Tag: coronavirus

Leadership needed in this crisis

March 29, 2020

Governments have shown leadership by announcing or implementing strong fiscal measures, many at an unprecedented scale and speed. Almost all nations have shut borders and put arrivals in quarantine but a (brave) few have locked down a city, region or the entire country. Effective strong government leadership, which I define as setting and implementing informed fiscal and public health goals with the compliance of the general population, has generally been achieved through open communication and either imposed (China) or compassionate (New Zealand) leadership.

China is an example of an enforced leadership that imposed drastic measures on a section of its population but openly communicated its actions, progress and results locally and globally. The leadership in New Zealand, on the other hand, showed compassion and openly communicated its reasoning, priorities and actions in response to the coronavirus threat and has earned the respect and co-operation of almost all the population in locking down the entire country.

Both China and New Zealand made mistakes along the way but admitted and learned from those mistakes. Having accepted and openly communicated the strategy of accepting short term pain for long term gain, they made hard decisions and look set to be among those emerging soonest and healthiest from the social, economic and fiscal storm in which the world finds itself. Yet, the leaders of some nations refuse to admit the size of the threat or in some cases, its very existence.

Many countries’ leaders, governments, media and people are still debating what to do or are openly in denial of the inevitable breaching of their border(s) by this unprecedented health and social threat. Most of those nations (both industrialised and emerging) are run by leaders who are no more than poster boys with egos and spin doctors, who think, speak and act out of self-interest and/or for political (or personal) gains and who seek only to reinforce or retain their power. They are leaders of nations in name only. They are not true leaders of their people, which is what the world needs now. They risk their nation and people suffering not only huge health, social and economic damage during and after the coronavirus pandemic but also isolation and loss of international prestige afterwards. One, in particular falls far short of his predecessors’ self-proclaimed title of leader of the free world.

To be a leader in the world, those at the top of the power pyramid in each country must show leadership in their own country, which means that they must seek informed advice to implement social and fiscal policies, and must view and interact with the world with an open mind and an open heart. And they must do it now!

Is the strong US dollar merely the Emperor’s new clothes?

March 22, 2020

One noteworthy feature of financial markets this month has been the rush to buy the US dollar. This has me puzzled.

At times of economic and fiscal stress and uncertainty, investors shift from demanding a return ON capital to demanding a return OF capital. Yet, they are rushing to buy US dollars, hoping for a return OF capital! If the US dollar is so strong despite such poor US fiscal, economic, social and political outlooks in a post-coronavirus environment, how bad is the rest of the world?

Prior to the outbreak of COVID-19, the risk-reward balance of the US economy favoured the reward.

  • The US was reporting economic growth (as measured by GDP) and offered interest rates higher than other main economies, except for China; the US is the world’s largest economy;
  • the US dollar is the world’s main reserve currency at a macro level (government, trade and debt) and micro level (it is estimated that more than 40% of US cash on issue is outside the US, fuelling the global black market);
  • almost all commodities are traded in US dollars;
  • the US is on track for an eye-watering USD1 trillion deficit this fiscal year (before any emergency fiscal packages);
  • the US Government is the world’s largest borrower; and
  • US companies have geared up their balance sheets in recent years to take advantage of ‘cheap’ debt (so, there’s lots of securities for investors).

The latter three highlight the US’ main risk and vulnerability, more so if you consider the implications for the substantial increased supply of US debt and US dollars. The US federal government (as well as state governments and municipalities) will have to issue more debt to fund their stimulus packages. There is no urgency for investors to buy US debt (both public and private sector). They can hang back and wait for higher interest rates.

To help fund the increased US government debt, the Federal Reserve has indicated that it will undertake more quantitative easing, i.e. it will print money to buy the government’s debt, thereby increasing the supply of US dollars. All things being equal, more US dollars in circulation will lower its relative value.

The US’ response to the coronavirus threat (at federal and state levels) has lacked a cohesive plan. With on or two exceptions at state and local levels, officials seem reluctant to adopt the hard-line public health measures that have been adopted elsewhere (e.g. China, Italy, France, UK, Singapore, South Korea, Australia and New Zealand). As a consequence, the US has fallen behind its major trading partners in addressing the health threat and economic fallout from COVID-19. Furthermore, the US can only fund any fiscal support by issuing even more debt, which puts it under even more obligation to investors and shifts the risk-reward balance towards risk.

Many US companies have increased their debt levels and overall leverage in recent years by taking advantage of low interest rates and easy credit conditions but that has made them vulnerable to the sort of dire economic outcome that many see in a post-coronavirus US. The recent, dramatic fall in US stockmarkets is an understandable adjustment to the risk-reward balance given many companies’ prospects for reduced future earnings and the need to feed higher gearing.

Again, I ask – why buy US dollars?

I expect that the recent rush into US dollars has been defensive – to acquire USD cash for future US dollar denominated spending and debt commitments. Some of those buying US dollars internationally are US based investors, such as mutual funds and those who manage the retirement and other savings of the ordinary US residents. However, many are foreign nationals investing through their central banks or sovereign wealth funds whose natural investment is not the US dollar.

Looking at this another way – the US is the Emperor and financial markets are its tailors who need to keep supplying the Emperor with new clothes even though all that the tailors have left are rags and their silver tongues. Eventually, the world will see the harsh reality of the Emperor’s new clothes, or lack thereof. Market prices (specifically, companies’ share prices, yields on US government and corporate bonds, corporate credit margins and the value of the US dollar) will then adjust for the US’ increased risk and savers will want their funds returned to the safety of home.

A country’s exchange rate against those of the main global currencies and its main trading partners is a major indicator of expectations for that country’s economic, fiscal, social and political performances, much the same way as a company’s share price is the major indicator of its activity, profitability and long term health. So, can someone please enlighten me as to why the US dollar has strengthened, why so many see the US dollar as a safe haven and why so many market economists and commentators are confidently predicting further US dollar strength?

‘Just in time’ is bad risk management, or just plain greed, in an interconnected and China-dependent world

March 8, 2020

COVID-19 is a smart coronavirus because it can spread quickly among humans. The speed of that spread has been helped by the interconnectedness of humanity through international air travel.

The speed and dramatic impact on the global supply chain and responses by financial markets, governments and central banks have also been due to the world’s increased interconnectedness, both physically and virtually.

That same interconnectedness also means that the whole world can learn of COVOD-19’s spread and score as they happen, provided there is a free and honest flow of information.

The supply chain effects have been complicated by China’s ascension as a major global player in manufacturing, a global dependence on single sources of ingredients and components and so-called efficient inventory management, i.e. ‘just in time’. The latter is proving to be a short-sighted cost saving that works very well in good times but fails in bad times. Poor risk management or greed, depending on your viewpoint.

China is now the world’s biggest manufacturer of steel, active pharmaceutical ingredients, medical supplies and motor vehicles, as well as industrial and consumer electronics. People can live comfortably if they delay the purchase of that new phone, car or TV for a few weeks but most pharmaceutical and medical supplies wholesalers and suppliers have only a limited supply of these essentials.

The hopes are that China’s manufacturing will resume soon and supply chains will move again. Now though, we are seeing forced isolations in other countries that could result in the same supply chain blockages that China is trying to clear up; forced isolations and supply chain blockages that will have drastic implications for the earnings and spending of the average business and household in countries that do not have the draconian ability to impose the same sort of control over and co-ordination of businesses and people as China.

For the rest of us, the threat remains for further restrictions on the supply to health professionals and individuals of vital items of medical and sanitary products – all because of someone’s poor risk management, or greed.

Be prepared for the indirect consequences of COVID-19

February 23, 2020

The COVID-19 coronavirus has become the dominant global news story and the prime driver of financial markets’ sentiment, volatility and direction. Only recently, have some of the short and long term effects been examined. I’m writing about some of the potentially dire consequences yet to be mentioned in mainstream media.

For some time, media have been reporting the number of people in China in isolation (quarantine) by official order. People stuck indoors are unable to turn up to work or go out and spend. Factories in China are running at well below capacity, if at all. There is also a shortage of truck drivers, port workers and officials to process both exports out of and imports into China. All of this adds up to a threat to key global supply chains, manufacturing capacity and household consumption.

Not only is China the world’s most populous and number one export nation but it also supplies key components and ingredients to manufacturers around the world. Key food imports have become stuck at Chinese ports (e.g. US and European pork, US and South American poultry and Argentinian beef) or held back at the country of export (e.g. New Zealand and Australia crayfish). Other imported goods are also stuck in Chinese ports, e.g. logs. Exports from China are also stuck at Chinese ports and warehouses.

Prices of beef, coffee, corn, crayfish, logs/timber and dairy products have fallen since the outbreak of COVID-19, more so recently, as producers seek alternative markets or simply want to dispose of surplus inventory.

Car manufacturers, from South Korea to Europe and the UK, are reporting two to four weeks inventory of Chinese supplied components and parts that are essential for vehicle assembly. Sellers of electronic consumables in Asia, Europe and the US are warning about low inventory levels of key components. Shipping companies are experiencing a sharp drop in traffic and demand. Construction companies in New Zealand and Australia are warning about an inability to source building materials from China.

Worryingly, China is the world’s leading supplier of active pharmaceutical ingredients (API) used in the manufacture of pharmaceuticals. India, the world’s number one pharmaceutical manufacturer, sources more than 70% of its APIs from China, which together with China’s pharmaceutical exports means that China’s APIs feed into almost 45% of the world manufactured medicines.

More than 10 years ago, the then (and still current) Chairman of India’s Cipla, one the the world’s leading producers of APIs and generic pharmaceuticals warned that “if tomorrow China stopped supplying pharmaceutical ingredients, the worldwide pharmaceutical industry would collapse.” If anything, the pharmaceutical industry’s reliance on China has increased substantially since that warning was uttered.

The COVID-19 coronavirus, in itself, may or may not be as deadly as the SARS coronavirus but, in the 17 years since the SARS outbreak, China has become a global economic powerhouse, a key player in the global supply chain and a significant consumer. Not only has the world become a much more connected place, both personally and virtually, but it is also highly dependent on China for many essential products and trade. This gives the human response to COVID-19, rather than the virus itself, the potential to produce the greater global harm.

We can do without the latest car, phone, computer or television but, consider the potential life threatening implications of a shortage of antibiotics, anti depressants and pain killers.

Almost all of that human response is outside our control but it is up to us to assess and manage COVID-19’s risks to the personal, family and business aspects of our lives.