Like a ton of bricks

Is investors’ love affair with commercial property ending?

After covid-19, the investment world will become more discriminating

The second week of March was a heartbreaking one for Will Beckett. The boss of Hawksmoor, a chain of steakhouses that employs 700 workers in Britain, had been days away from opening his first New York outpost. Instead government-imposed lockdowns forced him to close all his restaurants down.

The City types that usually queue for its sizzling cuts were forced to go without. So too were Mr Beckett’s landlords, after he told them he could not afford to pay rent for the second quarter. Most of his peers, he says, have also yet to square the bill. Restaurateurs are likely to miss their payments for the third quarter too.

Activity is gradually restarting. On June 23rd Boris Johnson, Britain’s prime minister, said he would allow restaurants to re-open on July 4th. A moratorium on repossessions, introduced in March, has been extended to September. Yet social distancing and warier, cash-strapped diners will squeeze eateries’ margins. Jonathan Downey, who runs street-food markets in London, says the hospitality industry risks “rent apocalypse”.

Most people probably have more sympathy for chefs and waiters than for landlords. But many do not realise that payments made to commercial landlords are increasingly channelled towards their own pension pots or insurance claims.

The global stock of investible commercial property—hotels, shops, offices and warehouses—has quadrupled since 2000, to $32trn (see chart 1). More than a third is owned by institutional investors, which piled in, lured by lucrative, solid returns.

Covid-19 has upended the impression of solidity. Most immediately, it has severely impaired tenants’ ability to pay rent. It also raises questions about where shopping, work or leisure will happen once the crisis abates.

Both are likely to prompt investors to become more discriminating. Some institutions may shift their funds away from riskier properties; other investors, meanwhile, might hunt for bargains, or seek to repurpose unfashionable stock.

The infatuation with commercial property began in earnest after the global financial crisis of 2007-09. Interest rates were cut to almost zero across much of the rich world, making it harder to generate the safe cash flows that pension funds and insurers need to meet future liabilities. “Core” property—often in desirable places and needing little refurbishment—typically produced secure annual returns in the high single digits to low teens, mostly in the form of contractual, often inflation-adjusted, rent payments (see chart 2).

Buying property allows investors to park vast sums of money—from tens of millions to billions of dollars—which they can forget about for years (commercial leases often last a decade or more). And the returns have been less volatile in crises than those from public equities and commodities.

As a result both the numbers of institutional investors buying up property and the amounts they have allocated to it have risen since 2010 (see chart 3). A chunk is channelled through private property funds, which have raised $1.6trn since 2008, according to Private Equity Real Estate, a publication.

All together, institutions hold about $6trn worth of assets privately, and $5trn through listed vehicles. Property is typically financed by helpings of debt, which accounts for just under half of the market’s value in America.

Investors’ appetite has been met by a growing supply of assets. Since 2000, businesses ranging from burger chains to banks have spun out trillions of dollars of property they used to own to free up cash, often leasing it back immediately after divesting.

Worldwide, offices and shops account for 61% of assets, though the share of commercial housing (ie, student housing and condominiums) and logistics assets has been rising.

Shop till you drop

By the start of this year there were signs of froth. Both offices and industrial properties (warehouses, chiefly) reached record prices at the turn of 2020. Retail-property prices had already peaked in 2018. Rent growth, however, had started to level off across most sectors. All this depressed yields, and returns had started to flag.

Then the pandemic hit. As investors panicked, stockmarkets tumbled and property markets froze. Transaction volumes in May were down by about a third in the West and two-fifths in Asia, according to Real Capital Analytics, a data firm. The proportion of offers that fell through before completion doubled in Europe and rose sevenfold in America.

Indices tracking listed trusts that invest in commercial property (dubbed reits) cratered in March. Part of that might have reflected an indiscriminate sell-off of shares by investors rather than an ebbing taste for property. But benchmarks have recovered only about half their losses.

Covid-19 jolts investors out of their complacency in two ways. First, swarms of tenants have simply stopped paying rent as the economy has reeled; the extent to which losses will persist is especially uncertain. Second, it may speed up long-term shifts within the sector: from shops, say, towards warehouses. Some types of property could become less bankable.

Start with delinquency. As lockdowns shuttered shops and businesses, rent collections collapsed. Less than half of all tenants in Britain paid rent on time at the end of March; a quarter of it was still due seven weeks later, says Remit Consulting, a research firm. Hotels have been worst hit: with borders closed and travel restricted, average occupancy fell from 70% before the pandemic to a low of 15% in early April.

In America, average revenue per room shrank by 84%, to $16 per night, in April. Stand-alone shops and shopping malls have also suffered. Collection rates have fallen below 50% on both sides of the Atlantic.

Offices have proved sturdier. Firms that rent out co-working spaces on short-term leases have suffered. Other tenants, bound by decades-long leases, have continued to pay. Still, collection rates range between 57% in Britain and 90% in America. Late or missed rent payments in the double digits are hardly normal.

The resulting lost rental income is likely to have passed through to missed mortgage payments.

Many banks report losses with a lag and with limited detail, but delinquency rates on commercial-mortgage-backed securities (cmbs)—bundles of loans sold on capital markets—provide a barometer.

In America this month they exceeded levels seen during the financial crisis (see chart 4). A fifth of debt payments on shopping properties are late; a quarter of those due on “lodgings”—including student housing, vacant since universities closed—have also been skipped.

As activity resumes, properties are adapting, at some capital expense. Hotels are implementing contactless check-in, automatic doors and new cleaning routines. Offices are introducing temperature checks and reducing pinch points at lifts. Brian Kingston, who runs the property arm of Brookfield, a private-equity firm, says it is reorganising mall layouts and car parks to make kerbside pickup easier.

But fresh outbreaks, or lingering fears of infection, could throttle the return to normality. Cash-poor and fearful, companies may limit business travel. Households may shun far-flung holidays and perhaps even shopping trips at home. That is bad news for hotels, restaurants and shops. Erin Stafford of dbrs Morningstar, a rating agency, reckons that, short of a fast recovery, half of America’s independent restaurants may go under.

Such effects will be compounded as the vast support provided by governments is rolled back.

Since March the authorities have propped up commercial tenants by paying employees’ wages, topping up business cash reserves, legislating against eviction, backstopping banks and reducing credit constraints.

Most measures are set to expire within months. Coface, a trade-credit insurer, expects insolvencies to jump by a third worldwide by 2021. Landlords could find that rental income dries up just as lenders, tolerant thus far, lose patience. Without progress on a vaccine or a treatment over the next three to six months, says Michael Van Konynenburg of Eastdil Secured, a bank, “we’ll start to see more enforcement actions”.

Bricks and mortar

Further ahead, covid-19 will also make some types of commercial property less of a safe bet than others, by accelerating trends that were visible even before the coronavirus began to spread. The most obvious is the rise of online shopping. Since February the rich world has seen a surge in e-commerce activity.

Many shoppers may choose to stick with the speed and convenience of click-and-deliver. In 2019 a record 9,300 bricks-and-mortar stores closed in America; Coresight Research, a data firm, says 15,000 could fold this year. JCPenney, a century-old department-store chain, went bust last month.

Shopping malls, particularly those in the sticks, could be in trouble. On top of the reduced rent caused by shop closures, the vacating of department stores, which often act as “anchor” tenants, may give other stores the right to pay lower rents, or even to cancel lease agreements, says Aditya Sanghvi of McKinsey, a consultancy. A third of America’s 1,100 malls could end up being demolished. On June 23rd Intu, which owns shopping centres in Britain, appointed administrators.

The pandemic’s effect on office space is less clear. Many workers may find that they quite like working from their bedrooms or kitchens. Others say they miss the camaraderie of the office. Social distancing may also force firms to spread out more, reversing a trend that saw office space per employee fall by half in a decade.

If the net effect were a reduction in rented space, it could cause havoc. Victor Calanog of Moody’s, a rating agency, calculates that if tenants in New York gave up even 10% of their space over the next five years, it could result in a halving of rents sought on vacant properties.

Meanwhile, the shift to remote shopping and working presents investment opportunities. Storage and distribution facilities remain geared towards industrial use rather than pick-and-pack. Brian Chinappi of Actis, a London-based private-equity firm, says the crisis has made it even hungrier for data centres, which it is now building in Asia and Africa.

The writing on the wall

Assessing the extent of potential losses from the crisis is hard. Britain’s financial watchdog thinks uncertainty on values is so strong that it has forced listed funds to suspend redemptions. Analysts canvassed by The Economist reckon property values will fall by less than 20% overall this year, and rents by 5-10%.

That compares with falls of 25% and 10-20%, respectively, in 2008-09. But a lot depends on how long rent suspensions last. msci, an index provider, estimates that assets subject to a six-month rent holiday and a recession could lose 37% of their worth. reit prices suggest retail properties could have further to fall.

Booking losses

Figuring out who will bear those losses is even tricker. Laws differ as to whether creditors or equity holders should get preferred treatment, with the former favoured in Europe and the latter better protected in America. Most important, ownership of property assets is “a big, complicated web” that cannot easily be untangled by outsiders, says a consultant.

Property vehicles are often owned by large asset managers that aggregate pension-fund money from all over the world. Despite improvements in disclosures, private funds remain opaque.

Lenders are not always best-in-class either. “Try getting a French bank to reveal its property-type breakdown for commercial real-estate lending,” says one analyst.

What seems clear is that banks are in a sounder position than during the financial crisis. Loan-to-value ratios were below 60% at the end of 2019, compared with 70% in 2007, so there is more equity to absorb drops in values, says Richard Bloxam of jll, a property consultancy. Banks’ capital buffers are bigger.

In America cmbss can catalyse credit crunches, because property lenders often use them as collateral to finance more loans. But these account for 15% of total property debt, down from over 50% in 2007. And they have held up well so far, thanks to purchases by the Federal Reserve. (The Fed’s programme, which excludes newly issued cmbss, expires on September 30th.)

A more diverse lending universe, though, means more entities are exposed to potential losses—including institutional investors, which have piled $235bn into specialist private property-debt funds since 2008. Some funds are already struggling to repay the short-term debt they have raised against long-dated assets. Bigger shocks may well occur when batches of loans mature. Britain faces a £43bn ($53bn) commercial-property refinancing wall in 2020-21; America’s is worth $2trn over the next five years.

Such losses notwithstanding, investors’ love affair with commercial property is unlikely to be at an end. Interest rates in the rich world are close to zero, if not below it, and going nowhere. The spread between real-estate and government-bond yields is still alluring. Private-equity firms’ mountains of dry powder—now worth a third of assets under management, the highest since 2010—will put a floor under values. But those who once blindly piled in are likely to think twice.

The result could be a more discerning investment approach. Institutional investors could become more cautious, favouring targets like housing blocks or prime offices that provide long-term secure income; more money seems to be chasing a shrinking pool of “defensive” assets, which could push prices up further and dampen yields. Some will hedge their bets.

Alisa Mall of the Carnegie Corporation of New York, a $3.5bn endowment with a 10.5% allocation to property, says it wants to add generalist managers who can invest across sectors and geographies to its portfolio of “sharpshooter” specialists.

Yet others, mostly private real-estate funds, hope to swoop on bargains (most public vehicles are trading below their underlying asset values). Craig Duffy of glp, a private-equity firm based in Singapore with a vast portfolio of warehouses, says the firm has $7bn of dry powder to deploy, and hopes to raise another $8bn-9bn by the end of 2020.

Some will focus on debt at a time when liquidity to stretched borrowers comes at a premium: Skardon Baker of Apollo, a firm that invests in distressed assets, says its European opportunistic fund has deployed €500m in the past 12 weeks.

The big winners will probably be giant firms like Brookfield, which closed a $15bn fund last year, and Blackstone, which raised a record $20.5bn vehicle a few months later. They have war-chests allowing them to command price discounts by buying bundles of assets at once. And they are among the few firms with the development skills needed to turn buildings round.

Ever greater demand for their services may allow them to charge hefty fees, on ever bigger sums. Pension funds and insurers are becoming warier of commercial property. But for private-equity barons it remains a giant moneymaker.

Iron ore outstrips gold as year’s best-performing major commodity

Latest data suggest China could produce a record 1bn-plus tonnes of steel this year

Neil Hume, Natural Resources Editor

The price of the rust-coloured raw material has risen almost 21% in 2020

The price of the rust-coloured raw material has risen almost 21% in 2020 © Ian Waldie/Bloomberg

Iron ore has outpaced gold to rank as the best-performing major commodity this year, as a rebounding China sucks in vast amounts of the key steelmaking ingredient from mines in Australia and Brazil.

The price of the rust-coloured raw material has risen almost 21 per cent in 2020, just ahead of gold, which is up 19 per cent as central banks have introduced huge stimulus programmes to try to quell the coronavirus crisis.

Such activities have pushed down yields on trillions of dollars of fixed-income assets, burnishing the relative appeal of gold, which yields nothing.Meantime, signs that China, the world’s biggest producer of steel, is mounting a solid recovery have propelled iron ore prices, which rose above $112 a tonne on Wednesday, according to S&P Global Platts, up 9 per cent over the past month.

As part of plans to reinvigorate its economy, Beijing recently announced plans to boost spending on infrastructure through an increase in local government borrowing.

A state-backed rally in Chinese equity markets has also played a big role, as investors looking for China-growth proxies have piled into iron ore derivatives.

Benchmark iron ore price soars on supply disruptions and China demand

Tyler Broda, analyst at RBC Capital Markets, said long-term demand trends for steel remained uncertain, given China’s increasing dependence on debt to fund new investment.

But the shorter-term outlook was bright, he said, because of policymakers’ clear focus on safeguarding jobs.

Data released this week showed China imported more than 100m tonnes of iron ore in June, up from 87m in May.

That was the highest monthly figure since October 2017.It also means that China’s steel production in June is likely to have surpassed May’s total of 92.3m tonnes.

This would put the country on course to produce a record 1bn-plus tonnes this year, compared with just 750m tonnes for the rest of the world.

Analysts said the sustainability of Chinese demand would be the main factor determining the direction of prices in the second half of the year. But supply disruptions could also have an impact, and not just in Brazil where Covid-19 is still spreading rapidly.

In Australia, big operations that were running at full strength in June are planning maintenance work on rail and port facilities.

Shipbroker Braemar ACM noted that last month it saw record levels of shipments from Port Hedland, the world’s biggest iron ore loading facility, in the Pilbara region of Western Australia.

But so far this month, it said, Australian iron ore listings had averaged slightly more than 2.2m tonnes a day, about 18 per cent lower than in June.

Brazilian exports have also stumbled, with shipments down 23 per cent week on week to 5.3m tonnes in the seven days to July 12, according to UBS.

The rally in prices comes as some of the world’s biggest iron ore producers are due to update the market on their production and shipments.

UBS estimates Rio Tinto, which is due to issue a production report on Thursday, shipped 88.1m tonnes in the three months to the end of June, up more than one-fifth from the preceding quarter.

At current prices, analysts say the company could generate more than $10bn in free cash flow this year — potentially paving the way for a bumper dividend alongside half-year results in August.

“The persistent strength in Chinese steel output, combined with lacklustre volume growth in the seaborne market, have led us to upgrade prices for the remainder of 2020,” said Dominic O’Kane, analyst at JPMorgan.

“Higher Brazil exports should dampen some of the tension, but we now expect prices to hover over $90 a tonne for the next two quarters.”

Beijing’s Big Bet in Hong Kong

The security law over Hong Kong raises the question of whether Beijing passed it from a position of strength or weakness.

By: Phillip Orchard

When Beijing retook control of Hong Kong from the British 23 years ago, the understanding was that Hong Kong would maintain a high degree of autonomy under the “one country, two systems” framework for a period of 50 years. On Tuesday, the Communist Party of China declared that that time was up. And it did so with striking ease. There was no bloody Tiananmen-style showdown between the army and pro-democracy protesters; no tanks inside Victoria Park.

Beijing merely had its rubber-stamp legislature unanimously approve a sweeping national security law – one first announced just a month ago and never released for public comment – bypassing the Hong Kong legislature in violation of the city’s mini-constitution, known as the Basic Law.

The move presages a dramatic deterioration of political freedoms in Hong Kong. The security law, which will be enforced by separate courts and security forces effectively controlled by Beijing, is conspicuously broad, meaning things like peaceful pro-democracy protests, anti-CPC editorials and school curricula that don’t toe the party line could realistically be defined as “separatism, subversion, terrorism and foreign interference.”

At minimum, uncertainty about how the law will be enforced will have a chilling effect on civil society in Hong Kong. Activists are already disbanding their organizations and bleaching their Twitter accounts. If China starts making full use of its powers, there’s not much anyone can do to stop it.

China, of course, could’ve done this years ago. The main reason it didn’t is that it benefits enormously from Hong Kong’s reputation as a stable, rule-of-law oriented financial hub – a reputation earned through the city’s autonomy and political freedoms. The national security law will undoubtedly undermine Hong Kong’s standing and capacity to facilitate the mainland’s financial needs, posing enormous risks to the already-teetering Chinese economy.

But Beijing is betting heavily on its ability to mitigate risks and walk the line between eliminating political threats from the city without burning the whole system down. Already, there are some signs that the conventional wisdom is wrong, that the Hong Kong business community has been bluffing. And if it’s wrong – if squeamish foreign firms and banks flee, or if the move accelerates China’s financial decoupling with the West – the CPC appears to be willing to say: so be it.

Still Indispensable

Hong Kong’s economic importance to the mainland has steadily diminished since China began to open and reform its economy. In 1993, Hong Kong’s economy was equal to 27 percent of China’s gross domestic product. Today, it's less than 3 percent. Last year, the GDP of Shenzhen province alone surpassed that of Hong Kong. China is hardly an easy place to do business, but thousands of foreign firms and investors in the country have found ways to get fabulously wealthy without Hong Kong anyway.

Yet, Hong Kong is still indispensable in several ways, including as a transshipment hub for Chinese exports. Perhaps its most important role is as the mainland’s foremost gateway for foreign investment, as well as a place for mainland firms to raise dollar-denominated funding critical for expanding operations abroad. More than half of foreign direct investment into China in 2018 was routed through Hong Kong, and nearly half of projects on the mainland funded by overseas investment were tied to Hong Kong interests.

The flows go both ways: The city facilitated more than 55 percent of outbound Chinese FDI in 2018, including the bulk of funding for Chinese Belt and Road Initiative projects. The same year, it was the largest offshore clearing center for yuan, with its banks facilitating a little more than 75 percent of the world’s yuan-denominated payments. Chinese firms on the Hong Kong exchanges now boast a total market capitalization of more than $3.4 trillion, or some 73 percent of the market total. This number will rise if/when the U.S. makes good on its threats to delist Chinese firms from its own exchanges.

Foreign firms have benefitted from Hong Kong's relatively impartial courts, independent regulators and central bank; free flows of information and modern fintech infrastructure made operations far less risky there than on the mainland. Foreign banks were happy to avoid mainland capital controls and party meddling. Chinese mainland firms gorged on access to dollars they couldn’t find as easily elsewhere, with the greenback-pegged Hong Kong dollar perfectly interchangeable in the West and Hong Kong’s sophisticated fintech infrastructure tightly integrated with those in London and New York. Hong Kong also enabled them to avoid some of the regulatory and geopolitical risks that would come with listings on Western exchanges.

Naturally, Beijing had been eager to assert its authority over the city with as light a touch as possible to avoid disrupting the status quo. In lieu of brute force, it tried to rely more on things like cooption of Hong Kong institutions such as the legislature, media and the police and its ability to capture the interests of the city’s business elite to the mainland.

It occasionally reached across the border to snuff out perceived threats to mainland political stability, most famously with its 2015 kidnapping of Hong Kong booksellers and wayward tycoons, but otherwise it largely avoided trying to muzzle the pro-democracy movement altogether. Evidently, Beijing felt that the protests of the past year had made the status quo no longer tenable.

How the Law Could Backfire

The national security law may well address Beijing’s concerns about political threats to mainland stability. But it will be extraordinarily difficult for China to impose the sorts of tight social controls needed to truly squash dissent without harming its financial vitality. Can banks credibly claim to be able to protect the privacy of their clients if and when the CPC – which wants to prevent corrupt mainland figures from using Hong Kong as a haven for their assets – demand access to their books?

Will financial analysts face prosecution if they publish an unflattering assessment of a Chinese state-owned enterprise? Can foreign firms expect a fair shake in court if seeking redress against a Chinese firm with suction among the CPC elite? Will Beijing feel compelled to bring down the great firewall around Hong Kong, cutting off free flows of information that are the lifeblood to the industry? What’s the risk of getting caught between Beijing and rival foreign governments like Washington, which is steadily ramping up pressure of its own over Hong Kong and threatening to deprive figures and institutions that support the law of access to critical U.S.-dominated financial networks?

So far, Hong Kong’s business community has been conspicuously supportive of the law. Even high-profile foreign institutions like the London-based Standard Chartered and HSBC – whose iconic headquarters in the city was designed as a monument of capitalism and has often served as a base for protesters – have thrown their weight behind it. To be sure, some are relieved by the prospect of returning to stability. Some, presumably, have good reason to fear the costs of openly opposing the CPC. Beijing has reportedly warned foreign banks that they’ll lose access to lucrative mainland accounts if they cause a fuss.

Still, Beijing wants to give itself room to apply the law as it sees fit, and is therefore unlikely to carve out explicit exemptions for commercial sectors. This means uncertainty over exactly how Beijing will exercise its power will hang over the business community in Hong Kong indefinitely, regardless of how much it actually decides to use the law. The sense that politically motivated prosecution or even rendition is just a misstep or misunderstanding away won’t vanish even if Beijing tries to exercise restraint. And if seemingly random, politically motivated interpretations do become the norm, foreign banks and firms will increasingly look elsewhere.

According to an AmCham survey released after the law was announced in May, some 40 percent of Hong Kong businesspeople polled said they were already considering pulling up stakes. Sixty percent said their operations would be negatively affected by the new law.
Beijing is going to great lengths to guard against certain risks. For example, Chinese financial regulators for the first time explicitly pledged to support Hong Kong’s currency if the city sees a surge of capital flight. Critically, Chinese money has steadily come to dominate the city, diminishing the risks, if only a little, of a foreign exodus.

It's making halting but notable progress on reforms intended to make foreign institutions more comfortable operating in mainland centers like Shanghai, Shenzhen and Hainan. It’s gaining headway on efforts to reduce the country’s dependence on the dollar by, for example, setting up alternate systems to facilitate cross-border transactions and a digital currency that could facilitate foreign trade without access to dollars. China realizes that it’s still home to the world’s most valuable labor pool, its fastest-growing consumer base, and among its deepest wells of investment capital.

It views the issue as similar to the question of how much longer foreign firms will be willing to depend on Chinese manufacturing and supply chains. So long as there’s money to be made in China, there’s good reason to believe that foreign firms will stomach a lot to keep their slice of the pie.

But China can’t eliminate all the risks of a major hit to Hong Kong’s value as a financial hub.

With the Chinese economy – and, in particular, its banking sector and bevvy of private firms struggling to pay down dollar-denominated debts – already under immense stress thanks to the coronavirus pandemic, the consequences of even a modest hit to Hong Kong’s currency or credibility in foreign finance circles could carry major costs.

This raises the question of whether Beijing is doing this out of weakness or strength.

In other words, is it willingly taking on these risks because it thinks it has succeeded in making them manageable – and, by virtue of its relative success in handling the pandemic, making itself ever-more indispensable to the global economy and ever-more immune to U.S. pressure?

Or because China's internal pressures turn concern about unrest spilling over from Hong Kong to the mainland into an existential fear? Or because it figures financial decoupling from the West and the accompanying capital flight were inevitable? Or merely because the protests have embarrassed Xi Jinping personally to the point where he had to act?

In truth, the answer is probably some mix of all of the above. China is strong and ambitious and yet contending with existential risks on seemingly every front. With Hong Kong, as with so many of its other woes, Beijing is stuck choosing between unsavory options. In these situations, its authoritarian impulse typically prevails. It leans on the only thing it really trusts – its own power – prioritizing control over capitalist efficiency, and figuring out the rest later.


Germany is doomed to lead Europe

The EU’s biggest member is in charge, whether Germans like it or not

WALK INTO any meeting in Brussels and, most likely, a German will be leading it. In the European Commission, Ursula von der Leyen, the former German defence minister, is in charge.

For the next six months, German ministers will be cajoling their peers into signing off legislation as the country takes over the EU’s rotating presidency.

In the European Council, where the bloc’s leaders butt heads, it might technically be Charles Michel, the former prime minister of Belgium, heading it. But it is Angela Merkel—longer in post than the leaders of France, Spain, Italy and Poland combined—who is the undisputed top dog.

The EU’s main response to the covid-19 crisis—a flagship €750bn recovery fund paid for with debt issued collectively by the EU—is based on a plan cooked up in Berlin and Paris. The Germans are running the show.

Usually, German power in Brussels is the political equivalent of dark matter: invisible, difficult to measure and yet everywhere. Now the Germans are stars, shining so bright as to be impossible to ignore.

There was no devious Teutonic plot to grab power. Mrs von der Leyen owes her position to Emmanuel Macron, the French president, rather than patronage from Berlin. (Mr Macron pushed Mrs von der Leyen because he could not bear the thought of Manfred Weber, also a German, getting the job.)

It is not Mrs Merkel’s fault that no French president has won a second term since she came to power, or that most Italian prime ministers fail to complete their first. A quirk of the calendar left Germany holding the rotating presidency. Whether they want it or not, German hands now grip the EU’s levers of power, just as the bloc overhauls itself to cope with the covid-19 crisis.

Being coy on the European stage used to work well for Germany. For obvious historical reasons, Germans do not like being seen to throw their weight around. And the EU’s status quo suited them. A single market let German supply chains whirr effectively and goods flow seamlessly. The euro allowed German exports to soar without the bother of an appreciating currency.

Any downsides were exported to southern Europe. Unemployment in Germany stands at only 3.5%, less than half that of the euro zone as a whole and a quarter of the Spanish figure. From a German perspective, the EU was not broken and did not require fixing.

This happy status quo is now under threat, often from Germany’s own actions. When the EU’s economy lurched to a halt, the European Commission loosened its strict rules on government funding for stricken businesses. But officials did not expect Germany to pledge €1trn for such support—nearly half of the EU’s combined total. As a result, well-run Spanish firms are likely to go under due to lack of state support, while stodgy German competitors are kept alive by German taxpayers, undermining the “fair fight” logic of the single market.

At the same time, Germany’s constitutional court recently aimed a blow at the European Central Bank’s efforts to inject more liquidity into the euro-zone economy, when German judges challenged the bank’s asset-buying programmes. In this sense, German support for mutualised debt might be seen as a polite apology for causing offence.

Saying no to common debt had been a red line for the German establishment. Now, however, a recognition that Germany needs Europe—not just vice versa—dominates thinking in domestic politics. Arguments for the recovery fund, which will see huge increases in German spending on the EU’s budget, are couched in terms of self-interest.

This marks a shift in world-view towards that of Alexander Hamilton, the father of debt mutualisation in the early American republic. During the euro-zone crisis, the debate over bail-outs was steeped in the idea that diligent Germans were bailing out feckless Greeks (rather than the feckless German and French banks who lent them the money in the first place). In a pandemic-induced crisis, there is less blame to go round.

Instead, there is recognition that without some form of transfer between Germany and her struggling neighbours in southern Europe, political misery beckons. The EU is supposed to be a convergence machine, spreading prosperity rather than embedding differences between rich and poor countries. It has not worked that way.

When the euro was introduced at the start of the millennium, Italian GDP per capita was 20% below Germany’s. Now the gap is nearly 40%—a figure that will only widen during the crisis. Italians may question the rationale of membership if their incomes continue to stagnate. It is for this reason that Mrs Merkel frames the recovery fund as a “political instrument against populists”.
Keeping the EU on the road takes on an existential importance now that America, the bedrock of German prosperity in the post-war era, has become an erratic ally. Strengthening the EU’s internal structures, by filling the gaps in its pockmarked constitution, is seen as the best way of protecting it from external threats.

Ideas that were once off-limits, such as the long-winded, politically difficult task of changing the EU’s treaties, are now openly floated by Mrs Merkel. It is, at heart, a conservative radicalism.

Things are allowed to change, but only so that things stay the same—specifically the rich, peaceful lives of German voters.

A still-reluctant hegemon

German leadership in Europe makes people uneasy, particularly Germans. In private, Mrs Merkel used to point out that Germany was unsuited for such a role since the country was itself a mini-EU, its complicated federalism built on delicate compromise.

Nimble decisions were impossible in such circumstances. Anyone relying on Germany to take bold steps would be disappointed, as many were. If this record is to change, now is the time. An institutional conjunction has left Germans calling the shots in Brussels.

Rather than a lame chancellor limping to the end of her 15-year career, Mrs Merkel sits on a pile of political capital, gained from competent handling of the pandemic. Germany has the means to change Europe—if it chooses.

The Road to COVID-19 Enlightenment

We have yet to identify the best explanations for countries’ varying success in controlling the pandemic, which obviously is enormously valuable when designing public-health strategies with potentially huge consequences. But knowledge does not advance just by formulating plausible hypotheses.

Ricardo Hausmann

hausmann86_Malte MuellerGetty Images_coronavirusresearchscience

CAMBRIDGE – Certainty is like a rainbow: wonderful but relatively rare. More often than not, we know that we don’t know. We may seek to remedy this by talking to people who may know what we want to know. But how do we know that they know? If we cannot ascertain whether they actually do know, we must trust them.

Historically, we have bestowed our trust on the basis of science, experience, or divine inspiration. But what if the knowledge we seek does not yet exist, and even science knows that it does not know what is being asked of it?

That is the situation we currently find ourselves in with COVID-19 and the SARS-CoV-2 virus that causes it. Our knowledge of the new coronavirus is rapidly increasing, but utterly inadequate.

We have not yet learned much about how to treat the infected, much less figured out how to make an effective vaccine. We do not even know how to control the pandemic reliably through social-distancing measures.

True, some countries have been remarkably successful in reducing COVID-19 cases and deaths from terrible peaks. The four countries that have so far recorded the highest number of deaths per million inhabitants in a single week are Belgium, Spain, France, and Ireland.

New cases in these countries have now declined by over 95.5% from their respective peaks (and by 99.1% in Ireland’s case), suggesting that their lockdowns actually worked.

And yet, while other countries that introduced legally stricter lockdowns (as measured by the University of Oxford’s Blavatnik School) and reduced mobility more (as measured by Google) avoided early deadly peaks, cases have continued to grow exponentially.

Countries in this category include India, Chile, Peru, Colombia, El Salvador, Kuwait, South Africa, and Saudi Arabia. And another group, including Israel and Albania, have experienced a resumption of exponential growth after they lifted successful lockdowns.

It doesn’t take long to devise many hypotheses – from the mundane to the speculative – to account for these differences. And, obviously, identifying the best explanations for countries’ varying success in controlling the pandemic is enormously valuable when designing public-health strategies with potentially huge consequences.

For example, large households may facilitate intra-family transmission of the virus, while a lack of refrigerators in some countries may force people to go to the market often. The unavailability of running water may prevent frequent hand washing. The public’s willingness to wear masks may vary.

The size of a country’s informal economy, households’ financial capacity to abide by lockdown measures, and the generosity of social transfers may be contributing factors. The seriousness with which lockdown measures are enforced, the level of trust in government, and even features of a country’s national character seem relevant as well.

But knowledge does not advance just by formulating plausible hypotheses. We must find out which ones hold water. And we can shorten the list by applying the nineteenth-century British scientist Thomas Huxley’s dictum that “many a beautiful theory has been killed by an ugly fact.”

To do this, we just need to collect more data and make it available for analysis. In the United States, for example, about 40% of COVID-19 deaths to date apparently are tied to nursing homes. Likewise, a recent study of more than 30 European countries by researchers from Tel Aviv University found a relationship between installed nursing-home capacity and COVID-19 deaths.

These analyses are not rocket science. In fact, if anything, they are extremely crude, because they use national rather than postal-code-level data. Moreover, these studies appeared only after tens of thousands of people had already died from COVID-19.

Rather than being a scientific triumph, therefore, such findings illustrate how unscientific public-health policies to combat the virus have been. If we had assumed from the outset of the pandemic that we know that we do not know, we would have created rapid feedback loops to learn as quickly as possible from experience.

Specifically, we would have focused on gathering simple data about each COVID-19 case –the date when the infection was confirmed, the patient’s age, gender, home and work addresses, means of transportation, and contacts – and supplemented this with additional data on hospitalization and outcomes as the disease progressed.

These data may already exist in many cases, but are hidden from society and often from officials by overzealous or turf-minded health ministers, and are not being made available to the many trained analysts who could contribute to policymaking.

And as the OECD has suggested, governments could also adopt approaches that use individual cellphone data, Internet searches, and rapid telephone surveys, with due regard for privacy concerns.

Many governments believe that this kind of data-driven strategy for tackling the pandemic is beyond their capacity, and decide to piggyback on what other countries have learned by adopting best practices.

This is the wrong approach. The pandemic’s effect on countries differs in ways that we currently do not understand and need to discover.

Are people living in Peru in households without refrigerators actually more likely to be infected, for example?

Moreover, each lockdown and social-distancing regime is different, reflecting the many degrees of freedom in their design. Finding out what works and what doesn’t on a daily basis is now critical, especially as we try to find ways to open up economies while holding down infection rates.

The fight against COVID-19 is still in its early stages, and it is not too late to start this effort.

After all, Socrates said that knowing you know nothing is a contradiction in terms. Let us therefore make our knowledge of our ignorance about the virus, and of our ability to overcome it, a source of strength. Let’s set ourselves up to learn.

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist at the Inter-American Development Bank, is a professor at Harvard's John F. Kennedy School of Government and Director of the Harvard Growth Lab.

Wouldn’t That Be Cool…

Take a world that’s spinning out of control with debt, money creation and pretty much every other measure of financial danger flashing red.

Add the inevitable (given the above) precious metals bull market, with rising gold and silver taking the precious metals mining stocks – especially the little speculative ones – along for the ride.

Then toss in something new: a brokerage industry – led by trading apps like Robinhood – that has decided to make stock trading commission-free, leading millions of not-very-experienced investors to become trend-following day traders.

And what do you get? The answer is in the following excerpt from a recent  MarketWatch article.

See if you can spot it:
Providing our call of the day is Crescat Capital’s global macro analyst Otavio ‘Tavi’ Costa, who thinks we’re in the early stages of a major bull market for precious metals as a noncorrelated macro asset class. 
“The mining space has been in sort of a recession since the 2011 peak of gold and silver prices. The capital in the space has dried up significantly. I think that now with the macro and fundamentals aligning with technicals on the long-term side, I’ve never seen such a good setup for an industry like precious metals,” said Costa. 
Costa says they have been taking friendly activist stakes in some “junior explorer” miners with prolific projects.” Crescat created a fund devoted to mining companies a year ago because the sector was so beaten-down. 
Miners are divided into juniors GDXJ, +0.87% that focus on hunts for precious metal deposits, and senior miners GDX, +0.62% that have big developed mining operations. 
precious metals juniors vs seniors day traders
He said the large-cap mining space has started to improve a bit, and thinks investors will move from there onto the bottom part of the industry. 
That is good news for one unloved group of stocks. “Wait until the Robinhood traders learn about the gold and silver penny stocks, that’s where we’re long,” Costa told MarketWatch. He was referring to a low-cost trading app that has lured a flood of new investors, who have lately won some bets on beaten-down stocks.

If you chose that last paragraph, well done. The junior miners are a notoriously thinly traded and volatile sector.

Let them catch the collective eye of millions of momentum traders and there’s no real limit to their upside — or at least to their volatility.

And this may already be starting. Here are the first few entries in a trading account that contains a lot of junior miners (yes, I’m definitely talking my book here), ranked by one-day percentage price gains on Tuesday, June 30.

junior miner gains day traders

Will momentum like this will look tasty to day traders – especially those with no prior experience in this treacherous sector?

Very possibly. Or could these stocks have already come to the Robinhood crowd’s attention, with Tuesday’s gains being the result?

Either way, the action going forward.