Rabobank: You Can Stop The Lockdown But You Won’t Go Back To Normal

Submitted by Michael Every of Rabobank

Suspicious Minds

It is perhaps the oldest Middle East oil trick in the book: you want higher oil prices, threaten to start breaking things. Yesterday US President Trump gave an order authorizing the navy to use “overwhelming lethal force” against any Iranian gunboats which harass American ships – and up popped oil. Of course, it probably won’t last long given supply-demand imbalances and the fact that Iran will now just switch to another way to harass and annoy the US in the region (of which it has many); and surely even the most suspicious of minds must concede that starting a war with Iran is pretty low on Trump’s to-do list going into the 2020 election? As such, the ripple effects from lower oil prices are going to continue to be felt in both some obvious and some unusual places. For example, one would think China is a big winner from this oil-price war – yet Caixin is reporting that the Bank of China sold the May oil contract to wealthy retail investors using fund names like “crude oil treasure”, who subsequently got absolutely crushed.

Jailhouse Rock

The UK government still can’t find masks. It still can’t tell us to wear masks. It still can’t do mass testing. But what it can do is tell the public what should have been obvious from the start: that social distancing measures will have to stay in place for the rest of the year in order to control COVID-19. We have made clear previously what the implications of this are: you stop a lockdown and yet you don’t go back to normal.

Please explain the functional business model of a restaurant already running on tight margins when customer turnover needs to be reduced by 50% to allow safe 2-meter gaps between tables, and where everyone is sitting there enjoying the food and drink and ambience in a mask. Imagine what the meal will have to cost to make a profit for the poor restaurateur; and imagine if subsequently the air-conditioning has to be turned off too given there is evidence that this also spreads the virus.

Need another simple example? RyanAir has announced that it won’t be flying again with “idiotic” social distancing rules, according to its CEO, which he proposes as middle seats being left empty when surely the 2-metre logic should be only 3-4 people per row, and two rows empty between each occupied one? On the more prudent basis an economy class ticket will surely be closer to business class fares – in which case the potential number of people willing and able to fly is going to be even lower than projected (an exponential/fat tail effect where less means less, just as more can mean more).

Likewise, Australia is now going to keep its international borders closed for another three to four months at least, even as local lockdowns are partially eased – so no international tourism until August at the very earliest. If anyone can afford to fly there when the skies do open again.

Of course, the US is also closing down to immigration for 60 days (except it isn’t: there are visa loopholes as big as the gaps in Trump’s Wall) even as it is seeing some states boldly reopen…and Trump is suddenly hedging his bets by allowing governors to reopen while being publicly opposed in the case of Georgia. Heads he wins, tails he doesn’t lose. We shall see within weeks if this action means the economy picks up or virus infections do..

Heartbreak Hotel

Consequently, even as Australia saw its services PMI at just 19.6(!) and as Japan recorded the worst manufacturing PMI since 2009 at 43.7 and the worst services PMI ever at 22.8, consider that for the services sector on which so much of the modern global economy is built, normal service is not anywhere close to being resumed. Other global PMIs follow today and are expected to see Eurozone manufacturing at 38.0, down from 44.5, and services also at 22.8, down from 26.4, while the UK consensus is for 42.0 and 27.8, respectively, and for the US 35.0 and 30.0 – making the US a relative outperformer.

Meanwhile, today we will all be looking at the US initial claims data to see if another 4.5 million people lose their jobs, taking the total to 26.5 million in five weeks, or if it’s slightly better or worse than that.

A Little Less Conversation

Today also has a “make or break” European meeting on what to do to save the economy and, according to the French and Portuguese leaders, the EU and Euro too. Yesterday saw the ECB set some limits when it prudently underlined that it is not allowed to buy government securities directly, as this is illegal, and that ‘helicopter money’ would also be problematic for it; this is the same ECB that is literally begging governments to spend vastly more so it has bonds to buy in the secondary market (which is not just legal, but standard policy) and which is now about to buy corporate junk-bonds too. (Rather ironically, yesterday saw data show that Eurozone debt-to-GDP in 2019 dropped from 85.8% to 84.1%)

But back to the politicians. By videoconference (underlining the lost service-sector revenue to a hotel and caterer somewhere) a temporary EUR300bn recovery fund is being discussed along with a EUR200bn recovery and resilience facility, EUR50bn in repurposed cohesion funds, and two EUR200bn funds “to protect the EU’s internal markets”. And that appears to be it, even though somehow this is EUR 2trn in some headlines. Italy, which yesterday announced that its fiscal deficit will be 10% of GDP in 2020 even though there is precious little stimulus taking place is, according to a report in the FT, now willing to avoid the debt mutualisation issue and instead favour ultra-long maturity or perpetual bond issuance. One wonders how the Usual Suspects in northern Europe will feel about that compromise. Is the numeric response still 999?

I won’t allow myself to get sucked into the classic Euro game of mind-stultifying fudge, acronyms, and deck-chair rearranging. Instead, I will quote Bloomberg directly: “The ‘roadmap’ EU Council President Charles Michel distributed to national delegations ahead of the video conference contained no details on the amount, the specific objectives, the time frame or the nature of the investment needed to get the bloc back on track. Leaders aren’t expected to reach a decision this week and a final package may not be ready for at least six months, according to a French official.”

SIX MONTHS?! And then action on a scale that looks completely out of kilter with the economic damage being wrought. Euro-committees are all very fine and good, and I am always told they work best when in a genuine crisis (or only in a crisis) – but where is The King when you need him? He appears to have left the building.