Month: May 2020

Today’s -4.8% GDP print was dire, but it would have been even worse had it not been for a spike in discretionary spending as Americans found themselves under house arrest for the second half of March. Given the importance of consumer spending on GDP, we looked at trends in the restaurant space amidst Covid-19 related headwinds, courtesy of Clover data compiled by Morgan Stanley. What we found is that for the first time in weeks there was a clear WoW improvement in dining spend, an indication that the worst is over for the restaurant industry. 

Here are some observations from the dining trends chart below:

• Small business food and drink saw a slight WoW improvement, with volumes down 21% the week ending April 19th vs a normalized level, compared to the prior week’s down 25%.
• Broader restaurant trends also improved WoW, with restaurant sales now down 49% YoY the week ending April 19th (vs. -60% YoY the week prior). QSR continues to perform better than restaurants,now down 14% YoY (vs. down 31% YoY the week prior)

Confirming the above observations, a new survey from Hospitality Trends indicates that pent-up demand for restaurants is elevated, even as many consumers maintain their off-premises frequency.

While takeout and delivery are the only restaurant options available for the vast majority of consumers across the country, based on weekly surveys conducted by the National Restaurant Association beginning in late-February, the proportion of consumers using these off-premises options remained remarkably consistent throughout the coronavirus crisis.

In fact, six in 10 adults say they ordered takeout or delivery from a restaurant for a dinner meal last week – a level that has held relatively steady during the past two months. In addition, an off-premises lunch purchase was made by roughly four in 10 adults during each of the last nine weeks. 20% of consumers say they picked up a breakfast meal, snack or beverage in the morning from a coffee shop or restaurant last week. This is down from roughly three in 10 adults who reported similarly in late-February.

For restaurants that are offering off-premises options, the good news is that many consumers want more. 52% of adults say they are not ordering takeout or delivery from restaurants as often as they would like. As a point of comparison, 44% reported similarly when the Association fielded the same question in mid-January.

58% percent of baby boomers say they would like to order takeout or delivery more frequently right now. This is roughly 10% points higher than their counterparts in the younger generations.

Not surprisingly, a strong majority of consumers say they would like to be dining out at restaurants more frequently – as this option is largely unavailable throughout most of the country. 83% of adults say they are not eating on the premises at restaurants as often as they would like. This is up from 45% who reported similarly in mid-January, and by far the highest level in the two decades that the Association has been fielding this survey question.

Baby boomers (90%) are the most likely to report that they would like to be eating at restaurants more often, though at least three in four adults in each age group want to increase their frequency. This suggests that as dining room doors being to reopen, pent-up demand among consumers will be strong.

It has been a long time coming and it’s finally here.

When the ECB first unleashed negative rates across Europe in 2014, banks were loathe to match the central bank’s deposit rates for their clients to those charged by the ECB over fears depositors would simply take their money and go elsewhere. After all, the premise of paying a bank for the privilege of holding your money is still absolutely insane to most normal people.

However, as the years went by, and as the ECB’s negative rates kept rising – or rather dropping – banks were forced to quietly admit they had no choice and starting at the very top, targeting only corporate clients and the biggest depositors, European banks started imposing negative deposit rates while hoping they could avoid going all the way to the smaller savers.

Indeed, just last November, Deutsche Bank vowed that it would pass on negative interest rates only to larger corporate customers or the deposits of wealthy individuals and spare most retail clients, Deputy Chief Executive Officer Karl von Rohr said, explaining that German banks have already paid several billion euros in penalty rates for their deposits with the European Central Bank and Deutsche Bank’s payments amount to “several hundred million euros for 2019.”

Now, less than half a year later, the Frankfurt-based bank – which itself is in dire financial straits – has capitulated and to avoid paying the ECB’s punitive rate will soon introduce negative interest rates for even its medium depositors.

A Deutsche Bank spokesman told Handelsblatt that “The ongoing pressure from negative interest rates makes it necessary for Deutsche Bank to charge custody fees for new accounts exceeding €100,000 starting May 18, 2020.” The “deposit rate” of -0.5% is equal to the rate the ECB charges banks for money parked there.

“This helps us on the earnings side, but above all it helps to prevent further inflows of particularly high deposits that cost us money,” wrote Manfred Knof, head of the bank’s German private customer business, to his employees. This applies “especially in the event that other banks further adjust their conditions and their customers are looking for an alternative for their deposits with us.”

In other words, with the ECB flooding the European financial system with a tsunami of liquidity – one which it expanded today with yet another meaningless long-term refi operation as if that will do anything to help banks who can  no longer earn a net interest margin arb become solvent – Europe’s banks no longer need deposits, and in fact will do everything they can to push away all but the smallest depositors. The good news, for now, is that “existing account contracts are not affected” however we expect that to change soon.

So with European banks finally cracking down on the bulk of their depositors instead of just the top 1% and corporate clients, what happens next?

Well, savers who collectively owns trillions in European bank deposits that are now non grata have two options: either pull the money out, convert it to cash and store it in a safe (something Germany has a lot of experience with especially in late 2016 when Deutsche Bank was on the verge of collapse, sparking a rush to buy safes) where it is outside of the financial system – this is precisely the alternative the ECB prepared for several years ago when it stopped printing the €500 banknote, or more likely, buy alternative physical assets which – in a time of pervasive deflation and negative rates – do not charge a penalty rate, such as gold or even cryptos.

So if over the next few months a wave of “mysterious” buying emerges and lifts all non-traditional assets which prevent central banks from imposing penalty rates, we will know why: the real great rotation has finally begun.

With the Nasdaq set to erase all of its 2020 losses after strong earnings from the tech giants, and stocks generally surging on the assumption that, as UBS put it, “lockdowns are lifted by the end of June and do not need to be re-imposed”, especially with today’s favorable if conflicting remdesivir news, it is easy to forget that emerging markets are facing their private hell as a result of widespread economic shutdowns, poor healthcare conditions which will only exacerbate the coronavirus pandemic, the dollar’s relentless strength, and trillions in dollar-denominated debt maturing in the next few years which the chronically strong US dollar will make prohibitively impossible to repay.

But don’t take our word for it: according to Bill Rhodes, CEO of Rhodes Global Advisors and a veteran of countless international bailouts in the 1980s and 1990s, the debt crisis that’s erupted across the world’s emerging markets is “the worst he’s ever seen.”

Rhodes, 84, is perhaps the world’s foremost expert on emerging markets in peril: the former Citigroup executive is a veteran of the 1980s Brady Plan that re-set the clock for Latin America’s struggling economies by creating a new debt structure for developing nations that’s largely in place to this day.

“It’s going to be difficult,” Rhodes said in an interview with Bloomberg discussing the coming EM crisis. “You need to have some sort of coordination between the private and the public sectors.”

The problem: three decades after a coordinated rescue of emerging markets orchestrated by US Treasury Secretary Nicholas Brady (the person responsible for the term Brady Bonds) the global pandemic is again challenging the world for a solution, and this time a raft of private bondholders must also be on board. More than 90 nations have already asked the IMF for help amid the pandemic.

The first challenge is that the $160 billion debt renegotiated during the Brady Plan pales next to the $730 billion that the Institute of International Finance says must be restructured by the end of 2020; the final number could be far greater.

Adding to the difficulties of the next global bailout, unlike 1989, when the loans were mostly held by banks and defaults had already happened, now it’s split between hundreds of creditors ranging from New York hedge funds to Middle Eastern sovereign wealth funds and Asian pension funds. Getting them all in the same room will be a challenge, forget about getting them all to agree on one outcome.

Following in the footsteps of forbearance protocols enabled across the US, academics and officials are pushing for steps that would allow developing nations to pause bond payments through at least 2020, if not even longer, until the coronavirus fades and economies stabilize enough to analyze debt sustainability. And since one’s debt is always someone else’s asset, that proposal is upsetting creditors on Wall Street who depend on those funds to keep their portfolios afloat and to generate current income.

Meanwhile, G-20 leaders and multilateral organizations are already working toward relief for nations to stay current on debt. The IMF and Paris Club asked the Washington-based IIF to coordinate a standstill, and the United Nations is calling for a new global debt body.

The other big challenge is that bureaucrats have to not only reach a solution, they have a strict time limit in which to do so: dollar-denominated debt from 18 developing nations already trades at spreads of at least 1,000 basis points over U.S. Treasuries. While the top three insolvent outliers – Venezuela, Argentina and Lebanon – were grappling with their own problems before the pandemic, others are fast approaching those levels amid currency sell-offs and record-shattering outflows.

Rhodes’ dire warning echoes that of another EM expert: Anna Stupnytska, Fidelity International’s head of global macro and investment strategy, told Bloomberg “I’m really worried about emerging markets,” adding that Brazil, Mexico, Colombia, South Africa, India and Indonesia may be among the most vulnerable to a virus-related crisis. She expects the coming months to be critical.

Stupnytska, who isn’t expecting a V-shaped economic recovery anywhere, said that weak public health systems, political worries and doubts on central bank independence are “really unhelpful” for EM nations, and that other than parts of Asia, large sections of developing nations are yet to see a peak in coronavirus cases.

“So we are potentially looking at some emerging markets crisis even over the next few months.”

With the clocking ticking, some sort of forbearance on debt payments – currently the most popular idea to help emerging markets – has to be agreed upon and soon; it would also need to extend beyond 2020, according to Anna Gelpern, a law professor at Georgetown University who spent six years at the Treasury. A coordination group could offer standardized terms to all of a country’s creditors that automatically push out payments, however how all creditors will get on the same page is unclear. After all, with memories still fresh of the massive profits Elliott Management earned by holding out on the Argentina debt restructuring early this century, what is to prevent all creditors to pursue this path?

Bloomberg agrees, noting that “it will be no easy task to convince private creditors, especially those with large emerging-market exposure, to take a hit by deferring debt payments.”

Zambia has started talks to postpone its arrears, while Argentina has proposed a plan to restructure its debt that includes a three-year payment moratorium. Neither country has found much traction with its creditors who demand a payment and in full upon maturity.

“Countries that look to markets and are willing to engage market participants have found success in bridging the Covid financial shock,” said an optimistic Hans Humes, CEO of Greylock Capital Management, which has been involved in most emerging-market restructurings over the past quarter-century. Many would disagree with his cheerful assumption.

Then again maybe creditors will find it in their bank accounts, if not hearts, to grant a reprieve: bondholders already granted Ecuador a delay on coupon payments until August, which may save the government as much as $1.35 billion this year, as it deals with one of the region’s worst virus outbreaks and a sell-off in oil.

Alternatively, “the time and resource costs of pursuing market debt relief may outweigh the benefits,” especially if a country plans to default anyway, Goldman’s Dylan Smith wrote in an April 17 note. Plus, “it is not clear that the fiduciary duties of large bondholders toward their investors would allow them to provide lenience to debtors, even if they privately support the initiative.”

And you thought OPEC deals were complicated.

Lee Buchheit, a four-decade veteran of the restructuring world, said forcing each nation to renegotiate on its own would only exacerbate the pain. “Here we have a planet-wide phenomenon that is going to make a number of countries have to face unsustainable debt positions.”

Authored by Simon Black via SovereignMan.com,

More than 4,000 years ago, the city of Kanesh was quickly becoming an important commercial trading hub within the ancient Assyrian Empire.

Kanesh was located in the dead center of modern day Turkey, so it was perfectly situated on the route between the Mediterranean and the Black Sea, and between Europe and Asia Minor.

As a result, Kanesh became a popular trading post. And merchants, scribes, and moneylenders from all over the Assyrian Empire traveled there to profit from the boom in copper, tin, and textiles.

What’s extraordinary about this period of history is how many records remain from those day-to-day transactions.

The Assyrians borrowed the writing system from ancient Mesopotamia and routinely chiseled their commercial trades on clay ‘cuneiform’ tablets.

Tens of thousands of these tablets have been discovered by modern archaeologists, so we have an incredible amount of detail about ancient financial transactions.

For example, one tablet on display at the Met in New York City documents the terms of a loan that originated in Kanesh some time in the 19th century BC.

According to the table, an Assyrian merchant named Ashur-idi loaned 3kg of silver to two traders, with 1/3 of the amount to be repaid in one year’s time.

This was fairly common back then: gold and silver were both used as a medium of exchange in ancient times. But this was before coins existed, so transactions would be settled based on weight.

In ancient Babylonia, for instance (which rose to power after the Assyrian Empire faded), the cuneiform tablets from that era tell us that the price of barley averaged about 17 grams of silver per 100 quarts.

And merchants would use elaborate scales to weigh gold and silver when exchanging their goods.

Gold and silver were also exchangeable for each other. Another tablet from ancient Babylonia during the time of Nebuchadnezzer states that 5 shekels of silver were worth ½ shekel of gold.

(A shekel in ancient times was a unit of weight, equivalent to about 8.33 grams.)

This implies a 10:1 ratio between silver and gold.

We’ve discussed this ratio several times; the gold/silver ratio has existed for thousands of years, and up until the 20th century, it remained within that ancient range of between 10 to 20 units of silver per unit of gold.

In modern times, gold and silver are no longer used as a medium of exchange. But there’s still been a long-standing ratio that has persisted for decades.

One ounce of gold has typically been valued at 50 to 80 ounces of silver. Rarely does the ratio go higher (or lower). And when it has, prices have always corrected.

As of this morning the ratio is 112, meaning it now takes 112 ounces of silver to buy one ounce of gold; and today’s level is spitting distance from the ratio’s all-time high of 120, which it reached last month.

And when I say “all-time high,” I mean it. Ancient cuneiform tablets prove that silver has never been so cheap relative to gold in literally thousands of years of human history.

If history is any guide, this means that the ratio should eventually narrow, i.e. the price of silver should rise and/or the price of gold should fall, bringing the ratio back to its more normal range.

And there are plenty of ways to potentially make money from this.

The Chicago Mercantile Exchange, for example, offers a financially-settled futures contract for traders to speculate on the Gold/Silver ratio.

But the CME’s gold/silver ratio contract is very thinly traded and difficult to purchase, so it might not be the best approach.

In theory, one way to speculate that the gold/silver ratio will return to historic norms would be to ‘short’ gold contracts and go ‘long’ silver contracts, i.e. speculate that the price of gold will fall while the price of silver will rise.

But, personally, there’s no chance I would bet against gold right now.

I’ve written for the past several weeks that I approach this entire pandemic from a position of ignorance and uncertainty.

EVERY possible scenario is on the table, and no one can say for sure what’s going to happen next.

There are very few things that are clear. But in my view, one thing that has become clear is that western governments will print as much money as it takes to bail everyone out.

According to the Congressional Budget Office, the US federal government will post a $3.6 TRILLION deficit this Fiscal Year due to all the bailouts. Plus the Federal Reserve has already printed $2 trillion.

Frankly I think they’re just getting started.

With this incomprehensible tsunami of government debt and paper money flooding the system, real assets are a historically great bet.

We’ve talked about this before: real assets are things that cannot be engineered by politicians and central banks– assets like productive land, well-managed businesses, and yes, precious metals.

And they all tend to do very well when central banks print tons of money.

Farmland, for example, was one of the best performing assets during the stagflation of the 1970s.

And financial data over the past several decades shows that whenever they print lots of money, the price of gold tends to increase.

Right now, in fact, the price of gold is relatively cheap compared to the current money supply.

And the price of silver is ridiculously cheap compared to gold. Again, silver has never been cheaper in 5,000 years.

This is why I’d rather just own physical silver. I’m not interested in betting against gold because I expect they’ll continue to print money. In fact I’m happy to buy more gold.

And while we cannot be certain about anything, there’s a strong case to be made that the price of silver could soar.

And to continue learning how to ensure you thrive no matter what happens next in the world, I encourage you to download our free Perfect Plan B Guide.

The US is going on the offensive once again against Venezuela, this time attempting to break up growing Iranian cooperation and assistance to Caracas. The two so-called ‘rogue states’ recently targeted for US-imposed regime change are helping each other fight coronavirus as well as Washington-led sanctions. Specifically Tehran has ramped up cargo deliveries related getting Venezuela’s derelict oil refineries fully operational.

Secretary of State Mike Pompeo in new statements has called on international allies to block airspace specifically for Iran’s Mahan Air, currently under US sanctions, and which has in recent days delivered cargoes of “unknown support” to the Venezuelan government, according to Pompeo’s words. 

Late last week it was revealed Venezuela received a huge boost in the form of oil refinery materials and chemicals to fix the catalytic cracking unit at the 310,000 barrels-per-day Cardon refinery, essential to the nation’s gas production.

Repair of the refinery is considered essential to domestic gasoline consumption, the shortage of which has recently driven unrest amid general food and fuel shortages, especially in the rural area. 

Mahan Air is considered to have close ties to the Islamic Revolutionary Guard Corps (IRGC), and its deliveries to Caracas are expected to continue.

“This is the same terrorist airline that Iran used to move weapons and fighters around the Middle East,” Pompeo asserted in his Wednesday remarks.

Pompeo demanded the flights “must stop” and called on all countries to halt sanctioned aircraft from flying through their airspace, and to further refuse access to their airports.

Mahan Air first came under sanctions in 2011 as Washington alleged it provided financial and non-financial support to the IRGC.

Just days after the CEO of Tyson Foods warned that the “food supply chain is breaking”, the disruptions due to the coronavirus are starting to surface not only in households and grocery stores, but also across corporate America, and even McDonald’s has now said it is changing how it is doling out beef and pork to its restaurants as a result.

The company has placed items like burgers, bacon and sausage on “controlled allocation,” according to Business Insider. Additionally, the company’s distribution centers have been placed on “managed supply”.

This means that the company is now going to be rationing meat supplies based on demand, instead of just ordering what the company thought was necessary. And while it doesn’t yet mean the company is facing shortages, it does suggest that even the largest US fast food restaurant believes further scrutiny of its inventory is warranted as the next may very well be shortages.

Two key McDonald’s suppliers are Smithfield and Tyson – names we have covered extensively (here  and here) over the last month as they grapple with the coronavirus causing significant production bottlenecks. More than 5,000 factory workers have contracted the coronavirus, with at least 20 of those dying. 

McDonald’s executives said mid-week that major production reductions were expected through “at least” the first half of May. McDonald’s CEO said on Thursday that the company, so far, had not had a supply chain break. 

He also admitted, however, the state of the meat industry was “concerning” and that the company was “monitoring it, literally, hour by hour.”

Tyson chairman John Tyson said last weekend: “As pork, beef and chicken plants are being forced to close, even for short periods of time, millions of pounds of meat will disappear from the supply chain. As a result, there will be limited supply of our products available in grocery stores until we are able to reopen our facilities that are currently closed.”

Meanwhile, reflecting the growing supply scarcity, we previously reported that wholesale American beef prices had jumped 6% to a record high of $330.82 per 100 pounds, a 62% increase from the lows in February.

 

In a world breaking economic records left and right, we can add one more: April is set to be the worst month ever for auto sales.

According to the car shopping experts at Edmunds, April will be a record down month for the auto industry – for obvious reasons – forecasting that just 633,260 new cars and trucks will be sold in the U.S. for an estimated seasonally adjusted annual rate (SAAR) of 7.7 million. This reflects a 52.5% decrease in sales from April 2019, and a 36.6% decrease from March 2020.

Edmunds analysts note that this would be the lowest-volume sales month on record; the second worst month for sales in the past 30 years was January of 2009, when 655,000 vehicles were sold.

“April auto sales took the biggest hit we’ve seen in decades,” said Jessica Caldwell, Edmunds’ executive director of insights. “These bleak figures aren’t just because consumers are holding back on their purchases — fleet sales are seeing an even more dramatic drop as daily rental business has dried up. Like many other industries, the entire automotive sector is struggling as the coronavirus crisis continues to cripple the economy.”

Edmunds experts note that plans for easing shelter-in-place orders across the country in May could open up opportunities for automakers and dealers to capture some deferred demand, but there is still economic uncertainty ahead.

“April is likely the bottom for auto sales, so hopefully there’s only room for improvement from here,” said Caldwell. “But with employment and consumer confidence at new lows, the question remains: Will people be in the position to purchase new cars? Although automakers are doing their part by offering landmark incentives, those might not be enough if consumers cannot recover financially from this crisis.”

Edmunds estimates that retail SAAR will come in at 6.7 million vehicles in April 2020, with fleet transactions accounting for 13.0% of total sales.

 

Authored by Art Berman,

It’s game-over for most of the U.S. oil industry.

Prices have collapsed and storage is nearly full. The only option for many producers is to shut in their wells. That means no income. Most have considerable debt so bankruptcy is next.

Peggy Noonan wrote in her column recently that “this is a never-before-seen level of national economic calamity; history doesn’t get bigger than this.” That is the superficial view.

Coronavirus has changed everything. The longer it lasts, the less the future will look anything like the past.

Most people, policy makers and economists are energy blind and cannot, therefore, fully grasp the gravity or the consequences of what is happening.

Energy is the economy and oil is the most important and productive portion of energy. U.S. oil consumption is at its lowest level since 1971 when production was only about 78% of what it was in 2019. As goes oil, so goes the economy…down.

The old oil industry and the old economy are gone. The energy mix that underlies the economy will be different now. Oil production and price are unlikely to regain late 2018 levels. Renewable sources will fall behind along with efforts to mitigate climate change.

It’s Really Bad

2020 global liquids demand may average 20 mmb/d less than in 2019 (Figure 1). This estimate is really a thought experiment because it is impossible to know what supply and demand are in the present much less in the next quarter or beyond. This is a time of unimaginable flux and uncertainty because no one knows how long economic activity will be depressed, how long it will take to recover or if it will recover.

The estimate in Figure 1 differs from most forecasts in two important ways. First, I believe that supply will fall much faster than most other sources. That is because storage will soon be full and shutting in production will be the only option for many producers.

Figure 1. 2020 global oil demand may average 20 million barrels per day lower than in 2019.
Source: OPEC, IEA, Vitol, Trafigura, Goldman Sachs and Labyrinth Consulting Services, Inc.

Second, I doubt that there will be a demand recovery in the third quarter despite the re-opening of businesses in the second. That is because we are in a global depression. Unemployment will remain high and consumers will be damaged from lack of income over the months of quarantine. The truth is that I doubt that demand will ever recover.

Economies will re-start slowly. A useful analogy is being at a traffic light behind 25 stopped cars. The light will change from green to red before your car begins to move. It may take several light changes before you get to the other side of the intersection.

U.S. consumption has fallen about 30% from 20 mmb/d in January to 14 mmb/d in April. Refinery intakes are already 25% lower than in the first quarter of the year and will fall further as consumption decreases. Refineries will close.

Most U.S. refineries require intermediate and heavy crude oil that must be imported. Few U.S. grades of oil can be used to produce diesel without blending them with imported oil. That is because they are too light to contain the organic compounds need to make diesel. Redesigning refineries will not change this.

The world’s natural resource extraction, shipping and distribution system relies on diesel. As refineries close and less diesel is produced, there will be lower levels of natural resource extraction, less manufacturing and less buying of goods.

Diesel cannot be produced without first producing gasoline. The U.S. has had a gasoline surplus since late 2014 and the current surplus is the highest in 5 years (Figure 2).

Figure 2. U.S. gasoline comparative inventory has increased 30 million barrels since March 20 to a record level of 28.4 million barrels more than the five-year average. Source: EIA and Labyrinth Consulting Services, Inc.

Diesel demand is less elastic than gasoline demand because of its critical role in heavy transport. What will happen to the excess produced gasoline if storage is full? Will it be burned?

Those who see an opportunity for renewable energy in the demise of oil need to think again. The manufacture of solar panels, wind turbines and electric cars depend on diesel all along the supply chain from extraction to distribution of finished products. A world in economic depression will default to the cheapest and most productive fuels. Oil will be cheap and abundant for a long time. There will be little money or appetite for the massive equipment changes that renewable sources require. Climate change will not be high in the consciousness of people struggling to survive.

Figure 3 is another thought experiment in which I use tight oil rig count and output to estimate forward levels of U.S. production. The normal trajectory is an estimate of how production might decline as rigs are idled from lack of capital investment. It suggests that tight oil production might decrease by about 50% from 7 to 3.5 mmb/d by July 2021.

Figure 3. Thought experiment based on rig count through April 2020 and 12-month lagged production.
Source: Baker Hughes, EIA DPR, Drilling Info and Labyrinth Consulting Services, Inc.

The shut-in trajectory suggests that tight oil production may fall below 3 mmb/d by June of this year. Since tight oil accounts for about 55% of U.S. output, total crude oil and condensate production could decline from 12 mmb/d to 5.5 mmb/d by the end of the first half of 2020. This estimate is much more aggressive than EIA forecasts because EIA hasn’t adequately modeled the speed of shut in production with full storage levels.

Energy is the Economy

Gross domestic product (GDP) is proportional to oil consumption (Figure 4). That’s because oil is the economy. Every aspect of production and use of goods and services requires burning fossil energy. There are approximately 4.5 years of human labor in a barrel of oil (N. J. Hagens, personal communication and The Oil Drum). No other energy source comes close to that level of energy density.

Figure 4. Gross domestic product (GDP) is proportional to oil consumption
Source: EIA, World Bank and Labyrinth Consulting Services, Inc.

Those who believe that the world will function the same on lower energy density sources like wind and solar should review their old physics text books. You cannot fit 4.5 years of work from sunlight or wind into the 5.6 cubic feet space of a barrel of oil.

Seventeen investment analysts recently estimated that U.S. GDP would contract an average of 30-35% in 2020 (Figure 5) within a range of 9-50%. The correlation shown in Figure 4 suggests it will decrease by about 20-25% based on estimated decrease in U.S. oil consumption. Any value within this spectrum is catastrophic.

Figure 5. U.S. GDP to contract 30-35% in 2020 based on estimates by seventeen investment analysts
Source: Charles Schwab and Labyrinth Consulting Services, Inc.

Economist Lawrence Summers has warned that the U.S. financial system may collapse because of cascading defaults. Approximately 25% of U.S. renters did not pay their landlords and 23% of Americans did not make their mortgage payment in April. When people don’t pay their creditors, creditors in turn cannot pay their creditors. For comparison, a 28% mortgage default rate contributed to the 2008 financial collapse.

Joseph Stiglitz recently explained that the current pandemic will affect the developing world more severely than it has developed countries. It might lead to mass migration problems that could dwarf the dislocations of the last six years out of Africa and the Middle East.

Slouching Toward Bethlehem

Many will probably find my analysis overly pessimistic. Crude oil markets do not. Negative WTI futures prices last week could not have sent a stronger signal for producers to cease and desist.

Large segments of the U.S. oil industry will have to be nationalized before the year is over. The price of oil is too low to justify the cost of extraction even if storage were available. The value of a barrel of oil, however, is 4.5 man-years of work and that productivity multiplier will be essential if the U.S. economy is to avoid collapse or for it to recover if collapse is unavoidable.

The United States has engaged in the foolish practice of draining America first since the beginning of tight oil production a decade ago. There was value up to the point that domestic oil substituted for imported light oil but exporting more was dumb. That is true especially now that someone else’s oil will be cheap to buy for years.

There are few moments when we may truly say that things are different now. This is one of those moments. We do not know what awful form the future may take, what rough beast slouches toward Bethlehem to be born.

The game is over for oil. We should place all of our attention on saving the economy.

I hope that we learn to view what is happening as a chance to simplify and to learn to be satisfied with no more than what we need. It is unlikely that we will have much choice.

Brazil hasn’t even confirmed 100k cases of COVID-19. Yet, government officials across South American fear the largest country on the Continent, which shares a land border with every country in South American except 2 (Ecuador and Chile), has already become one of the world’s most dangerous hot spots.

Even some epidemiologists in the US have warned that, if left unchecked, Brazil’s outbreak could jeopardize the rest of the hemisphere and destroy all of the hard work accomplished by lockdowns and other extreme social distancing measures. Yesterday, Brazil’s far-right President Jair Bolsonaro insisted there was nothing he could do to stop or mitigate the outbreak – despite all obvious evidence to the contrary.

“So what?” he said. “I’m sorry. What do you want me to do?”

“My name’s Messiah,” Bolsonaro added, a reference to his second name, Messias. “But I can’t work miracles.”

Though governors in nearly all of Brazil’s 26 provinces imposed some level of restrictions, across the country, businesses are reopening and people are returning to work as states like Santa Catarina and Mato Grosso do Sul have dialed back restrictions on malls, gyms and churches. Most Brazilians appear to be more or less returning to their regular way of life. Demand is up at gas stations across the country. Government tracking data have shown that people are getting out more, even in places like Sao Paolo – where most restrictions remain in place.

As we noted, on Tuesday, Brazil reported its highest single-day death toll since the pandemic hit the country in late February. In 24 hours, Brazil recorded 474 fatalities. On Wednesday, another 449 people died. Still, the number of confirmed cases has nearly doubled to 78,162 in the last week, while deaths have climbed to ~5,500. Experts say insufficient testing has hidden what were probably much higher numbers.

But despite fears that the virus has penetrated much further into Brazilian society than the data suggest, roughly 10% of Brazil’s malls have reopened in the past couple of weeks. And in some places, Brazilians rushed in by the thousands to shop. One photo drew the attention of law enforcement as the tightly packed crowds created ideal conditions for the virus to spread.

In Sao Paulo, the epicenter of Brazil’s outbreak, quarantine restrictions are slated to stay in effect until May 11. But mobile phone data shows the so-called “isolation rate” – a critical figure used by officials to evaluate the virus response – has fallen to less than 50% over the past few days, well below the 70% level authorities believe is necessary to halt the spread of disease. And more and more, reporters are relaying stories of public health hospitals in Amazonas – a sparsely populated jungle region in the middle of the Amazon rain forest – as well as in Ceara, Rio de Janeiro and Para.

Source: Bloomberg

The flow of people, local media reported health authorities are probing a mall in the southern city of Blumenau after local media showed crowds packing in for the reopening.

And that only scratches the surface of the chaotic scenes unfolding across the country. Since there’s no coordination happening from above, there’s no consensus on how states should return to business as usual.

Reopened Retailers and factories say in corporate filings seen by Bloomberg that they are following local regulations and taking measures to ensure the safety and health of employees and clients.

Given Brazil’s massive population and economic heft, whether the country manages to reopen without triggering a Wuhan-level outbreak – something that remains a big “if” – will be a critical issue for the country’s neighbors, and possibly even for Mexico and the US. It’s possible that a roaring, out-of-control outbreak in Brazil could sweep all the way across the continent then northward to slam the southern US just as life is returning back to normal.

In a reflection of the massive gulf between the ‘official’ death toll and the reality on the ground, deaths from the outbreak have piled up so fast in the Amazon rainforest’s biggest city that the main cemetery is burying five coffins at a time in collective graves, according to the SCMP.

The mayor’s office said the city’s funeral system was collapsing and running out of coffins. Undertakers are burying coffins one on top of the other. Though the city of Manaus stopped the practice after relatives complained.

Brazil’s neighbors are already taking steps – some are taking drastic steps – to stop Brazilians from spreading the virus.

In Argentina, the big worry is truck traffic from Brazil.

Argentine officials say they are particularly worried about truck traffic from Brazil, their top trading partner. In provinces bordering Brazil, Argentina is working to set up secure corridors where Brazilian drivers can access bathrooms, get food and unload products without ever coming into contact with Argentines.

“Brazil worries me a lot,” Argentine President Alberto Fernandez said. “A lot of traffic is coming from Sao Paulo, where the infection rate is extremely high.

Uruguay had a recent incident where several Brazilian workers crossed the border to help build a cement plant. Four ended up testing positive.

In Uruguay, President Luis Lacalle Pou said the spread of the virus in Brazil was setting off “warning lights” in his administration and authorities are tightening border controls in several frontier cities.

Thirty workers recently crossed from Brazil to the Uruguayan border city of Rio Branco to help build a cement plant. Four tested positive for the virus, prompting Uruguay to place the whole crew in quarantine.

Officials in some Uruguayan border towns have discussed setting up “humanitarian corridors” through which Brazilians could safely leave the country.

Colombia is worried about the long-term impact on public health and its economy.

Authorities in Colombia are also worried, said Julian Fernandez Nino, an epidemiologist at National University in Bogota.

“In a globalised world, the response to a pandemic can’t be closed frontiers,” he said. “Brazil has great scientific and economic capacity, but clearly its leadership has an unscientific stance on fighting coronavirus.”

Even Bolsonaro’s biggest regional ally, Bolivia, is closing its border.

Bolivia’s government, a right-wing ally of Bolsonaro’s, declined to comment on its neighbour’s antivirus measures, but Defence Minister Fernando Lopez promised this month to strongly enforce the closure of the border.

“If we keep being flexible on the border, our national quarantine will be useless,” he said.

That’s definitely not a good look for Bolsonaro.