This was our worst case.
Covid getting worse again is the worst thing that can happen to the Global Economy – worse than Russia allowing that nuclear plant in Ukraine to melt down. But, is it getting “worse” or has China simply committed a colossal policy mistake?
China is the last country on Earth still pursuing a “Zero Covid” policy and clearly it’s not working – especially because they are surrounded by the rest of the World. 21M people live in Chengdu and they may no longer leave their homes without special permission. Why is this happening? Because 157 people caught Covid on Wednesday (vs 90,338 in the US). Â
While a lockdown may be rough on President Xi, it’s better than having people think his Covid policy is failing only a month before he is expected to be handed an unprecedented 3rd 5-year term on October 16th.Â
In Hong Kong (population 7.5M), they have 10,000 cases of Covid per day, which is a pace for 3.65M cases in a year – half the city’s population. That is something the rest of China views as a cautionary tale about what happens when you ease restrictions.
China’s economy is suffering, of course and it’s probably not realistic to pursue Zero Covid but Xi can’t admit he was wrong – certainly not before his re-appointment. So China will continue to suffer one way or the other and so will the rest of the World as they slow down – oil collapsed down to $87.12 overnight and let’s not forget that, when Covid first hit – the price of oil went briefly NEGATIVE (April 20, 2020) as traders were stuck with barrels that nobody wanted in the Global Lockdown. Â
China just threw the “Off Switch” on 1Mb/d of demand and they have plenty of other mega-cities they can shut down if Covid keeps spreading – again. Then that becomes yet another indicator that we’re likely to enter a Global Recession and this is all happening just a week after Powell and other Fed Heads said they don’t care if people are going to suffer from their tightening policies – they are still going to keep doing it! Â
“I hurt myself today
To see if I still feel
I focus on the pain
The only thing that’s real” – Nine Inch Nails
All this, of course, is panicking people back into the Dollar, which is back over 109 so, on the whole, the markets are holding up pretty well at the moment as we wait on the revised Q2 Productivity Report (8:30), followed by PMI (9:45) and then ISM & Construction Spending (10). So it’s going to be a busy morning.
8:30 Update: Productivity was a little better than the first estimate (-4.6%) but still down 4.1% and Unit Labor Costs not as bad as the first estimate (+10.8%) but still up 10.2% which makes us 14.3% less productive per Dollar than we were last year. That is NOT GOOD!Â
People who are struggling to make ends meet and juggling credit cards and checkbooks are yes, less productive and they are not as focused on their jobs – especially when they have to go right to a second job because the first job doesn’t pay them enough money. We were discussing this in yesterday’s Webinar.
Nixon took the country off the Gold Standard (a dollar was, in theory, backed by $1’s worth of gold) in 1971 and the Dow went from 100 to 120 as liquidity increased but then Inflation hit (sound familiar?) and we fell almost to 60 (50%) into 1975, which led to Carter and an energy crisis (sound familiar?) and Volker came into the Fed and raised rates to 22% in 1982 and, by the end of Reagan’s 2nd term (1989), inflation was down to about 7%.
This is what we have forgotten after 15 years of 0% interest from the Fed – THIS IS NOT NORMAL! 5% is “normal“, not 2.2% we have now. The Fed is 3% away from normal and they are NOT going to go back to zero once they are done. The sooner markets accept this and price it in, the better. Â
