Viral Thoughts

By John Mauldin

We are looking at a world with parameters bounded by pure imagination; where we go from here is anyone's guess.

—Will Thomson and Chip Russell, Massif Capital

Today’s letter will be another hop-around review of the crisis landscape. I’ll touch on several topics instead of going deep into a single theme. So much is going on, it’s really hard to know where to start. There will be something to annoy everybody. So, let’s just dive in.

Actually, let’s start with some good news. I talked with Dr. Joseph Kim of Inovio yesterday. They are beginning the initial safety/immune response phase human trials of a vaccine which should show data in June, and they should be in a larger phase 2/3 trial as early as July/August. Inovio plans (but isn’t promising) to have a million vaccinations ready by year-end, and is looking for even higher capacity.

Many other vaccine trials are underway around the world, too. Dr. Kim named several he was familiar with, some of which are also beginning human trials. They use different mechanisms but with the same end goal. He is hopeful some will work, saying, “Look, think of it like 71 shots on goal. The more we try the more likely we are to score.” Of those, probably 10 or so will look promising enough to draw funding.

Vaccine production capacity will be key. We will need millions per week and eventually billions per year. This is a global crisis and must be treated globally. Dr. Kim thinks people will likely need multiple vaccinations, probably every other year, but we just don’t know yet.

The first vaccinations should go to healthcare workers, then those providing necessary services like food, power, and so forth. Then those who are most at risk, and finally everyone else.

Future Trajectory

If you want to know the future, some say to look at China.

The coronavirus originated there and China was the first to impose the kind of restrictions now common elsewhere. The virus had already spread rapidly through that highly dense urban population before lockdown measures.

What we see is that after 2–3 months of ruthlessly enforced lockdown, the virus receded enough to let people leave home and businesses begin reopening. The downtime created massive unemployment, disruption, and lost income that will take years to recover.
Daily life is still heavily constrained, consumer spending is nowhere near what it was and will probably remain so until a vaccine is available. We don’t yet see anything that looks like a V-shaped economic recovery in China.

Unfortunately, I think the US and Europe will follow a similar course. We will learn a lot in the next couple of weeks as some areas begin reopening. The key question: Can they do so without hospitalizations and deaths spiking higher? If so, maybe we can have a modified but somewhat normal summer.
But there is a real risk of having to clamp down again if it doesn’t work.

The economic trajectory is also uncertain but only in the sense that we don’t know how bad it will be. I am sure you’ve seen poll data like this from CBS News.

Source: CBS News

There are other surveys with different timelines and activities but they all point in the same general direction. This is not going to be like turning on a light switch.

Absent miraculous breakthroughs, the economic pain is only just beginning. We are going to see entire industries either wiped out or hastily transformed.
I was expecting some of this anyway, but over a much longer period of time which is why my forthcoming book is called the “Age of Transformation.” Thanks to the pandemic, it is coming even faster than expected.

We’ll be discussing all this in my Virtual Strategic Investment Conference, an online event we are holding on five days between May 11–21. If you ever wanted to attend the live event but couldn’t make it, this year you can get a front-row seat and never have to leave home.
I am rather enjoying the challenge of reorganizing the event for this format. It opens new possibilities I hadn’t previously considered. It will clearly be the greatest lineup of speakers we have ever had. Click here to learn more and register.

Juggling Act

Everybody wants to know when the economy can reopen. In one sense, that’s the wrong question. The economy isn’t “closed.”
Many essential businesses are still open. People still buy and sell things.
Those sitting at home still engage in economic activity. But it is of a different nature, and the change creates costs.

So what we’re really asking is when the previously normal economy will be back. The answer is “never,” I’m afraid. We will return to something quite different and as yet unknown.

According to Danielle DiMartino Booth’s Quill Intelligence, less than 3% of US counties account for half of GDP and 61% of COVID-19 cases.

Until these densely populated counties can reopen, economic activity will be lackluster which drags on consumption.

The urban areas will be the hardest to bring back online. But without them, we can’t approach anything that looks like “normal.”

As for when this can happen, we actually have a plan. On April 16, President Trump announced his guidelines for “Opening Up America Again.” These are recommendation to governors, who may choose different paths, but the plan seems sensible.

It envisions three phases, and each state would move through them based on 14-day periods of declining cases and adequate hospital capacity.

You may think Trump’s plan is too relaxed or too strict, but it is at least relatively objective. It gives us targets to meet and recognizes local differences. Best of all, the phased approach should boost public confidence that the danger is easing—and that is critical to bringing the economy out of deep-freeze.

I get the resentment some feel toward being kept from work, but lockdown orders aren’t the only barrier. Businesses won’t reopen and put employees back on the payroll unless customers feel they can return safely, and the poll data shown above says they mostly don’t.

All this will take time. There’s no way around it. The measures we are presently taking have successfully “flattened the curve” nationally (local areas vary).
We have to reopen without letting it shoot higher again. We also have to protect vulnerable people—the elderly and those with underlying health conditions.
Doing all this at once will be a giant juggling act, but I believe we can do it. I think most of the US can be in phase 3 by the end of May if we do this right.

If we don’t do it right?

Good-bye, summer, and hello to a recession that lasts much longer than it otherwise would.

Testing Time

I am privileged to be in an email group (courtesy of Dr. Mike Roizen) that is helping provide counsel for state governments. The suggestions they make are somewhat similar to Trump’s, but with a lot more detail.

They break the population into five groups based on risk factors like age, and health condition.

For instance, Group 1 is under age 50.

Group 2 would be 50 – 65 without body mass indexes of greater than 39.

Group 3 would be those with BMI over 39. (About 3% of Ohio, as an example.)

 All those over age 80 and those age 65 to 80 with one or more serious comorbidities (hypertension, obesity, type2 diabetes, chronic lung disease, immune dysfunction, kidney disease requiring dialysis, increased clotting disorders) are in Group 5 (about 3.5% of population and 55% of deaths).

The recommendation is to offer some type of financial inducement for higher-risk groups to stay home until there is adequate testing of the total community.

If we do something like this, they estimate that 80% of the working population can be released initially, and another 10% in phase 2, and then everyone when adequate testing and a vaccine are available.

Testing is key to any reopening plan.

Most of the experts think the US needs to be testing at least 500,000 people a day to truly get the pandemic under control.

We are just starting to get into the neighborhood of 200,000 on average for the last few days.
We need to at least triple that number.

And then double it again.

And then double that again.

And again.

We know private labs have plenty of capacity.
We trust them to test us for everything else. Get them working…

The tests and labs are not the only constraints here. Paraphrasing the old proverb, “For lack of a swab, the test wasn’t done.” Ditto for supplies like gloves and other protective equipment for health workers.
We need to get every component, in adequate quantity, in the right places at the right times. Our initial inability to do that let the virus grow far faster in the US than it did in places with extensive testing, like South Korea and New Zealand.

I can’t stress enough how important this is.

Widespread, reliable testing will help generate the confidence we need to get the economy moving again.

Not enough testing will mean less confidence and slower recovery.

The Inflation/Deflation Debate

As I’ve been saying the last four weeks, without intervention we face the certainty of a massive deflationary depression.

The Fed is leaning against this in unprecedented ways while the government tries to replace the lost income for businesses and individuals.

This is not what we normally think of as “stimulus.” It is not intended to boost economic activity but simply replace a lost portion of it.

The hope is to reopen the economy soon enough for recovery to take place on its own. I think this will take 2+ years, and we won’t see anything like a V-shaped recovery this year.

I sadly think that we will need even more rather large government spending.

It will almost certainly be needed before the election, and quite likely before Congress breaks for the summer so that those checks and other help arrive in time for the elections. This is a bipartisan “need” for politicians.

Furthermore, although it offends every philosophical sense of right and wrong I hold dear, I understand why the Fed is intervening in the junk bond market to keep some zombie companies from going under.

These companies represent jobs and the task right now, at least as the Fed sees it, is to prevent a major recession from becoming a depression.

Clearly that is going to help some companies but not all.

(Bloomberg)—More than 10% of US collateralized loan obligations are now at risk of cutting off cash payments to holders of their riskiest portions amid a surge in downgrades among leveraged loans backing the securities, according to analysts at Nomura Holdings, Inc. (H/T Mark Grant)

Essentially, many of the loans the Fed was trying to help are going to be downgraded anyway.

The Fed’s action simply kept the price up, but did not increase the companies’ ability to actually service their debt. So many of the zombie companies will fail anyway.

But is all this Federal Reserve buying (NOT money printing) going to cause inflation down the road?

Let’s turn to Dr. Lacy Hunt’s latest Hoisington Investment Management letter:

Recent articles have suggested that the Federal Reserve and the Department of the Treasury are engaged in Modern Monetary Theory (MMT) or some form of “helicopter money,” the famous Milton Friedman phrase also referred to by Ben Bernanke.

The inference is that once the virus is contained, these new efforts will yield different and more powerful economic and inflation results than did the Quantitative Easing periods following the 2008–09 Global Financial Crisis (GFC).

Further, the suggestion is that the fiscal policy actions taken this year totaling $2.7 trillion will be far more effective than the $2 trillion stimulus package of 2009.

Are these assertions that MMT is in place and monetary and fiscal actions will spur economic and inflation rates higher true? The short answer is no.

…For the Fed to engage in true MMT, a major regulatory change to the Federal Reserve Acts would be necessary: The Fed’s liabilities would need to be made legal tender.

Having the Treasury sell securities directly to the Fed could do this; the Treasury’s deposits would be credited and then the Treasury would write checks against these deposits. In this case, the Fed would, in essence, write checks to pay the obligations of the Treasury.

If this change is enacted, rising inflation would ensue and the entire international monetary system would be severely destabilized and the US banking system would be irrelevant.

Many cases of making a central bank’s liabilities legal tender or its equivalent have occurred historically—China in the 1930s, Germany in the 1920s, Yugoslavia and Hungary immediately after WWII as well as multiple cases in Latin America.

Inflation in these circumstances was so burdensome that economic conditions became horrific and serious political ruptures occurred. As these cases remind us, money printing would in the final analysis be an attempt to improve the economy by destroying its very basic foundations.

Note that Lacy is well aware that inflation and indeed hyper-inflation are possible under the right conditions. The Federal Reserve act would have to be changed.

Dr. Woody Brock in his latest writings pointed out that it was the rise of the service economy from 25% of the workforce in 1910 to 86% of the workforce today that produced the stability we have seen in the business cycle. (The instabilities were due to leverage, especially from low interest rates and the financialization of the economy. These were an enormous monetary and regulatory policy mistake.)

The shock we are experiencing today is unlike anything we have seen in the past. We are simply seeing the service sector implode and we have no idea how long it will take to come back. As the quote at the beginning of the letter said, we are living in a world bounded only by our imaginations.

How High Will Unemployment Go?

Here are two predictions, the first from Danielle DiMartino Booth at Quill Intelligence and the second from Mike (Mish) Shedlock.

Quoting Quill:

Extrapolating the data for the last five weeks indicates U3 unemployment rate for April payrolls should be around 16.2%; risk is to the upside surprise for the unemployment rate as some densely populated states’ unemployment rates are lower than what would be expected

Mike Shedlock offered another analysis. You can see his math and methodology as to how he comes up with his numbers at the website.

Based on 26 Million Claims, What's the Unemployment Rate? My comfort range is 17–25% with an expectation of 20–24%. A U-6 rate well into the 30% range is likely in any case.

(“U-6” is a broader unemployment rate that includes “involuntary part-time workers” who took those jobs but really want to work full-time.)

In a late-night conversation with Mish, we both agreed that the May number will be even higher, because unemployment will still be rising into their data collection, which is whatever day includes the 12th of the month.

Depending on how fast the economy opens up, and how fast the large urban areas can begin to function, a 25% unemployment rate for a short period of time is quite possible. That is just ugly.

There is so much else I could talk about. Literally I could do another letter this size just from the data that is screaming to get on this page. But it is time to begin to close. But first, this quick notice.

I think this pandemic is accelerating the timeline for what I call The Great Reset, when we will have to rationalize global debt. My friends at CMG and I are redoing a paper on that along with some other COVID-19-related items. You can see these and more by visiting the CMG website. You can also learn how my team at CMG is helping clients navigate the current investing environment. I am proud of how our team has been working together to help clients just like you.

Puerto Rico and Missing My Gym

It is impolite to complain when you are quarantined in paradise, but I have taken more long walks on the beach in the last 40 days than I have in my entire life. I prefer to get on a treadmill where I can read on my iPad, and then go to the various machines and weights and try to stay in shape.

I am 70 (so in that vulnerable age range), and am slowly gaining weight. My wife has started online workouts with The Beast back in Dallas. With her complaining how sore she is, I have agreed to start tomorrow. We really do have no idea when the gym will open and for what groups. I try to work out at home, but it is not the same.

I look at the surveys about when people will venture out to do what (restaurants, shopping, air travel, hotels, etc.). I will admit that it might be a while before I get on a plane. We’ll see. But I’ll definitely be back in the gym the first day it opens. Wearing gloves and a mask, of course, but I need to feel Brother Iron and Sister Steel in my hands. I will never take them for granted again.

It is time to hit the send button. You have a great week!

Your needing to do more push-ups analyst,

John Mauldin
Co-Founder, Mauldin Economics

Global economy already set for historic contraction

Tiger index suggested collapse in activity before the height of the coronavirus crisis

Chris Giles in London

Kristalina Georgieva, IMF managing director, said that 170 of its 189 member countries would suffer falling output per head in 2020 © AFP via Getty Images

The global economy was facing the worst collapse since the second world war as coronavirus began to strike in March, well before the height of the crisis, according to the latest Brookings-FT tracking index.

The index comes as the IMF prepares to hold virtual spring meetings this week, when it will release forecasts showing the deepest contraction for the global economy since the 1930s great depression.

With confidence indicators falling off a cliff, financial markets in turmoil and real economic indicators plunging, bankruptcies and job losses will leave deep scars on the world economy and hinder its healing for a long time to come, the data suggest.

Kristalina Georgieva, IMF managing director, said that 170 of its 189 member countries would suffer falling output per head in 2020.

“The bleak outlook applies to advanced and developing economies alike. This crisis knows no boundaries. Everybody hurts,” she said.

Three months ago, the fund had expected increases in prosperity in 160 countries. With no country immune from the Covid-19 crisis, a recovery once the lockdowns have been eased is likely to be slower than hoped, said Professor Eswar Prasad of the Brookings Institution, who railed at the lack of a co-ordinated policy response from governments.

Line chart of Composite index of relative strength of a range of indicators showing A global economy on the cliff edge

“The inability of national governments to come together even at such a critical time to forge a common front against the pandemic highlights a dangerous fracturing of international co-operation. This is further damaging business and consumer confidence, which are already in free fall,” Prof Prasad said.

“The US economy has come to a virtual standstill . . . France, Germany and the UK face historic recessions as all indicators of activity and trade tumble,” he added. The Brookings-FT Tracking Index for the Global Economic Recovery (Tiger) compares indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for individual countries.

It showed historically large declines across financial indicators, real economic data and confidence indicators in March, well before the worst effects on the economies of most countries.

Line chart of Index compared with previous levels of confidence data showing Confidence has fallen off a cliff

Only in China are the data stabilising, having fallen steeply much earlier after it suffered first from lockdowns after coronavirus emerged in Wuhan.

Prof Prasad said: “In some respects, China’s command economy is built to better withstand such massive shocks compared to market economies.

But the economy is hardly out of the woods yet, especially with unemployment rising, domestic and external demand likely to remain weak, and given the risks of a second wave of infection.”

Many other emerging economies have to deal not only with a health and economic crisis, but also with capital flight worse than in the 2008-09 global financial crisis and a sudden slump in demand for their exports.

The Tiger index’s gloomy reading is in line with other economic indices and forecasts, which increasingly point to the most difficult moment for the global economy in almost a century.

The Peterson Institute of International Economics forecast US unemployment would reach almost 20 per cent in the second quarter of this year and the eurozone would suffer a 12 per cent drop in gross domestic product.

In the UK, the National Institute of Economic and Social Research forecast that by the end of the second quarter, UK output would be 25 per cent lower than at the start of the year, before beginning to recover.

Economists are divided on the speed of any recovery once the lockdowns are lifted, although they all agree that this will depend on the continued risks from the Covid-19 pandemic and health systems in many countries.

Karen Dynan of the Peterson Institute put herself on the positive end of the spectrum with the belief that recoveries would be reasonably strong, although she said there would be “setbacks” as lockdowns were gradually relaxed.

“I see a peak in the unemployment rate around 20 per cent but that comes down pretty quickly in the third and fourth quarters, so it is in single digits by the start of next year,” she said.

Prof Prasad was less optimistic.

“Demand has been ravaged, there are extensive disruptions to manufacturing supply chains, and a financial crisis is unfolding simultaneously,” he said.

“Unlike the 2008-09 crisis that was triggered by liquidity shortages in financial markets, the crisis now unfolding involves more fundamental solvency issues for many firms and industries beyond finance.”

With central banks increasingly active and governments preparing historically large insurance packages for households and companies, the IMF will say this week that there is likely to be a “partial recovery” in 2021.

But Ms Georgieva warned that the outlook could still get worse if the pandemic continued to spread around the world.

Pandemic preparedness

Latin America’s health systems brace for a battering

Despite recent improvement, the region’s health care is not ready

A procession of disappointments awaits residents of Guayaquil, Ecuador’s largest city, when illness strikes. Those who report symptoms of covid-19 to the health-care hotline get appointments scheduled for several weeks later, by which time they will probably have recovered or died.

With ambulance services overwhelmed, stricken people arrive at hospitals in pickup trucks, only to find there are no empty beds. When somebody dies at home, the corpse joins a long waiting list for removal. The city has run out of wooden coffins. Some relatives dump loved ones’ bodies in the sweltering streets.

Guayaquil is the first place in Ecuador where covid-19 has struck with force. That is probably because the country’s Pacific coast takes a long school holiday starting in early February, five months before the Andean region, including Quito, the capital. Guayaquileños flew to and from Europe after the novel coronavirus began spreading but before cancelling trips became the norm.

The hospitals and bureaucracy could not cope with the disease they brought back. In desperation the city’s mayor, Cynthia Viteri, told municipal vehicles to park on runways to block incoming flights. She contracted the virus.

Other parts of Latin America wonder whether Guayaquil’s horrors will soon be theirs. “No health system in the world” can cope with covid-19 once the rate of transmission gets beyond a certain point, notes the director of a public hospital in Mexico. Northern Italians have discovered the truth of that.

But the capacity and competence of health-care systems matter a lot, and in Latin America they vary greatly, both between countries and within them. “You have Europe and Africa on the same continent,” says Alejandro Gaviria, a former Colombian health minister.

In general Latin American health systems, though still smaller and less well managed than those of Europe, have matured greatly. Colombia, which introduced universal, taxpayer-financed health care in 1993, has ten times the number of intensive-care beds it did before then.

This year Peru’s health budget as a share of GDP—3.3%—is two-thirds higher than in 2015.

Across Latin America and the Caribbean, public and private health spending is about 8.5% of gdp, compared with an average of 12.5% in the oecd, a club of mainly rich countries. The region has recent experience of fighting outbreaks of infectious disease, including cholera in 1991, swine flu in 2009 and the Zika virus in 2016.

Most countries have competent health-care technocrats. The Pan American Health Organisation, the world’s oldest international health body, founded in 1902, helps governments learn from each other.

But Latin America’s safety net has shortcomings, which covid-19 will expose.

Fragmentation, red tape and corruption will enfeeble its response in some areas. Government budgets support world-class urban hospitals and crumbling rural clinics. In several countries, bare-bones publicly financed health care operates alongside plush private provision for the rich. The course of the pandemic may sharpen grievances about inequality that drew millions of protesters onto the streets of many Latin American countries late last year.

The delay in the arrival of the pandemic from Europe and Asia has given the region valuable time, which some governments have taken advantage of. El Salvador announced a national lockdown when it had three covid-19 cases. With 15 confirmed cases on March 12th, Ecuador suspended large events and shut schools a day later. Peru’s government locked down the country on March 15th. On the same day, with 75 confirmed cases, Chile announced the closure of schools and universities.

Other countries have responded more sluggishly. In Brazil governors and mayors have stopped commerce even as the country’s president underplays the crisis. Mexico, keen to protect the incomes of informal workers, merely exhorts its citizens to stay home. Nicaragua is in a class of its own. Schools remain open. European sports channels are in talks to broadcast games from the country’s football league, which plays on. This month the authoritarian government sponsored bikini pageants and food festivals.

Countries that took early action have no doubt slowed the disease’s progress, but the region’s relatively low numbers of confirmed cases are deceptive. As Ecuador counted 98 deaths nationwide on April 1st, Guayaquil’s civil registry was processing 40 death certificates per day more than usual.

Brazil counted 2,369 hospitalisations of covid-19 patients in the four weeks to April 4th. But in the same period the health ministry reported 18,000 more admissions for respiratory illnesses than during the same period last year. Chile’s relatively high number of confirmed cases—5,116 as The Economist went to press—reflects a high level of testing.

Young, but not fit

The resilience of Latin America’s health systems depends partly on whether its young population will need less care than ageing Europe’s citizens. But its youth are not as healthy as Europe’s.

The “monstrous burden” among young Mexicans of diabetes, hypertension and obesity—all of which could worsen covid-19 cases—may wipe out the age advantage over countries like Italy, says Hugo López-Gatell, Mexico’s coronavirus tsar. In Rio de Janeiro a quarter of coronavirus-positive patients in hospital have been under 40.

Health systems are racing to equip themselves for caseloads on a European scale. As in other regions they are building field hospitals and graduating medical students early. Chile has suspended its requirement that migrant doctors requalify. In Colombia private health insurers, which provide most health care, have been agile.

They offer online consultations and have rolled out home delivery of remedies to non-covid-19 patients, largely through Rappi, an app-based service. This relieves pressure on the health system. Peru’s president, Martín Vizcarra, set up a central command to co-ordinate management of the pandemic and plan long-term reforms.

Peru’s Congress has given the government powers for 45 days to issue pandemic-related decrees. Chile’s president, Sebastián Piñera, has invoked a constitutional clause that lets him spend money equivalent to 2% of the budget to deal with a calamity. Mexico’s army has taken charge of procurement, logistics and 35 hospitals.

But such urgency will not compensate for long-standing failings.

Several countries, including Mexico, Argentina and Ecuador, have fragmented public-health systems, which leads to inefficiency and confusion among patients. Mexico, for instance, has separate federally run hospital networks for private-sector workers, government workers, veterans, oil workers and another for workers in the informal economy and the poor. In Peru hospitals are run by the health ministry, social-security institutes, regional governments, the police and the army.

Corruption and mismanagement make things worse. Ecuador’s social-security agency paid $12 per mask for face-masks, which led to the sacking of a senior official. Directors of some public hospitals in Colombia have stolen millions of dollars and starved their organisations of investment. Rural areas are underserved because the private sector sees little prospect of profit there and neither national nor local governments have stepped in.

Such failings have left the region short of ventilators and intensive-care beds (see chart). Tumaco, a Colombian town with 250,000 people, has one public hospital and no ventilators. In late March Ecuador’s government commandeered two ventilators from Lago Agrio, in northern Amazonia, for use in a regional capital, but failed to deliver 1,400 testing kits it had promised. A baby with covid-19 died.

One disadvantage caused by the late arrival of the pandemic is that Latin America was slow to join the international scramble for N95 masks and ventilators. Many governments, including those in the European Union, have banned their export.

“We have suffered many difficulties finding [ventilators], to the degree that we have had to obtain them in small quantities,” says Mexico’s Mr López-Gatell. Brazil and Mexico, which have large manufacturing sectors, are repurposing factories to repair old machines and test new ones.

Scarcity raises the risk that the poor will suffer far more from the pandemic than the rich. Brazil’s private health system, which serves mainly the richest quarter of the population, has half the ventilators and intensive-care beds. Perhaps made sensitive by last year’s protests, some governments are taking steps to narrow the gap.

In Chile, Mexico and Colombia they have declared states of emergency that give them the power to tell private hospitals how to allocate beds. Argentina’s health minister backed off from his claim that “all beds are public, whether they are public or private.” But he has taken control of all purchases of equipment. A debate on the public takeover of private hospitals “is coming to Latin America pretty soon”, says Mr Gaviria.

In such expedients may lie the seeds of change. Every government in the region is learning a hard lesson about the value of investing in public health. The problem is, covid-19 is destroying the prosperity that would help make it happen.

China should not count its successes too soon

The economy may no longer be in freefall but it faces a demand shock as well as other headwinds

George Magnus

A worker assists travelers wearing face masks and suits to protect against the spread of new coronavirus at Wuhan Tianhe International Airport in Wuhan in central China's Hubei Province, Wednesday, April 8, 2020. Within hours of China lifting an 11-week lockdown on the central city of Wuhan early Wednesday, tens of thousands people had left the city by train and plane alone, according to local media reports. (AP Photo/Ng Han Guan)
Travellers wear protective gear to prevent the spread of coronavirus at Wuhan Tianhe International Airport on Wednesday, hours after the city's lockdown was lifted © Ng Han Guan/AP

Wuhan’s 76-day lockdown has been lifted at last. For China’s leaders, it marked the final stage of what President Xi Jinping had called the “people’s war against the coronavirus”, in which he himself played a decisive role.

Success has allowed the government to restart the economy and rewrite the pandemic narrative from a tale of its own mis-steps to one highlighting its global leadership and governance role — in a marked contrast to the “incompetence” of the US.

Yet, the story is by no means complete, and real success depends critically on outcomes in epidemiology and economics, over which dark clouds will continue to linger for some time.

We may never know the true number of Covid infections and fatalities in China. The criteria for confirmed cases have changed several times, and there has been speculation about much higher estimates. State media report only a few new cases involving people returning from overseas. That certainly suits the political script. The government’s governance role in battling the virus and in restarting the economy are now inextricably linked.

As factories, offices and some shops reopen, and public transportation resumes, there are unofficial reports of local transmissions, and of continuing or new restrictions on residential compounds. But none indicate any surge in new hospital admissions or an imminent “second wave” of infections. So much the better if this persists.

The economy has certainly bottomed, following a significant contraction early in the year. Production, especially among state enterprises and in heavy industry, has now risen back to January levels.

The drift back to work and resumption of transportation has eased the supply choke points in the economy.

Even so, demand remains very soft.

Retail footfall, city subway systems, property transactions, many service sectors and consumer demand are all improving, but from an extremely weak baseline.

The official urban unemployment rate of 6.2 per cent in February understates the true level of joblessness and doesn’t include China’s 280m migrant worker population, many of whom haven’t returned to work yet. Close to 500,000 small and medium-sized businesses, the heart of the economy, which were sidelined politically before the crisis, are reported to have failed in the first quarter alone.

The hope that exports might come to the rescue now seems forlorn. The pandemic has sunk demand into a crater around the world, with no early or significant economic recovery in sight.

China’s own economy may no longer be in freefall, but it still faces a demand shock as well as more familiar structural headwinds, including over-indebtedness that has so far kept the government’s bridge finance and stimulus programmes restrained. At little more than 2.5 per cent of gross domestic product, they pale against the quasi-fiscal credit programmes adopted in 2008-09 and 2014-15 or current western policy announcements. Credit expansion, even if unwise, may yet be unleashed again with adverse consequences for the renminbi.

Yet, for the moment, China is able to use its self-proclaimed success to step up further into a global leadership role in health and global governance. Expertise in treating disease, producing life-saving medical equipment and manufacturing medicines has enabled it to show it is a provider of crucial public goods.

The US, UK, Italy, Iran and several EU countries are among the recipients of medical supplies shipped in from China. Beijing has also organised crisis response initiatives among member states of the Shanghai Co-operation Organisation, the 17+1 countries of central and eastern Europe, some African countries, and the Pacific islands. It continues to have a strong influence in the World Health Organization, which does not recognise Taiwan as a sovereign state.

Recently, the government also sought — but failed as a result of American pressure — to lead the World Intellectual Property Organisation. It is trying to convince the UN to adopt facial recognition and surveillance standards and persuade it to endorse changes to the architecture and standards underpinning the internet so that state-run service providers have more control. Earlier this month, China was appointed to a seat on the panel in the UN Human Rights Commission that oversees human rights governance, freedom of speech and arbitrary detention.

The irony of many of these initiatives may be self-evident. But it is important to see how China is trying to seize the moment to raise its global political profile. Ultimately, that profile is likely to be determined by whether China has the capacity and will to become a global leader that others follow willingly, without sanction. It will also depend on the US’s own behaviour on the world stage.

In the meantime, China is hostage to confirmation that the outbreak at home is reverting to a nuisance from a crisis. It must also show that economic growth can overcome the malaise in demand, employment and the private sector, without stressing the financial system and nation’s debt capacity even more.

There is a long way to go before success can be proclaimed, if at all.

The writer is author of ‘Red Flags: Why Xi’s China is in Jeopardy’, and an associate at Oxford university’s China Centre

Finally, It Matters What The Fed Can And Can’t Print

by John Rubino

Sound money advocates have been proclaiming that “the Fed can’t print gold” pretty much since the end of the last gold standard. But no one outside that little echo chamber paid attention, fixating instead on what the Fed could print: trillions of dollars that were perfectly fine for buying anything a creditworthy person could want.

To paraphrase the old Saturday Night Live skit, “Fiat currency has been berry berry good to me.”

But the reaction of the worlds’ central banks to this latest crisis – effectively unlimited currency creation to buy up/bail out everything everywhere – seems to have rattled people who in the past have viewed aggressively-easy money as an unequivocally good thing.

‘The Fed can’t print gold’: How the yellow metal could hit $3,000 — 50% above the current record
Bank of America Corp. raised its 18-month gold-price target to US$3,000 an ounce — more than 50 per cent above the existing price record — in a report titled “The Fed can’t print gold.” 
The bank increased its target from US$2,000 previously, as policy makers across the globe unleash vast amounts of fiscal and monetary stimulus to help shore up economies hurt by the coronavirus. 
“As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure,” analysts including Michael Widmer and Francisco Blanch said in the report. “Investors will aim for gold.” 
BofA expects bullion to average US$1,695 an ounce this year and US$2,063 in 2021.  
The record of US$1,921.17 was set in September 2011. Spot prices traded around US$1,678 on Tuesday and are up 11 per cent this year. 
To be sure, a strong dollar, reduced financial market volatility, and lower jewelry demand in India and China could remain headwinds for gold, BofA said. 
“But beyond traditional gold supply and demand fundamentals, financial repression is back on an extraordinary scale,” the report said.

This sentiment shift is a potentially big deal for at least two reasons:

1) The vast majority of investors are amateurs, which is to be expected. Very few people know how to repair cars, diagnose illnesses, or build houses.

Instead, we rely on trusted experts to do those things for us. In the world of money, the experts whom most people trust have traditionally ignored or trashed precious metals because they don’t pay dividends or otherwise generate cash flow. This is a deal-breaker in normal times for conventional money managers.

But now those same money managers, spooked by the new normal of soaring debt and unpredictable volatility, are tiptoeing into safe havens like precious metals. Or, in BofA’s case, jumping in with both feet. That means the 99% of investors who either didn’t know gold existed or were steered away from it by their financial advisors are now being actively told to buy it.

2) The amounts of money in play absolutely dwarf the amount of available metal and related derivatives like mining stocks.

While there is admittedly a fair bit of gold sitting in vaults around the world, 99% of it is not for sale because central banks need it to back their currencies (and are in fact net buyers now), while owners of jewelry tend to keep their family heirlooms regardless what the spot price of bullion does.

Meanwhile, the silver market is almost too small to notice in the context of asset classes like stocks and bonds. You could probably tuck all the available silver bullion into the space created by the coming collapse of shale oil junk bonds, with room left over for all the pure-play silver miners.

The conclusion? A ton of “generalist” money is about to start chasing a relatively tiny supply of monetary metals and related stocks. That’s good for gold but great for silver, which quadrupled the last time it came into favor:

silver in the 2000s Fed can't print gold

And that was with the vast majority of financial advisors ignoring it.

This time around, with precious metals suddenly trendy, the action could be life-changing.

Fed caught in political crosshairs over bailout role

US central bank under pressure to fairly disburse trillions of dollars to companies and municipalities

James Politi in Washington

Polls show Jay Powell, the Fed chair, is entering the crisis in relatively good standing with most Americans © REUTERS

The Federal Reserve is facing heavy pressure from lawmakers and watchdogs to fairly implement a rescue plan that could deliver up to $4tn in financial support for corporate America, as the US central bank treads into the politically fraught terrain of crisis-era fiscal policy.

Since the coronavirus pandemic exploded last month, shutting down many parts of the US economy and leaving at least 26m people unemployed, the Fed rushed to ease monetary policy and calm investors by slashing interest rates, ramping up asset purchases, and set up lending facilities to stressed corners of the financial markets.

But the US central bank was also tasked by Congress and the White House to manage the main government aid plan for distressed companies in last month’s stimulus bill, placing it at the heart of the fiscal response in a way that exceeds its role in the 2008 financial crisis and raises the risk of a political backlash for the central bank. 

“If the economy emerges, post Covid-19, with a lot more large companies alive and healthy and potentially even stronger, whereas a lot of the smaller, more innovative companies have been wiped away, I think it’ll be hard for the Fed to escape some of the blame,” said Kathryn Judge, a professor at Columbia University Law School.

In recent weeks, the Fed has begun work on the stimulus plan, which allows it to use $454bn in equity from the US Treasury to extend loans and buy debt from companies and local authorities during the crisis.

The money can be leveraged as much as 10 times the equity, bringing up to $4tn in liquidity to the economy if it is fully used, and Fed officials have pledged to perform their role in as luminous and impartial a way as possible.

“Considering the speed and scale of damage caused by the virus outbreak, we are making all efforts to implement these facilities at maximum speed,” Daleep Singh, executive vice-president at the New York Fed, said last week.

“At the same time, though, we are moving with maximum care, drawing upon all of the lessons learned since 2008.”

Jay Powell, the Fed chair, is entering the crisis in relatively good standing with most Americans, even after three years of persistent criticism from Donald Trump, the US president.

According to a Gallup poll released this week, 58 per cent of Americans have a “great deal” or a “fair amount” of confidence that he will do the right thing for the economy, the best score in that survey for any Fed chair since Alan Greenspan in 2005.

Critics have already warned the Fed that it risks falling short. Bharat Ramamurti, a former aide to Elizabeth Warren, Massachusetts senator, who was chosen to be a member of a congressional oversight panel for the bailout funds, has been pressing the central bank to offer concrete details or their loans and urged strict enforcement of the conditions on that assistance.

These include maintaining workers on payroll, limiting executive compensation, and avoiding share buybacks and dividend payments.

“If we know which companies are getting loans from the Fed, then we can assess what the companies do thereafter and are they acting in the best interest of American families,” Mr Ramamurti told the Financial Times.

On Thursday, the Fed said it would supply the identity of companies receiving federal aid through its facilities on a monthly basis, along with other information including amounts borrowed, interest charged, and overall “costs, revenues and fees” for each facility.

Mr Ramamurti said on Twitter the move was a “significant victory for the public” and a “very good step” but the panel would “need to look carefully at the first report to see if other information is needed”.

French Hill, a Republican lawmaker from Arkansas who was also selected to be a member of the oversight panel, said the Treasury and Fed were doing the best they could under “incredible pressure” but acknowledged they would both face some criticism given the speed of implementation.

The panel’s “mission”, Mr Hill said, was to check the Fed was respecting the goals of Congress to ensure the “wellbeing of the population and financial stability”.

Some of the pitfalls of providing federal aid in the coronavirus era have already emerged from this month’s disbursement by the Treasury and the Small Business Administration of a $350bn loan programme for troubled small businesses, which ran out of funds within two weeks and has already had to be replenished.

Revelations that some public companies had managed to qualify for the support, crowding out the intended beneficiaries, like small restaurants and dry cleaners, was met with a harsh backlash on Capitol Hill — a scenario that the Fed might want to avoid.

The US central bank has some ties to the SBA plan in that it has agreed to backstop some of the loans made by the banks.

More importantly, it has established a “Main Street lending programme” as part of the stimulus bill that is designed specifically to help businesses with up to $2.5bn in annual revenues or up to 10,000 employees — and which is expected to be even more heavily scrutinised.

The Fed does not expect the Main Street programme — which has $600bn in firepower, based on $75bn of Treasury equity — to run out of money as quickly as the SBA programme did, which should dampen some concern about limited access to the facility.

But Prof Judge said that its reliance on banks to screen eligibility for the loans could still tilt lending towards the established customers of financial institutions.

“There are a lot of reasons to be worried that the tools the Fed has available are just not the optimal tools to get money to the right companies, on the right terms, for this crisis,” she said.

In its foray into implementing fiscal policy, the Fed is trying to ensure that it is being as neutral as possible. To avoid any perception that it is picking winners and losers in the economy, it has set detailed eligibility criteria for each of its facilities under the stimulus legislation.

And as it takes on more potential credit risk than it has in the past, including through the purchase of debt that was recently downgraded to junk, it will require more equity to cover losses.

Even so, there are big political and lobbying battles occurring over which sectors and companies will benefit from the aid.This week, as oil prices plunged, Republicans demanded some changes to the terms of the Fed’s credit facilities to make it easier for energy groups to participate, while Democrats protested against any rescue for fossil fuel producers — ensuring that one side or the other will be disappointed.

Meanwhile, Democrats are asking the Fed to modify the eligibility criteria for its municipal liquidity facility, which the central bank said would lend only to states, cities with over 1m residents, and counties with more than 2m residents.

That attracted complaints for cutting out middle-sized cities such as Baltimore, Maryland, and Toledo, Ohio, and large counties like Westchester in the New York suburbs.

Chris Sperry, a portfolio manager for Franklin Templeton Fixed Income’s municipal bond group said making these determinations should not be up to the Fed.

“This is a very political arena,” he said. “How much does the Fed want to be involved in public and municipal finance? It is a dangerous road.”

Additional reporting by Colby Smith in New York