Action movies all include the ‘race against time’ element in the plot.
A noxious gas will be released in five minutes and counting. James Bond is headed for certain death unless the conveyor belt is jammed.
Tick. Tick. Tick.
The tension builds. Will the hero save the day? With seconds to spare a collective sigh of relief is released. The world is saved.
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In 2008, the world teetered on the edge of a financial crisis. Australia was spared the full fury of the GFC thanks to China riding to our rescue with a pile of cash.
But this time it is different. Frenemies are becoming enemies. We have competing alliances. There are military frictions.
As reported by Bloomberg on 5 July 2020 (emphasis added):
‘“We are in the foothills of a Cold War.”
‘Those were the words of Henry Kissinger when I interviewed him at the Bloomberg New Economy Forum in Beijing last November.
‘The observation in itself was not wholly startling. It had seemed obvious to me since early last year that a new Cold War — between the U.S. and China — had begun.’
The difference between 2008 and now
My good friend Greg Canavan — editor of Crisis & Opportunity — has been preparing an in-depth report on how our changed (and changing) relationship with China will impact the Australian economy and markets.
Have resources peaked out? Will there be a shift in supply chains?
Watch out for Greg’s report later this week.
The difference between 2008 and now is this…93% of economies are in recession. This figure surpasses even the Great Depression.
Source: Hoisington Management
According to Hoisington Management (emphasis added):
‘Recessions are either deeper or longer lasting when a very high percentage of the world’s economies are contracting rather than when they are centered on a limited number of countries.’
Why is that? Simple. When one is down, another could lend a hand. But when almost everyone is down, it’s a case of every nation for themselves.
Which is why we are seeing increased global tensions. And, this recession has only just started.
How deep and how long might this last for? That depends on a few factors.
On 13 July 2020, Bloomberg reported (emphasis added):
‘To date, the economic damage wrought by the pandemic has been mostly hidden by massive government subsidy. That’s about to change. And so the next few months will reveal the underlying economic impact of Covid-19 across the globe more clearly than we’ve seen so far. My bet: As governments withdraw fiscal support, the economic picture is going to look worse than commonly appreciated.
‘The global economy is now caught in a race between efforts of governments and those of the pharmaceutical industry. Can drugs that address the fear factor be created faster than governments pull back on fiscal support? As we watch their progress, the next three or four months may not be pretty…’
The clock is ticking.
Can the villain — COVID-19 — be stopped in time?
Will governments continue funding programmes or like we heard yesterday from our PM, will the programmes be tapered?
This race against time was something we identified in the 22 June 2020 issue of The Gowdie Letter…
‘The various US Government and Central Bank support mechanisms — similar to our JobKeeper, JobSeeker, Rent relief, Mortgage relief programmes — have helped alleviate immediate concerns.
‘The administration of these “painkillers” provides a sense of relief from what — as shown by the numbers — is a world of hurt.
‘The great hope is that the economic body will be able to repair itself to the point these prescribed programmes can be (largely) withdrawn without another severe contraction in economic activity.
‘But time is not on the policy makers side.
‘OECD Economic Outlook June 2020
‘The OECD’s best case scenario — on when we might return to pre-COVID economic output — is predicated on this great hope.
‘The latest OECD report is titled “The World Economy on a tightrope”.
‘To quote from the report (emphasis added):
“The global outlook is highly uncertain.
“The COVID-19 pandemic is a global health crisis without precedent in living memory. It has triggered the most severe economic recession in nearly a century and is causing enormous damage to people’s health, jobs and well-being.
“The lockdown measures brought in by most governments have succeeded in slowing the spread of the virus and in reducing the death toll but they have also frozen business activity in many sectors, widened inequality, disrupted education and undermined confidence in the future.
“As restrictions begin to be eased, the path to economic recovery remains highly uncertain and vulnerable to a second wave of infections.
“With or without a second outbreak, the consequences will be severe and long-lasting.”
‘The OECD forecast is based on two scenarios…
‘single-hit’ — the one and done — COVID-19 shutdown.
‘double-hit’ — a second wave shutdown.
‘Under the single-hit scenario, recovery — which is defined as just getting “back to where we were” — is at least 18 months to two years away.
‘If, however, there’s a second wave shutdown, then recovery is pushed further into the future.
‘What’s the probability of a second wave?
“We can only look at what other seasonal coronaviruses and seasonal influenzas do. Based on that, most of us feel comfortable there will be a second wave.”
Dr Gregory Poland (studies the immunogenetics of
vaccine response in adults and children) at the Mayo Clinic
“Spring undoubtedly helped us,” Prof Jonathan Ball, a virologist at the University of Nottingham says.
“A second wave is almost inevitable, particularly as we go towards the winter months.”
BBC News 21 June 2020
‘Given what we’ve seen recently in Victoria and other parts of the world, the odds of a second wave are probably 50/50.
‘Can a vaccine be identified AND commercially developed AND administered between now and when the Northern Hemisphere enters its next flu season?
‘This chart is from the US Center for Disease Control and Prevention…
‘The clock is ticking.
‘The timing of the expiry of support programmes coincides with the expected OECD road to economic recovery in the third and fourth quarters of this year.
‘The fourth quarter (starting in October) is when seasonal conditions increase the likelihood of a second wave…which is when the OECD’s Double-hit scenario (red line) turns down.
‘To avoid another possible economic shutdown — even a partial one that households decided to impose on themselves — would require a vaccine to be identified, commercially developed and community administered within the next 4–5 months?
‘The odds of that happening are slim.
‘Every day we move closer to twin factors of withdrawing financial support programmes and the Northern Hemisphere entering flu season, the closer we move to the tipping point…recession going into depression.’
Since writing that one month ago, the second wave is already hitting the US.
Source: Real Investment Advice
Be prepared for a painful recession
Does this mean we’ll see a third, and possibly fourth, wave when the flu season starts?
To escape this real life drama, we can always seek comic relief from Wall Street.
What’s happening on US markets is a joke. It’s funny for those of us who stand back and watch the slapstick routine of day traders chasing the price of loss-making entities ever higher.
But sadly, it won’t be funny for those who actually believe this comedy routine is serious business.
Please realise the market action for what it is: ‘Abbott & Costello go to Vegas’.
The reporting season for US banks provided an insight into how seriously they are taking the recessionary risks.
The Wall Street Journal on 14 July 2020…
Here’s an extract…
‘The provisions amount to a sharp increase above what they put away in the first three months of the year, reflecting a shift in their assumptions about the length and severity of the pandemic’s economic toll. JPMorgan, the largest U.S. bank by assets, said it put aside extra to prepare for an unemployment rate that remains at double digits well into next year and a slower recovery in gross domestic product than the bank’s economists assumed three months ago. “This is not a normal recession,” said James Dimon, JPMorgan’s chief executive. “The recessionary part of this you’re going to see down the road.”’
Government initiatives and central bank printing have bought us time, but they have not bought us a stay of execution.
It’s highly unlikely there will be a heroic last-minute rescue.
Be prepared for a deep and painful recession in the months ahead.
Editor, The Rum Rebellion