Sept. 2, 2022

Another Lock-Down?

At 6 pm local-time Thursday night, the city of Chengdu, China, was locked down. Twenty-one million residents were required to stay at home. At the same time, one household member could venture out to obtain needed provisions, like food and medicine. If this all has that “old familiar feeling,” it’s because this is how we began 2020.

In the waning weeks of 2019, China discovered a new, novel Corona Virus, which would be identified by its date: Corona-19.
China led the world that year in its draconian lockdowns of towns and cities.

For the United States, the economic lockdown resulted in the worst financial performance in nearly a century, as people lost their jobs and non-essential businesses closed. Some closed permanently.

Today is the first full day that Chengdu is in complete lockdown. And although there have been other quarantines around China, to my eyes, this looks like the real deal. The likelihood is that the Chinese Government will, once again, bring their economy to a complete stop.

You may recognize Chengdu as the home of the Giant Panda, that cuddly black and white bear that looks like a kid’s toy. Currently, Xiao Qi Ji is enjoying the hospitality of the Smithsonian Zoo in Washington, DC.

But Chengdu is more than the home to the world’s most photographed bears. Chengdu is also the commercial hub of Western China. With technology and financial companies from around the world having offices in Chengdu. Many of the most prominent US companies have offices in Chengdu, including JP Morgan Chase and Citigroup, among the US Banks. And technology companies: Intel, IBM, Motorola, Microsoft, and Cisco Systems.

Chengdu is a top ten regional center in China in both finance and technology. Locking down a city of this importance was not taken lightly by the CCP. But exactly what the motivation of the CCP is not easy to see. The inscrutable Chinese often act with obscure goals and objectives hidden from the world to see. The outcome of these actions may not be seen for months or years.

The official reason for the Chengdu lockdown is (quote):

To “decisively arrest the spread of the outbreak and guarantee the health of all citizens.”

Of course.

Perhaps that is all there is to it. Maybe the Government is responding to a public health threat. Even so, this will likely put in motion a series of responses by the rest of the world.

I can see three possible reactions.

The first global consequence of this will be a renewed Supply Chain bottleneck. As the world’s manufacturing plant, China is relied on to produce the goods and components the other global economies need. Chief among these is the US, which is, by far, China’s largest customer. This new Chinese lockdown will put America’s teetering economy under even more pressure.

Second, China was the global leader in dealing with the pandemic when it struck just over two years ago. Along with the United Nations and World Health Organization, China provided the impetus to quarantine an entire population for the first time in modern history. The medical protocol has always been to only quarantine the ill. But in 2020, whether someone was sick or well made no difference. The policy was to lock down everyone. And the result was a complete halt in virtually all commercial activity. Chengdu tells us that China is doing that again.

Finally, the Quarantine of Chengdu will put the American leadership under the spotlight. Two years ago, the Biden Administration, governors, and mayors around the country adopted the Chinese strategy. Lockdowns were put in place everywhere. Citizens were advised to remain at home and self-quarantine. And the vast majority in this country complied. I sense that should those self-quarantine orders return, few Americans will go along a second time. The psychological damage alone would be enough for many to resist.

However, on the Federal Level, it becomes an open question: how will this President and his administration react? In watching President Biden over these last couple of years, it is apparent that he does not always act in the way that will make him more popular. Biden is a man who relishes the exercise of power. I believe he would not hesitate to declare a national emergency and, once again, go into lockdown.

As the country prepares to enter Fall and the notorious “Flu Season,” the question becomes more focused. Will he shut down the nation over another Covid Threat? as happened in 2020? Or will he ignore China and the rest and keep America open?

A potential lockdown would become the defining moment of the Biden Presidency. One that the White House is probably considering even now. After all, the elections are just five weeks away, and I’m sure President Biden wouldn’t want to interfere with them.

Economic News

UN Food Report

This morning, a report is coming out of the United Nations that needs to be read very carefully. The headline reads that World Wide Food Prices hit a seven-month low, and I can hear everyone breathe a sigh of relief. But before we get too comfortable, feeling that the food crisis may be over, a close look at the report reveals several vital details.

First, prices have declined, but only from an astronomical level reached seven months ago that took us into uncharted waters. We got the highest price levels ever seen. If you ignore that blow-off top in January, we are currently at the highest level in the 25-year history of this survey.

Traders have focused on the good news in cereals, where upbeat wheat crop surveys in Russia, Canada, and the US and the resumption of shipments out of Ukraine have driven wheat prices down by over 5%.

Good news.

But we still have a long way to go before we can put the food crisis behind us. Most of this year’s harvest is yet to come. And this particular food index reading reveals little of what’s happening in the fields. Yes, the index is lower than in the last seven months but up big compared to the previous 25 years.

We’ll have to wait and see.

Jobs

The big news of the morning has been the Jobs Report. A paltry 315k jobs were added to the economy in August. In August, new jobs came in, more than 200k fewer jobs than in July. This is the lowest gain in new jobs for 16 months and, to my eyes, an indication that this economy is struggling.

This raised the unemployment rate to 3.7%, two ticks higher than the month before.

The bottom line, the labor market, a lagging economic indicator, is starting to sputter.

Earnings

There were no significant earnings reports today.