Monday, May 25, 2020

Big Tech | The Corporate Hydra

 

The shear size and breath of Big Tech is staggering like a corporate hydra that continues to grow even during one of the worst global pandemics since the 1918 Spanish Flu. It’s influence is far more insidious because globalization and technology promotes instantaneous worldwide communications.

 During the pandemic Microsoft, Apple, Amazon, Alphabet and Facebook have added $1.7 trillion collectively to their market capitalization. Not only economically but politically they’re unstoppable and untouchable because they’ve grudgingly considered as ‘saviors” of the economy through digital services that enabled millions of employees to work remotely and prevented a total global economic catastrophe. For this reason they’ve made aggressive digital expansion a top priority and essential and even patriotic services on a scale on which only they’ve capable of achieving.

 The following chart Microsoft is the Last Member of the Trillion-Dollar Club provided by Ycharts and presented 24 March 20202 by Statista, an online German statistical firm, provides a visual comparison of the market capitalization enormity and digital power of Big Tech.

 


 

Additionally, despite the global economic downfall since the emergence of the pandemic, Big Tech’s revenue has grown remarkably as shown in the following chart provided by company filings and presented by Statista 4 March 2020 entitled Tech Giants Shrug Off Covid-19 Crisis in Q1.


The Human Innards of the Digital Oligopoly

Aside from their obvious economic power the more insidious and dangerous trend is occurring now with respect to the composition of people who are running these oligopolies. Because of this industry’s short but historical lack of ethnic and racial diversity, the present-day [and future algorithms] have been documented to be flawed lacking breath, depth and texture. This leads these firms unable or unwilling to serve the broad-based American public fairly and efficiently.

Under the protection of propriety laws it will be difficult to assess to level of bias making comparisons with those from other tech firms impossible. For this reason decisions-making making impacting millions will be made on flawed studies. If it was a human entity artificial intelligence would choke on bad data.

Lack of diversity at all corporate levels means loss of creativity while creating false assumptions. A management that remains stubbornly ethnically and racially homogeneous promotes a rigid mindset and a myopic corporate vision. A monolithic management structure creates a working environment in which no one at any level “sees it coming.” True diversity means different colors, not variations within the same color.

It’s an industry that has always been elitist and will be even more so. Imagine an industry run by billionaire owners and millionaire workers and soon by billionaire owners and multi-millionaire workers.

The economic destruction wrought by the pandemic has created an elite and exclusive club of even larger firms on steroids serving as oligopolies with the financial decimation of the competition. This greater concentration of overall power is to the detriment of society and eliminates competing ideas and perspectives.

Digital Saviors and Future Societal Masters

Big Tech. Too big to control. Too big to unplug. Despite the US Department of Justice’s preparation for anti-trust lawsuits against Big Tech firms, they’ll inevitably forced to make a pact with the devil.

Firstly Big Tech has as much and perhaps more legal “firepower’ than the government and can withstand whatever fines are imposed guilty or not.

Secondly, with respect to all fiscal and professional resources because of the pandemic the government is over-stretched. They will be too preoccupied with digging out from historical debt after spending trillions for stimulus packages. For this reason Big Tech will not be subservient to the government rather a leading partner. For public relations and “optics” any anti-trust trials will be nothing but a showcase kangaroo case with Big Tech paying some modest, slap-on-the-wrist fines, undoubtedly tax deductible.

Small tech firms will operate profitably in their shadow in the role of de facto cyber-colonies operationally “persuaded” to continue using Big Tech’s operating platforms. Alternate platforms can be made operationally efficient but will be uneconomical. It’s legal discrimination. In other words small tech firms will forever operate under Big Tech’s the sword of Damocles. If small tech firms become too independent, uncooperative, threatening or even grow too much then their sources of political and financial support can be unplugged.

In the present-day and post-pandemic world Big Tech represents an oligopoly of control over information flow. Mainstream media represents its twin flame because that industry is controlled by only a handful of mega-corporations whose interests and objectives are closely aligned. Big Tech functions in a post-pandemic society in the same way movie The Matrix presciently described in the scene with the woman in the red dress providing the illusion of choice along with “food & circus” to pacify the citizenry.

 Copyright 2020 Indo-Brazilian Associates LLC.

Indo-Brazilian Associates LLC is a NYC-based think-tank and advisory service that provides beyond-the-horizon contrarian perspectives and risk assessments on energy investments, geopolitical dynamics and global urban security.




Retro Jet Set Glamour

 


The jet set of the 1960s is back! Or will soon be in a similar yet familiar retro-format. The global pandemic and subsequent concurrent present-day recession have decimated the airline industry. Because globalization is irreversible with aviation serving as its essential component, the industry will recover slowly and progressively with a distinctly different post-pandemic business model.

Deregulation | Free For All

During the jet set era of the 1960s regulation made it possible for only the well-heeled to travel. Airline deregulation in the early 1980s heralded in a new era enabling the “salt of the earth” to fly to cities, especially overseas, at affordable prices. Airline competition then heated up “melting” ticket prices with domestic flights almost as competitive as the taxi fare to the airport itself.

Pandemic Fallout | Grounded

Deregulation endures yet the economic fundamentals – market forces – dictate prices. Airlines are permanently retiring aircraft, mostly older less fuel-efficient models, and keeping the newer more efficient ones, while placing a hold on new purchases. Furthermore unprofitable or marginally profitable routes will be eliminated making it a seller’s market to the tune of; “my way or the highway” or is it “runway”?

The following chart 22 May 2020 provided by UNWTO (United Nations World Tourism Organization) entitled Global Tourism to Suffer Crushing Blow in 2020 and presented by Statista, an online German statistical firm, shows the projection for tourism demand destruction.

 

 


 

For this reason air traffic has dropped considerably as shown in the following chart dated 31 March 2020 entitled Covid-19: Unprecedented Decline in Air Traffic provided by Flighttrader24, an air tracking service, and presented by Statista.

 


 

This leads into the inevitable massive financial losses as depicted in the following chart 6 March 2020 entitled Airlines Could Lose $100+ Billion Due to Coronavirus provided by IATA (International Air Transport Association) and presented by Statista:

 


The Future of Air Travel | Into The Wild Blue Yonder

The new business structure for the business or leisure traveler will conjure a new aura of elitism coming full circle back to the jet set era. Because the global economic recovery will be modest and fall far short of pre-pandemic levels, air travel will become a luxury to most even for domestic travel.

The immediate and post-pandemic business model will feature fewer airlines operating at far less capacity with fewer passengers. In a tumultuous economic era demand will be unstable and unpredictable forcing cash-strapped airlines to be justifiably ultra-conservative how they restart their business.

The following are additional operational and financial challenges for airlines:

·         Bankruptcies: Multiple airlines worldwide will face bankruptcies and liquidations - a total operational and financial restructuring of the industry operationally.

·         Pilot Demographics: There will be a permanent furlough of pilots far more pilots than operational aircraft and the new pilots will be hired at far lower salaries than the low salaries they receive now. The pre-pandemic demographics heavily favored younger pilots because the ones about to retired exceeded younger pilots. However because of far less demand and aircraft in service, younger pilots may be scrambling to secure employment.

·         Pilot Flying Currency: Not only have aircraft been mothballed but the media has forgotten the pilots who are furloughed and haven’t been in an actual cockpit in months, more than likely on simulators.

·         White Elephants: The recently expended or constructed airports could be the new white elephants designed for the pre-pandemic era which now have excess capacity.

·         Cheap Fuel: The upside is that fuel prices, a major airline cost component, will remain low so operational costs will be manageable.

The trend of fewer aircraft orders occurred merely weeks before the emergence of the pandemic and is already accelerating the cancellation of orders. The projected future impact is evident in this chart dated 30 October 2019 entitled Turbulent Times for Commercial Aircraft Orders provided by Boeing, Airbus and presented by Statista.

INDUSTRY PROJECTIONS

Leisure & Hospitality

High unemployment will continue and even the employed are fearful about keeping their jobs. For this reason air travel is already a luxury with more vacations taking place regionally by car, train or auto. Air travel will be affordable for the well-healed akin to the throwback 1960s jet set of rock stars, movie celebrities and the wealthy. It will be full price with full service as airlines retool their business model to serve them.

Business Travel

There will be far fewer business travelers particularly with the upgrade of teleconferencing software that will offset the necessity and expense of travel as only senior management will travel to key events such as annual industry conferences and visit major customers.

Whether for business or pleasure the proverbial “time and money” factor there will be strong consideration to justify travel to smaller cities. From a cost perspective airlines may reduce or even eliminate connections to smaller regional airports from major hubs. This will necessitate alternate non-air travel arrangements via bus or train which means longer and more expensive trips.

A beneficiary of this chaos may be the corporate jet sector. A business can conduct a cost/benefit analysis based on required annual travel and level of urgency, with flexibility. Its choices include one or more of a combination of buying, leasing, chartering or fractional ownership. The corporate business sector already has long-range, large private jets that matches, and sometimes exceeds, those in first-class of large commercial aircraft.

Recommendations

With respect to an investor, although there is still much uncertainty in the transportation field, a cautious foray today with progressive additional investments in this field may pay off handsomely by late 2021 by which time a vaccine will have been developed and possibly in the process of distribution.

Investment considerations should be an industry-specific index rather than company-specific because of the inevitable and unpredictable shakeout such as the U.S. Global Jets ETF (JETS) and Dow Jones U.S. Airline Index (DJUSAR).

 

Copyright 2020 Indo-Brazilian Associates LLC.

Indo-Brazilian Associates LLC is a NYC-based think-tank and advisory service that provides beyond-the-horizon contrarian perspectives and risk assessments on energy investments, geopolitical dynamics and global urban security.







Wednesday, May 20, 2020

Economic Micro-Burst During the Viral Ceasefire


The Trough Between the Viral Waves

As the easing of restrictions unfold there is a particular type of pent-up demand that consumers will grab before a potential second resurgence of the virus compels governments to impose another lockdown.

I’ve identified two types of people during the delicate period between the first and second waves: the ants and the grasshoppers. Adhering closely to the Aesop’s fable “The Ant & The Grasshopper” the ant is the industrious prepper who takes advantage of the reopening of businesses to acquire whatever is needed before the second wave arrives forcing another government-mandated lockdown, whenever it may occur, often at the most inopportune time.

On the other hand the grasshopper is the na├»ve Pollyanna believing that things will inevitably - slowly but surely – return to almost pre-pandemic normal. In a Stephen King twist to Aesop’s fable, a nasty turn of events converts these grasshoppers turn into crazed, ravenous locusts – aka looters.

My intuition says that this viral ceasefire will conveniently fall between Memorial Day and Labor Day before the arrival of a second viral wave to the point that state and municipal governments require another lockdown.

Big Business for Mom & Pop

Mom & pop shops will benefit most during this “phony war” trough of indefinite and unpredictable duration between the first and second waves. Just as the Spanish flu had three large waves, I project that Covid-19 will follow a similar pattern.

The pent-up demand may compel these small shops to extend their hours of operation, and gladly so, to soak up as much revenue as they can. These are the 1,001 little things everyone takes care of piecemeal throughout the week never imagining that time will stop for months without any of these tasks getting completed. Let’s review some of those basic services provided by these mom & pop shops that were already vanishing pre-pandemic:

·         Dry cleaners & clothing storage: winter coats, sweaters and other winter garb require cleaning before they’re stored away because of the seasonal change.
·         Tailor: The critical in-person fittings with the required PPE and inevitable repair of tears and adjustment of newly purchased garments whether pre-lockdown or online during the lockdown.
·         Hairstylists & Barbers: After weeks of lockdown most people probably look more caveman/cavewoman and who rightfully exclaimed with an air of understatement, “I can’t do a thing with my hair.”
·         Shoemakers: A dramatic increase in reconditioning footwear more so than ever because of the newly unemployed, under-employed and those who are fearful of becoming the former two.
·         Watches: Replacement of batteries for quartz models. Time may stop but life carries on.
·         Dentists: Getting that check-up and cleaning for those still with healthcare benefits.
·         Autos: Even vehicles were furloughed and urgently need servicing such as the change-of-season oil & filter changes and general servicing for late spring through fall driving.

HOSPITALITY AND TRAVEL INDUSTRY READY FOR TAKE-OFF

You may not think of Boomers and fatalists having much in common and in fact they don’t except under extreme circumstances such as between the waves of a pandemic.

Boomers

The oldest Boomers (the generation born between 1944-1964) will be in their 70s in 2021 with the oldest being 77. Long-retired and denied the opportunity to travel in 2020 due to cross-border closings and lockdowns, this sub-demographic of Boomers probably has the miserable preview experience of being in an assisted living facility or nursing home.

For this reason these Boomers with more disposable income than younger generations will be racing to the airline departure gates because of fast-approaching decrepitude with or without a vaccine. Furthermore add their fear of a subsequent pandemic requiring more extended lockdowns and eliminating any future opportunity to travel because they’ll be too old. For Boomers the sands of time are running out. It’s a fatalistic yet logical choice for those in this demographic subgroup with the attitude, ““Damn the torpedoes full speed ahead!”

This travel demand will increase further trend among the middle and younger Boomers will take hold when a successful vaccine is developed at scale and administered for the same reasons.

Fatalists

This demographic is partly made of Boomers and a generous demographic chunk of the younger generations who refuse to wallow in misery. Because their future job prospects are bleak or non-existent, instead of deferring their travel dreams, they’ll fast forward their pleasures applying “carpe diem” to the max. It’s far easier to regret credit card bills than lifelong regrets. The former can be paid back, the latter never. These fatalists would rather that a stunning landscape take their breath away rather than a virus.

The Travel & Hospitality Industry

In this seller’s market there will inevitably be far lower demand than during the pre-pandemic era however higher prices due to limited capacity will not deter this Odd Couple demographic. The industry will reopen in whatever format demand meets capacity.

On the other hand business travel growth to shrink far below pre-pandemic levels through enhanced and upgraded teleconferencing technology that will substitute face-to-face meetings.

With respect to business travel I believe that there will be a tepid recovery but far below pre-pandemic levels. The success of business communications during the extended lockdowns has convinced firms to invest in new technological communications systems and reduce, if not eliminate, business travel altogether.

The travel capacity with respect to aircraft in particular will be limited due to the inevitable bankruptcy and restructuring of every airline with a slow and selective entry of mothballed aircraft back into service. For this reason I expect airline prices to be expensive. Nonetheless because of the aforementioned reasons Boomers and fatalists will be willing to travel at any price.

According to the following chart The Industries Worst Affected by the Covid19 Job Crisis provided by the US Bureau of Labor Statistics and presented 11 May 2020 by Statista, an online German statistical firm, the hospitality and leisure industry has hit rock bottom with an unemployment rate of 39%.


This presents a superb opportunity for investment in anticipation of its albeit limited recovery driven by the aforementioned forecast demand.

Because of the lingering effect of mass employment across all industries and projected permanent unemployment of those workers, the travel & hospitality industry will not return to pre-pandemic levels. However the short-term opportunities as outlined should be seriously considered.

Recommendation

For the investors stock picks for specific airlines and hospitality firms are highly speculative because each firm has their particular financial and labor challenges that will determine whether they will survive or die.

For this reason investment travel & hospitality indices are preferable for investments such as Dow Jones U.S. Travel & Leisure Index (DJUSCG: Dow Jones Global Indexes).


Copyright 2020 Indo-Brazilian Associates LLC.

Indo-Brazilian Associates LLC is a NYC-based think-tank and advisory service that provides beyond-the-horizon contrarian perspectives and risk assessments on energy investments, geopolitical dynamics and global urban security.

Tuesday, May 19, 2020

The Emerging Cash-Poor Wealthy



The Present-Day Snapshot

After months of lockdowns the easing of restrictions has begun allowing greater freedom of movement. However the economic destruction wrought by the Covid-19 pandemic will be long lasting regardless of how high the stock market may soar. Companies are cautiously looking to reopen on a highly limited basis and will justifiably under-hire furloughed employees because there’s an initial tepid demand for goods & services that are non-essential.

It’s widely reported and documented that food banks are becoming overwhelmed not just by those on the lower socio-economic rungs rather by multi-generational, middle class families who have depleted their savings because of unemployment and limited unemployment insurance.

A Profile of the Wealthy

The May 2020 Wealthy-X report provides a basic overview of the wealthy and the various categories of wealth.

Category
Net Worth
Percent
High Net Worth (HNW)
$1-$5 million
40
Very High Net Worth (VHNW)
$5-$30 million
25
Ultra High Net Worth (UHNW)
Greater than $30 million
35

In their report from 2005-2019, the number of individuals with a net worth of at least $1 million has doubled from about 13 million to 25 million.

With respect to professions, banking & finance lead the way with 22.6% and businesses & consumer services are second at 16.3%. Interestingly those in the real estate field compose only 5.4% of the wealthy.

“The Rich Are Different From You and Me”

As quoted from F. Scott Fitzgerald, author of The Great Gatsby, the 21st century wealthy are far more numerous because they can use financial leveraging by taking Lombard loans which use equities in their own firms as collateral. As the stock market soared to Icarus-like heights during the 2010s so had their net worth. Although their net worth is impressive, many of the wealthy who utilized this financial arrangement were technically cash poor.

When the markets plummeted in March the banks called in those Lombard loans and requested additional monies to cover those exposed positions, the wealthy had to liquidate whatever they could, from equities to cash, “everything but the house”, which exacerbated the market selloff.

This trend by the desperate wealthy is discussed in several Financial Times articles notably Wealth Managers Ask Rich Clients to Stump Up More Against Loans, 13 March 2020 and  Hedge Funds Suffer Worst Quarterly Outflows Since Financial Crisis, 22 April 2020.

A highly publicized example is Elon Musk of Tesla who readily admitted that he’s cash poor because most of his wealth is in his company’s equity half of which is collateral for personal loans.

For this reason a surprising number of the cash-poor wealthy is on the cusp in joining their non-wealthy socio-economic classes - the merely middle class who are facing survival level vulnerabilities.

Assessing The New Landscape

Many are still wealthy on paper but they’re cash poor and stuck with high overhead and illiquid assets such as multiple residences, high-end cars, boats, airplanes, art and exotic financial instruments such as derivatives.

Because of their financial over-reach, opulent lifestyle and expenditures more wealthy families than you can imagine can only hold out for the short-term before declaring bankruptcy. Vaccine or not the global economic recovery will fail to support their over-the-top lifestyle.

For this reason the best option is downscale and downsizing through the aggressive selling of assets which they’ll get pennies to the dollar. Even as early as early April purchases of luxury residences stalled as articulated in the Financial Times article New York Luxury Towers Quake As Coronavirus Hits New York Property Market, 7 April 2020.

On the flip there were wealthy individuals who foresaw a market meltdown [certainly not caused by a pandemic] and were savvy enough to remain financially disciplined and  highly liquid as articulated in the Financial Times Wealth Management article, Rich People Are Hoarding Cash, and Money Managers are Frustrated, 19 September 2019.

 Tectonic Socio-Economic Shifts

The socio-economic tectonic plates are already in motion. The suddenness of the economic downfall has resulted in a delayed reaction to the financial destruction by many ultra and merely wealthy who might not even know their financial position. Formerly highly-rated illiquid assets are almost impossible to reassess in a vacuum where no demand exists. Some might be psychologically in denial and insist on wearing the finest Emperor’s clothes and blithely become paupers overnight, from wealthy to marginally solvent, after their accountant crunches the numbers.

There may be some near future feature articles about how a high-flying, formerly wealthy [albeit cash-poor] CEO or founder lost it all during the pandemic and economic meltdown. However in most cases the cash-poor and perhaps humbler wealthy will muddle through with a subdued lifestyle.

Elsewhere the overwhelming rest of the citizenry will experience a nightmare rollercoaster ride downhill as the economic figures appear like state-size iceberg that slices off into the ocean as follows:

·         A slice of the ultra-wealthy will now be merely wealthy.
·         The wealthy will become the new upper middle class.
·         The upper middle class is the new traditional middle class.
·         The middle class is the new lower middle class at best or working poor.
·         The poor will become destitute.

Luxury Market | Economic Behavior Modification

For the aforementioned reasons expect a severe reduction in luxury purchases by the wealthy in every category contingent on their financial position:

Slightly Affected: The priority for these wealthy families will be the once-in-a-generation opportunistic business acquisitions rather than non-revenue generating luxuries.

Hard Hit: These wealthy families will engage in an economic survival mode in a “wait & see” mode to determine whether what revenue they’ll have near and medium term. For this reason luxury purchases will cease.

In sum the luxury market faces a new, far smaller consumer base with a vastly diminished buying power. Furthermore US shoppers of all socio-economic backgrounds during the 2010s have been de facto hoarders and are “shopped out” making it challenging for marketing departments to create a “must have” item. Keeping up with the Jones isn’t as tempting when the Jones are desperately staying financial afloat. All this bares the fact that a certain sliver of the wealthy was never wealthy at all because the genuinely wealthy are well-positioned to weather any economic storm.


Copyright 2020 Indo-Brazilian Associates LLC.

Indo-Brazilian Associates LLC is a NYC-based think-tank and advisory service that provides beyond-the-horizon contrarian perspectives and risk assessments on energy investments, geopolitical dynamics and global urban security.

Wednesday, May 13, 2020

OPEC+: The Virtual Oil Cartel


The cross-border closings and the potential lethality of Covid-19 forced OPEC+ to conduct a virtual meeting on April 12 similar to the Group of 20 virtual meeting on 26 March. These virtual meetings have set a precedent with organizations at the highest levels during a crisis and may carryover as standard operating procedures for post-pandemic communications.

For OPEC+, like their counterparts, holding a virtual meeting was critical because the Covid-19 pandemic has resulted in the collapse of world economies and subsequently oil demand destruction.

The New Game Changing Virtual Reality

Should OPEC+ adapt this new and effective communications protocol, it will fundamentally change the decision-making process by making them far more proactive rather than reactive to changes in the global oil market. Historically OPEC’s inability to be more proactive has been its Achilles heel whose decisions lag in an ever increasingly fast-moving market. Virtual meetings place them far closer to oil price dynamics.

For this reason virtual communication is particularly useful in a present-day extreme crisis in an environment of low oil prices, low demand, record-setting inventory against the backdrop of the tentative re-opening of world economies.

Virtual meetings provide OPEC+ members a rapid response to schedule emergency meetings within days if not hours. Furthermore these virtual meetings won’t have the logistical encumbrances of travel and time which means its duration can continue well beyond the 72 hours at regular in-person. Nonetheless the application of advanced technological of communications does not signify better business communications or coordination – often it amplifies them.

Whether and to what extent they exercise this new communication option is an open question because for political reasons some OPEC+ members would prefer in-person meetings.

The New Co-Swing Producers

Emerging from the oil demand destruction caused by the global economic lockdowns, the Saudis and Russians have emerged as the new co-swing producers who have achieved their objectives. Whether through design or default, US shale oil firms are in full retreat and disarray with a considerably diminished role as zero demand and rock bottom prices have accelerated the bankruptcies, consolidations and eventual restructurings. Furthermore the diminished US shale oil production provides the Saudis and Russians have a window of opportunity to increase market share, and despite their uneasy alliance. Political and operational cohesiveness is key.

The Russo-Saudi Oil Price Gap

The Saudis require $83/bbl to balance their budget while Russia is satisfied to be in their sweet spot breakeven price of $40/bbl – a canyon-wide difference of $43/bbl.

How? For the Russians there are internal competing interests: oil producers and the government. Oil prices above $40/bbl are by law heavily taxed by the Russian government. This means that $40/bbl is a strongly preferred price point for Russian oil producers; anything above $40/bbl favors Russian government coffers. This price point applies to their aging “brown fields” which have low extraction costs.

The Saudis have increasingly relied on issuing international bonds and the recent modest Aramco IPO to raise funds for Vision 2030 megaprojects. The pandemic has seriously damaged those objectives and more ominously damaged their efforts at meeting basic services to the citizenry, a crisis that if it continues well into 2021 represents an existential threat to the Mohammed bin-Salman leadership.

This is why the huge oil price gap as to what the Saudis require and what the Russian energy firms are satisfied with in the shadow of a global recession exacerbates the never-ending friction between these two countries with respect to OPEC+ production issues.

US Shale Oil Runs Out of Gas

In my article published by Seeking Alpha 19 November 2019 entitled Oil Prices Heading toward A Hard Landing, I discussed in detail how US shale oil firms’ lack of fiscal discipline will shortly drive them into a financial ditch. Under the article’s “Supply – U.S.” sector I noted: “In sum the following USIA chart shows the widening gap between US oil production vs declining oil prices that signals an unsustainable financial trend for many US shale oil firms and a potential a hard landing in oil prices.” One of US shale oil’s largest firms Chesapeake Energy Corporation [NYSE: CHK] is considering bankruptcy.

Oil Price Projections

According to The Financial Times 11 May 2020 article, Saudis Will Make Further Supply Cuts To ‘Encourage’ Peers, the Saudis announced a production cut of an addition 1 million bbls/day in June while the UAE and Kuwait agreed to production cuts of 100,000 bbls/day and 80,000 bbls/day respectively.

With the severe reduction in US shale oil production, I believe that oil prices will meander slowly upwards in an attempt to find the right price point. Because of the overly optimistic forecasts of re-openings that will overshoot the fundamentals, oil prices will probably be slightly over-valued during its ascent. Furthermore, upward pricing will have traction issues because of the historical massive inventory glut.

In sum I project that oil prices will reach $40/bbl by Labor Day as global economies gradually recover.

Virtual Reality and Its Impact On Investors

For the long-term investor OPEC+ mobility will have little impact on investment strategies because of the long view that relies more on fundamentals.

Short-term investors must develop a new mindset because OPEC+ has the potential to be more nimble and more pro-active enabling them to shift directions rapidly - from the captain of a super-carrier to that of a speedboat.

Recommendation

I am cautiously bullish on oil prices for the short-term until the Labor Day weekend because of the gradual re-opening of world economies in the midst of the driving season as well as the limited opening of the travel & hospitality industry. For this reason I recommend a broad-based index in which to invest such as the S&P Global Oil Index (CNY).


Copyright 2020 Indo-Brazilian Associates LLC




Tuesday, May 12, 2020

The Summer of Pandemic Pandemonium



A devilish witch’s brew of festering elements is developing that may trigger a societal breakdown of law & order if they coalesce in just the right way. The catalyst is the devastating impact of Covid-19 which has injected this cocktail with steroids can unleash a firestorm of civil disorder this summer. The new “hot spots” won’t be the epidemiological dominant presence of the coronavirus rather the physical dominance of rioters and looters from every socio-economic level.

Here’s the menu of the toxic elements for a perfect storm this summer:

Economic
The suddenness of the global economic collapse occurred within weeks, faster rate than the Great Depression which took months. For many middle class Americans they suddenly found themselves staring at the possibility of becoming poor and/or homeless overnight.

The gradual re-opening of many urban areas in the US just before and around the Memorial Day weekend with the easing of restrictions will not assuage the shock, despondency and anger over mass unemployment. The official unemployment rate of just under 15% reported by the government the first week of May and a possible double-digit decrease in GDP for the 2Q2020 are Depression-like figures.

Millions will never return to the workforce because of tepid demand and corporate overhaul of the business model requiring fewer employees. For this reason businesses will open gradually, cautiously and hire only a fraction of the workers they laid off or furloughed. To make matters worse, some workers will be forever unemployable as companies use not only automation but also hire far fewer (aka younger and cheaper) workers. Even the oldest Millennials who are entering middle age will soon face age-discrimination hiring.

The following chart Unemployment Rate Jumps to Highest Level Since WW II provided by the US Bureau of Labor Statistics and presented by Statista 10 May 2020, an online German statistical firm, the official unemployment spike is visually depicted:


There are few from the Greatest Generation era who survived the Great Depression who could offer advice and solace, comfort and wisdom. We’ve entered uncharted territory economically and psychologically because we’re facing a gruesome economic nightmare plus a global pandemic.

According to the World Bank Poverty and Shared Prosperity report in 2015: “The United States has a Gini coefficient of 0.485, the highest it has been in 50 years according to the United States Census Bureau. In 2015, the top 1% of earners in the United States averaged 40 times more income than the bottom 90%. Like other countries with higher Gini coefficients, poverty is an increasing issue. In the U.S. about 33 million workers earn less than $10 per hour, putting a family of four below the poverty level. Many of these low-wage workers have no sick days, pension, or health insurance.”

The following chart provided by the Pew Research Center in February 2020 indicates the Gini co-efficient as a measure of income inequality among the G7 countries with the US being the highest:




The elite have greased the ladder to success for years and now have resorted to pulling up these ladders and hunkering down in their penthouse fortresses. Until recently the “salt of the earth’s” road to success has always been by luck & pluck. Whether by default and/or design as supported by the ever-widening Gini index, American society has inexorably moved ever closer to an un-American societal hierarchical structure, that of a feudal society.

Finally according to the following chart compiled by Economic Innovation Group (“a policy and advocacy organization dedicated to empowering entrepreneurs and investors to forge a more dynamic U.S. economy”) and the US Census and presented by Statista 6 May 2020, Next Recession Brings Severe Risk for High Poverty Areas, there’s an obvious Shakespearean tragedy unfolding with the severe disconnect between the booming stock market of the 2010s and the 36% increase in high-poverty areas. This decades-old trend is the perfect accelerant for a societal meltdown.


Social
The trauma of reverting back to a dangerous and violent in American society of the late 1960s through early 1980s is nothing but historical fodder for the younger generation. Overlooked, forgotten and never mentioned is the decades of low crime rates [including violent crime]. The attitudes that such levels can be sustained and prolonged through a healthy economy and effective law enforcement are misguided when a crisis emerges such as when Hurricane Katrina slammed New Orleans and surrounding areas. Now imagine the potential future chaos nationwide with this economic collapse and pandemic.

We’re experiencing the implosion of an outdated and dysfunctional societal and political model that emerged from the tumultuous late 1960s through 1970s. Those who believe those times of mass demonstrations of the Vietnam War and civil rights, and high [violent] crime rates are something of the past will be rudely awakened. The question will soon beg, “Is Washington, DC burning?”

The historical governmental tactic of “food & circus” to distract and placate the citizenry is broken because of food insecurity and lockdowns. The food chain is stretched and brittle and sporting/ art & culture events have been put on hold that limits entertainment choices to indoors

As we enter the warmer months of late spring and then summer, anger and frustration will rise in tandem with the mercury resulting in hot weather and short tempers. Already there is an increasingly defiant citizenry, a leaderless movement against social distancing and lockdowns in several states.

Furthermore the anger is fueled by surging markets at the same time unemployment is surging which brings one to the conclusion that big corporations and the wealthy are profiting handsomely - again - at the expense of the general public and protected by a phalanx of white-shoe lawyers and laws that protect them. These decades-old political and economic injustices are fuel to society’s ire.

Present-day there exists a dangerously high percentage of unemployed who have nothing to do and nothing to lose. Despair and despondency pervade American society at all socio-economic levels which increase alcohol and drug consumption that includes the higher socio-economic levels not just the historic living-on-the-edge, lower wage workers. It wouldn’t be surprising to see an increase in more drug related crimes such as property theft, break ins, well-organized and targeted home invasions and ultimately looting.


Exacerbating this dilemma is the economic fundamentals of illegal drugs prices which have been affected like all other imported products. According to The Financial Times article 6 May 2020, Cocaine Trade Caught in Disrupted Global Supply Chains, the UN Office on Drugs and Crime report, it’s far more difficult for drug traffickers to hide their product because of the dramatic decrease in shipping activity. Cocaine comes from only three countries - Bolivia, Columbia and Peru - which now must go exclusively overland through Mexico. With fewer routes to evade law enforcement, the demand side the retail price has increased dramatically.

The following Russian adage is universally applicable as millions seek to ease the pain wherever they can get it: the blue-collar father comes home one day and tells his children that the factory where he works is cutting his salary by 40%. The children then ask since he’ll get paid less money whether he’ll drink less. The father responds, “No, you’ll eat less.”

Meteorological
One final element is the hurricane season which runs from June through November. This threat represents the coup de grace to the economic and psychological trauma already suffered by millions of Americans. Last year there were no major hurricanes. But “when it rains, it pours.” If hurricane season reverts to its normal pattern it couldn’t be worse for our overall recovery.

The gathering of elements that create a meteorological storm doesn’t guarantee an intense tempest merely the possibility if the conditions are just right at the right moment. If one of these elements doesn’t reach its forecasted level, the storm could be far less intense than forecast or simply dissipate. Economic and societal forecasts, like meteorological ones, are always more art than science.

Political
I believe that Democratic presidential candidate Joe Biden’s objective and sole purpose is to remove Trump not to solve America’s dilemma. He’s a four-year placeholder for a younger, bolder, dynamic new generation of leadership – not necessarily a Democrat - that has the guts to create an equitable capitalist system. In the meantime he needs a bold & dynamic running mate because if he wins, he’ll be in it up to his ears of four years of America in crisis, a burden too heavy for someone his age.

The continuing lack of governmental credibility and conflicting policies between the federal, state and municipal levels gives the citizenry almost a cart blanche to take matters into their own hands with respect to social distancing, mask wearing and other public safety measures.

Conclusion
The aforementioned factors apply globally too. They’re particularly more intense in emerging economies because hundreds of millions have been lifted out of poverty during these past two decades. The young generation now have refrigerators, TVs, a car, and even homeownership which they consider essentials, not luxuries. The threat of losing everything in short-order will be unacceptable even if such a loss is exclusively economic and non-political.

In the US the level of desperation at all socio-economic levels is building to powder keg levels. For this reason the present-day level of security and civility is untenable. The extended lockdowns have turned us into caged animals that will bring out our primal instincts and behavior with the realization that the government doesn’t have the financial or operational capacity to protect and feed us. It’s a brutal assessment of what the early 21st century society is facing. How this plays out is contingent on how those elements inevitably coalesce.



Copyright 2020 Indo-Brazilian Associates LLC


Monday, May 4, 2020

Prosperity Deferred for the African Century



Like a biblical pincer movement the Covid-19 virus and increasing swarms of locusts are threatening to decimate Africa’s impressive socio-economic progress achieved over these past decades.

The awful reality is that G20 countries may not have the resources to rescue African countries of this dual dilemma should the situation spiral out of control because of their own respective overwhelming economic burdens of battling the pandemic including the global commonality: food security. Frighteningly the global food chain is at the brink of snapping making the African continent more vulnerable and isolated as the potential for mass starvation looms.

Economic Destruction
Many of Africa’s 54 countries have made enormous socio-economic progress in the 21st century that has lifted millions from abject poverty. The global economic downfall and plagues of locusts threatening to devour East Africa’s food supply could push millions back into poverty.

The following chart entitled Covid-19 Could Push Half Billion People Into Poverty provided by Oxford Committee for Famine Relief (Oxfam) formed in 1995 by a group of NGOs, and presented by Statista, an online German statistical firm, 9 April 2020 shows this risk to millions in various regions indicating that almost 85 million, divided equally between Middle East/North Africa and Sub-Sahara Africa. This not only represents a humanitarian crisis like no other but certainly mass social unrest that could turn most of the African continent’s countries into failed states.


‘Locust-19’ & Mass Starvation
A cascade of the worst possible scenarios is already underway with the emergence of record-breaking swarms of locusts devouring crops within war-torn areas, high reliance on food imports with strong US dollar and little foreign reserves.

The Wall Street Journal 20 April 2020 article Africa Braces for a Wave of Locusts, provides a short but profound comprehensive overview of the looming crisis. To paraphrase the critical points in the article:

·         World organizations and the African Development Bank are shortly expecting a second wave of locusts – dubbed ‘Locust-19’ – which may be 20 times larger than the first wave (a swarm the size of Manhattan) – or about half the size of Western Europe and the same time of the start of the planting season.
·         Commodity exports are limited.
·         Shipping costs have tripled.
·         Not only is there is a severe shortage of pesticides to combat the second wave locusts’ breeding grounds but many of these areas are in war-torn areas and difficult to access safely without the cooperation of rebel groups. If allowed to lay their eggs, the third wave of locusts will be 20 times larger than the second (which was 20 times larger than the first!).

The following chart entitled Where Reliance on Food Imports is Highest 30 April 2020 provided by the World Bank and presented by Statista indicates the additional vulnerability many smaller African countries in their ability to purchase foodstuffs with closed borders.



Furthermore historically because of under-developed infrastructure there is limited infra-Africa movement of goods. Even with a robust relief effort it would be a logistical nightmare not only for landlocked countries but also those with ports because of poor infrastructure from port to inland destinations at the scale required.

Pollution

Finally acerbating the pandemic and food shortage, pollution has played a detrimental role in the reduction of life expectancy in many African countries. The following chart March 2020 entitled Where Air Pollution Is Reducing Life Expectancy The Most provided by The Journal of Cardiovascular Research and presented by Statista, indicate the countries where pollution has a profound impact of life expectancy.



Optimistic Perspectives

Several experts and government officials have stated that the African countries have two components working in their favor to minimize the pandemic’s rage:

1.    First is African countries’ decades of experience in successfully managing infectious diseases with limited resources and outdated equipment.
2.    Second African countries are observing and learning from on-going case studies in developing countries with respect what strategies have worked.

Forecasting how the pandemic will impact particular African countries will be exceptionally difficult because its spread of Covid-19 within the same regions can be uneven. For example the pandemic has hit Indonesia far harder than nearby Malaysia; devasting fatalities in Iran but little in Iraq and growing in India but hardly touching Pakistan, high death tolls in Spain vs. far fewer in Portugal even when adjusted for population differences.

There are valid arguments to explain the disparities one of which is that certain countries’ inability to obtain sufficient testing kits or provide enough testing.

Notwithstanding each African country will have to assess their level of risk with respect to the movements of citizens who crisscross their borders such a tribal families whose territories share two countries, cross-border trade and geographical locations, and take whatever precautions they can afford.


Copyright 2020 Indo-Brazilian Associates LLC

Indo-Brazilian Associates LLC is a NYC-based think-tank and advisory service that provides beyond-the-horizon contrarian perspectives and risk assessments on energy investments, geopolitical dynamics and global urban security.