Factories Cut Output, Jobs as Coronavirus Lockdown Bites

A series of business surveys paint an almost uniform picture of sharply declining production, falling new orders and contracting payrolls

By Paul Hannon and Harriet Torry


A steelworker in Germany, which registered the largest drop in output since the immediate aftermath of the financial crisis. / Photo: wolfgang rattay/Reuters .


Factories across the U.S., Asia and Europe cut output and jobs at the fastest pace since the global financial crisis, a sign the global economy has entered a deep freeze as governments lock down their populations in an effort to contain the novel coronavirus and minimize mortality.

In the U.S., the Institute for Supply Management said its manufacturing index fell to 49.1 in March from 50.1 in February. Readings above 50 indicate activity is expanding across the manufacturing sector, while those below 50 signal contraction. The index has been in contractionary territory for six of the past eight months.

Pullbacks in demand, production and employment—as well as challenges in running factories during the outbreak—offer few signs of improvement ahead. “I think April’s going to be a lot worse,” said Tim Fiore, who oversees the ISM survey of factory purchasing and supply managers.

Separately, data firm IHS Markitsaid its seasonally adjusted final U.S. manufacturing purchasing managers index dropped to 48.5 in March from 50.7 in February.

A series of business surveys released Wednesday painted an almost uniform picture of sharply declining production, falling new orders and contracting payrolls. The main exception was China, which registered a slight rebound in activity as its economy began to thaw out, having been the first to be frozen.


Factories across the globe reported a series of challenges. Some had shut entirely as workers were forced to stay at home to meet social-distancing requirements.

Some had been forced to cut output because the raw materials and parts they needed had become scarce. And others had cut back because demand had fallen as the global economy entered a downturn.

Factory output and employment is likely to fall further before it starts to rebound, although that recovery may be limited by job cuts and shutdowns that can take time to reverse. If they don’t receive help from governments and forbearance from banks, some manufacturing companies may close for good.

“Manufacturing conditions are likely to get worse,” said Rosie Colthorpe, an economist at Oxford Economics. “Increasingly strict lockdown measures, both in the eurozone and globally, will shut even more factories. Rising layoffs in the industrial sector reported in March mean factories won’t be able to immediately restore production once containment measures are lifted.”

In addition to China, there were other countries where some aspects of manufacturing activity defied the general trend. Turkish factories hired additional workers, and both the Netherlands and Taiwan just about managed to avoid a decline in overall activity in the sector.

But in most other countries the freeze has taken a huge toll on factories, overshadowed only by the toll it has taken on service providers.



In Europe, Italy has been hardest hit by the virus, and its manufacturing sector was hardest hit by the measures taken to contain it. Data firm IHS Markit’s Purchasing Managers Index, a measure of activity in the sector, fell to 40.3 in March from 48.7 in February. A reading below 50.0 indicates a decline in activity compared with the previous month, and the measure for March points to the largest drop in almost 11 years.

“With the Italian economy effectively shut down, it is unlikely that any recovery from the significant Covid-19 disruptions will be swift,” said Lewis Cooper, an economist at IHS Markit.

Factories in Greece, Poland and the Czech Republic were also hit hard by lockdowns and other setbacks. Germany, the continent’s manufacturing powerhouse, saw the largest drop in output since the immediate aftermath of the financial crisis, although the impact was mixed across industries. IHS Markit said producers of tools and equipment, and automobiles saw the largest declines, while makers of cleaning products and protective clothing reported a pickup in output and hiring.

Food producers also reported a pickup as German shoppers stocked up on essentials, a practice known as “Hamsterkäufe,” or hamster-shopping. Figures released Wednesday showed German retail sales increased sharply in February in anticipation of lockdowns to curtail the coronavirus pandemic.

In Asia, Vietnam and the Philippines logged the largest declines in activity, the latter registering an even larger drop than Italy. But big declines were also reported in Japan, South Korea, Indonesia and Thailand. In each of those countries, factories cut jobs.

In Europe, governments have rolled out a series of measures intended to limit the rise in unemployment as large parts of the economy hibernate. They include a series of programs that pay a big chunk of the wages of workers that companies have been forced to place on reduced hours.

The German Labor Agency Tuesday said around 470,000 businesses asked staff to work shorter hours in March, a record high. Detlef Scheele, the agency’s chairman, said the number of workers on state-subsidized short-time work schemes would likely rise considerably higher than its peak during the 2008-09 financial crisis, when 1.4 million workers took advantage of the program.

Continental AG, the German automotive supplier, Wednesday said that in light of the temporary shutdown of nearly half its 249 factories, including most of its operations in Europe and the U.S., 30,000 German employees, or half the workforce in its home country, had been put on short-time work as of April 1.

“We have agreed with employee representatives to use all available options in the coming weeks to respond to this crisis in a flexible manner,” Ariane Reinhart, Continental’s executive board member for human resources. “Our mutual goal in the current phase is to protect our employees and to protect jobs. Instruments such as short-time work in Germany help us here.”

In Switzerland, takeup appears likely to be high. Its survey of purchasing managers found that more than a quarter of manufacturing companies have already applied for government help, affecting 13% of their workers on average.

Even with those schemes, the number of people without work is expected to soar in Europe during the coming months. But that rise will take place from a low level: According to figures released by the European Union’s statistics agency Wednesday, 88,000 people found work across the eurozone in February, lowering the unemployment rate to 7.3% from 7.4%, its lowest since March 2008.


—William Boston and Ruth Bender in Berlin contributed to this article

Coronavirus and Supply Chain Disruption: What Firms Can Learn

Wharton’s Senthil Veeraraghavan talks with Wharton Business Daily on Sirius XM about the impact of the coronavirus on supply chains.




Long stretches of empty supermarket shelves and shortages of essential supplies are only the visible impacts to consumers of the global supply chain disruption caused by the COVID-19 pandemic. Unseen are the production stoppages in locations across China and other countries and the shortages of raw materials, sub-assemblies and finished goods that make up the backstory of the impact.

The Coronavirus Disease 2019 (COVID-19) outbreak is unprecedented in its scale and severity for humans and supply chains, not to mention medical professionals and governments scrambling to contain it.

Businesses dependent on global sourcing are facing hard choices in crisis management amid the supply chain disruptions. But in planning to mitigate the risks of similar disruptions in future, they confront other questions that have no easy answers: Should they broaden their supplier choices, or do more local or near-shore sourcing?

How much inventory of raw materials, sub-assemblies and finished products should they stock to tide over the crisis?

The impact of the coronavirus pandemic on global supply chains is “a major disruption, along the lines of having an earthquake or a tsunami,” said Morris Cohen, Wharton professor of operations, information and decisions.

“This is an unprecedented type of disruption. I don’t think we’ve ever seen anything quite like this.” Cohen is also co-director of the Fishman-Davidson Center for Service and Operations Management at the school.

The uncertainties ahead swing between extremes. As the shortages worsen before they get resolved, prices of many products could go up for consumers even if laws exist against price-gouging, said Cohen.

At the same time, constrained supplies could cause declines in demand, which in turn may end up weakening prices. “All those things will happen and have already happened. There’s no magic answer here.”

Medical Supplies Are the Priority

The choking of supply chains is “a second-order problem,” and the foremost priority is to ensure the availability of medical supplies, Senthil Veeraraghavan, Wharton professor of operations, information and decisions, said in an interview with the Wharton Business Daily radio show on SiriusXM. (Listen to the podcast using the player above.) 

“The first-order problems have to do with medical devices, medical products, productive equipment, masks, screeners, disinfectants [and so on], which are critically necessary for providing care for people we are going to see getting infected over the next few months,” he said.

Veeraraghavan noted that the U.S. alone needs a “supply chain ramped up for about 100 million people to get tested and taken care of,” based on predictions for the number of infections. With social distancing, the peak demand in the U.S. for testing kits is an estimated 5 million or 6 million, he added.

Getting those testing kits to the right locations across the country is the next big challenge.

“This is why a lot of epidemiologists and supply chain [professionals] are suddenly talking about what we call flattening the curve, to help with production smoothing,” said Veeraraghavan. (Production smoothing, or production leveling, refers to removing unevenness in the supply of intermediate goods in manufacturing processes.)

Parallels from the Past

The 2011 earthquake and the tsunami it unleased on Japan is probably the closest comparison to the coronavirus outbreak in terms of the extent of disruption to supply chains, said Cohen. “It was also unprecedented, had a global impact and it had multiple dimensions. Coronavirus is also a natural disaster.

This is not something caused by the actions of governments or policies or economic actors.”

Marshall Fisher, Wharton professor of operations, information and decisions, also pointed to the 2011 tsunami as a watershed period for supply chains, and included the 9/11 terrorist attacks, the 2008 Great Recession and the health scares around the Ebola virus in 2013-2016 and SARS in 2002-2003 among key disruptive events.

Although the 2011 earthquake and tsunami were short-lived, “we’re living with the consequences to this day,” Cohen continued. The tsunami caused a cooling failure and a meltdown at the Fukushima Daiichi Nuclear Power Plant, triggering the release of radioactive waste that continues to this day, he noted. “Many factories in that part of the country were closed and they were suppliers of key parts to supply chains all over the world. And it took weeks and weeks for companies to recover.”


The northeastern region of Japan that the earthquake hit was home to many factories manufacturing semiconductors, auto parts and other components for export, and crippled manufacturing in China, for instance, according to a Knowledge@Wharton report at the time.

Honing Risk Mitigation Strategies

Businesses have sharpened their risk mitigation tools after each successive disruption to supply chains. For example, after the 2011 tsunami, “companies like Cisco and Boeing have invested substantially in supply chain risk management policies, strategies and infrastructure so that they can be aware of [such] an event and understand its consequences,” Cohen said. “Now, there’s a fairly well-understood methodology, and most major companies have some kind of supply chain risk management process in place.”

However, those risk management processes are not robust enough to cope with the fallout of the coronavirus pandemic, Cohen said. “This is unprecedented in its scale and in the extent of it. We’ve never seen a disruption like this where … a large number of countries are telling their populations to stay home, to not work — there are lockdowns all over the world.” 
Businesses would surely revisit their strategies on sourcing raw materials, sub-assemblies or finished products. Over the past two decades, the concept of supply diversification has focused on continually driving down costs, said Veeraraghavan.
 
Companies such as General Motors, which have sizable demand for their products in both the U.S. and China, benefit from locating production capacities in both countries to be close to their customers, he noted. Consistent with that strategy, it would benefit U.S. businesses to have “some amount of supply capability” that they can ramp up to deal with the outcome of a pandemic like coronavirus, he added.

“It is a prudent idea for companies to invest in the resilience of their supply chains — and this has become more important than ever before,” Veeraraghavan continued. “Given that we are living in a global economy with a lot of people traveling all over the world, we’re going to have such public health crises — hopefully infrequently — for sure in the future.”


Companies could “stabilize their supply chains” in multiple ways such as enlisting new suppliers, boosting inventories or invest in omnichannel distribution that includes online sales, according to a McKinsey report on the implications of the pandemic for businesses.

The Benefits of Timely Action

“All those are great ideas of ways to mitigate the risk and they can be effective, but unfortunately, most of those are based on decisions that you have to make before the event occurs,” said Cohen. “It’s hard after the event occurs to go find alternative suppliers or redesign your product or your process or introduce new technologies. Those are all great things to do in the long run.”

“There’s always been pressure or incentives for companies to maximize efficiency and reduce costs, finding the lowest-cost supplier and the most efficient producer or distributor in the world and to go after that,” said Cohen. “On the other hand, if you end up with a single source, you’re vulnerable to risk. And that’s what is playing out now.”

There’s always a fundamental trade-off between costs or return, and risk, Cohen noted. “This will tip the balance more towards trying to mitigate risk, which means going to the low-cost producer and giving them 100% of your demand may look very risky now.

Companies may start to want to hedge their bets and have alternative suppliers more than they would have in the past.”

Another possibility is that businesses could be persuaded to source more of their needs locally.

Cohen pointed out that the pharmaceutical industry is particularly challenged now, since “the vast majority of the active ingredients are manufactured in China.”

Mitigating risk by adding new suppliers is not an easy solution, though. “There will be more pressure [on businesses] to make those investments and perhaps absorb a higher cost of sourcing things so that they have a higher insurance against these disruptions,” said Cohen. “It comes at a price. If you want to mitigate risk and absorb uncertainty, you have to make investments and pay a price.”

There are two schools of thought regarding how businesses could plan for those unforeseen risks, said Fisher. “One is you try to identify the risks that might happen.” However, “had anybody been making up a list of potential risks, I’m not sure this [COVID-19 pandemic] would have even been on the list. The other school of thought is to identify all the different things that might disrupt supply.”

But companies don’t need to go through that exercise, said Fisher. “Just take it as a given that something could disrupt your supply. The prevention is either keep a buffer stock in inventory or have multiple sources of supply, geographically separated. Or you could do both.”

However, the disruption in supply chains caused by COVID-19 is “the mother of all disruptions,” said Fisher. “How do you do geographic mitigation of supply when the whole world is involved?”

Be Proactive and Agile

Being proactive is critical, according to Cohen. “If you want to be prepared for the occurrence of a random risk, then you have to make investments and decisions upfront, before the event,” he said. “You have to buy that insurance by making those investments.

But once the event has occurred, as in this case, many of those strategies take a long time to implement; they may not be feasible at this point. It’s hard for a company that has its main supply coming from China to go find an alternative supplier. Maybe there isn’t one. Maybe the alternative supplier is also disrupted. The problem is they’re not going to find enough capacity to replace what was lost in many cases. It’s just not feasible.”

For sure, there are exceptions that have demonstrated superior supply chain agility. Fisher recalls how a fire in 2000 at a Philips Electronics semiconductor plant in Albuquerque, NM, disrupted the supply of chips for Nokia of Finland and Ericsson of Sweden, who needed them for the mobile phones they manufactured. Philips needed weeks to get the plant back up to capacity, as The Wall Street Journal reported, but Nokia deployed a crash plan to cope with the crisis.

Within two weeks of the fire disrupting chip supplies from Philips, Nokia “redesigned chips on the fly, sped up a project to boost production, and flexed the company’s muscle to squeeze more out of other suppliers in a hurry,” according to the Journal.

Ericsson lost nearly $400 million in potential revenue that year, and eventually became part of Sony of Japan. Like that episode, “there have been lots of events in the past that have been wake-up calls for companies that disruptions can be a big deal in your supply chain,” Fisher added.

In the current situation, in order to overcome capacity shortages, more capital is needed for production planning and equipment delivery, Veeraraghavan said. The transportation industry, for instance, will need that additional capital as it faces both supply and demand constraints, he pointed out. “I’m not sure every company that’s facing a crisis right now has enough capital to last them for the next few months. I do see governments having to play a role [here] at some point, for sure.”

In addition to governments, multiple other actors would have to come aboard to address shortages of various products, almost like “a war effort,” said Veeraraghavan. He noted, for instance, that LVMH, the French maker of Dior and Givenchy perfumes and cosmetics, has decided to repurpose its production lines to make hand sanitizers to cope with shortages in that country.

The fallout of the coronavirus pandemic on supply chains will also likely strengthen the hands of critics of globalization. “Absolutely; it’s going to have an impact on that whole debate,” said Cohen. A March 2019 paper Cohen co-authored with Stanford University professor Hau L. Lee examines the impact of changing government policies on designing supply chain networks.

Those changing government policies have taken the form of trade wars, such as those between the U.S. and China, protectionism and efforts to bring back American manufacturing jobs lost to China and Mexico.

“Are people going to hit the pause button on globalization?” Fisher asked. “That was already happening for a number of reasons, including the tariffs and trade wars with China and other regions, and Brexit. Trade disruptions are already causing companies to have to rethink how they approach globalization and basically do less of it.”

Long Road to Recovery

The pandemic’s disruption to global supply chains will have a long tail. “Supply chains are a problem so sticky that they take time to resolve,” said Veeraraghavan. Even if production “comes back to 100% levels, let’s say as about six months back,” there will be delays of up to a few months in getting products to consumers, and that situation will continue until fall 2020, he added.

It is precisely because these disruptions take a long time to wear off that it is important for companies “to have [sufficient] capital to last this period of lull,” he said. Meanwhile, China seems to be on the rebound, according to Veeraraghavan. “[We are] seeing some life for production and consumption coming back in China,” he said. Apple, for instance, reopened all its 42 stores in China last Friday, he noted.

Businesses that have already invested in supply chain risk mitigation will be able to bounce back faster than others. “The reason that companies maintain these networks of locations around the world and have multiple factories and multiple suppliers is precisely to respond as events occur by shifting production and shifting sourcing,” said Cohen.

Redundancy is built into that diversified supplier base, which enables a quicker rebound, he added. “This is like buying a real financial option, and you either exercise that option or not.”

According to Cohen, “the capability of global supply chains to recover [from the COVID-19 fallout] is fairly strong.” Many businesses have already invested in redundancies to absorb the risks of supply chain shocks, he said. “I think they’ll respond quickly. I’m going to be an optimist here.”

Signs of optimism are available also in the progress in select regions in containing the pandemic. Fisher pointed to data on the global spread of COVID-19 as tracked by the Center for Systems Science and Engineering at Johns Hopkins University, which shows a sharp drop in the number of new cases after reaching a peak in China’s Hubei province and its capital, Wuhan, where the outbreak first began.

Fisher noted that the number of new cases in Hubei peaked on February 13 at 14,840 cases, but by March 13, that number had fallen to 5, according to the Johns Hopkins data. That extent of containment shows how effective social distancing, self-quarantine and testing could be, he added.

So, is the end of the coronavirus pandemic within sight? “If everybody enacts identification of who has [the infection] and isolates them, and [with] all the aggressive [measures that are] going on now, it has the potential to be over in a month or two,” said Fisher. However, if people just go back to life as normal, and don’t change the way they live or practice hygiene, it could blow up all over again.”

The repercussions of COVID-19 could extend far beyond supply chains. “This is almost an issue that we all face as individuals, thinking about how this will change our lives,” said Fisher.

“Maybe the world will become less materialistic or consumers will be less materialistic. Many of us have multiples more of material goods than we actually need to lead a happy life.”

Egypt’s Water Security Problem

By: Hilal Khashan


The ancient Greek historian Herodotus described Egypt as the gift of the Nile River, because without the Nile, Egypt wouldn’t exist. But this lifeline, which supplies nearly 99 percent of Egypt’s water needs, is facing a threat the government believes could be disastrous for the country’s population.

The Grand Ethiopian Renaissance Dam, which is scheduled for completion in 2023, will be the largest hydroelectric dam in Africa and capable of generating more than 15,000 gigawatts per hour of electricity.

But for years, the project has been a major source of friction between Ethiopia and Egypt; Ethiopia even refused to attend talks in late February in Washington to resolve the dispute. Nine years into the dam’s construction, it seems Egypt’s options for blocking the project are shrinking.

The Making of the Standoff

In 1929, the Anglo-Egyptian Treaty regulating use of the Nile River waters granted Egypt a yearly water allocation of 48 billion cubic meters and Sudan 4 bcm out of an estimated annual yield of 84 bcm.

The treaty entitled Egypt to veto any attempt by an upstream riparian state (especially Ethiopia, Uganda, Kenya and Tanzania) to construct dams along the river. In 1959, Egypt and Sudan signed an updated agreement that increased their water allocation to 55.5 bcm and 18.5 bcm, respectively.

Since it did not participate in the negotiations, Ethiopia has refused to recognize the two agreements, dismissing them as vestiges of colonialism. It argues that Egypt has no right to claim the lion’s share of the Nile’s water and disrupt Ethiopia’s own development plans, including construction of the GERD, which lies on the Blue Nile, a river that originates at Ethiopia’s Lake Tana.

Ethiopia wants to fill the GERD reservoir, which has a total capacity of 74 bcm, within three years, but Egypt has proposed a seven-year filling period. Egypt also tried (unsuccessfully) to convince Ethiopia to reduce the reservoir’s capacity from 74 bcm to 14.5 bcm and the dam’s height from 145 meters to 90 meters.

The Nile River Dispute From Ethiopia's Perspective



Another subject of the dispute is water allocation. Egypt wants to be guaranteed 40 bcm of water annually, but Ethiopia is offering only 31 bcm. The U.S. has proposed that Egypt be granted 37 bcm, and it’s likely that, in a compromise deal, Egypt would be allocated 35 bcm. (Egypt, after all, never endorsed the 2010 Cooperative Framework Agreement, which was signed by Ethiopia, Rwanda, Tanzania, Uganda, Kenya and Burundi and which promotes equitable allocation of Nile River waters, because it would require Egypt to reduce its share of the water supply.)

Another factor complicating talks is Egypt’s unwillingness to compromise on its demand that the water level at the Aswan High Dam stay 165 meters above sea level.

It’s easy to see, however, why Egypt is so protective over the Nile. Egypt is an arid desert, and 95 percent of its population lives along the banks of the Nile and its delta. For Egyptians, access to the river is a matter of life and death, and the thought of going to war to secure the flow of its water runs deep in their collective consciousness.

Upon completion, the GERD will cut Egypt’s agricultural production by 50 percent, devastating water-intensive crops such as rice, potatoes and cotton. The GERD will also reduce Egypt’s hydraulic electrical supply by one-third, valued at $300 million, thereby increasing overhead costs for industry.

More than 5 million farmers will lose their jobs. They will likely relocate to densely populated urban centers, overburdening these cities’ failing infrastructure, exacerbating the country’s social insecurity, and creating a fertile breeding ground for Islamic militant groups.

Public Perspectives in Egypt and Ethiopia

Egypt’s minister of irrigation recently criticized Ethiopian Prime Minister Abiy Ahmed for reneging on his public oath not to compromise Egypt’s water security, but there’s little sympathy in Ethiopia for Egypt’s cause.

Ethiopians generally view Egypt as a colonial power and blame it for the high rate of poverty in Ethiopia. They accuse Egypt, whether correctly or not, of racism against Africa’s black populations and of taking part in the slave trade, particularly during the 19th century.

In his bid to seize the Blue Nile, Egypt’s Khedive Ismail sent his European and confederate-led army to Ethiopia. Egyptian troops took Massawa, a port city in present-day Eritrea, which precipitated the Ethiopian-Egyptian War of 1874-76. Egypt suffered a crushing defeat in the battles of Gura and Gundet, losing thousands of troops and an entire arsenal of rifles and cannons. The conflict was one of the factors that led to Egypt’s bankruptcy under Ismail.

One of the war’s lasting consequences is the lingering perception in Ethiopia of Egyptians as invaders. Their frequent threats to go to war over the Nile has sparked anger among many Ethiopians.

Former Egyptian President Mohammad Morsi publicly threatened to declare war on Ethiopia, and his predecessor, Hosni Mubarak, said he would have used Tu-160 bombers to stop Ethiopia from building the GERD if construction had begun during his time in office – even though Egypt did not even possess the Tu-160 at the time. Some have even claimed that President Anwar Sadat ordered airstrikes in the 1970s against Ethiopia to block it from building a dam on the river.

Egypt’s Options

But what can Egypt really do to stop the GERD’s construction? Egyptians have learned the lessons of their failed invasion of Ethiopia in 1974; they, and the Egyptian military, are not eager to go to war against Ethiopia again.

Egyptian rulers and military commanders have also learned from Egypt’s involvement in the unwinnable war in Yemen from 1962 to 67 and Gamal Abdel Nasser’s bluff in 1967 that led to a disastrous war with Israel. Egyptian officials understand, therefore, that a failed military campaign against the GERD would have devastating consequences.

Moreover, President Abdel-Fattah el-Sissi wants to keep his grip on power and has no interest in initiating a foreign military intervention. In addition, the armed forces, which were focused on business and dominated more than half of the country’s economy during Mubarak’s administration, are ill-prepared for an armed conflict. Many army units are preoccupied with operating factories or involved in construction projects, and Egyptian military officers want to avoid any actions that might jeopardize their elevated socioeconomic status.

So, when el-Sissi met with the Egyptian command’s top brass, instructed them to prepare for the possibility of action and dispatched military and intelligence envoys to Khartoum, Juba and Addis Ababa, after Ethiopia boycotted the talks in Washington, it was clear that a full-blown war was extremely unlikely. Subtle threats to launch an airstrike against the GERD do not intimidate Addis Ababa because it knows such an attack is exceedingly unlikely for at least three reasons.

First, the dam site is well-defended. Second, U.S. mediation is still ongoing despite the failure of the talks in Washington. Third, Saudi Arabia and the United Arab Emirates, which have close ties with Egypt, have significant economic interests in Ethiopia and would not approve of a strike against the country.

What’s more, Egyptian Rafale and F-16 Block 52 fighters lack the range to reach the GERD since the Egyptian air force does not have air refueling capability. Even if they reach the dam, it’s unclear if Egyptian pilots have the skill needed to negotiate the elaborate missile defense systems that protect the construction site, let alone destroy its thick concrete walls.

Egypt has a large and well-armed standing army and a modern navy that includes two Mistral Helicopter warships and fours Gowind-class corvettes, but they are ill-suited to attack the GERD.

For Egypt, diplomacy is the only option available, even though its bargaining power is limited.

The GERD’s construction is approaching completion, and Abiy has the support of the upstream riparian states, as well as Sudan, which opposed the Arab League’s draft resolution supporting Egypt in its current dispute with Ethiopia. Egypt cannot count on the support of the U.S., which has cautiously stressed the need for mutual respect among the Nile Valley states.

The only real course of action for Egypt is to conserve water as much as possible, invest in water desalination plants, and normalize its relations with all countries in the Middle East because it needs all the foreign assistance it can get.

Point of No Return

BY John Hathaway



Gold and precious metals mining shares are casualties of panic selling across all financial markets.

The scenario is similar to what happened in 2008 during the global financial crisis (GFC).

When the general selling exhausted itself in late 2008, gold and mining shares delivered superior absolute and relative performance for the following three years. We believe that this pattern is likely to repeat following this sell-off.

While COVID-19 outbreak is grabbing the headlines, the far bigger story is the deflation of financial assets that it has triggered and the resulting loss of investment confidence.

Markets that had been priced for perfection must now reckon with a likely recession, soaring fiscal deficits and the very real possibility of a sustained bear market.

Mining company valuations appear extraordinarily cheap.... Buying low is never easy but now is the time to do it. In our opinion, even though the economy will recover from the downturn and the health scare will prove to be temporary, financial asset valuations are unlikely to return to pre-crash manic levels. In mid-February, the Wilshire 5000 Stock Index1 traded at approximately 145% to gross domestic product (GDP),2 its second highest level since 1950, and only slightly below the 2000 peak (see Figure 1).

At this writing, the ratio has fallen to 114% (as of 3/17/2020), which is still very expensive by historical standards.

Valuations are driven by investor psychology, leverage and the liquidity necessary to support leverage.

All three may have been critically impaired for the near to intermediate term.


Figure 1. Total U.S. Corporate Equities and U.S. GDP (1950-2020)
figure 1
Source: AdvisorPerspectives.com. Data as of 3/3/2020.


Gold Will Continue to Do its Job

If financial assets struggle, interest in gold is very likely to widen.

Gold may have been caught up in the recent stampede for liquidity, but it has delivered good relative performance on a year-to-date basis; gold bullion is up 0.73% as of March 17, compared to -25.17% for the S&P 500 Index.3 

The 12-month figures (as of 3/17/2020) are even more impressive: gold has returned 17.19% vs. -8.54% for the S&P 500.

On a peak-to-trough basis for the last few weeks, gold has declined roughly 12%. Other safe haven assets have experienced the same pressure. For example, the yield on 30-year U.S. Treasury bond rose from less than 1.0% to 1.5% in only a few days, a drawdown of more than 30%.

What this shows is that quality assets will be sold by portfolio managers desperate to reduce leverage. Low-grade assets cannot be sold quickly enough to meet margin calls.

It was leverage that inflated valuations, not fundamental economic growth and strong year-over-year earnings. In fact, corporate pre-tax profits have been declining since Q3 2014.

Figure 2 shows pretax profits on a quarterly basis since 2014.


Figure 2. U.S. Corporate Pre-Tax Profits Have Been Declining ($Billions)
Figure 2
Source: Federal Reserve Bank of St. Louis Economic Research. Data as of 3/16/2020. 



The illusion of earnings growth that has captivated investor psychology was achieved through share buybacks and increased leverage.

Growth of earnings per share, not the same as profit growth, has been juiced by financial engineering. The same can be said for returns on financial assets.

The amount and location of leverage within the economy and financial markets is opaque but may well have reached high tide for many years.

A post-recession economic recovery will not necessarily, and does not have to, translate into strong returns from investing in financial assets.

Global Debt Has Increased +100% Since 2007

In popular thinking, the current U.S. administration, or the one that follows it, will pull every trick out of the bag to stimulate the economy. This belief will likely excite investors from time to time in anticipation of a rebound. Unfortunately, the financial markets are experiencing a deflationary bust that could spread to general economic activity.

Public policy has all but exhausted the potential benefits of resorting to traditional monetary and fiscal solutions. The marginal benefit to economic growth from heaping on new layers of debt is capped by the law of diminishing returns, as shown by Figure 4 from Rosenberg Economics.

Since 2007, global debt increased 110% vs. 46% for global GDP:


Figure 3. Global Debt vs. Global GDP ($ Trillions)
Figure 3
Source: Rosenberg Economics. Data as of 12/31/2019.


Central banks have few conventional tools remaining to combat credit deflation.

An impotent response can be expected from new rounds of monetary stimulus, rate reductions or central bank balance sheet expansion.

Global debt, public and private, measures 287% vs. global GDP ($244 trillion divided by $85 trillion).

The debt burden will most assuredly grow, a post coronavirus rebound notwithstanding.

The world’s debt structure is already incapable of withstanding even a minute rise in rates.

More debt relative to GDP will only make matters worse. All that remains is currency destruction.

Gold has been rising for the past eighteen months side by side with a strong stock market and no inflation. Conventional wisdom said that wasn’t supposed to happen. As shown in Figure 4, gold has outperformed equities and bonds since 2000, the dawn of radical monetary experimentation by central bankers.

We think gold has been sensing the endgame for Keynesian policy prescriptions, mainstream economic thinking and hyper-leveraged investment practices.


Figure 4. The Modern Era of Gold

Gold Bullion vs. Stocks, Bonds, Oil, USD (2000-2020)


For the period from 12/31/1999 to 3/16/2020, gold has provided posted an average annual return of 8.55%, compared to 5.44% for U.S. bonds, 4.44% for U.S. stocks, 0.57% for oil and -0.19% for the U.S. dollar.

figure 4
Source: Bloomberg. Period from 12/31/1999 –3/16/2020.4

 

Gold Miners are Poised to Perform

During the 1930s credit deflation, gold and gold mining stocks performed well in relative and absolute terms. When credit deflates, and counterparties cannot be trusted, gold is the ultimate safe asset.

In the 1930s, the metal price rose, costs of producing gold declined and the miners generated strong earnings and paid handsome dividends. We believe that this is a sequence that will repeat.

At the moment, mining company valuations appear extraordinarily cheap. It is one of the few industries that will report solid year-over-year earnings gains for the remainder of this year and perhaps into the next. 

Buying low is never easy but now is the time to do it.

1The Wilshire 5000 Total Market Index is a market-capitalization-weighted index of the market value of all US-stocks actively traded in the United States.
2GDP represents the total market value of goods and services produced within the borders of a country.
3The S&P 500 Index is a stock market index that tracks the stocks of 500 large-cap U.S. companies.
4 Gold is measured by GOLD Comdty; Bbgbarc US Agg Bond Index is measured by the Bloomberg Barclays US AggTotal Return Value Unhedged USD (LBUSTRUU Index); S&P 500 TR is measured by the SPX; Oil is measured by USCRWTIC; and the U.S. Dollar is measured by DXY Curncy. Past performance is no guarantee of future results.

A Brain Hack to Break the Coronavirus Anxiety Cycle

Uncertainty about coronavirus spreads anxiety through social contagion. Here’s a way to minimize that.

By Judson A. Brewer, M.D.


Stocking up on large amounts of toilet paper when you see others doing so is an example of social contagion.Credit...NurPhoto, via Getty Images


Anxiety is a strange beast.

As a psychiatrist, I have learned that anxiety and its close cousin, panic, are both born from fear. As a behavioral neuroscientist, I know that fear’s main evolutionary function is helping us survive. In fact, fear is the oldest survival mechanism we have. Fear helps us learn to avoid dangerous situations in the future through a process called negative reinforcement.

For example, if we step out into a busy street, turn our head and see a car coming right at us, we instinctively jump back onto the safety of the sidewalk. Evolution made this really simple for us. So simple that we only need three elements in situations like this to learn: an environmental cue, a behavior and a result. In this case, walking up to a busy street cues us to look both ways before crossing. The result of not getting killed helps us remember to repeat the action again in the future.

Sometime in the last million years, humans evolved a new layer on top of our more primitive survival brain, called the prefrontal cortex. Involved in creativity and planning, the prefrontal cortex helps us think and plan for the future. It predicts what will happen in the future based on past experience. If information is lacking, our prefrontal cortex lays out different scenarios about what might happen, and guesses which will be most likely. It does this by running simulations based on previous events that are most similar.

Enter anxiety.

Defined as “a feeling of worry, nervousness or unease, typically about an imminent event or something with an uncertain outcome,” anxiety comes up when our prefrontal cortexes don’t have enough information to accurately predict the future. We see this right now with coronavirus.

Scientists are racing to study the characteristics of the coronavirus so that we can know precisely how contagious and deadly it is — and act accordingly. Uncertainty abounds.

Without accurate information, it is easy for our brains to spin stories of fear and dread.

In addition to being fueled by uncertainty, anxiety is also contagious. In psychology, the spread of emotion from one person to another is aptly termed social contagion. Our own anxiety can be cued or triggered simply by talking to someone else who is anxious. Their fearful words are like a sneeze landing directly on our brain, emotionally infecting our prefrontal cortex, and sending it out of control as it worries about everything from whether our family members will get sick to how our jobs will be affected.

Wall Street is a great example of social contagion: we watch the stock market spike and crash, the stock indexes being a thermometer for how feverish our collective anxiety is at the moment. Wall Street even has something known as the Fear Index, or VIX, which outstripped the 2008 financial crisis this week.

When we can’t control our anxiety, that emotional fever spikes into panic. Panic is defined as “sudden uncontrollable fear or anxiety, often causing wildly unthinking behavior.” Overwhelmed by uncertainty and fear of the future, the rational parts of our brains go offline. Logically, we know that we don’t need a six-month supply of toilet paper, but when we see someone’s cart piled high, their anxiety infects us, and we go into survival mode.

So how do we not panic? Too many times, I’ve seen my anxious clinic patients try to suppress or think themselves out of anxiety. Unfortunately, both willpower and reasoning rely on the prefrontal cortex, which isn’t available at these critical moments. Instead, I start by teaching them how their brains work, so that they can see how uncertainty weakens the brain’s ability to deal with stress, priming it for anxiety when fear hits.

But this is only the first step.

To hack our brains and break the anxiety cycle, we need to become aware of two things: that we are getting anxious or panicking and what the result is. This helps us see if our behavior is actually helping us survive, or in fact moving us in the opposite direction — panic can lead to impulsive behaviors that are dangerous; anxiety is both acutely mentally and physically weakening and a slow burn that has more long-term health consequences.

Once we are aware of how unrewarding anxiety is, we can then deliberately bring in the “bigger better offer.” Since our brains will choose more rewarding behaviors simply because they feel better, we can practice replacing old habitual behaviors — such as worry — with those that are naturally more rewarding.

For example, if we notice that we have a habit of touching our face, we can be on the lookout for when we act that behavior out. For example:

•If we are starting to worry: “Oh no, I touched my face, maybe I’ll get sick!”,


•Instead of panicking, take a deep breath and ask: “When was the last time I cleaned my hands?”


•Think. “Oh, right! I just washed my hands.”


Just by taking a moment to pause and ask the question, we give our prefrontal cortex a chance to come back online and do what it does best: Think.

Here, we can leverage certainty: If we’ve just washed our hands, and haven’t been out in public, the likelihood that we’re going to get sick is pretty low.

The more we can see the positive feeling and effects of good hygiene and compare them to the negative feeling of uncertainty or getting caught in anxiety, the more our brains naturally move toward the former, because it feels better.

How do I know this works? My lab has studied these mechanisms for decades. We’ve recently found that simple awareness training (delivered through an app) can reduce anxiety by 57 percent (in a study with anxious physicians) to 63 percent (in a study with people with generalized anxiety disorder) in two to three months.

Understanding these simple learning mechanisms will help all of us “keep calm and carry on” (which is how London dealt with the uncertainty of constant air raids in World War II) instead of getting caught in anxiety or panic in the coming days, and whenever we face uncertainty.

When our prefrontal cortex comes back online, we can compare anxiety to what it feels like to be calm. To our brains, it’s a no-brainer. It simply takes a little practice so that the bigger, better offers become new habits.


Judson A. Brewer is an associate professor at Brown University and the author of “The Craving Mind.”