You’d be forgiven for thinking that Trump was trying to win re-election in a few months, as he takes a couple of steps to try and ingratiate himself with voters. Step one; cut funding for the World Health Organisation in a bid to shift the blame for the pandemic, and its effect on the US, to their door – that’s not to say there aren’t questions that everyone is going to have to answer, but to cut their funding without those questions even being posed is to be judge jury and executioner. The US makes up about 15% of the WHO’s funding, which is a $400m hole that will likely be plugged by other countries, though in a twist of irony for Trump, it will probably be China that picks up most of the slack.
The next step is to remind everyone who has single-handedly saved their economy from collapse; he’s chosen to do this by having his name appear on all of the $1,200 support checks that are being posted to US households. He was aiming for his signature too, but apparently the President isn’t authorised to sign Treasury payments – though his hand does control his Treasury puppet Steve Mnuchin, so it’s probably the next best thing.
Trump’s approval ratings have actually risen in the past few weeks, with 48% saying they approve of the way he’s handled the Covid response. The main issue that Americans are focussing on now is who will better handle the rebuilding after the crisis and it looks like there is marginally more support for Joe Biden in this issue, who is about 5 points ahead of Trump overall.
The Major US airlines have reached an agreement with the government over a bailout. There was a lot of back and forth as airlines didn’t want to give up equity in return for cash and it seems that’s worked out pretty well for them. The bailout monies include lots of payroll support which won’t need to be fully repaid and a lot of low rate loans. There have also been some warrants granted by various airlines which will give the government upside if their share prices recover, but the equity stakes are in the low single digits (or less) so they’re not going to upset shareholders too much.
There’s been more talk of just how bad this shutdown is going to be for the global economy, with parallels drawn to the great depression and the UK’s Office for Budget Responsibility have gone so far as to say that this could be the worst recession for 300 years – which even if correct feels very dramatic and not entirely relevant given that would have been pre the industrial revolution. Despite the doom forecasts (which I entirely believe) the market is still back up and dancing as though somebody only spilt a drink on the floor and that’s the reason they had to stop for a while. This might start to change as companies refrain from giving any kind of guidance/reassurance that their numbers will bounce back quickly, but the fundamentals are failing to be grasped. As the FT points out; if 10% of the labour force in the US has been laid off and tens of millions of others have retained their jobs but taken pay cuts, then spending is going to be reigned in, which in turn constrains growth.
They talk about the ‘cognitive gap’ between the logic and the behaviour being driven by historic thinking that dips are temporary and also by not fully grasping how limited the actions of central bank and government actually are. They also go on to talk about approaches that investors should take to prepare for whatever resides on the other side of the virus, which in short are; get out of corporate and sovereign debt where the debt levels are high and the cash balances low. Keep money available for ‘special situations’ and opportunistic purchases and go through stocks one by one to work out what is resilient and able to perform well without too much dependency on the outside world i.e. complex supply chains, heavy outsourcing.
Oil is back in the news again today because Saudi Arabia has decided that it can keep up its promise on output cuts, but at the same time still try and shaft the competition by offering discounts on its pricing. It’s being smart though and has only increased the discounts on flows into Asia, which will hurt Iran and Russia whilst US discounts have actually reduced, so as to technically keep Trump on side. This may comply with the words of the OPEC agreement, but it certainly doesn’t comply with the spirit of it. It also brings global oil prices down, so even though the US isn’t losing out because of import discounting, it’s still losing out because global market prices this low are uneconomical to produce at. On top of all of this, oil inventory reports keep on showing that stockpiles are growing faster than almost any analyst is predicting.
Oil prices this low are risking dragging some economies into deflation, which is a dangerous place to be at the moment as it will restrain already weak consumer demand and also means debt piles become more expensive as their value in real terms increases. Japan is possibly going to be the first country to find itself in deflationary territory, but this is not unchartered territory for them as they spent all of the 90’s in deflation – unfortunately, this was known as “Japan’s lost decade”, which isn’t a label that uplifts in any way.
I wanted to find some good news to end on, and I did; throughout this lockdown air pollution levels are falling dramatically, to the point that residents in a northern state in India are able to see the Himalayas, which are more than 100 miles away, for the first time in 30 years. Unfortunately, in Googling this I also found that the Trump administration is likely to go against advice to tighten clear air standards and will leave soot limits at 12 micrograms per cubic metre, despite the proposed curb to 11 micrograms saving about 12,000 lives per year. Because fossil fuels is where the real power lies in America.