RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)
THE BOOSTER SHOT
-Trump saves the day
-Don’t bet on a Beijing Consensus
It was a busy weekend. US President Donald Trump signed executive orders aimed at extending financial support for the estimated 20 million people in the country off the payrolls. But, with the executive branch unable to do anything with the purse strings, questions remain whether it will stick. Saudi Aramco, meanwhile, reported a heavy loss in the second quarter, but expected demand in the Asian economies to accelerate. On the global spectrum, we continue to watch as the nodes of multipolarity consolidate. When the dust settles, the global power centers might be in unexpected places.
The price for Brent crude oil rose some 2.5% during the week ending Aug. 7, more or less in line with the Yellow alert issued last week. Crude oil prices jumped in the early part of the week on data showing commercial oil stockpiles in the United States plummeted, though fuel inventories, particularly diesel, continued to elevate. Brent posted its highest mark since early March on Wednesday, but eased back somewhat on global economic concerns. If Brent gets too hot, there could be a reversal in store.
President Trump has created a divided political and social culture by intent. Lawmakers in the Democratic party tabled social support legislation early this year, while Republicans ran out the clock before making a low-ball offer. Sharp partisan differences in an election year left any real deal-making on the cutting room floor. That shows there are (at least) two sides to the Trump administration. During his tenure as a real-estate tycoon and on the campaign trail, Trump has touted himself as a deal-maker and the lack of real diplomacy in the US political system shows he’s failed to deliver. That said, political dysfunction plays to his narcissism and, with jobless claims continuing to climb, he can claim himself the savior.
“Political games that harm American lives are unacceptable, especially during a global pandemic, and therefore I am taking action to provide financial security to Americans,” an executive order on social welfare read.
A complex package, however, may take months to implement and its questionable whether the president has legal grounds to unlock federal money. And while much of the headline news will play into the president’s hands, his proposal does little to provide holistic relief. Like the response to the coronavirus, Trump’s order defers some of the burden to the states, which are already bleeding money. To make matters worse, the order suspends the collection of payroll taxes for those making less than $100,000 annually, though it’s those taxes that help pay for Social Security, Medicare and other federal support programs. On paper, the president can declare a win. But the details make it more like paper-tiger policy. Nevertheless, seizing Congressional power for his own shows not only his narcissism, but his unchecked ability to pursue absolutism. The market loves it, though the market is not the economy.
The US economy posted a sharp contraction in the second quarter. That’s not necessarily the case elsewhere in the world. While most European economies are in decline, it’s not nearly as severe as the 32.9% contraction in the US economy. And like its counterparts it in the United States, Saudi Aramco, the world’s largest oil exporter, recorded a 73% drop in profits during the second quarter. The pressure from the quarantine economy and historically low oil prices clearly hurt the bottom line. Nevertheless, Aramco President & CEO Amin Nasser said there were signs that parts of the energy market were recovering as countries ease back on pandemic restrictions. That demand is coming mostly from the Asian economies.
“Look at China, their gasoline and diesel demand is almost at pre-COVID 19 levels,” he told reporters. “We are seeing that Asia is picking up and other markets (too).”
Geopolitical analysis from The GERM Report focuses on the so-called single dynamic theory presented by Charles F. Doran at John Hopkins. This theory ties the cyclical waxing and waning of macroeconomics to state power. As the economy grows, the state feels emboldened. As it contracts, it feels weak. Through that lens, it appears as if China is the ascendant power in the international system, and Aramco’s statement on demand centers is the proof in the pudding. With its Belt and Road Initiative extending China’s system’s steadily westward, and with Beijing’s ability to cast Communism as a benevolent political ideal, China to some extent is mimicking US reconstruction efforts after World War II. That effort, The Marshall Plan, helped establish Pax Americana. But Trump’s disdain for internationalism broke that down. That disrupted the global order and the dust has yet to settle.
Storied political theorist Stephen M. Walt proposed balancing and bandwagoning to explain how alliances work in the international system. Balancing behavior is characteristic of states opposing the dominant power, while bandwagoning is just the opposite. In 2020, it looks like more state powers are hopping off the US bandwagon, though we’ve yet to see any real balancing behavior exhibited yet. The Trump administration’s efforts to handicap international regimes such as the World Trade Organization breaks US power rather than enhances it. But that doesn’t necessarily mean the world will favor a Beijing consensus. Bids for hegemony rarely end in hegemony, as Germany learned in the early part of the 20th century. From an internal perspective, states can either wage offense or defense. An offensive moves pegs power on supremacy, while a defensive posture sees offense as a means to destruction. If the German example tells us anything, it’s that the defensive states usually come out ahead. The ability of the European Union to maintain cohesion, as evidenced by its durability in the face of the British exit and recent multilateral agreements on aid, shows the power of playing defense. When the dust settles on the multipolar order, it may be Europe the evolves to hegemony. We should, therefore, watch closely as the French appetite grows in the Middle East.
China reported a slight uptick in inflation on Sunday, though it stayed in a relatively healthy range of 2.6%. With Brazilian President Jair Bolsonaro seen as South America’s version of President Trump, the readout from the Brazilian central bank on Monday will be telling in more ways than one. And we’ll see how good those Asian economies are doing too when Singapore releases data on second quarter GDP. A bunch of reports are out midweek on the continental economies in Europe. Russia on Wednesday is expected to show a sharp contraction in GDP during the second quarter. French unemployment and German inflation data are out on Thursday. The week ends with GDP readings in the euro zone, Taiwan and Hong Kong. But it’s the OPEC and other monthly market reports that will grab the headlines this week. Crude oil prices could be set for a pivot, though we’re sticking with the Yellow alert for the week, holding that Brent will move around by at least +/- 2%.