will be assured of getting the support they need to fight the infection. The world is far closer to that position than it was at the start of the pandemic, but it is not there yet.

At this point, testing is still rationed. That will likely be the case for the duration of the summer. This means decisions will have to be made as to who gets tested first. Most states have tried to emphasize testing for those at highest risk—the elderly and those with existing health concerns. There is also emphasis on those most likely to come in contact with the affected—medical personnel and those with extensive contact. Even more important than identifying the sick is identifying who could be spreading it. The same rationing will be required when there is a vaccine developed. In the meantime, there is just the clumsy isolation tactic which assumes that everybody has the virus and is spreading it to everybody else.

A Vexing Kind of Disaster
Very often, one finds that disasters bring people together—if only temporarily. We are all heartened by the response people have to their neighbors in distress when there has been a hurricane or tornado or flood. We rally, rebuild, find ways to help out. Of course, there are the those who loot and scam and take advantage of that suffering, but most of the response is truly humanitarian. The coronavirus disaster has been different and has created more divisions than existed previously. There is little focus for our energy—nothing to physically rebuild, few places to offer our help. We are left with private reactions and personal decisions. And these have been politicized.

The mask debate has been getting angrier and more confrontational every day. Those who choose to wear one look at those without as tantamount to murderers. Those who are not donning one look at the masked as dupes and fools. Most of us remain situational as far as when or where, but we all see emotions running high. We now have the introduction of virus tracking via an Apple update. Some see this as a great way to know where risks are high and others see this as an invasion of privacy that gives institutions way more information than is proper. The virus is making us choose sides. I am fearful that these divides will last far longer than the pandemic itself.

2019 Discretionary Spending Breakdown
The concerns that have developed over the size of the U.S. deficit and debt are certainly not new. This has been a theme for many economists for years. The immediate response has been that the U.S. needs to reduce its spending and raise more revenue, but that is always far easier to suggest than to implement. The only spending that can be cut is discretionary spending. That is less than a third of the total budget. Given that most of the spending is in half of that third, it is not so obvious where one finds over $20 trillion in savings.

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Friday, 23 October 2020