The GERM Report

Risk level: Red

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

THE BOOSTER SHOT

-Trump will still be in office on Wednesday, no matter what

-The overall situation is expected to only get worse

Well, here we are. Election Day Eve, 2020. Last week, we had reports that US GDP was up some 30%, reflecting a sharp rebound from the 2Q doldrums. But as we’ve said before, sequential figures are meaningless in the quarantine economy. Year-on-year, and it’s obvious that this is a deep, deep contraction. So far in 2020, the price for Brent crude oil is down 43% from where we started — $66.25 per barrel, a number that looks surreal by recent standards. The market mood will be determined by the outcome of the vote on Tuesday, and it might be an unsettled one because, unless it’s a blowout, we might not know who won come Wednesday. We nonetheless feel the mood will set the tone this week and, if we’re honest, we think the mood will be dark no matter who wins.

As we suspected on Friday, we were in Spanish Inquisition territory last week. Nobody expects a 10% contraction for Brent crude oil, but that’s what we got. The global surge in new cases of COVID-19 means we have a clear problem given that most economic managers are running out of tools. Brent lost its grip on $40 per barrel early in the week and finished trading at $37.46 per barrel.

“The trajectory of restrictions is clear,” Saad Rahim, the chief economist at Trafigura, told The Financial Times. “It’s likely to get worse before it gets better.”

The Big Two in Europe – France and Germany – are locking down again as new cases of COVID-19 surge. For the third quarter, GDP for the countries that use the euro increased 12.7%, driven largely by growth from France, Spain and Italy. What makes that rear-view mirror figure troubling is that it preceded the return to lockdown. As is the case with the United States, still the world’s largest economy, it will take another round of stimulus to keep any momentum going. But with a longer winter ahead in the North, the lockdown is an anchor at best, and a headwind at worst.

In the United States, the economy grew 33% in the third quarter, and there’s certainly no way in hell that momentum continues. Rig counts, meanwhile, showed gains again, but levels are still something like 65% below what they were last year. State-level cases of COVID-19 are outdoing entire countries in some cases. In Michigan, a central component of the Midwest economy, the governor issued new restrictions on social gatherings as new cases linger around 3,000. And here’s a kicker from The Detroit Free Press.

“Masks are recommended but not required for people who choose to cast a ballot in person on Tuesday.”

A narrow opinion held by Republican justices on the state Supreme Court limit what the governor can do in terms of restrictions. Illinois, flirting with the 7,000 mark at times, started closing down the bars. In Texas, a judge in El Paso tried to impose lockdowns in defiance of orders from the state governor, drawing fire from the state attorney general. Ballot boxes are something of a sparse commodity in the state and, there too, voters don’t need to wear a mask to vote in person. The New York Times is describing the wave of infections in the United States as a third wave of this stubborn pandemic. If its map on the outbreaks were the Electoral College map, US President Donald Trump would be a shoe-in.

Which brings us to Tuesday. Betting odds and guesses on the make-up of the Electoral College show this is former US Vice President Joe Biden’s race to lose. Biden has put forward an aggressive clean-energy policy that has spooked many in the market. On the surface, a Biden win would have long-term implications on US energy policy, from drilling on federal lands to tighter policies over oil and gas in general. Reporting in The Houston Chronicle finds it might not be all that bad for a shale state like Texas. Blue-collar workers would make an easy transition into clean energy and, with no federal land, Biden’s restrictions would be moot. Paraphrasing a Platts forum, the team at Rystad Energy said Biden’s drilling ban “would have hardly any impact on oil and gas production in the medium term.”

So what happens Wednesday? Odds are that, unless Biden sweeps the map, we won’t know the outcome for a while. We expect the court fight over anything close to make Bush v. Gore seem benign in comparison. Trump not only has a conservative advantage in the Supreme Court, but he’s eroded many of the separations of power enshrined in US-style democracy. The Justice Department is his, but it shouldn’t be.

Meanwhile, a Pew survey finds that the US reputation under Trump is the worst its been in decades. So let’s return to mood. Let’s assume Biden wins. Trump would still have something like 75 days left in office. If he loses, Trump will spend the next few months in office seeking revenge. That would likely mean no stimulus package, a threat to US healthcare subsidies and stiffer tariffs on US adversaries. If he wins, he would be emboldened on a dictatorial trend and take the country down a far-right path. That would mean a watered-down stimulus, but likely similar pay-back tactics for assuming he’d lose in the first place. It would also add to the durability of the pandemic. So we’ll repeat it again.

“It’s likely to get worse before it gets better.”

There’s really not much point in looking at the economic calendar for this week. Everything will focus on the outcome of the US election. Friends of The GERM Report in the day-trading world see seasonality at play, with recent trends for the price of oil more or less in line with the 5-, 10- and 15-year average. Oil prices on Friday looked to establish a new level of resistance at around $37.50 per barrel or so for Brent. Oil is not looking like a safe-haven at this point. And no matter the outcome of the US presidential race, we think the mood will darken. We’re going with a Red alert, anticipating Brent will move by at least +/- 4% on the week.