The GERM Report

Risk level: RED

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

THE BOOSTER SHOT

• US Fed goes all in. Will US lawmakers do the same?
• This is a leadership crisis as much as a health crisis.

The global market, and in fact the global population, is now on a war footing amid the greatest challenge in generations. Major components of the economy are closed down in an effort to contain the spread of the coronavirus, which is ravaging the Iranian, Italian and now the American population. And it’s happening at a breathtaking pace. Too fast, it seems, for the upper echelons of leadership to respond appropriately. Part of the reason for the leadership void is the fact that the coronavirus narrative is changing by the minute and therefore makes recovery a moving target. Another aspect may be the lack of leadership in general as the collapse of the liberal order leaves elites in a state of nature where it’s every man against every man.

There has likely never been a crash quite like this. Brent lost 20% in trading last week and, as of this writing, $30 per barrel – about half the peak from January – seems like a surreal dream of economic optimism. The demand destruction thus far is nothing like what’s around the corner and already there are murmurs that some commodities could hit zero.

French supermajor Total announced Monday it was slashing some $3 billion from its capital expenditures in an effort to survive in the sub-$30 era. In presenting an “Action Plan at $30/bbl,” the company said it was better suited to weather the storm than it was during the last price crisis in 2015, “but an action plan is required.” For the company, that means deep cuts, a suspension of share buybacks and a hiring freeze. A company can act accordingly, but there seems to be no coordinated action plan from the global community.

Asked how long the economy can endure demand disintegration, an overwhelming glut and fracturing supply chains, Isabel Schnabel, a member of the executive board of the European Central Bank, said it was unclear.

“At some point, this situation will presumably become unsustainable, prompting the question as to what role the state intends to play in supporting firms,” she said.

The state, in these uncertain times, seems to have no idea of what role it intends to play. The British government is poised to enforce quarantines on much of the population in an effort to stem the spread while its central bank pledges billions of dollars in support. Meanwhile, the Chinese and Russian media continue to tout their aid for foreign governments struggling to respond the health crisis. Even Cuban doctors are heading to Italy to help tackle the heartbreaking loss of life. In the United States, the Trump administration has been unable to lead an effective response and lawmakers during the weekend bickered over the terms of a massive stimulus package while taxpayers watch their retirement savings vanish. Meanwhile, four members of the US Senate were accused of dumping stocks while Washington dithered in the early days of the crisis. Once seen as the source of direction in times of trouble, the US leadership void leaves the global system rudderless.

Jean-Jacque Rousseau in his seminal second discourse on inequality observed that “most of our ills are of our own making.” The rise of populism was a response to a globalized system that seemed to no longer be working. If the system seems broken, those involved in it will want change. Instead of well-practiced political experts, a public experiencing the consequences of decline first-hand will make emotional decisions on leadership now that their lives and families are impacted, bringing inexperienced players to power that thrive on emotional rather than effective management. Rather than collaborate in times of crisis, players in this system will compete in order to survive. For Rousseau, this breeds jealously and passions that create even more divisions. These divisions open the door more to finger-pointing than they do solution-finding. Rosseau said any leadership must obey some form of “sublime virtue” lest it “become corrupt.” If the case of stock dumps by US lawmakers tells us anything, it’s that virtue is lost. A survey from the Pew Research Center found that only 17% of the respondents trusted the US government to do what is right. That was last year. It may require something or someone else to save us this time.

The US Federal Reserve, at least, managed to open the spigots. That came after St. Louis Federal Reserve President James Bullard said the US economy needs something like a “no questions asked” form of stimulus. That helped push S&P 500 futures into the black before the start of trading on Wall Street. Europeans, however, may be playing from behind as the German economy teeters on recession. German PMI readings out later Monday are expected to show a deep retreat away from the point separating growth from contraction. US manufacturing PMI is expected to come in at 44, a dive from the previous reading of 50.7. Later this week, Fitch assesses the sovereign debt for a British economy that’s already struggling to manage life outside the EU. Jobless claims in the US should be staggering. We remain for the foreseeable future in Red territory, with Brent moving by at least plus or minus 4% on the week.