THE DAILY EDGE: 17 MARCH 2020: Pandenomics

PANDENOMICS

• Empire State Manufacturing Survey

Survey responses were collected between March 2 and March 10.

• U.S. OIL DEMAND DESTRUCTION BEGINS

Informative stuff from RBC:

Gasoline demand destruction has arrived in the US. Traffic is tapering in several cities. For
example, congestion during peak hours in NYC is about 20% lighter than normal. By the same
metrics, Seattle, which is situated in the state hit hardest by COVID-19, has declined by more
than one-third. Preventative measures like social distancing and working
from home mean that gasoline consumption will see further weakness in the coming day.

The US is the world’s largest gasoline consumption country, by a long shot, which is concerning
given that demand destruction remains likely in the early innings. Given the lack of historical
comparisons to the current events, a COVID-19 impact on domestic gasoline demand to the
same degree as China could send US demand sharply lower to the tune of 4–4.5 mb/d given
that China saw vehicle traffic contract by 40–50%.

US gasoline demand is more than three times larger than that of China. This means that while
China lost about 1.4 mb/d of gasoline consumption during much of February as a function of
the widespread country-level lock-down, a reduction in road travel by 15% in the US would
equate to the same notional degree of demand that was lost in China. Scale matters, and the
amount that could be lost due to a protracted slowing of US activity could have a devastating
impact on global oil demand given that America comprises nearly 20% of world consumption.
Put another way, the entirety of China could cease driving and that would amount to a
demand hit that is softer than if US gasoline demand were curbed by 30%.

The recent suspension of travel into the US from Europe in an attempt to halt the spread of
COVID-19 will impact jet fuel demand, but by how much? The US is the world’s largest
consumer of aviation fuel, and flight activity has yet to see meaningful deviation from normal
weekend seasonality, though we anticipate that flight activity will ease in the coming weeks. Nearly 400 daily flights depart for the US from Europe, and while those are
being halted, the percentage of flights departing from major North American airports en route
to Europe equates to only 3% of total US flight traffic. This means that only a sliver of the 1.9
mb/d of US jet fuel demand will be impacted by a disruption to cross-Atlantic travel.

The recent halting of flights from the UK is meaningful given that 18% of
flights from Heathrow are earmarked for the US.

While Chinese flight cancellations bottomed in late February and are on a path, albeit a slow
one, toward normalizing, flight traffic continues to trend softer in most other regions. Our
weighted average index of flight activity from major European airports is down 21% relative
to normal levels. Italy, unsurprisingly, leads the way with flight traffic down more than 80%.
Similarly, activity in South Korea has fallen 76%, and our composite of Asian flights ex China is
softer by 28%. Middle East flight activity, which is a small sliver of global
flight traffic, is down meaningfully, and we anticipate the softness continue given that Saudi
recently banned international flights while Kuwait suspended flights for two weeks.

• OPENTABLE DATA SHOWS JUST HOW BAD TRAFFIC IS FALLING

According to OpenTable, reservations at restaurants around the country had been declining steadily in late February and early March before falling off a cliff last week, declining 36% on Friday. (…)

According to OpenTable, the declines in reservations are steepest in states where the outbreak appears to be worst.

Washington state, where the country’s first outbreak appears to have originated, has seen declines in reservations of at least 12% since March 1. They have worsened steadily since and were down 53% on Friday.

In Seattle, where the outbreak was worst in a local suburb, reservations were down 63%.

Reservations in New York state fell off a cliff last week, declining 54% there as the government took increasingly serious action to prevent large gatherings. That includes a 61% decline in New York City on Friday as many locals worked from home and Broadway’s shows went dark. (…)

This table via Raymond James:

The case for massive corona-stimulus

Just in time to embolden timid hearts at the Treasury, a brief paper from Emmanuel Saez and Gabriel Zucman at Berkeley university laid out the urgent case for action on a giant scale (…)

The academics estimate that US output will fall 30 per cent, and if the interruption to life lasts for three months, that translates to a 7.5 per cent drop in GDP – a severe recession. (…)

A three-month programme to mitigate the impact, they estimate, would involve spending 3.75 per cent of GDP (…) The amounts sound big (they are big!), but not in terms of the economic impact of deep recessions. (…)

Even if the measures were to extend for six months, spending 7 per cent or even 10 per cent of GDP to prevent a public health crisis becoming a financial depression is proportionate. (…)

What Happens to the Economy When Everything Stops? The U.S. economy has experienced sudden stops in the past, but nothing like this

(…) In 1980 the economy received a short, sharp shock after President Jimmy Carter, in an attempt to break the back of rampant inflation, persuaded the Federal Reserve in March 1980 to introduce stringent controls on the use of credit. The controls had an immediate effect on behavior, tanking spending and leading to large job losses. Final sales of domestic product, a measure of overall economic demand, fell by an inflation-adjusted 7.7% in the second quarter. On July 3, 1980, the Fed removed the controls and demand rebounded, ending what was the shortest recession on record.

The other example is more familiar: The 2008 financial crisis. The sapping of confidence and the drying up of credit that began that fall led to final demand falling 2.5% in the third quarter and 6.5% in the fourth. Despite aggressive action by the Fed and fiscal authorities, there was no sudden rekindling of demand after the shock. Too many businesses went under and too much wealth had been destroyed. The recession stretched on, and when the recovery began in mid 2009, it was feeble. (…)

But there is unlikely to be any sudden clearing of the skies. Even as the virus’s spread lessens and we learn how to better contain it, many activities will remain curtailed. So the recession will likely last longer, as in 2008, and the initial recovery will be feeble. It probably won’t be until a vaccine or other therapy is developed and widely distributed that things will come roaring back. It will be a cause for jubilation.

Morgan Stanley Economists Say Global Recession Now ‘Base Case’

Goldman Sachs Group now expects China’s economy to contract by 9% in the first quarter while Morgan Stanley economists declared that a global recession is now their “base case.”

CFOs Expect Coronavirus to Significantly Affect Operations and Revenue

CFOs and finance executives, mostly at Fortune 1000 companies based in the U.S. and Mexico, are concerned that the pandemic could lead to a global economic downturn, disrupting their businesses, according to a bimonthly PricewaterhouseCoopers survey of about 50 respondents conducted March 9-11, when U.S. markets were in the middle of a steep decline.

Fifty-four percent of respondents said the outbreak has the potential for significant impact to their business operations. Fifty-eight percent said they expect their company’s revenue or profit to drop this year as a result of the virus. Others said they are considering supply-chain changes or that the impact has been limited to specific regions. (…)

Nearly half of the finance executives surveyed said they anticipate changing their financial disclosures to address the virus. (…)

Financing an Economic Shutdown You can’t close down an economy without a way to keep business and individuals liquid.

Well, that didn’t work. The Federal Reserve on Sunday went all in with its 2008 bag of monetary tricks, and financial markets continued their stampede like frightened cattle. Someone has to turn the herd, and that will take new tools and better leadership than Washington is now providing.

Start with the political and health context, which is that state and federal leaders are shutting down the American economy without a plan to finance it while everyone stays home. This is prudent as a health measure to “flatten the curve” of infections, in the phrase of the hour. On Monday the feds recommended no meetings of more than 10 people. But you can’t close a modern economy for months, or however long it takes to control the virus spread, and not have thought about how to keep companies and individuals liquid and solvent.

The Fed is deploying its tools from 2008, but this isn’t a bank solvency panic—at least not yet. This is a liquidity panic over how huge chunks of the U.S. economy will stay afloat while American commerce essentially stops. You can’t tell everyone to stay home for eight or 16 weeks, except to shop for groceries, and expect businesses to resume in July where they were in March like Rip Van CEOs.

The question is how are they going to stay in business in the interim lest they shed employees willy-nilly, default on their corporate debt, or go bankrupt. If that happens the economic damage will be that much more severe and the recovery that much harder and longer to get underway. The biggest losers will be the lower-income workers who are finally seeing bigger wage gains. Policy makers need new tools to deal with this black-swan event. (…)

Under its Section 13(3) authority, the Fed can create a new facility that could lend to companies hit by the economic shutdown, not merely banks and financial institutions. Presumably these would include retailers, airlines, hotels, transportation and energy companies, among others. (…)

Treasury’s Exchange Stabilization Fund could provide some back up for collateral while the facility is starting. The Fed could take some losses on this lending if a company fails, so Congress would need to provide a capital backstop for the new facility.

We don’t like this temporary government role in commerce, but then state and federal governments are essentially ordering the economy to close. This isn’t a meltdown of the mortgage market caused by bank lending. This is a health crisis that government is addressing with command-and-control emergency powers. Companies can’t be blamed for missing what the government also missed, and being prepared for a pandemic is one reason Americans pay government so much of their hard-earned incomes.

This being an election year, the politicians will step in with some fiscal action in any case, and a Fed facility is far superior to the industry-specific bailouts that President Trump and Congress seem to be considering.

The facility lets companies decide if they need it, rather than the politicians picking winners and losers. It would prevent an ugly bidding war on Capitol Hill over which industries get relief. And it is designed so the government will get its money back, as opposed to cash grants or other subsidies.

Ideally the Treasury would present it to the public in a way that also offers more financial relief for individuals whose incomes may also fall as the economy closes. Our preference would be a tax cut rather than more spending or tax rebates that may not get to people for months. The payroll tax cut that Mr. Trump is floating won’t stimulate the economy. But it will let Americans keep more of their own take-home pay, and it may be the best of the urgent ideas to cope with an economic pause.

All of this will take more vigorous leadership and explanation than we’ve seen so far from the Fed, the Treasury, the White House or Congress. Treasury Secretary Mnuchin has become a junior legislative negotiating partner with House Speaker Nancy Pelosi when he ought to be thinking through the larger financial and economic issues. Fed Chairman Jerome Powell isn’t inspiring confidence by copying the 2008 playbook without explaining the current problem and rationale for action.

The White House will have to lead and offer financial and economic solutions, not merely settle for what Mrs. Pelosi will allow behind closed doors. This means more than random tweets with policy impulses and cheerleading. As flight director Gene Kranz says in “Apollo 13,” “work the problem, people.”

Yesterday, I read a lot of stuff about the political scene amid this crisis. The one word that just kept coming was “pathetic”. Not only in the USA mind you, but especially in the USA which has been an important leader in past crisis.

Rather than “working the problem”, this president finds time to tweet about Hillary, the “corrupt and fake media”, a trial balloon on his thinking of pardoning Flynn and, worst of all, tweeting discord between him and state governors trying to get the federal government do what it is meant to do in such times.

The public, business people and investors need a credible, well articulated action plan to deal with the crisis. At least, Trump seems to have understood something not very beautiful is really happening (“it’s bad”!), if not from Dr. Fauci, perhaps from the market crash.

D.C. as a whole must forget this is an election year and really and quickly “work the crisis”.

Why Boris Johnson Reversed Britain’s Virus Response

Flanked by his chief medical officer and chief scientific adviser Monday afternoon, Boris Johnson didn’t so much announce an escalation in the government’s response to the coronavirus crisis as signal a sharp course correction.

Exactly why the government has changed direction was confirmed some hours later, when the Imperial College Covid-19 Response Team, whose epidemiological modelling helps inform U.K. policy-making, published a bombshell report on its findings with implications for both Johnson and U.S. President Donald Trump. If either follows the logic of the report, there are far more stringent measures to come and long-term implications we’ve only begun to contemplate. (…)

With no mitigation measures at all, the Imperial Team said they would expect 80% of the population to be infected, resulting in 510,000 deaths in the U.K. and 2.2 million in the U.S. — and that’s without accounting for the impact on mortality of health systems getting overwhelmed. By the second week in April, the critical care capacity of Britain’s National Health Service would be overwhelmed.

Even with more optimal mitigation measures, including many of the new measures Johnson announced Monday — self-isolation for anyone with symptoms and their family members for 14 days, longer term isolation for the elderly and vulnerable, and asking the general public to refrain from non-essential travel — peak demand on critical care beds will likely be eight times the capacity of Britain’s medical system. And for those insisting that the U.S.’s private care model is somehow better equipped, afraid not — the gap is the same.

Mitigation, in other words, would overwhelm our health-care systems and lead to hundreds of thousands of deaths. Suppression is more draconian, but also more effective. Suppression measures include social distancing of the entire population, strict isolation of infected cases, household quarantine, school and university closures. (…)

Mnuchin Seeks $850 Billion

Fiscal support soars to fight virus: $1.14 trillion and counting

A Generational War Is Brewing Over Coronavirus Scientists and government officials fighting the pandemic say they have a problem: Carefree youths, partying from Berlin to Princeton in defiance of social-distancing rules.

India Could be Next Virus Hotspot With an ‘Avalanche’ of Cases Experts say containment measures that succeeded elsewhere in Asia may not work in the world’s second-most populous country.

Saudi Arabia and Russia dig heels in over oil price war Battle between strongmen threatens to upend markets and damage economies

How Bad Could Markets Get? History Says Much Worse This bear market is already deep and was quick to take hold. But it hasn’t gone on for long.

Think about the fall in terms of the number of years of gains given back, and this would be the briefest period of loss of any recession since the 1960s. This bear market is already deep and was quick to take hold, but hasn’t gone on for long. A recession now looks inevitable.

The worst-case from past precedents would be a repeat of 2009, 1974, 1920 or the Great Depression, in all of which investors gave back more than a decade of stock price appreciation, counting dividends and inflation. The S&P 500 would have to halve again from here to get back to where it stood 10 years ago. (…)

The S&P has lost 29.5% from last month’s peak so far, one of the fastest falls into a bear market in history. But stocks soared in the previous 12 months, so that hasn’t done much damage to long-term investors. The fall took prices only back to where they stood amid the recession fears of December 2018.

The question is whether we should think in terms of time, or in terms of money. In terms of money, this is already a severe loss. But easy come, easy go, and last year was a stonker for stocks. In terms of time, giving up just under 15 months’ worth of gains isn’t even as bad as the 2016 correction, which took prices back to where they stood in 2014. (…)

UBS estimates fiscal stimulus announced so far at just 0.92% of the world economy, much less than in 2008, with half of it from China. There is a lot more talk of support, as with the Group of Seven statement on Monday, than actual money.

I expect governments to step up eventually, once corporate layoffs and bankruptcy warnings get bad enough to overcome political differences. It would be easy for stocks to get a lot worse and give back a lot more of their decade-plus bull run before that happens.

  A study of 700 Americans by MagnifyMoney showed that about 20% of the people surveyed would be compelled to give up on stocks after a 5% drop and that most people cannot stomach a 10% market decline. Only 17% can handle a 20% decline and fewer than 10% can tolerate a 30% dip. (Palos)