The GERM Report

Risk level: RED

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

THE BOOSTER SHOT

• Kemp: Things may be full in a couple months
• Trump shot the hare.

US crude oil prices at one point in pre-market trading dipped below $20 per barrel and the casual asides last week were that Western Canadian Select was cheaper than a cup of coffee. The prolonged shutdown of major components of the global economy and a lack of storage for all the excess barrels is hammering commodities beyond conception. Massive stimulus efforts tabled by economic policymakers across the world did little to offset the more fundamental aspects of the market at hand – few segments can use fuels are other petroleum products during quarantine. On Sunday, US President Donald Trump bowed to reason by acknowledging his early calls for an end to isolation were wildly optimistic. The current climate is severe, though the storm will be short. In more abstract terms, how each player moves its pieces in the energy sector will determine the winners and losers after this game is over.

To comment that Brent crude oil lost 7% of its value in trading last week is almost comforting, given the global benchmark slumped 20% in the week ending March 20. It’s not just the demand disintegration dragging on commodities, but the lack of storage. According to estimates from Reuters oil guru John Kemp, “the entire supply chain is likely to be completely full within 2-4 months.” Elsewhere, India has declared force majeure at a half dozen or so ports as part of a quarantine, isolating one of the world’s leading economies from the rest of the trading world.

Trump, the presumptive overseer of the world’s leading economy, has been criticized for a federal response to the outbreak of coronavirus that borders on denial. From brushing off the initial infections, to his penchant for petty warfare with his opponents, the administration has become the topic of open ridicule in the foreign press. There has been, according to the British press, a total vacuum of leadership in Washington. Unemployment figures in the United States topped 3 million as plants and industries shut down. It’s no surprise then that Trump initially called for a re-opening of the economy, though state leaders are calling the shots to some degree. On Sunday, he was forced to come to terms with the severity of the situation after American cases of COVID-19 surpassed the rest of the world. For a leader such as Trump, admitting the situation is out of control is tantamount to suicide. So it was then for Anthony Fauci, the director of the US National Institute of Allergy and Infectious Disease, to say on CNN’s “State of the Union” that the Trumpian myth has been defeated.

“There’s a reality and a rhetoric,” he said.

Trump came to power with pledges that, by making America “great again,” the US economy would thrive to the benefit of his loyalists, while xenophobically punishing alleged cheaters like China. And indeed, this president has presided over one of the greatest expansions in economic history. Nationalism pegs its success on the ability to survive in a self-help world. Those that succeed in this world, where it’s every man against every man, have the ability to shape the rules of the system. Success breeds mimicry, which breeds acceptance. That in part is what led to the rise of the United States as the pre-eminent superpower. It’s been said that former President Bill Clinton’s foreign policy was his domestic policy, meaning that those observing American success from overseas will seek to emulate that behavior or fall by the wayside. In Trump’s world, however, that is no longer the case. In Trump’s world, the hare is eaten and the prisoner squeals.

If manufacturing and other segments of the economy are synonymous with hegemonic potential, then the United States is a descending power. Early estimates suggest the PMI reading in the Dallas Fed district will show a sharp contraction, while China is on the rise. Instead of conflict, it’s the coronavirus that’s reshaping the international system. And many powerful players seem to know it. Russia and Saudi Arabia, the architects of the global oil economy, are engaged in a war over market share that leaves the US shale sector, already on the decline, as collateral damage. US lawmakers along with Secretary of State Mike Pompeo have urged Saudi Arabia to change sides. Trump himself is expected to put pressure on the Kremlin. Beneath the diplomatic veneer, however, reveals something of a hat-in-hand mentality. The situation as such bears resemblance to The History of the Peloponnesian War, where historian Thucydides relays the account of negotiations between the ascendant Athenians and the rulers of Melos. Sensing the advantage, the Athenians give the Melians the option of annihilation or surrender. “The strong,” the Athenians argue, “do what they can and the weak suffer what they must.” The strong and the weak are now changing places.

The federal US stimulus package has yet to show up and it might not matter anyhow so long as the economy remains shuttered. US manufacturing activity is on a swift decline, with plants shuttered in. Refiners too are closing down. Later on Monday, we get a sense of how things are going in the Japanese and Chinese industrial sectors. Tuesday brings a gauge of Canadian GDP, and with the oil economy collapsing, it might not be pretty. In the US, we’ll also see how consumers feel when confidence indices are released Tuesday. Wednesday brings the standard data on US oil and product inventories along with new US construction spending. We could see another 3 million jobless claims filed in the United States later this week. And on Friday, the damage to US shale will be revealed with the Baker Hughes rig count. There are few signs of recovery just yet, so the Red alert holds for the foreseeable future, with Brent expected to move by at least plus or minus 4% on the week.