Thoughts from Pontevedra, Galicia, Spain: 16.4.20

Spanish life is not always likeable but it is compellingly loveable.   

- Christopher Howse: A Pilgrim in Spain*

Note: I'm indebted to Lenox Napier's Business Over Tapas for one or two of today's items.

The C Word

• This is a decent overview, albeit with a US bias.
• And here's the latest - accurate? - data on deaths per million, compared with 5 days ago. Countries to note: Belgium (No. 1); Switzerland; Sweden (still in the middle), the UK(rising), the USA (same place), and South Korea (no more deaths.  Chilling to know that the many home and care-home deaths are often excluded:-

	Deaths  per M @ 11.4.20	Deaths  per M @ 16.4.20	By  deaths per M @11.4.20	By  deaths per M @ 16.4.20
Spain	330	402	1	2
Italy	302	358	2	4
Belgium	218	419	3	1
France	187	263	4	5
N'lands	140	183	5	7
Switzerland	119	386	6	3
UK	118	190	7	6
Sweden	79	119	8	8
Luxembourg	70	110	9	9
Ireland	53	90	10	10
USA	50	86	11	11
Iran	49	57	12	13
Denmark	41	53	13	14
Portugal	40	59	14	12
Austria	33	44	15	16
Germany	31	45	16	15
Norway	20	28	17	17
Romania	13	20	18	20
Canada	13	27	18	18
Iceland	11	23	20	19
Israel	10	16	21	22
Czechia	10	16	22	22
Turkey	9	18	23	21
Finland	8	13	24	23
Poland	5	8	25	24
Brazil	5	8	25	24
S Korea	4	4	27	28
Peru	4	8	27	24
Chile	3	5	29	27
China	2	2	30	29
Australia	2	2	30	29
Japan	0.8	1	32	33
Russia	0.5	2	33	29
India	0.2	0.3	34	34

Spain: Not everyone is convinced it's the right moment to start implementing a relaxation of the lockdown, though it'd be nice to be allowed to go out for a walk, at least.

France: Has been almost as badly hit as Italy and Spain. President Macron has extended the lockdown for another 4 weeks, 

Germany: Chancellor Merkel has announced plans to slowly ease restrictions on shop-opening but distancing rules will stay in place until at least 3 May, and Mrs Merkel has also recommended the use of face masks in shops and on public transport.

The UK: The curve is said to be flattening and the government has promised to announce its lockdown exit strategy soon. Meanwhile, it's reported that many home and care-home deaths will inflate the already high number of deaths.

The USA: 1. The COVID-19 outbreak that has infected more than half a million Americans is killing people or causing them to become seriously ill at vastly different rates in different states, baffling scientists who are still learning about the virus that causes the illness. 2. The USA on Wednesday posted nearly 2,600 additional deaths in 24 hours, a new record and the heaviest daily toll of any country. The figures came after President Trump earlier in the evening said "The data suggests that nationwide we have passed the peak on new cases," and that he will announce on Thursday the first plans for lifting coronavirus lockdowns. 

Life in the Time of Something Like Cholera

• The article on street activities in Malasaña that I cited yesterday reminded me of my regular assertion that there's nothing more important to the Spanish than having fun. Except surviving Covid-19, of course,
• Good to know that the virus has at least reduced pollution in our major cities.
• But very bad to read the the virus will create more unemployment here than in Italy.
• And very sad - and disturbing - to read of this sort of thing. There's a lot of talk of 'solidarity' when Spain is seeking/demanding money from Brussels but, back home, the concept might well only apply to family members.
• As I was out - illegally? - jet-spraying the pavement outside my house yesterday, my neighbour suggested I do theirs as well. I replied that I'd rent the machine to him or, if he asked nicely, lend it to him, as I've done in the past. To which he claimed we're not allowed to touch each other's things (as it were). "Nice try, Toni", I replied. "Get yourself some gloves".
• Talking of neighbours . . . I've said that the husband of the couple who've moved in next door might well be an individualista, one of those Spaniards who don't think inconvenient rules apply to them. As indeed might be the last Prime Minister, who's being investigated for taking an illegal run in the street.
• This is a useful reminder of the fact that, whatever problems or difficulties I might have, they're very minor compared with those of others.

The EU

• I missed this Guardian article last week. The coronavirus crisis has exposed the truth about the EU: it's not a real union. 

The USA 

• Did we really need Fart to spell out that he thinks he has absolute power and can compel state governors to obey his every whim? We haven't forgotten his ludicrous claims about Article 2 of a Constitution he's unlikely to have read. Or understood if he had.

The Way of the World 

• Western European countries are facing an acute shortage of agricultural labourers. These are usually brought in from the East but are now unable or unwilling to come. But not all of them; the UK is said to be flying in Romanians to pick strawberries.
• Never a natural optimist, Ambrose Evans Pritchard, in the article below, pooh-poohs the 'delusional' forecasts of a V-shaped economic recovery. One hopes he's wrong but fears he's right.

Spanish

• Word/Phrase of the Day:- 

1. Sacar pecho: 'To adopt an attitude of pride and defiance'. (Lit. To puff out your chest)
2. Contra viento y marea:  Against all the odds (Lit. against the wind and the tide).
3. Trascendental: Momentous

Finally . . .

• A couple of years ago, a reader kindly advised me my blog was no longer appearing in at least one reader. So, I investigated and eventually discovered I needed to change an RSS code in a 'feed' I didn't know I had. Anyway, if my blog won't appear in your reader, try this code in the Add Subscription box:-    http://www.blogger.com/feeds/5993007/posts/default

THE ARTICLE   

Delusional markets are still betting on a V-shaped recovery that cannot possibly happen: Ambrose Evans Pritchard, the Daily Telegraph.

Investors are repeating the mistake they made all through February and early March. They are again underestimating the immense economic shock of Covid-19.

Can there be any parallel in market history to the surreal clash of narratives we saw on Tuesday? Global bourses soared even as the International Monetary Fund painted a series of scenarios ranging from dire – the most violent slump since the Great Depression – to catastrophic, with all the potential chain-reactions spelt out in its Global Financial Stability Report.

Yet Goldman Sachs tells us that Covid-19 is under control and the worst is over. “The number of new active cases looks to be peaking globally, projections of cumulative fatalities and peak healthcare usage are coming down,” it says. From this breathtaking premise, Wall Street’s fashion leader argues that we should “look through” the Great Lockdown to sunlit uplands ahead, anticipating a further 8% rise in the S&P 500 index by the end of the year.

We can disregard normal bear market rules. This time we will avoid the textbook sequence of events in recessions: a swift crash followed by a torrid buy-the-dip rebound, and then a slow downward grind over months as reality hits home, ending only in capitulation at far lower levels. Authorities have spared us such a fate by rescuing everything immediately. “The Fed and Congress have precluded the prospect of a complete economic collapse,” it says.

I agree that $5 trillion (£3.9 trillion) of central bank QE, vast fiscal packages (10%of GDP in the US), and blanket guarantees, have averted disaster. They have – in a disjointed way – bought time and given us a chance of emerging from this global sudden stop without irreparable damage to the productive system.

What is surely wrong is to imagine that this pandemic is a one-off shock lasting three months or so, followed by an early release from lockdowns and a swift return to near normality. The first glimpses of antibody data – such as Denmark’s test on blood donors – show that we are nowhere near the safe threshold of herd immunity. They confirm fears that the mortality rate is at least 1pc of infections and that therefore no democracies can let the virus run its course without overwhelming their health services and destroying their political legitimacy. The supposed trade-off between lives and the economy is an illusion. The most certain way to turn this crisis into a depression is to give up too soon, as Spain is already doing, and Donald Trump is itching to do. We would end up in the worst of all worlds, with multiple waves, and another forced closure of the economy to avert a winter tsunami, requiring trillions more in fiscal relief.

The only viable path is to contain the virus – to drive the Ro transmission rate below 1.0 – and hold it down by East Asian means of “testing, tracing and isolating” as we shift from an acute phase to a chronic phase. We are not close to achieving this. We lack the testing infrastructure at scale – even in Germany – and little is being done to prepare the public for tracking surveillance.

“We need a vaccine. Until we get one, the stock markets are in cloud-cuckoo land,” says professor Anthony Costello from University College London.

The IMF’s most extreme scenario is all too plausible. It assumes the pandemic drags on, with a second outbreak in 2021. This would cause output to contract by almost a tenth and set in motion a “non-linear response of financial markets” – fund parlance for defaults and panic.

Public debt ratios would jump by 20 percentage points of GDP. The shock would push Italy’s debt above 17% of GDP. Ratios would rise to 155%in Portugal, and to 135% in Spain and France. In my view, such debt spirals among sub-sovereign borrowers would render monetary union dangerously unstable unless the EU faced up to its “Hamiltonian” moment and agreed to fiscal union. The evidence is that Europe is not about to do any such thing.

Markets are assuming that Germany and its northern allies may grumble but will always allow the ECB to keep covering Club Med fiscal deficits. But assumptions are treacherous.

The IMF prefers to dodge this minefield, but its Stability Report lists plenty of other weak links. For starters, “emerging and frontier markets are facing the perfect storm”. Currencies have buckled. Foreign funding has been cut off. Outflows are running at twice the pace of 2008. Median debt is almost 100%f GDP, much higher before the Lehman crisis. Most lack the fiscal firepower to backstop their corporate systems and to cover lost wages.

Global banks were supposed to be bullet-proof after boosting capital ratios but the regulatory buffers were never stress-tested for such a shock. They risk becoming the “amplifier” of the downturn as rising bad loans force them to pull back, starving the real economy of credit.

Even if the worst is avoided and there is no secondary financial crisis, there will not be a swift return to normal. Mohamed El-Erian from Allianz said the rescue measures offer liquidity but cannot prevent the slow burn of defaults. Nor can they kick start the economy when companies refuse to invest because they have no idea what is going to happen.

The market has yet to grasp that “we don’t come out of this where we went in”. Earnings are structurally damaged for years to come. Equities are not worth the same. Some 17m Americans have lost their jobs in three weeks and the Great Purge has yet to run its course. Global unemployment rates will explode to politically dangerous levels if the pandemic is not properly contained.

The idea of V-shaped recovery was overly hopeful three weeks ago. Clinging to that position today borders on delusional.

 *A terrible book, by the way. Don't be tempted to buy it, unless you're a very religious Protestant.