The GERM Report

Risk level: Orange

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)

THE BOOSTER SHOT

-Fear is spreading faster than the coronavirus.

-IMF issues urgent please for cooperation.

Saudi Arabia closed the curtain on the latest meeting of ministers from the G20 under a cloud of fear. During the meetings, the International Monetary Fund shaved 0.1% from global growth figures on expectations the travel restrictions used to contain the outbreak are lowering demand. Several countries have already closed their borders with Iran to stem the spread, and panic is gripping the European markets amid an Italian outbreak. Speaking from Riyadh, IMF Managing Director Kristalina Georgieva said global coordination is essential to prevent any further contagion, pointing to the possibility of a jenga-effect on the global economy. Global coordination, however, has fallen out of favor.

The market is exceedingly volatile, with emotions running hot on the latest coronavirus news. Brent crude oil finished last week up 2% to close out at $58.50 per barrel. If Monday’s trading is any indication, that may seem high by the end of the week.

“Global cooperation is essential to the containment of the COVID-19 and its economic impact, particularly if the outbreak turns out to be more persistent and widespread,” the IMF director said during the weekend. “To be adequately prepared, now is the time to recognize the potential risk for fragile states and countries with weak health care systems.”

Analysis last week from The GERM Report noted that reciprocity is out of fashion in the me-first era. Globalization promised relatively even exchanges and relatively even effects among the countries involved. Globalization also required a true pilot to lead the way in the international system, and for decades that stewardship came from the United States. But after years of hegemony, the world’s great superpower became weary. Policy was focused, seemingly, on external players to the detriment of the working class that for years propped up the economy through the blood, sweat and tears of a manufacturing wage. Those wages supported the American Dream, but those wages also strained the very manufacturing giants that sang the siren song of success. That, in turn, led to the rise of nationalism that we see today, with the working class no longer able to make ends meet. And who’s to blame? The foreign trade partners that fueled the wave of globalization, not the domestic messiahs, the logic goes. With the rise of nationalism came the rise of xenophobia, but it also forced a retreat into the comfort of domestic issues. In this environment, no power has an incentive to lead.

Saudi Arabia had the distinct honor of hosting ministers from the G20 during the weekend. That should have presented an opportunity for the kingdom to showcase its economic agenda in a way that smacked of leadership, though the mood on Monday was soured by concerns in Iran, Italy and elsewhere that the coronavirus was tantamount to the collapse of Lehman Brothers in 2008. There were no real messages of assurance from the global leaders gathered in Riyadh. The IMF director pleaded for a concerted effort to contain the coronavirus and the subsequent demand destruction wiping millions of dollars from the global economy. With little other direction, Georgieva said the fund was ready to provide grants and debt relief to the most vulnerable economies, but that too carries risks, with Argentina serving as Exhibit A. Statements from the United States were relatively absent and it seems no power is willing to take the hot potato of leadership.

A non-zero-sum game is one in which everyone has at least a chance of winning. That holds for a zero-sum game too, though the odds of losing increase greatly in a heads-I-win world. Liberalism is a non-zero-sum game, but it requires management. Economic liberalism requires a management system because liberals are concerned with procedures and institutions just as much as they are with good outcomes. The IMF plea suggests there are few players willing to manage the system for the greater good. At OPEC, none of the parties can reach an agreement on the way forward either. Kenneth Waltz, one of the premier thinkers in international relations, argued that parties engaged in cooperative behavior must search for the lowest common denominator. They usually end up in the worst of all possible worlds when they find it. Alongside management fatigue, that may help explain the lack of cooperative behavior that seems pervasive today. Saudi Arabia and Russia, serving as the balancer in the OPEC+ relationship, cannot seem to find the lowest common denominator to address global demand. US leadership is absent. Europe seems to have no answer.

“Of course, we all hope for a V-shaped, rapid recovery—but given the uncertainty, it would be prudent to prepare for more adverse scenarios,” the IMF director said.

Brent was down more than 4% in early-trading on Monday as fear takes hold of the global economic mood. Adding to strains in manufacturing, China reported that steel production would contract in the first quarter. On Monday, the EIA added that natural gas inventories in the US were expected to be about 12% above the five-year average for the 2019-20 winter heating season. Few indicators outside coronavirus data will move the markets on Monday. On Tuesday, watch for GDP figures from Germany and the Case-Shiller composite index for the US. Data on new US home sales are released on Wednesday, as are EIA reports on US petroleum inventories. US GDP figures and jobless claims come out on Thursday. And the week ends with a flood of data, from Japanese construction orders to Canadian GDP. We may be in “who knows” territory, though some of Monday’s retreat may be technical in nature after Brent flirted with $60/bbl last week. Volatility is the soup of the day, so expect Brent to move by at least +/- 3% on the week.