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Monthly Archives: June 2017

Business Intelligence Brief: June 29, 2017

Short Items of Interest – US Economy

 

  • Four Weaknesses to Focus On – There are likely more than four areas of apprehension as far as the US economy is concerned but these are near the top of most lists. The assertion by the Trump team has been that tax reform, infrastructure spend and de-regulation will prompt growth spurts of between 3% and 4% but past experience suggests that these spurts are very rare and that growth of around 2% is far more likely. The second issue is the US has too much public sector debt. It is around 107% of the GDP and growing fast. The third issue is that investment has been weak, especially as far as infrastructure is concerned. The promise of a trillion dollar spend is pure fantasy at this point. Finally, there is the deteriorating labor situation as there is no replacement workforce for the one that is retiring at the rate of 10,000 a day.

 

  • Latest Revision of GDP Shows Improvement – The GDP numbers have been steadily improving but there is no sense that rocket growth is imminent. The first iteration of GDP growth in the first quarter was an almost recessionary 0.7% and then came the first revision to a slightly more respectable 1.1%. The latest revision has the growth rate up to 1.4% due to increased levels of exports and consumer spending on services. This is still not great and a far cry from the 3% and 4% growth numbers that get tossed around. The second quarter numbers are expected to be a lot better – perhaps to the 2.5% level but once again the year has started off slowly.

 

  • Small Increase in Jobless Claims – The rise in the number of first time claims for unemployment rose a little this last week but it is no cause for concern at this stage. The sense is that most of the lay-offs are seasonal and corrections will appear later in the year. The summer is always a weird period as there are lots of people hired for the hospitality sector and there are adjustments in the auto sector as there are temporary layoffs for the purpose of re-tooling. The data at the end of the summer is a bit more reliable but even with this volatility the news has been pretty solid as far as the job market is concerned.

 

Short Items of Interest – Global Economy

 

  • Merkel Set to Challenge Trump at G-20 – It would be hard to find two leaders who dislike one another more than Angela Merkel and Donald Trump. They can barely be in the same room together and have abandoned all diplomatic pretense. In a very aggressive speech she has indicated that she will directly challenge Trump at the G-20 meetings on everything from trade issues to the Paris climate change accords. She has been especially angry at the US stance on Nato, the EU and the conduct of German economic policy. This is going to be one very tense and icy meeting.

 

  • Maduro Prepares to Step Up Pressure – The helicopter attack on the nation’s Supreme Court was not the beginning of a coup and by all accounts the perpetrator was unbalanced. The Maduro government still plans to make a major issue of this and has used it to justify a further crackdown and that may well trigger the coup that he is afraid of. Observers assert that he has lost control of at least half the police and military and many are simply counting the days before an organized attempt is made to overthrow him. His actions have polarized the situation even further.

 

  • Can Somaliland Succeed? – The nation once known as Somalia is no more. This country has fractured beyond repair and is still one of the most war torn in the region. What is left of Somalia is shattered and run by warlords but two sectors of the country broke away some time ago and are struggling to develop. Somaliland and Puntland remain desperately poor and threatened by violence but both are trying to attract investment and have had some success. The economies are extremely fragile but these states have been peaceful for the last few years and that allows some progress. It is hoped that they do not fall apart as South Sudan has but they will need a great deal of help.

 

 

 

Is the Party Really Over?

The investment community has been asserting that this was going to happen at some point but there has never been anything close to consensus on when. The fact is that there has been an extraordinary period of extremely loose money, the central banks have been almost exclusively focused on stimulus and there has been no pressure from the usual inflation threats. There are many reasons the central banks have been so preoccupied with this – everything from the slow recovery of the global economy to the fact that most of the world’s legislatures have not picked up the challenge as they have in the past. They are not engaged in much stimulative spending as they continue to be more concerned with debt and deficit (at least until recently). That left the central banks on their own.

 

Analysis: In the last several days the bond markets have been shuddering and the yields of many government bonds are higher than they have been in a month. There has been a lot of adjustment taking place in the currency markets as well. The dollar has been losing ground against many of the major currencies. Investors are dumping US Treasuries and European bonds in reaction to what they expect from the Fed and the ECB. The British pound and the Canadian dollar are rising in response to all of this as well. Does this suggest that a massive correction is imminent in the world’s markets? Probably not but the sense is that major changes are finally on the way as far as central bank behavior.

The Fed has been the only major central bank that has been hiking rates but that is not going to be the case much longer – at least if one pays attention to the latest commentary. The European Central Bank is starting to talk about what an end to stimulus would look like and the Bank of England has been edging closer as there are at least three members of the board who are now calling for rates to go higher. The comments that have been made by the majority of the bankers on the speaking circuit are suggesting that the stimulus effort is no longer needed – at least not at the level that it has been.

There are many reasons central banks would like to see rates go back up – at least a little. At the top of the list is the fear of inflation. Granted, there has been little reason to be concerned lately. The inflation rate has struggled to even reach the 2.0% core level the Fed and the ECB would like to see but the bankers are well aware that inflation moves very quickly and reactions to interest rates are not all that swift. It takes several months before the economy responds to a rate hike but all it would take for inflation to burst on the scene would be a jump in some key commodity price. There is no imminent threat and none of the banks are even discussing much higher rates – they just want to be ready when the moment arrives.

Another reason for wanting higher rates is to build up the ability to react to a recession should one appear down the road. It is assumed that the legislatures will be just as reluctant to act as they have been and that the central banks will be required to do most of the heavy lifting again. If they are supposed to boost the economy with rate cuts they are going to require some room to move and that means getting rates back up to some degree.

Finally, there is the reason that many of the more hawkish bankers have cited over the last few years. The loose money policy that has been in place has prompted a great deal of speculative activity and more risk taking than most of these bankers are comfortable with and they have been arguing for higher rates as a means by which to control that activity.

 

The Fundamental Problem

At the heart of the health care debate is a much bigger issue and one that will never be solved simply. The US may be a complex institution providing a lot of services and regulatory controls but if one looks at the budget it is clear enough that the vast majority of the taxpayer’s money is devoted to three things – all of which are getting more expensive with every passing year. Social Security, Medicare and Medicaid currently account for 58% of all the tax revenue collected and by 2047 that percentage will be close to 80%. This is not sustainable under any stretch of the imagination and there are only two ways to deal with the issue.

 

Analysis: The government must either raise a lot more money from the taxpayer or it needs to cut a lot of the services that have been offered thus far and it truth it is likely going to require both. The divide right now is due in part to a refusal to cope with this reality. The anti-tax forces want nothing to do with increasing revenue through taxation and continue to assert that taxes must be lowered. Those who support the continued provision of these services want nothing to do with reducing them or altering the benefits in any way. Given that power determines what happens in Congress one only has to look at who has the leverage.

The wealthy have influence and will do all they can to reduce their tax burden and the older generation have the voting power necessary to protect the provisions of Medicare as well as Social Security. There may be all kinds of reasons to alter the way that these institutions operate and there are all manner of arguments that can be made for taxing wealth more aggressively but the reality is that these sectors will be able to protect themselves from real change.

The weakest sector is the poor and that is why there has been such emphasis on Medicaid. Of the three big social programs Medicaid has consistently been the least expensive but the recipients of that service have less ability to influence the process and that means that cutting Medicaid is far easier politically than cutting anything else. The enmity that has been directed at those who receive Medicaid help is part of an overall sense of anger at the poor – assertions that they should be able to take care of their own needs, all evidence to the contrary.

 

Security vs. Convenience

There is an intense and ongoing battle when it comes to modern defense from terrorist acts. The terrorist is not under the impression they are able to overthrow a system or even that they can exact much from those they consider enemies. The terrorist act is designed to evoke terror, to make the enemy uneasy and afraid. There is no “front”, no battleground or territory to seize and control. The attacks are random and designed to do nothing more than make people suffer and become fearful. In the great scheme of things these attacks are impotent and useless – unless you are the unlucky person who is maimed or killed or loses a loved one. There is little or no logic to these attacks and there is nothing a person can realistically do to protect themselves. This leaves the security efforts in the hands of the government and law enforcement.  The problem is that security clashes with the freedoms we all treasure and enjoy. We have seen that transformation over the years as air travel has become increasingly miserable with inspections, pat downs, screenings and an ever growing list of restrictions.

 

Analysis: The latest plan is emerging as the intelligence community asserts that terror groups have developed a way to weaponize electronic gadgets such as a laptop computer. The threat is that such a device will be carried aboard an airplane and detonated at some point. The take down of an aircraft is considered by the security community as the “gold standard” for the terrorists although that is hard to prove. The terrorist attacks that have been carried out on concerts and on the street seem to have had plenty of shock value. The tension between security and normal life is stark when it comes to this latest plan.

The ban on laptops in the airplane cabin has gone through several iterations already. The first suggestion was that laptops (and other large electronic devices) would be banned on flights that were coming to the US from a select number of airports in the Middle East and North Africa. This was deemed ineffective for the most obvious of reasons so the ban was to be extended to all international flights arriving in the US from almost any airport. This provoked howls of outrage from the airlines and the flying public as the majority of those who are taking these international flights are business people and they can’t really function without these machines. Now the idea has metamorphosed again and involves additional screening of laptops and other devices and if the originating airport can’t accommodate the changes they will see flights to the US banned. The screening is theoretically simple enough and authorities indicate that most major airports are already near compliance. That remains to be seen.

Analysts assert that these additional procedures will be required for US domestic flights in time. After all, if the idea is to ban a potential threat it has to be assumed that the terror group can as easily build the weapon in Cleveland or Miami as they can in Cairo or Doha. In fact, if the aim of the terrorist is to disrupt normal life what better way than to attack a very ordinary and routine flight within the US. The bottom line for the passenger is that security will only get tighter and that will force even more changes on the flying public.

 

Japan and Europe Buck Protectionist Trend

The stance that has been taken by the Trump administration on trade has opened the door for other nations. The US has been talking a strong protectionist game since the election although many of the actions taken have been far less draconian than had been expected. The US still talks about revamping Nafta but progress has been slow. The only real action taken thus far was the formal end of the TPP. The Trump plan has come under intense criticism from all of the international institutions (IMF, IBRD, OECD, G-7 and so on). The more direct threat to the US comes from those states that are moving ahead with their own trade pacts that will essentially exclude the US.

 

Analysis: Japan and the European Union are about to sign a new deal although many assert that this agreement still faces some of the toughest slogs. The deal would grant better access to carmakers in both Europe and Japan – granting them better access to each other’s consumers. There will be more opportunities for Europe to sell farm output to Japan and that will be a direct threat to the US as the Japanese market is a key one for the US farmer. There will be opening as far as the service sector is concerned as well. This pact has been in development since 2013 and came close to fruition last year before the sticking points derailed the talks. The impetus now is the fact the Trump position has been anti-trade. Japan and Europe both fear losing access to the US in the next year or so and they want to be proactive as far as replacing what market opportunities they stand to lose. The US has succeeded in pushing Europe and Japan into each other’s arms despite their reservations.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

It Really Doesn’t Take All that Much

As often as I complain about shoddy service it seems only fair to call out the times when I am delighted and surprised. I am well aware that there are places that one can patronize that offer considerable thoughtful attention and most of the time one is paying handsomely for that attention. When dropping a couple of hundred dollars on dinner the wait staff is expected to be exemplary (although they sometimes are not quite up to that standard). The delightful moments are when they are least expected.

I went to a fast food joint in my neighborhood called Zaxby’s – a place I had not been to before. The food was as expected and the counter staff was ok but the highlight of the meal was provided by the woman who was cleaning the tables and delivering the food. We had ordered a huge amount of food as we were trying to use up a gift card. She noted this enormous pile of food and promptly brought over to-go boxes without being asked. She was friendly and took care of us better than many have in much fancier restaurants. It put a big smile on our faces and made a thoroughly ordinary meal a real pleasure. Nothing complicated – just an attitude that made us feel welcomed.

I have spoken about my friend at the airport snack bar before. This is the most thankless task of them all – just standing at the cash register all day as she rings up drinks and those 25-year old sandwiches. The fact is that she is charming and after a few trips through her line she recognized me and now we also chat a while – about her grandson the K-State football player and her observations on airport life. I look for her now and always drop by to visit – even if the gate I need is at the opposite end of the airport. She makes the simple task of buying a Diet Coke fun and she never stops smiling so I end up smiling as well. That is not something I would ordinarily do in an airport!

 

These are parts of the commentary that appeared in a recent Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

To get a FREE TRIAL go to www.armada-intel.com

 

 

Drought Conditions Set-in across the Dakotas/Montana: impact.  There is a drought condition being created in a three-state area in the upper plains. Montana, North Dakota, and South Dakota are now seeing some extreme drought conditions across a portion of those states.

 

The number one commodity classes across all three of these states is the cattle industry. Cattle, hogs, and dairy products face the greatest risk. In times when we see drought conditions in cattle country, getting water to herds and getting enough food to those herds are primary concerns.

 

Hay conditions will probably be poor in these regions and the shipment of hay north could be a big trend that we see hit the transportation sector.

 

The NASDAQ may not be reacting solely to this news (Chinese imports of US beef are opening back up – which is helping push the projected demand for US beef higher), but feeder cattle prices have started to increase.

 

We are also getting a strong reaction in the lean hogs sector.

 

The farming sector overall is not seeing prices where producers would like them to be, but farm output has been strong and operating costs have been modest.

 

One of the indirect benefits that we see when prices for certain agricultural commodities rises is a surge in farm equipment and light-duty truck sales. Many farmers and ranchers will take a windfall of revenue and go out and purchase new equipment. We came off a cycle like that just a few years ago, so some of agricultural operations may not be quite ready for a replacement cycle.  But, we should see some lift in farm equipment sales and light duty truck demand.

 

 

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Business Intelligence Brief: June 28, 2017

Short Items of Interest – US Economy

 

  • No Need to Hike Rates Now – Every day it seems that the Fed finds more doves and this week the commentary is coming from the head of the Minneapolis Fed – Neel Kashkari. He has been one of the more vocal Fed officials and has an interesting background as well. He was the head of the TARP program and then became one of its most ardent critics. He also ran for governor in California as a Republican and did reasonably well. He has now become the latest member of the Fed to suggest that interest rates do not need to climb any further this year – mostly because the threat from inflation has been subdued and there are still pockets of the economy that need the boost.

 

  • Another Potential Member of the NLRB – William Emanuel has become the latest appointment for an empty position on the National Labor Relations Board. The first nominee was Marvin Kaplan, a man who has been around the Washington scene for years and has served as part of the OSHA board in the past. Emmanuel is a labor lawyer from the Los Angeles area and has been active in defending employers in cases involving unions and workers. If both of these men are approved by the Senate the NLRB will have a Republican majority for the first time in over a decade. There will be many issues coming before the NLRB in the next year that will affect overtime pay, union organizing and establishment of work rules.

 

  • Slowdown in Home Prices – For the first time in months the average price of a home has started to fall in the US. It must be noted that this decline is far from universal and that there are many cities where prices are still trending up sharply. These are the areas where the demand far exceeds supply and most assert that this is a situation that will not change anytime soon. The national trend is for the price hikes to start ending and some cities are witnessing substantial reductions. This would suggest that housing may have reached a peak and could start cooling off through the summer and into the rest of the year.

 

Short Items of Interest – Global Economy

 

  • Another Cyber Attack – The latest ransomware attack has affected some of the largest companies in Europe and Asia and may be contributing to supply chain disruptions as Maersk was one of the companies targeted. As attacks go this one was not all that sophisticated but it was a broad attack and affected a great many companies. The ransomware assault has become one of the primary threat as far as cyber security is concerned and is costing the business community billions in lost revenue. It has been nearly impossible to track the attacks to a source and that leaves business with little option other than to try to prevent the attack from spreading.

 

  • Divisions Over Brexit Approach in the UK – When Theresa May was made the leader of the Conservative Party in the wake of the Brexit vote she emphasized unity and a solid front as far as the negotiations are concerned. That worked until the last election when she was handed a stunning defeat at the polls. The divisions within her Cabinet have become stark and there are now definitely two schools of thought as to where the process goes from here. Her Chancellor – Philip Hammond – is pushing hard for a “soft” exit with as many compromises with the EU as possible. Her Brexit Secretary takes a far more hard line position and that has affected the talks with the EU.

 

  • Helicopter Attack on Court in Venezuela – A police helicopter has attacked the Venezuelan Supreme Court and this immediately raised suspicion that a coup was in the offing. It appears that the assault was not part of a larger effort but analysts assert that it is no longer a matter of “if” but “when”. The military and police are losing confidence in the Maduro government and do not want to become ever more repressive towards the population. The cracks are deep and wide and either Maduro finds a way to depart quietly or the country gets another leader installed via military coup.

 

 

 

Yellen Weighs In

It was not the first time that Janet Yellen has commented on the issue of globalization and she has been joined more than a few times by others on the Fed Board and those who head up the various regional Feds. This talk was delivered before an audience at the British Academy and comes a few days after the remarks by the Chief Economist for the Bank for International Settlements. The BIS is essentially the central bank for central banks and the assertion by Claudio Borio that trying to stop globalization is akin to trying to stop technological change. It is not really possible and is a bad idea in any case. Yellen essentially agrees with that position but has taken great pains to acknowledge the downside of both of these developments.

 

Analysis: It is clear that advances in technology have improved many people’s lives and there has been considerable economic expansion that has come as a result of these changes. Very few would argue the Luddite position and want to go back to the days prior to these tech advances but these have been occurring with such speed that millions of people have been adversely affected – at least in the short term. The on-line shopping revolution is killing the traditional retailer and has taken jobs away from those who once worked in that sector. The ride share explosion has nearly killed the taxi industry. The introduction of widespread robotics has made US manufacturing competitive again but at the expense of those who once did the jobs the robots are doing now.

The same observation is made regarding the process of globalization. The consumer thoroughly enjoys the incredible variety of products and services that are available from all over the world and they likewise appreciate the low prices that are part of that trade. On the other hand, the domestic producer is often unable to compete with these foreign imports and people lose their jobs. Is there a way that a society can reap the benefits of technology and globalization without experiencing the downside? It is not likely that any system can avoid the disruption of change – whether that is technological change or the change that comes with being open to other markets.  However, there are ways to ameliorate the impact and that was the largest part of Yellen’s commentary.

The solutions basically come down to providing alternatives. If people are losing their jobs to technological change or the globalization process they need to have alternative ways to make a living. The first set of suggestions involve training and education – helping people get new and more relevant skills that allow them to compete in the new world they now inhabit. The challenge is that this takes time and is expensive. The training has to be offered and it has to be relevant, people need to have the time and ability to engage in the training and there has to be a close connection the training and the needs of the business community. This is a complex process at best.

There is another alternative and one that Yellen and others have discussed many times before. The Fed is not in the business of setting up trade schools or providing displaced workers with new options – they manage the money supply and stimulate the economy through the banking system. The idea is that banks will lend when the interest rates they pay each other are low and when the Fed is providing more incentives. The hope is that banks then make money available to the business community and the growth here results in more jobs.

The key is entrepreneurial activity and the creation of small business. For decades, the pattern has been the same. The majority of new jobs are created by the entrepreneur and the majority of jobs in the country are created by small and medium sized business. In the last few years the number of start-ups have been declining and the economic pressure on the small business has been brutal. These are the companies that will absorb the people who have been displaced but only if the company is healthy and growing. These are the companies that will do their own training and will be the transition for workers who are seeking new careers. These are also the businesses that are under the greatest threat from high taxes, regulation and lack of capital. The focus for the country ought to be on the entrepreneur and the small business but it rarely is and that creates ongoing problems.

 

IMF Downgrades US Growth Prospects

At the start of the year the International Monetary Fund was among those that were excited about the prospects for US growth. There were lots of expectations as far as economic change was concerned. It seemed likely that big shifts would be taking place as far as health care was concerned and there was an expectation of major tax reform, deregulation and the potential for infrastructure build. The IMF was less than enthused with the approach to trade but other factors seemed more positive than not. It has been just six months but that enthusiasm has faded badly as none of the change has taken place and now seems more distant than it was before.

 

Analysis: The reform of the ACA has been stalled and perhaps for a long time, tax changes are just as distant and no progress has been made in finding that $1 trillion for infrastructure. The deregulation process has been slow and halting and most of the trade deal and changes have been on hold as well. There is precious little unity in the GOP and the White House has been remarkably distracted and unable to push this agenda. Not that any President has enjoyed the support of Congress completely but the acrimony that is part of the current situation has made unity within the President’s own party difficult to achieve and there is no hope at all for bi-partisan cooperation. This is the main reason the IMF has reduced its estimate for US growth from 2.6% to 2.1% this year and expects to see growth of just 1.7% over the next four to five years. This is a far cry from the 3.0% that had been promised at the start of the year.

 

The Appeal of Populism

As so often happens the term has taken on a life of its own as the media and analysts try to make sense of the changes that have swept through the western world over the last few years. There are right wing groups that seek to change the status quo (National Front in France, AfD in Germany) and there are left leaning groups with the same basic antipathy to the powers that be (Five Star Movement, Bernie Sanders, Syriza). The classic definition of a populist is someone who divides the world neatly into two camps – the “good” ordinary people who are just trying to live a normal life and the corrupt elites that are trying to exploit them. They generally do not trust institutions, the media, the courts or the bureaucracy. They do not believe “experts” in general and tend to be very isolationist. The movements can drift quickly into racism and other forms of bigotry as they do not trust “outsiders” who seek to change their way of life. As mentioned before the term has been liberally applied of late to any group that seems to be upset with the status quo.

 

Analysis: There is a core motivation shared by both the left and right leaning populists. They are both angry at the economic changes they perceive to be at the core of their concerns. The basic assertion is that the rich have become far richer and that this has come at the expense of everybody else. There has been plenty of evidence to support some of that assertion as the very wealthy have indeed become wealthier and the rest of the population has stagnated in terms of income. The story is not as simple as that of course.

Much of the wealth is created by investment decisions. Those who have seen their wealth expand every year are taking full advantage of the rapid rise in the stock market. The boom has made those with a stake in the markets very rich indeed. At the same time those who are not engaged in the markets as fully have not seen the raises they were once accustomed to. The lack of wage hikes and salary increases has more to do with the lack of inflation than any other single factor. With limited hikes in the price of goods and services the providers have little to work with as far as raising wages. The good news is that while wages have not gone up – neither have most prices and in many cases; there has been a dramatic decline in the costs of such items as fuel.

There are two factors to be aware of that could drastically change the current situation and both of these changes are nearly inevitable. The first is that the markets go from boom to bust. It is generally acknowledged that the market is too frothy at the moment and in need of a correction. It has been estimated that almost a quarter of the money in the US market is foreign (most from Europe) and if there is a reason to bring that money home the correction in the US could be steep indeed. That would wipe out billions of dollars of value and make a lot of wealthy people a great deal less well off. The second change is a surge in inflation. It is not considered imminent but the economy has rarely been without an inflationary period this long. The negative aspect of an inflation surge is the high prices but at the same time there will be room to offer wage and salary boosts.

The conditions that have provoked the populist resentment can and will likely change but that hardly means that populism will lose its appeal. The average person is angry and frustrated and not prone to listening to reasoned arguments at this stage. They are too busy finding someone or something to blame.

 

Chemical Attack in Syria

There has been some confusion within the global intelligence community over the latest warnings from the White House. A statement was issued that asserted there was proof that the Assad regime was preparing to launch another chemical weapons attack on rebels and others within Syria and Trump asserted that such an attack would mean that Assad would pay a “very heavy price”. The problem is that no other intelligence community has seen any evidence of such an attack or even the planning of one. The Defense Department and the CIA both expressed surprise at the statement and there has been no corroboration from Israeli or Saudi intelligence and both of these states keep a close eye on what happens in Syria.

 

Analysis: The Assad regime, the Iranians and the Russians have denied that any such plan exists but that would be their stance even if there was such a move under development. It is clear enough that the reaction to another chemical assault would be severe and Assad has been put on notice. It is not clear why this assertion has been made by the White House now. It may be simply to reiterate the US position but it could be a justification for some other move against Assad. The fear is that this assertion will prove to be fantasy and that will make it that much harder to call the world’s attention to a real threat should one evolve. It is the “chicken little” fear – calling for a reaction too many times and reducing the chances of a real response later.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

(sigh) My Physician is Moving

There are relationships that we all become very dependent on and one of those is the one we have with our doctor. I have been exceedingly lucky to have had a long relationship with Dr. Hussain Haideri. We have been friends more than we have been patient and doctor. He has been instrumental in many of my family’s health issues over the years. When my wife was diagnosed with a return of ovarian cancer he was the guy who calmed me down and played a big role in directing care. Her oncologist and surgeon were great but Dr. Haideri was the man I leaned on for support. He is a fascinating intellect and our conversations are deep.

For very good family reasons he is moving to Dallas. We will certainly stay friends and I plan to make visiting with him a priority when I get to the big “D” but he will not be the doctor I will see now. He has made a suggestion as far as who I can now work with and I am sure she will be fine but it will not be Hussain. This is the way it is as we gain in years. The people we count on and value often move on. They retire and they move and we must adjust. It is simply that losing these relationships is hard and making new ones are just as hard. When I am visiting with some of the older people I get to speak to from time to time that is often the most common theme. Their friends are not going to be around forever and losing them hurts. I suppose this inevitable change is yet another reminder to treasure the people that are in your life now.

 

These are parts of the commentary that appeared in a recent Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

To get a FREE TRIAL go to www.armada-intel.com

 

Crisis in Illinois – The state of Illinois faces its biggest fiscal challenge in decades. As a budget deadline looms for Friday, legislators have a difficult set of choices to make.

 

If they don’t get a suitable deal done and signed by Friday, S&P will downgrade the state’s bonds to “junk status”. That would deal a heavy blow to the state, its’ cost of financing debt, and its ability to attract investors.

 

Most of us believe that they can come to a short-term budget compromise that will keep the government funded, and get (or keep) capital projects underway. So, it would send a shockwave across the country if the state cannot come to a compromise and get to an agreement.

 

But, just like those of us that have to manage the finances of a company, the state has some long-term challenges that can’t be solved easily.

 

Obligations under state pension plans have created more than $130 billion in unfunded pension obligations.  It has also now racked up more than $15.7 billion in “unpaid bills” that it is now paying significant interest on. The state has been paying just over $6.6 billion in interest payments, which is nearly $1 billion a year more than it did in 2007. They just aren’t digging out.

 

Just like a company, Illinois has an income problem – which forces it into a challenging spending environment. It has made many of the easy cuts over the past two years.  The difficult ones are still coming.

 

The problem is that it also needs to continue to attract business and investment. As infrastructure spending gets reduced and citizens/business leaders see conditions deteriorating, the risk of migration out of Illinois increases. You may have seen the headlines that Illinois was (for the third year in a row) the state that had the biggest net population loss. The state lost 37,508 people in 2016. Its population is currently the lowest since 2009.

 

Michael Lucci of the Illinois Policy Institute (admittedly right-leaning according to the Chicago Tribune) said: “”I think what that says about Illinois is quite dire,” he said, calling for transformational reform in state leadership. “Overwhelmingly, people are leaving to go anywhere other than Illinois.”

 

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Business Intelligence Brief: June 27, 2017

Short Items of Interest – US Economy

 

  • Minimum Wage Change May Have Backfired – When Seattle changed the minimum wage law there was an expectation that conditions for the low-paid would radically improve. How could it not if these people were getting paid twice what they were paid before. The city commissioned a study to determine if that assumption would play out and the result is not what they had expected or desired. The hike in the minimum has resulted in lower wages for those workers. As many had predicted the employers reacted to the higher wage demands by firing many of their employees and cutting the hours of many more. The reality is that these businesses were prepared to pay certain labor costs and when the hourly rate went up they compensated with layoffs and reduced hours and the wage earners lost money.

 

  • Finding a Community Banker for the Fed – It has been mandated that that Fed’s Board of Governors have someone on it with community banking experience and that has been far harder to accomplish than many had assumed. The issue is the divestiture rule. The nominees are required to divest themselves of interest in their former institution so as to minimize conflicts of interest but the majority of those who come from that small bank community run privately held banks that may be three and four generation operations and few want to give that connection up so they are turning the opportunity down.

 

  • Bank Deregulation Stressed – It appears that some of the stringent rules imposed by the Bank Reform Act will be loosened shortly. The so-called Volcker Rule that prohibited banks from making risky investment decisions may be dropped or altered significantly and there is likely to be reduced emphasis on the stress tests that were imposed after the financial meltdown. The man that has been spearheading this effort is Jerome Powell – a member of the Fed’s Board of Governors who has taken over the regulatory role from the retired Daniel Tarullo (long considered an enemy of the big banks). Powell will eventually be replaced by a new member of the Board chosen to fill Tarullo’s spot but there are some who suggest that Powell may be named the next Chair of the Fed.

 

Short Items of Interest – Global Economy

 

  • South Korean Labor Unions Step Up Pressure – For the last few years the unions in South Korea have been relatively quiet as they knew that the former President was anti-union and they had little chance to gain anything from additional pressure. Now that the country has a left-leaning President in Moon Jae-in the unions are stepping up the pressure with demonstrations and strikes demanding that campaign promises be kept and soon. In some respects, this can be construed as support for Moon but it also makes it appear he is just knuckling under to that pressure.

 

  • Germans Object to Italian Bank Rescue – The loophole was wide enough to drive a truck through and the Germans are not happy at all. The rescue that Italy has engineered to bail out two of its largest banks involved spending 17 billion euros of taxpayer money and that is contrary to the rules that has been established in the EU. But the bigger problem is that senior bondholders have not taken any of the brunt of the rescue – they were totally insulated despite the fact that many of these bond holders bought in when the banks were starting to get in trouble as they assumed they would be bailed out. The Germans despise these speculators and want that loophole closed.

 

  • Socialists Win in Albania – The Socialists won an outright majority in Parliament and that should clear the way for both an aggressive anti-corruption effort and closer ties to the EU. Prime Minister Edi Rama has been ruling in a coalition government and that has slowed his progress in many areas. These inhibitions will now be lifted and he can be more assertive. The country has been riven by corruption and ethnic tension for years and desperately needs a closer relationship with Europe if it is to start to grow again.

 

 

 

Health Care and the Economy

There are many issues who have profound influence on the economy but don’t necessarily lend themselves well to analysis strictly concerned with economic impact. Health care is at the top of that list. There are very different approaches taken to the issue of health care as for many this should be a right of every citizen and for others the issue is more one of privilege and economic expedience. It is very hard to assign a measure of cost to health matters as the person in need of treatment will consider any expense worth it and will demand attention.  However, the practical reality is that somebody has to pay for that treatment and the majority of those getting that medical help can’t come close to being able to pay for it. This is what engages the insurance debate. There are two issues as far as health care is concerned and thus far all the focus has been on just one of them. The Affordable Care Act was aimed at how to pay for health insurance and the repeal and replace efforts have been likewise concentrated on how people are to pay for their health insurance. Very little attention has been directed at the overall costs of health care and the reality is that the US pays more for health care than any other nation on earth – over 25% of the GDP as compared to around 10% for the other developed nations.

 

Analysis: The attempt to replace the ACA has been far harder than it was expected to be and at this juncture it appears the Senate bill is in trouble as there has been opposition from both the GOP moderates and conservatives. This may well be nothing more than posturing as the various Senators try to bolster their positions for upcoming elections but at some point, they will have to vote yes or no and get on the record. The latest assessment of the plan from the Congressional Budget Office has sharpened the debate as it provides the numbers necessary to evaluate the impact on the economy and the public as a whole.

The headline statement has been the observation that some 22 million people will lose access to health care due to the cuts proposed to Medicaid and the withdrawal of subsidies for those who can’t afford to buy their own health insurance. One of the economic issues that has not received a great deal of attention has been the fact that most of the 22 million people denied insurance will turn to other options as they did prior to the ACA. The most expensive of these was the heavy use of the emergency room as the primary source of medical care. This has nearly bankrupted many hospitals and is a very expensive way to treat people who are not suffering an acute emergency.

The Senate bill could save the government as much as $321 billion and that is $202 billion more than the House version saved. This is due to the changes in the tax provisions included in the ACA.  By rule the Senate bill can’t save less than the $110 billion in the House version but they can mess with the other $202 billion and add some or all of that back into the plan as a way to cajole some of the wavering Senators.

In the first couple of years it is expected that premiums will rise somewhat but after that they are likely to start falling but not all that quickly or that far. The major reason for the fall will be loosening regulations that will allow insurance companies to offer cheaper plans that cover far less than is mandated now. It is expected that deductibles will increase sharply as those who have been getting subsidies will no longer get them. The bill would also allow insurance companies to impose very high deductibles on those with pre-existing conditions and it is expected that many will be forced to go without insurance altogether despite the conditions.

The proposed changes in the Medicaid expansion plan will likely save the government $772 billion over the next ten years but it will also mean 15 million people losing their coverage under this program. The CBO report holds that the insurance market will remain fairly stable as there will still be some incentives for the young and healthy to sign up and there are still some subsidies for low income people as well as funding mechanisms for those with serious issues. The bill doesn’t do away with all the provisions of the ACA but most all have been reduced and curtailed. One of the key concerns is that insurance companies will pull out of rural areas where there are too few healthy people and too many who are elderly and in poor health.

Despite all the intense political debate the two fundamental questions have yet to be addressed. How does the US reduce the overall cost of health care and how is health care to be treated? Is health care something that should be guaranteed by the state in the same way that education has been or is something that the individual has to handle on their own?

 

Durable Goods Orders Still Declining

For the second month in a row the level of durable goods has fallen but as is always the case with this data there are caveats. The durable goods segment of the industrial community involves those items designed to last three years or more and this means the vast majority of the goods are for industrial use. One of the key sectors is aerospace and the data from the airlines can make a huge difference as far as the durable goods activity is concerned. A good month for Boeing makes the numbers look really solid and vice versa. It is always necessary to pull the aerospace numbers out to get a realistic sense of what is actually happening.

 

Analysis: The decline this month has been steep – more pronounced than at any time this year – a 1.1% decline. If the airplane numbers (military and civilian) are stripped out, the decline is not as steep but remains serious. There has generally been a slowdown in capital expenditure as manufacturers are a bit less confident about the state of the economy going forward. The auto sector has been especially cautious and there are signs that agricultural machinery orders are way down due to the generally low commodity prices that have been dominating of late.

 

Hollowing Out the Middle

The story has been the same across a wide variety of consumer sectors. The retail community is watching the end of the department store and the rise of the on-line option as well as the specialty store. In the restaurant business, the fast food joints and the high end places are doing well but those in the middle are struggling to capture customers. The hospitality business is experiencing the same issue with high end hotels and low end hotels thriving but those in the middle having issues with occupancy.

 

Analysis: The restaurant trade has seen this develop rapidly and with the most intensity and there are several theories in play. The first issue is sheer competition. The majority of large cities and many smaller ones are experiencing a real wave of enthusiasm for eating out. For the first time since records have been kept there are more people eating out than are eating at home. The motivations for this decisions vary from being too busy to cook to simply enjoying all the options that are now available. The explosion of new restaurants provides a wealth of opportunity for the consumer but it puts immense pressure on the restaurant to survive the competition. The lifespan of a new place can be only a matter of months and even the most popular place can suddenly lose its appeal as another rival appears. The fast food explosion is based on convenience and the fact that many now offer meals that can be as cheap or cheaper than those that can be prepared at home.

Another factor is the changing demographics of the US consumer. The millennial is at the center of this shift as well. The observation has been made that the millennial is not a “thing” buyer as much as they are an “experience” buyer. They would rather attend a concert or travel or have some kind of “foodie” experience than buy a car or big house or some other toy. They have been gravitating to the nicer restaurant or at least the more unique place. The ethnic offering is more popular with the millennial than with either the Gen-X or Boomer generation. The fast food option is also popular but the mid-range place is not. The majority of the millennial generation is also without family and that limits the appeal of the place that gears to that family.

The revolution in consumption will alter a lot of business assumptions in the near future. The department store once competed on the assumption they had the most variety – one would shop there as they would likely have everything one needed. No store can compete with Amazon for variety and certainly not with the Internet as a whole. The idea behind the department store was convenience and they destroyed the market for the small store. Now the Internet is doing that to the department stores and the smaller specialty shop has started to make a comeback as they might have the expertise needed.

The divisions in consumer taste are becoming stark with expansion on the extremes – high and low end. The future for the middle is not all that encouraging and that could mean an acceleration of that hollowing out process in the not so distant future.

 

Draghi’s Confidence Bolsters Euro

Mario Draghi is like most central bankers in the sense that he is very careful with his words. He knows full well that the investment community hangs on every word and that an ill-advised commentary can send the market soaring or plunging. As a result, the majority of these comments are bland and cautious. The latest remarks have been neither of these and this has the European investment community aflutter to a degree.

 

Analysis: The gist of his commentary is that he is very confident that the Eurozone recovery is going to be complete and that most of the past damage will be repaired. He indicated that he though inflation would recover soon and that has prompted speculation that stimulus efforts will soon end or be significantly curtailed. That could mean anything from higher interest rates to the end of the bond buying that has been the ECB version of quantitative easing. He is convinced that deflationary trends are ending and his remarks contributed to a rise in the value of the euro. To be fair, the dollar has been weakening a little on its own but the impact of his attitude can’t be overlooked. The assertion is in line with what has been coming from the Germans of late. They are seeing their own economy surge and have stepped up their pressure on Draghi to end the stimulating before the inflation threat starts to become worrisome. At the moment, there is faint evidence for an inflation problem as it is just starting to get to the levels the ECB has been seeking for the past several years. The Draghi comments are the most upbeat heard in quite a while and now everyone waits to see if they are justified and what actions may be prompted if they are.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

Summer Reading

Not that I really have any more opportunity to settle in with a good book in the summer than at any other time but there is something compelling about the notion of whiling away a few hours immersed in a volume or two. I can recommend a couple that I have found fascinating this year. The first is “The Tale of the Dueling Neurosurgeons” by Sam Kean. If you have ever been curious about how the brain works and how we learned all this you will find this book as amazing as I have. It is alternately hysterically funny and engrossing as the research on the brain is revealed and comments are made regarding what we still don’t know.

Another one that captivated was “Of Moths and Men” by Judith Hooper. It is the weird and instructive story of how science can be subverted by greed, jealousy and bad judgement. The story is as much detective story as anything else and it is astonishing what could be at stake in the story of moth evolution. Both of these books will amuse and entertain and both provide some keen insights into how we know what we know.

 

These are parts of the commentary that appeared in a recent Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

 

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Business Activity Slowing Again in June – According to the Flash Reports.  The Markit Flash reports released today showed that both the US services and manufacturing sectors continued to decelerate in June. Remember, the flash report reflects approximately 70-80% of the total survey data collected each month. When we get final figures from the ISM after the first, this perspective could change.

 

The Flash reports showed that US manufacturing slowed to a 9-month low, coming in at 52.1 from 52.7 in May.  Since the index is still above 50, it suggests that manufacturing is still expanding, just at a slower pace.

 

On the positive side of the equation, new orders appeared to be hitting their highest levels since January.  That suggests to us that manufacturing activity would pick up next month and into August.  That makes sense, it plays into normal seasonality as companies get ready for the traditional peak season.

 

The services sector (which represents about 70% of the US economy), also slipped in June.  The index came in at 53.0, down from 53.6 in May. Just like we saw in manufacturing, the services sector experienced an uptick in new order activity in the month.

 

Interestingly, Markit pointed out that the PMI figures are consistent with an economy growing at 1.5%. Understand that the second half of the year will provide a significant amount of annual growth, and that figure will go upward. The importance of that statement is still this: as a total economy, the US expanded at just 1.4% for all of 2016.  Therefore, we think the country is still on pace to hit the 2.3% to 2.5% target rate forecast set by the OECD, IMF, and Federal Reserve.  Most of you will still see growth rates that exceed what you had last year.

 

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Business Intelligence Brief: June 26, 2017

Short Items of Interest – US Economy

 

  • The Volatile World of Durable Goods – The latest durable goods numbers are presenting analysts with the same dilemma they always do. The expectation was that there would be a modest decrease in the level of durable goods orders – maybe a reduction of 0.4%. Instead there was a much steeper decline of 1.1% but as is often the case the issue has been aircraft sales. These dipped for the second straight month and the decline here was steep. Last month there was a drop of over 31% in orders for military aircraft and an 11% drop in orders for civilian aircraft. That decline is in evidence this month as well. If one strips out the aerospace orders the overall data doesn’t look all that bad but neither is it improving. The impression is that manufacturing has stalled to some degree but not in every sector.

 

  • Massive Tax Change Proposed – Part of the House Republican proposal for tax change has not gotten as much public attention as one would have expected but it is clear there has been considerable behind the scenes activity. The plan would eliminate the deduction that business can take on interest paid on debt. This has been the key to finance at almost every level of business. Big companies leverage debt as it is cheaper than relying on equity financing; farmers use it to get through until harvest. The fact is the US system is weighted towards debt and a big part of this strategy is the ability to write off some or all of the interest paid. Changing this could be a $1.5 trillion-dollar change.

 

  • Banks Pass Stress Tests – The stress tests that have been mandated by the government and the Federal Reserve were designed to identify issues far enough in advance that they can be dealt with before reaching a crisis level. In the wake of the financial collapse many banks did not pass these tests as they lacked sufficient capital to back their obligations. Since those bad old days, the banks have changed enough to comply and none of the major banks had any trouble passing the tests this time around. By this measure the financial sector is in better shape than it has been in years.

 

Short Items of Interest – Global Economy

 

  • Italy Bank Rescue Under Attack – The banking system in Italy has been teetering on the edge of crisis for years and was reaching the point of no return. The Italian plan to bail out two of the largest banks in the country has evoked a lot of antagonism in the EU. The plan breaks the pattern that had been set by the ECB and EU and weakens the effort to avoid future taxpayer bailouts. The state will provide 17 billion euro to wind up these banks and that is a taxpayer bailout. The ECB argued against the move but the options were just not acceptable to the Italians and now the EU is more or less back to where it was when it first started to try to deal with Greece. Other nations will certainly look at this as permission to do much the same as Italy just did.

 

  • Labor Shortages in Eastern Europe – Economic expansion has been compromised in much of eastern Europe as there are simply too few people to build these economies. There are at least three important factors – the first is that these are older populations and demography is catching up. The second is that too few have the appropriate education and training and thirdly the people who would be the next generation have been leaving in droves to work elsewhere in Europe while few people make the trip in the opposite direction.

 

  • Canadian Rate Hike Less Likely – There had been an assumption that the Bank of Canada would hike rates but the latest inflation data has made that less likely. The subdued numbers take the pressure off the BoC and that will give the doves a bit more ammunition to make the case that in the wake of low commodity prices the Canadian economy still needs help.

 

 

 

Why Protectionism is Not Such a Good Idea?

The Bank for International Settlements has become the latest global financial player to add its opinion to the conversation regarding trade and protectionism. The comments by the chief economist are as strong as any that have been released thus far by the likes of the OECD, IMF, WTO, World Bank and so on. Claudio Borio was quoted as stating that “rolling back globalization would be as foolhardy as rolling back technological change”. This is a very interesting and telling comparison as both globalization and technological change would be at the top of the list as far as economic disruptions responsible for costing millions of people to lose their jobs. There is often fierce opposition to both of these developments and there are many who would forcefully advocate slowing or stopping both the process of globalization and the advance of technology. The fundamental question is whether this would be good for the overall economy of the countries involved as well as the world in general – the old argument of “the greater good”.

 

Analysis: The standard argument for increased attention paid to globalization as well as technological innovation is that consumers benefit greatly from both of these advances. The consumer is given access to imported (and usually cheaper) goods from all over the world through trade and technology is always pointed towards making their lives easier and more efficient (at least that is the theory). It is quite evident that both trade and technological advance has a downside for some and in many cases a very serious downside. The person whose sees their employer fail because they can’t compete with the foreign import will lose their job and so will the person whose job is now being done by a robot.

Is the consumer advantage large enough to offset the damage from job loss? At a macro scale, the answer is yes. The consumer is the anchor for most every economy and certainly for the major industrial states. The consumption of goods and services accounts for more than 80% of the US economy and this activity accounts for a like percentage of the jobs. It is simple math to note that if people have more money to spend on these goods and services there will be more economic opportunity. This can be accomplished as people make more money but the price of those desired goods and services matter as much or more. If the price of things rise the consumer will be able to consume less – this is the threat that has always been posed by inflation. The connection between inflationary pressure and trade has always been close and it has been the same story with technology. It is the availability of less expensive imported goods and the advances in technology that have been largely responsible for the lack of inflation. If there was to be a dramatic reduction in imports and technology was to be restricted, the price of goods would shoot up and the impact on the consumer would be severe.

In the great scheme of things an inflation threat is far more dangerous than a recession. It has been a long time since the US really suffered a severe inflation and many have forgotten (or never knew) what it feels like. Everybody is affected as everyone tries to catch up with the higher prices. The average person watches their whole lifestyle erode as they can’t afford the prices and those with the least leverage are hurt most as they can’t do anything to improve their income. The average recession hits some parts of the economy really hard but others are essentially unaffected and may even benefit as prices are falling in response to the reduced demand.

The bottom line is that restricting trade is a bad idea as it has very negative impact on the economy as a whole. It is also very apparent that expanded trade and the expansion of technology costs many people their livelihood and that is a not an insignificant problem. At the moment, it would seem there is a solution just waiting for the powers that be to take action. For over a decade the manufacturing community (as well as construction, transportation and many others) have complained bitterly that they do not have the workers they need and they assert that in a few years the crisis will be acute as their older workers retire. Millions of jobs remain unfilled and there are millions who have been laid off – is it that hard to determine that the solution is to train those who don’t have jobs to do the jobs that are available? Not that this is an easy problem to solve but if ever there was a good use of government money this would be it.

 

How is Trump Doing? Depends on Age, Gender and Other Factors

As always there are profound differences between members of the voting public. People have differing attitudes according to their age and gender and where they live and how much money they make – among other things. The Trump administration is no exception as he has both supporters and detractors. The challenge for analysts has long been that people really don’t have a real sense of who is responsible for either success or failure. Is their issue the President or Congress or the state they live in. Much of what transpires in the economy is out of the hands of a President and is more the purview of the Supreme Court or the Federal Reserve or any of the hundreds of bureaucracies in the government.

 

Analysis: Support for Trump breaks down by both age and gender with his supporters coming from men over the age of 50. Over half think the economy has improved and give him credit for it. Only around 43% of men under 50 give him that credit. Among women his support is weak with only around 15% of women under 50 asserting the economy has improved and that he should be given credit for his. Among women over 50 the percentage that thinks the economy has improved due to Trump is only slightly better at 40%. Of course, there are many other reasons for a voter to favor a given President other than economic attitudes but as the 2018 elections near there will be a lot of politicians remembering that “it’s the economy, stupid” and these attitudes will play a big role in what transpires in the coming campaigns.

 

The Economic Diplomat

The major critique of the Trump administration from the perspective of the US allies is that it has been very hard to get a sense of what the policy is on any given issue. Trump has been incoherent at times and mercurial at other junctures. His campaign positions have been consistently altered as the realities of governing have become more apparent. The ferocious threats directed towards China have faded as the US is taught once again what China can use as leverage. The promises to pull out of Nafta have been replaced with assertions that some part of the pact will be changed and altered. The border adjustment tax proposal is facing significant opposition in Congress and so on. The alternating threats and promises have left allies with a sense of unease and confusion and that makes the most recent appointment to the Trump team all the more important – provided that he will be given the attention needed by the Trump team. Indications are that he will have a voice and thus far the allies and enemies of the US are expecting him to provide some clarity.

 

Analysis: The man that is being referred to as the economic diplomat is David Malpass and if confirmed he will be the new Under Secretary for International at Treasury. He is a former Bear Stearns economist and was part of the Trump transition team. He is not an economic nationalist and will side with Steve Mnuchin and Gary Cohn more often than not. His views are basically traditional Republican orthodoxy on trade and various alliances. He will be the point person for the rest of the world but that hardly means that he will be able to set policy all on his own. The important role he will play is as “chief explainer”. The allies (and enemies) have trouble figuring out what Trump wants from one day to the next as he contradicts himself often in those stream of consciousness tweets. It is obvious by now that Trump likes to vent and much of what is expressed is a reflection of what he is thinking at that precise moment and may not reflect the ultimate policy or decision. Malpass will be expected to put these comments in some kind of perspective so that the rest of the world can react appropriately.

At the top of the list of issues to address will be trade. The US pulled out of the Trans Pacific Partnership even before Trump took office but since that decision there have been many elements of the pact that have re-surfaced and there are other nations that intend to go forward with some version of it. The US has long been critical of some elements of Nafta but enjoy benefits due to other provisions. The new position will have to be developed and communicated. The US will be building a new relationship with a post-Brexit UK but there is also a need to stay close to the EU and not be seen as taking sides in the coming set of negotiations. The US needs to find ways to work with the Chinese and thwart some of their aim. India is a new opportunity and a challenge and there will also be delicate relationships with Japan and especially with South Korea under its new and more anti-US leader.  Malpass will likely be less public and more the advisor in Trump’s ear.

 

Is India Ready for this Reform?

Narendra Modi has been nothing if not bold and aggressive when it comes to long awaited reforms. His determination has been lauded by some while others simply assert that he is being bull-headed and unrealistic. His massive currency reform was expected to be an unmitigated disaster but it turned out better than even the supporters had hoped. The next round of serious reform is the imposition of a nationwide goods and services tax designed to get the whole country on the same page. The opposition has come from a variety of quarters – the various states resent being excluded from the tax process and business has objected to the demands and the amount of paperwork involved. They will need to provide information three times a month and they are going to have do all of this digitally despite the fact that even big companies are far from ready.

 

Analysis: There is general agreement that most of these reforms are necessary (although the states refuse to accept this as they have been milking the system for years). The issue for most is speed. They are afraid the system will devolve into chaos because there are too many parts that have been untested and companies have not been able to react in time. The Modi team responds by saying that this is always the excuse and there will always be demands for more time. This is considered stalling and the Modi deadline has been unchanged. The chaos will be dealt with as it appears. If India is able to pull this off, the power of the central government will be dramatically expanded and doing business with and in India will be simpler as today there can be dozens of jurisdictions to contend with and that has made business expansion very hard.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

One Man’s Vacation is Another Man’s Work Environment

The next time I get on an airplane to fly to some exotic locale to deliver some words of (ahem) wisdom will be July 19. That is nearly THREE weeks of being able to sleep in my own bed, reintroduce myself to my wife and indulge in the attention of cats. To me this is a vacation although I will be working and writing every day. I will be doing this at my desk and not in a hotel or an airport and that is glorious indeed. As I was completing the odyssey last week I was growing more irritated and impatient with every passing day. It didn’t help that I was in Louisville on Tuesday, Albuquerque on Wednesday, Chicago on Thursday and Greensboro on Friday. It especially didn’t help that I arrived in Raleigh at 2:00 AM Friday morning and had to barrel out to drive an hour to Greensboro at 6:00 AM.

I do love what I do when I get there. I have an insatiable desire to pontificate and am always in need of strangers to afflict as my friends and family just put their hands over their ears and start humming. It is the getting there that can make one question one’s choices. The tender ministrations of the TSA, the weather delays and those mysterious “mechanicals” that suddenly make connections a form of gambling. Hotels are generally decent but they aren’t home (most suffer from a major shortage of cats). The biggest problem is that so much time is wasted in the process of moving about and I fall behind in all the other duties as assigned. Now I have almost a month to get my act together and I am looking forward to that. I also have to confess that I will be enjoying more than a few evenings sitting on my deck and sipping wine at the end of the day!!! Now THAT is what I call a vacation.

 

These are parts of the commentary that appeared in a recent Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

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Evolution of Revolution – When behemoths of industry go through a paradigm shift, it can rock an entire industry. Sometimes, market leaders make mistakes. They try something, it doesn’t work, they revert back to the old way of doing things and they recover and move on. But, sometimes it disrupts an entire industry.

 

McDonald’s is now going through the “Experience of the Future” (EOTF) in many of its stores. It will allow customers to engage in mobile ordering, kiosks and other features that will create a model for the fast-food restaurant of the future. I wondered at first whether this would work. But, after a series of experiences in stores with human cash register operators (that weren’t good experiences) vs. some experiences in convenience stores ordering sandwiches and products using kiosks, I have to admit that this Gen Xer can probably jump on the kiosk ordering bandwagon. That’s especially true when I’m standing in line and people are taking forever doing their transaction.

 

But, the big point here is that McDonald’s is seeing Wall Street analysts already giving them a boost because of what they think this transition to the EOTF will mean for its bottom line. If McDonald’s pulls it off and we see all their stores converted to EOTF by 2020 (which is the goal), the entire fast food industry will go through this evolutionary phase. It has to. With McDonald’s finding a way to make this affordable and attractive to the franchise model, and as it evolves into this new format, competitors can’t afford to not follow. That’s especially true if it is as profitable as they project it to be.

 

And, we call this an evolutionary step because the kiosk ordering process has been around for a decade or more. Coupling it with a mobile ordering offer makes it hinge between evolutionary and revolutionary. These stores will still offer a human at a counter to work with those people that need the help or prefer it.  It will be slower. But, rest assured, companies like this will need fewer workers.  Think about it this way…in just about every situation where you walk up, place an order or pick up a product and someone physically takes your money, that job is in jeopardy.

 

And, perhaps most importantly, the timeline for that to happen by 2030 or 2040 was probably wrong.  It sounds like the timeline is accelerating and the next 5 years will see a major change in the types of employment available for entry-level, hourly workers. – KP

 

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Business Intelligence Brief: Jue 22, 2017

Short Items of Interest – US Economy

 

  • Budget Splits – The countdown is under way and it is relentless. Despite the assurances of Treasury Secretary Mnuchin the government is going to be unable to meet its obligations soon. For the last few months the bills have been getting paid because Treasury has been moving money around. There is enough wiggle room to keep the lights on into September and then there is no more. The annual battle over the budget has weakened the US credit rating and has thrown millions into confusion as they do not know if they are going to get a check. The latest battles are within the GOP itself as there are factions that want to significantly increase military spending fighting with those who want to see far less spending by the government on anything at all. It will come down to the wire – as it always does.

 

  • How Permanent is the Federal Reserve? – The fact is that every central bank in the world was a creation of the national legislature and they are not all the same. Some are more independent than others and some are more politically aligned than others. The US has had three central banks and the first two failed. The challenge is to keep the central bank’s ability to manage monetary policy without bending to the whims of the political moment but still have an institution that is accountable. Congress has oversight authority and the President picks the people who will be considered for membership on the Board of Governors but much of this influence is still indirect. The debate over what the Fed should do will intensify as the two vacancies that exist are filled. Will these be critics, economists, specialists? The thinking is that the Board needs a small banker and many want to see a more critical member.

 

  • Where Do Democrats Go From Here – Not that we are embarking on overt political commentary but it is very hard to separate the economic conversation from the political one. The Democrats lost a seat they wanted very badly in Georgia but frankly this was always an uphill battle – this is the seat that Newt Gingrich held for years and has gone with the GOP for over five decades. The issue now is how the Democrats react as there are many who take the defeat of the moderate Democrat as a signal that the future of the party is in populism – as exemplified by Bernie Sanders, Elizabeth Warren and others on the left of the spectrum.

 

Short Items of Interest – Global Economy

 

  • Where Does Saudi Arabia Go After Oil? – The fact is that oil will underpin the Saudi economy for many years to come but it is important to note that the country has already exploited more than half of its known reserves and the day is coming when they will have to look elsewhere. This is what prompted King Salman to elevate his son to Crown Prince. The options for the Kingdom are limited – there is interest in expanding tourism but there is much about the country that will put western tourists off. There is interest in high tech and that is what the education system has focused on. The issue is that many other states are pushing that same agenda.

 

  • US Pushing China to Act Against North Korea – The reality is that North Korea is essentially a vassal state that would crumble without Chinese support. China knows this and leverages the madman in Pyongyang. The US wants China to intervene and force Kim to change his tactics and China has responded with a simple question – “what’s in it for us”. If the US pursues punitive tariffs on Chinese exports there is no chance they will try to control Kim – his missiles are not pointed at them after all.

 

  • Argentina Denied Market Status – The hope had been that MSCI would restore the nation’s status as a market economy and when that was denied there was an immediate reaction in the equity markets and with the peso. It has plunged to new lows and the expectation is that it will stay there unless and until the country can make its case successful.

 

 

 

Tax Reform – What Are the Chances Really?

In many respects the altering of the country’s tax system is akin to the quest by Don Quixote – lots of tilting at windmills. The basic problem has always been the fact that no two people agree on the issue when it comes to details. It comes down to people wanting tax cuts for themselves and tax hikes for others. The issue is made even more complex by the fact that a tax system is asked to do so many things. At its heart, it is to provide revenue for government to operate on but it is also used to shape behavior. Taxes are imposed no things that have been deemed unworthy (cigarettes and alcohol and the like) and tax breaks are offered to get people to do certain things (such as install solar panels and insulate homes). These penalties and rewards become ever more significant when applied to the business community. There are two approaches to budgeting and taxing – the first is to make a list of all the things anybody wants the government to do and then raise enough taxes to pay for all of this while the other approach is to determine what level of taxation should be imposed and then determine what government can do with that budget.

For years the strategy was primarily the former – finding ways to fund the wide variety of offerings from the government. Money was needed to make good on those promises of Social Security and Medicare and a strong national defense and good highways and welfare programs and so on. The challenge is that tax revenue has to keep going up in order to pay for all that. The desire to limit the hikes in taxes means that the government is unable to do all the things that everybody would like and that means making some difficult choices. Today we have a budget that exceeds the revenue coming in and the “solution” has been to borrow money to the point that we run a consistent multi-billion dollar deficit and have a debt that is over 100% of our national GDP of well over $18 trillion.

 

Analysis: Tax reform has been at the top of the agenda for the GOP for years and there are many in the Democratic Party that have been just as interested in change although often for other reasons. The unity that would be necessary to get significant tax reform passed through Congress is not in evidence at this point and many analysts remain very dubious about the prospects. There are fundamental disagreements within the ranks of the GOP that would have to be settled before any real change would be remotely possible.

One of the points of contention is the border adjustment tax that would reverse the current system rewarding importers as opposed to exporters. This has been an important part of Paul Ryan’s tax plan but support for it has faded considerably under pressure from the big importers and because many have pointed out that such a tax shift will not really have the impact on exports that is hoped. Some in the GOP indicate they will not support a tax revamp with this border adjustment piece included. Another issue is whether this plan is to be revenue neutral. There are many in the GOP that do not want to preside over anything that actually raises taxes and they want only to rearrange the system so that the same amount of revenue is raised but with a different distribution as far as who is taxed and by how much. Those who want more revenue assert that something has to be done to address the debt and deficit and the issue of what the government is being asked to do.

One of the biggest hurdles is over whether this should be a temporary or permanent change to the tax code. There is no good reason for these changes to be temporary. Everyone concerned opposes the idea as it makes future planning all but impossible. The sole reason that a permanent change is not the automatic response is that it is far harder to get one of these through the political process. To get a permanent tax change requires using the reconciliation process and committing to budget deficits 10 years out. This process would allow a simple majority vote and not the 60 vote process that is in place for most tax and spending plans. The GOP would need Democrats to help if the 60 vote requirement stays intact and this doesn’t seem likely at this point. The bottom line at this point is that there is precious little evidence of common purpose within the ranks of the GOP and this suggests that there will only be minor alterations to the tax code and temporary ones at that.

 

Existing Home Sales Increase

There have been increasing concerns over the state of the housing sector over the last few months and for good reason. The headwinds that are constantly referred to have been picking up as surely as an approaching hurricane. The price of homes has escalated and in some markets now exceed the highs that were noted in the last boom. The mortgage rates have stayed low but are still higher than they were a year or so ago. The biggest concern is that there are too few houses available for sale in many markets. New home builders can’t find people to employ and the sellers of existing homes are in short supply. They may be willing to sell but they can’t find their next house to buy and thus can’t sell the one they are in.

 

Analysis: The latest data on existing home sales is better than had been expected with a 1.1% increase in sales over the previous month. This is not necessarily a sign of real housing sector recovery but it may signal that the decline in activity will not be quite as precipitous as had been feared. The majority of the sellers are Boomers who are seeking to downsize or to move to some kind of senior living arrangement and the majority of buyers have been millennials who have finally started to enter the market in significant numbers. These are the older millennials who have started families, are in their 30s and no longer want to try to handle the higher rents that are being charged in the majority of the country. The new home numbers are not great but at least the existing home activity appears to be at least stable and with some growth.

 

Major Protectionist Move by Trump White House

The promises made during the Trump campaign have generally not been kept – at least not as they were outlined in the campaign. There’s nothing at all unusual about this process as every candidate for office will promise everything they can think of to lure votes and once they are in office the reality of government sinks in and many of these promises are altered or abandoned altogether. Trade was a major issue in the campaign and there were many assertions indicating wholesale shifts in the way the US interacted with the world. China was to be assessed as a currency manipulator and imports were going to be denied, the Nafta agreement was going to be torn up and the US was going to halt talks with Europe. Thus far the only major trade action taken was the formal withdrawal from the TPP and that had really already taken place when Congress killed it last year. Now the Trump White House is poised to take a major action as regards steel imports into the US.

 

Analysis: For the last several months there has been an “investigation” to determine whether imported steel is a threat to the national security of the US. This study was conducted under the authorization of a 1962 law that gives the President wide discretion over trade and tariffs when the national security is threatened. The assertion is expected to be that reliance on imported steel is indeed a threat to the security of the US and that will justify the imposition of tariffs on imported steel in order to protect the domestic steel producers. This act will set up some serious reactions that could lead to an all-out trade war with some of the key allies to the US.

It is still not entirely clear whether this will be a blanket tariff on all imported steel (40% has been discussed thus far) or a series of more nuanced quotas and tariffs that would treat countries differently. The real target of the administration’s frustration is China and this is the country that has provoked the most anger as they have been selling steel into the US market at very low prices. The Chinese have been accused of “dumping” but it is unclear these sales meet the definition. China is not necessarily selling steel for less than it costs to produce it – their steel production is simply cheaper as wages are far lower and the regulatory burden is extremely light. The US actually buys relatively little steel from China – it is not even in the top ten as far as suppliers to the US. The fear is that they are accelerating their exports to the US as China is not consuming as much of their own steel and have to find markets for it.

The top ten suppliers of steel to the US are mostly close allies – Canada, Brazil, South Korea, Mexico, Turkey, Japan, Russia, Germany, Taiwan and Vietnam. Those that have been advocating for a more nuanced approach want to see these allied states get a break but that makes it clear that China is being singled out and that guarantees retaliation.

One of the bigger questions is how this national security tactic will play. The provision is considered the “nuclear option” in trade and was supposed to be used only in times of war. To employ it now will certainly provoke a response at the World Trade Organization and the US would likely be ruled against. The Trump response would be to ignore the WTO and that instantly cripples the fading credibility of the organization – the one that has ruled in the US favor in over 80% of cases brought before it. If the US wins the argument the sense is that every country in the world will start to use that rationale and a real trade war will erupt. Beyond all this there is the issue of the impact on those that consume steel in the US – any way one looks at this the prices will go up and that cascades through the greater economy at a rapid pace.

 

China and Market Status

What exactly is China in terms of its economy? In many respects it is neither fish nor fowl. There are certainly significant elements of the Chinese economy that function in a fully market facing manner and it is just as obvious that other parts of the economy are closely tied to the state. Unfortunately for those who want to make a clean designation there are many other countries that straddle the divide between the market and the state (and the US is one of these). Is it a market system if the government offers subsidies and tax breaks and other incentives? If so, no country could claim to be a market based system. In the end it becomes a matter of degree.

 

Analysis: China would like the World Trade Organization to label it a market state and allow China all the WTO advantages that come with that assignation. The US and other nations are bitterly opposed to any such change as they assert that China’s economy is strictly controlled by the state. The Chinese government will prop up industries simply because they hire a lot of people and that is not the market at work. On the other hand the US has bailed the auto industry out repeatedly in order to protect jobs.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

An Apology in Advance

You, dear reader, will not get a BIB tomorrow morning. I know this already as I know what faces me in the next 24 hours. At noon today I will be speaking to a business group in Kansas City and later today I fly to Chicago to present at an evening meeting. Immediately after that is over I race to the airport to catch a 10:30 flight to Raleigh that gets me there at 1:30 AM. Friday morning I grab a rental car and race off to Greensboro (an hour’s drive) to do a morning talk. If I am lucky I will get maybe four hours of sleep. The activity that gets sacrificed in all this is writing the BIB.

I really do try to meet the deadlines for the BIB and I know that people like seeing this in the inbox. Sometimes the vagaries of travel intercede and I fail at the task of reliably delivering every morning. I have it on the best of authority that absolutely nothing of importance will take place today and tomorrow and that all the important stuff will wait until Monday. It is also the time of year that I get a little break in travel as nobody in their right mind schedules conferences in July. I am off the road for three whole weeks and there is nothing that will keep me from putting the BIB out every morning (other than sheer sloth and laziness). August starts the whole process again and there will be other missed days on occasion.

On those occasions when I am unable to impose my scribblings on you I suggest you seek alternative sources of news. My recommendation is to seek out old Pogo comics so that you know that what happens in politics today has been happening for a very long time and that Pogo’s quote remains relevant today “We have met the enemy and the enemy is us”  Of course our Black Owl Report is available as well.  See the link for details www.armada-intel.com .

 

These are parts of the commentary that appeared in a recent Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

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Excessive Heat Warning – I was making my normal National Weather Service daily troll, and I saw a metric from the NWS.  At first, I thought it was an advertisement. It looks like a cheesy graphic we would see advertising some testosterone booster miracle drug or something. But, it’s real.  The NWS has issued an Excessive Heat Warning for next week across a large swath of the US Southeast. The warning runs from Saturday through next Thursday with the real temperature in some areas eclipsing 120 degrees.

 

The map shows the actual national situation with current warnings and watches in place. The bright purple color is the Excessive Heat Warning, orange represents heat advisories. From a business perspective, there are a couple of things to watch.

 

Energy consumption will obviously skyrocket during this time throughout these zones. In these areas, there is a variety of different types of electricity being produced (wind, hydroelectric, solar, etc.), so it might not have a material effect on natural gas or oil (electricity production).

 

Crop conditions could be impacted – some positively. There are crops that need a period of significant heat to fully mature and put on strong growth. Some crops are ready for harvest and getting quick, dry, weather will help with the harvest of some of these crops.

 

But, for other regions, this heat wave comes right on the heels of a strong rainy pattern. When fields are exceptionally wet, root systems on plants are relatively shallow. Getting a heat wave like this immediately after can kill young plants with shallow root systems – in areas that are not sufficiently irrigated.

 

I thought it was interesting that the NWS had resorted to some trendy graphics to hit a wide audience. – KP

 

 

 

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Business Intelligence Brief: June 21, 2017

Short Items of Interest – US Economy

 

  • Uber Ousts the CEO – We do not usually do much writing about the trials and tribulations of specific companies but this story has been too tempting given all the implications. I also have a more than passing interest in the future of the ride share idea. I use Uber at least six or seven times a week as I have lost all faith in the taxi business. By all accounts Travis Kalanick was an example of the tech guy who has no clue how to do anything else and managed to build a poisonous culture. He is no more the CEO and the company is struggling to figure out who replaces him. The point is that my personal experiences with Uber have been universally good -not one bad ride as compared to the dozens of miserable taxi experiences that had me fearing for my life. The moral of this story is that one has to be good at everything when you are running a company and Kalanick was really bad at most of these duties.

 

  • Republican Control of NLRB – The five person NLRB is the federal agency that rules on most of the labor decisions in the country and in the past it has either been an ally to the unions or an enemy. This is the board that determines what makes a union and which workers can form one. At the moment, there are two vacancies and Trump has just nominated Marvin Kaplan to one of the seats. He is an attorney with extensive experience in labor negotiations and is expected to win confirmation. That would mean there would be two Democrats and two Republicans on the board and the fifth member will be nominated by Trump by the end of the year. The GOP has not held the majority on the NLRB since 2007.

 

  • The Dove Speaks – Charles Evans is the head of the Chicago Federal Reserve and has established a firm reputation as the most dovish of all the regional Fed leaders. He also has tenure in his position and has been a leading advocate for keeping rates low. He has indicated that his preference would be to leave rates where they are until December. That doesn’t mean that the others will follow his lead but he is going to fight a September hike – that much is clear.

 

Short Items of Interest – Global Economy

 

  • Germans Face Reality with Refugees – The statements have been terse as the German government has asserted the majority of the refugees that sought protection and a new life will be unemployed for a very long time and will have to rely on the state. The problem is that there were three distinct waves of migrant. The first were the better educated and wealthier Syrians fleeing the war and most of them have been able to resume their lives in Germany. The second wave was Syrian but poor and they have not been assimilated as quickly. The third wave was the largest and came from all over North Africa, the Middle East and South Asia and the estimate is that 90% are without work or the skills to get work.

 

  • Comeback for Berlusconi? – Many in Italy would shudder at the prospect as he left office beset by scandal and most of his policies were judged to be epic failures. The center left is still ahead in the polls but there are many who are not favorably inclined towards their policy choices. It was assumed that the Five Star Movement would be the challenger but they appear woefully unprepared to govern and now some are looking at the right again and concluding that Berlusconi might not be so bad this time.

 

  • State Department Urges End to Feud – Trump has moved on to other issues and has seemingly lost interest in the situation with Qatar and that has put the State Department back in control. The demand is for the Gulf States to delineate their issues with Qatar and to move towards a solution. The US is not willing to lose that key air force base and there is frustration over the lack of specifics from the Gulf States as they cut off ties to Qatar. The US wants a brokered agreement that allows all parties some room to back off but they can’t do that without knowing what the grievances really are.

 

 

 

Oil Market Defies the Old Logic

It is a brave new world out there for the oil producers and suddenly nobody really knows the rules. It is not that many years ago that the oil markets were predictably volatile. You never knew what the price per barrel would be but you could count on that price going up and rarely down for any length of time. The demand was always close to constant and production was limited and could be constrained at will. The power of OPEC may have peaked in the 1980s as there were more nations producing than before and many were not members but even those that were not formally part of the cartel would follow its lead when it came to production in order to get prices where they wanted them to be. This system seemed to be a constant and most assumed that oil prices would continue to ratchet up over time. Go back and look at the predictions that came from the likes of Goldman Sachs in the 1990s – their analysts were not alone in asserting that the per barrel price would climb to over $200 by the end of the century and just before the recession the prices were between $100 and $125. Suddenly the prices started to fall and at first everyone assumed this was just a reaction to the recession and the expectation was for the higher prices to return as soon as there was more economic activity. It didn’t happen and oil prices have struggled to get past $50 or $60 a barrel despite the overall growth of the global economy. While it is true that growth has not been exactly robust there has been enough to have stimulated more oil consumption and still the market is in bear territory.

 

Analysis: There are many factors explaining why this has become the new normal but five stand out as the most relevant at the moment. The first is that the OPEC deal to cut production was not aggressive enough. In past years the problem with many OPEC deals to limit output has been that members cheated the quota. Many of these countries rely almost exclusively on the oil money they make and simply can’t reduce as much as the Saudi Arabians would like. This time the deal was struck with an eye towards getting maximum compliance and this means that the proposed cuts were pretty anemic. The members are in general compliance and that is a good thing but the cuts have not been deep enough to have much impact on the glut. They are limiting their output to 1.8 million barrels a day but analysts assert that the production number should be half that large. Getting production numbers that low will risk seeing many members cheating as they have in the past.

A second factor has been unexpected levels of output from countries that had been essentially written off as major players at this time. Libya and Nigeria had both been exempted from the reduction due to their political circumstances. There is barely a government in place in Libya and yet oil production has been climbing and all of that oil has been hitting the market. Nigeria has been fighting insurgents that attack the oil infrastructure and in the past that has severely limited the levels produced. Now they are getting better at defending the system and output has risen.

The third factor that has been playing a role is the persistence of the glut in storage. The intent behind the OPEC reduction was to provide an opportunity for the storage surplus to recede. It was assumed that demand would pick up and that the global stockpile would be consumed rather quickly. It has barely fallen at all because the demand expected has not materialized and the cuts were not deep enough (as outlined above). The talk in the oil world is of “peak demand” and not “peak supply”. The global economic recovery is not robust – the US is growing at perhaps 2.3% and Germany is ecstatic over the prospect of hitting 1.8% this year. China is limping along at 6.5% and India is the top dog with growth that is hitting 7.0%. Both of these states were boasting growth numbers in the double digits just a few years ago. This is not growth that bolsters oil demand. Even with growth the majority of the business community has adopted policies that limit energy use and that further dampens demand expectations.

The fourth factor is perhaps the most consistent and likely to be the major one for many years to come. The US was not even in the production game a few years ago but is now the largest producer in the world. The oil shale revolution is very real and the US has barely tapped the potential in the country. Then there is the 85 billion barrels of known reserves offshore. The Obama approach might have limited the oil output a bit but under Trump the oil sector has boomed and would be growing faster were it not for the low global prices. The US can now easily replace any production cuts from the OPEC states if it wants to.

Finally, there is the behavior of the oil market itself. When OPEC made its decision to cut production and got the Russians to follow along the investors immediately assumed that the old rules were still in place and the speculators bet heavily on higher prices. Those did not materialize and they have been trying to dump their positions ever since. All of this adds up to the return of a bear market and one that looks persistent.

 

A Couple of Other Factors to Consider in Oil

The five factors explored above are the drivers right now but consider some others that could play a role. The unity of OPEC is as strained as it has ever been and the recent fight between Qatar and the various Gulf Oil states is an ongoing issue. The Saudi Arabians and Iran are still both in OPEC despite the enmity between them. It is not out of the realm of possibility that the OPEC organization starts to come apart at the seams and that would mean an end to even modest efforts to control the oil states.

 

Analysis: It has been asserted that a break up of OPEC would cause oil prices to plunge to $30 and even $20 a barrel and that sets up a dangerous spiral as many nations would be unable to produce at that price and would drop out – setting up a shortage down the road.

 

Significant Changes at the Top in Saudi Arabia

Under no stretch of the imagination is Saudi Arabia a democracy – this is a Kingdom where the power clearly resides within the royal family but that doesn’t mean the King has all the power he might want. Making big changes in the country’s leadership requires a consensus position and the engagement of many of the royal players. The current King has been trying to get his son positioned to be the successor in the event of his death or his desire to step down. King Salman has been trying to walk a delicate line between factions within the country that want to return to conservative positions and those that are pushing reform. The selection of Mohammad bin-Salman to be the Crown Prince means that Mohammad bin-Nayef has been replaced as far as the succession is concerned. He was also removed from his position as Interior Minister and is no longer the man with the anti-terror portfolio. The US has long relied on a close relationship with bin-Nayef but bin-Salman has been pro-US as well and has tried to court relationships with Trump as well as some of the European leaders.

 

Analysis:  Mohammad bin-Salman is very young (31) and his elevation would be almost shocking in a country which has been led by older men for decades. It was once asserted that somebody in their 60s would be a radical move. The concerns that have been expressed have come from outside the Kingdom as few would dare to bring these up inside the Kingdom. There is worry that he is too inexperienced and that he favors moves that challenge the country too much. He leads the effort to break away from being an oil dependent state but the alternatives force the country to be more open to outsiders and that means cultural change. He has favored the engagement of women in politics and business but thus far only at a local level. He has pushed a more aggressive foreign policy and has been behind the activity in Yemen as well as the confrontations with Qatar and Iran.

King Salman is not suggesting he plans to step down anytime soon and by all accounts he remains in good health. The expectation is that Mohammad bin-Salman will be Crown Prince for several more years and even then his succession will be a topic of debate as there are certainly other contenders.

 

Scandals in French Politics

The new Macron government has had to face a crisis already although it is one that should be weathered with minimal damage. The decision was made to combine forces with a smaller centrist party at the end of the National Assembly elections. Modem has been around for a while and would bring 42 seats to the coalition. The Marcon party has enough seats to form a government without them but the total would have been more impressive. Unfortunately, the Modem politicians are now under investigation for misuse of funds and nepotism. In the old days they would likely have fought to stay in their positions but the mood of the French voter is different now. It was financial scandal that derailed the campaigns of Francois Fillon and even Marine Le Pen and Macron has acted swiftly by demanding the resignations of people he just appointed to the government.

 

Analysis: One of the concerns about this brand new party is that not much is known about many of those who ran for the National Assembly and there was not a lot of time to get the candidates vetted. The fear is that there are potential land mines out there and that some of these new members will have skeletons in the closet that could appear. Right now, Macron is acting quickly to remove anyone tainted by scandal but at some point those in his government will wonder if he ever has their back. If there are people removed simply due to allegations there will be an incentive for the opposition to accuse people of things even when they know the accusation is groundless. This has long been a tactic of the National Front and most expect they will further employ smear campaigns to keep Macron off balance. He will have to take a stand at some point and defend the people he has put in place.

The good news for Macron is that many of those who ran on his ticket are not politicians and have no track record. That doesn’t mean that they are without personal challenges but these will affect the French voter less than what happens when a politician is perceived as corrupt. Those who have been brought in thus far do not know Macron well and that allows him to be somewhat picky about the inner circle and right now it appears that this circle is very small and tight. The one key advisor is the same as it has been throughout his life. His wife – Brigitte Macron – has been the most important advisor in his career and she wields a tremendous power in terms of who gets access to him. She sizes people up very quickly and her assessments are almost always dead accurate.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

Louisville and Me

One of the most common questions I am asked is which city I like. People know I travel a lot and they make the assumption that I learn a lot about the cities and communities I visit. In fact, I am judging most of these places by their airport and their hotels. But there are places that I go to often enough that I start to get a bit of a feel for the community. I always tell people that having been born in Kansas City and having spent my entire life there I have no desire to go anywhere else – KC is my home and my favorite place. BUT – if I was to somehow offend the entire city to the point that I was tarred and feathered and run out of town on a rail where would I choose to go.

Louisville is a town I could live in. It has the same feel that KC has – a little more southern but KC is a cross between southern and western. The people are charming and the pace is about right – not frenetic but not slow either. It is a physically beautiful city and there appears to be lots going on. On my last trip, I was in a Holiday Inn that was being renovated and when I got to the room I noticed there were no lamps. I struggled with this for a moment and then concluded that people in Louisville emit their own light and don’t need lamps. Beyond all the other factors there is one that stands out as far as Louisville is concerned – the food. I really have had some of the best meals ever in that city and frankly that is more than enough for me.

 

This is a commentary by Keith that appeared in this week’s Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

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The “Blue Line” in the Sand.  Russia has drawn a line in the sand, and it’s the Euphrates River.  In the 24 hours immediately after a US F-18 shot down a Syrian SU-22 fighter, Russia has said that it will paint and shoot down anything airborne operating West of the Euphrates River. According to wide reports in the media, it’s not too uncommon for US assets to get “painted” by targeting radar in and around Raqqah and areas on the Euphrates.

 

US military authorities and officials are working to smooth over relations between the US and Russia after the incident – to prevent further issues from happening. The US and Russia have operational communications in place to prevent accidental engagements between the two countries in an area that has no less than 6-10 different military interests operating and carrying out operations. Russia threatened to cut off communication with the US in retaliation for the attack – but doing so will put Russia at risk of embarrassment – which it will likely avoid. It will use a stick wherever it can, instead of soft diplomacy, because it believes the door is now open to do so. With so many different entities operating in the country, the risk of accidental engagements is high. Don’t be surprised if there is at least a mild incident in the next week that allows Russia to show it’s “control” of the situation. It might be an attack on a drone or something unmanned.

 

But, here’s the real reason why I wanted to comment on this story (the mainstream is covering it in length if you want specific details about the event).  This is a new method of engagement and field operations for the US military. Well, it’s new in the sense that we haven’t had this level of field operating authority in about 8 years.  Previous administrations (regardless of political party) typically gave the military full operating authority in areas of high conflict risk. The White House or Congress would set the parameters for an engagement or in a theater where tensions were high, perhaps set objectives, and areas where political risk could not be compromised; then they would allow field commanders to use the tools necessary to ensure that the US had an “overmatch” situation in place.

 

Giving operational authority to the experts in the field is the right way to operate. We are adjusting to this “back to the future” way of operating. As a public (and perhaps even many military authorities) have forgotten what it feels like to wake up in the morning and read that a significant incident has taken place. Frankly, the White House is informed before we are – but it can also get caught by surprise if a theater is fluid and engagements are swift with this method of operating.

 

This new construct has also sent a message to potential adversaries all over the world that a US response to aggression can be swift and decisive. That will keep many foreign leaders off-balance. It will also ratchet up the risk of conflict in many areas of the globe. So, there is a trade-off.

 

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Business Intelligence Brief: June 20, 2017

Short Items of Interest – US Economy

 

  • Why is the US Struggling? – This is a subject that will get far deeper treatment in the Black Owl Report but just as a starting conversation, the US is facing endemic issues that have led to a populism that still baffles the pundits. How is Trump so unpopular with the majority of the elites and still so popular with others? The premise is that the US has at least three deep structural problems that have been building for years and are now coming home to roost. The first is that it has become extremely hard to move up the income ladder in recent years and that challenges the notion of an egalitarian society. The second issue is that there has been a failure in terms of education and its value. Too many are dismissed as “second class” as they lack a degree and yet business can’t find people to hire and the third is that much of society and the business community has become complacent.

 

  • What is the Fed Saying These Days? – Now that the June meeting is over and the decisions have been made, the focus on the Fed shifts to what the various governors and local heads are saying. Bear in mind these people are not all completely on the same page as there are hawks and doves when it comes to Fed policy. Over the next several months they will be making their case for their position with the hawks urging higher rates amid assertions that inflation is still something to worry about and a belief that the economy really doesn’t need all that much stimulation right now. The doves will be arguing that the current recovery is still new and not all that robust and that tightening too much and too fast will create more pressure than the economy can bear.

 

  • Reactions to Student Death – There is no doubt in anyone’s mind that the leaders of North Korea are among the cruelest of people on the planet. The fact that Kim Jong-un sentenced his uncle to death by being attacked and eaten by wild dogs is proof enough. The North Koreans arrested a college student for the crime of taking a propaganda poster as a souvenir. He was mistreated in prison and was released to the US in a coma. He subsequently died. The US is outraged along with the rest of the world but we have been outraged at Kim for a long time. At the end of the day we have to question why anyone would come near this country and we need to make people understand that they are beyond help in this tyranny.

 

Short Items of Interest – Global Economy

 

  • Tensions Rise in Middle East – There are so many reasons this headline would be true but this particular incident involves Iran and Saudi Arabia. The assertion is that members of Iran’s military elite were seized on a boat that had entered Saudi waters and that the boat was carrying a large cache of arms. The implication is that Iran is actively trying to equip elements in Saudi Arabia that might challenge the Kingdom. The Iranians deny that this was the intent but they have not explained where these weapons were heading.

 

  • South African Central Bank Under Attack – The government of Jacob Zuma has been at war with the Reserve Bank for years as he wants to promote an extremely aggressive policy of government largesse and the bank wants to keep an eye on inflation. Zuma has been packing the bank with his supporters and it now appears that inflation is not a concern for them any longer and is threatening to accelerate. This has been enough to cause the Rand to drop in value as it appears the government will be “printing” currency recklessly.

 

  • DRC on Edge of Utter Collapse – The Democratic Republic of the Congo has been a failed state almost from its inception and it is hard to see how it could get any worse but that is the assertion. The government barely controls a several square block in the capital city and at last count there were over twenty militia armies active. It is now thought that famine will tear through the country and reduce the fragile state to utter chaos.

 

 

 

Are Tariffs in the Interest of National Security?

There are many reasons given for the imposition of tariffs, some more understandable than others. Nearly all have a political element in that there are domestic industries and interests at stake and the determination has been made that imports should be discouraged to some degree. There is the “infant industry” argument that is based on a national desire to build up a certain sector and the assertion that this sector needs to be protected from competition until it has time to get established. There are tariffs that are based on the fact that other nations have an unfair trade advantage due to low wages and production costs or because they have weak environmental and consumer protections. Trade barriers are erected to protect specific industrial sectors where domestic jobs are at stake. The imposition of tariffs and regulation is overtly designed to promote the domestic economy but usually comes at the expense of the consumer and certainly hurts the countries that seek to sell to the US. There is another rational used to restrict trade and it has been deemed the “nuclear option” by trade theorists and advocates. Opposing trade and establishing tariffs based on national security opens up a more serious debate and often leads to more aggressive trade policy.

 

Analysis: It is not all that unusual for a country to assert that a trade barrier has been erected as a means by which to ensure national security protection. Japan has imposed very high tariffs and extensive regulation on imported rice as this is considered a national staple and government is sworn to protect the ability of the country to feed itself. Japanese rice farmers are small scale and woefully inefficient compared to those in the US, Brazil, and throughout Asia but they are aggressively protected. The US has injected tariff protections to block foreign control of key resources and lately the attention has shifted to the steel sector. It is not the first time that steel has come under the wing of the government and it is not the first time that steel tariffs and restrictions on imports have been used to ensure the survival of the domestic steel business. Nor is the US the only country that has elected to protect this sector – steel remains a mythically important industry. Remember that the origins of the European Union was the European Coal and Steel Community as it was asserted that nations could not go to war against one another if their steel industries were monitored and controlled.

For a variety of reasons, the protection of the steel sector became a major part of the Trump campaign and it was assumed that there would be significant trade barriers erected to block the import of foreign steel shortly after he came to power. The decision was not as swift as had been expected but it seems that this week will see the full development of the plan and it will be centered on the national security motivator. There is a provision in a 1962 trade agreement referred to as Section 232 and it allows a President to impose tariffs and other measures on the grounds that national security is at stake. It was designed to allow country to impose barriers when the product or service is coming from a nation that would be considered hostile to the US. In the years since the provision was created the US has only pushed its case 26 times and all were abandoned but two – both having to do with oil imports (from Libya and Iran). The vast majority of the imported steel comes from close allies to the US – 60% of the imports are from Canada (17.1%), the EU (14.3%), South Korea (11.5%), Mexico (9.1%). China accounts for just 2.6% of the imports that come into the US. The remaining 45% of imports are spread among many smaller producers that may specialize in a specific kind of steel output.

The health of the US steel industry is not good. The majority of the steel produced in the US is by mini-mill and this relies on scrap as opposed to iron ore. This is a harvested resource and the supply has been dwindling over the years. The majority of scrap comes from vehicles, construction teardowns and the scrapping of other items. The longevity of vehicles and the heavier use of plastic and aluminum has reduced the steel available for harvest and there have been fewer construction related sources. The US can’t even scrap most of its own ships due to environmental regulations and that means that scrapped US warships have been sold to the Chinese for dismantling. The tariff imposition may not be enough to bolster the industry but it is certain to cause steel prices to rise in the US and that is a major issue for all the manufactures and others that consume steel. The consumer ultimately pays that price through more expensive cars and equipment.

Why is the Trump Team Aggressive on Trade?

The rhetoric is fiery to say the least and the critics have lambasted Trump for his consistently hostile approach to trade but there is likely more nuance here than might be expected. The commentary and explanation that has been coming from within the administration is far less theatrical and reflects a position that has been held by Democrats as well as by some in the GOP. The gist of the argument is that many of the trade pacts and agreements the US has entered into were motivated by factors that are far different now than in the past.

 

Analysis: Most of the organizations created to manage the global economy and orchestrate trade stemmed from the end of World War II and the US was committed to helping the rest of the world rebuild. Part of that plan was based on giving access to the US market and many of these strategies are still as they were in the 1950s. The US has also used trade as a political weapon – especially during the Cold War. If you supported the US against the USSR you were granted access to the US market. Today the need to rebuild the world is no longer an issue and the Cold War has ended. It may well be time to reassess the breaks that other states receive from the US and it is time the US demands a few breaks of its own.

German Growth Expected to Accelerate

Suddenly it appears the German economy is firing on all cylinders and the prognosis for the country has been improving with almost every passing week. The latest assessment from the Ifo organization asserts that growth this year will be at around 1.8% and that is up from the 1.5% assertion of just a few months ago. Furthermore, the assumption is that growth will be at 2.0% in 2018 if the current trends are maintained. This growth has all sorts of implications for Germany and the rest of the EU and the fact that growth is accelerating has come as something of a shock to many who had been assuming the worst at the start of the year. The sense was that Brexit was going to do significant damage to the German export community but that no longer seems to be the case. It was assumed that the populist wave was going to deliver politicians such as Geert Wilders in the Netherlands and Marine Le Pen in France and it was feared that this would affect the politics of Germany and strengthen the position of the AfD (Alternative fur Deutschland). Thus far these threats have not played out as many had assumed and right now Merkel is seeing a rise in her poll numbers and seems likely to win another term as Chancellor.

 

Analysis:  The analysts are suggesting there are perhaps four reasons for the rebirth of the German economy in just the last few months. One is the collapse of the populist threat and the fading of right-wing criticism of Merkel. The AfD is still active and still feeds off the general antipathy towards the refugee policy but that pressure has eased somewhat. The second rationale is that Germany has been growing its employment ranks at a record pace. The country has thus far seemed to avoid the demographic trap that has affected many others in Europe and in Asia. The workforce is indeed getting older but there have been enough newcomers to offset the ones that are leaving the workforce and a significant number of these new workers are coming from the ranks of the refugees. The third motivation for the new growth has been a business community that has successfully expanded its ability to export and to new markets. The slump in Europe over the last several years forced German companies to look elsewhere and they have been successful in selling to Asia and Latin America as well as the US. The fourth rationale for growth has been the performance of a more upbeat consumer. The spending levels are not to American standards but the Germans are buying more than they used to. They are buying homes and cars and other larger items as well as more normal consumer purchases. The German vacation is alive and well and more of them are being taken in Germany itself and that boosts the impact of the tourist euro.

A strong German economy is very good news for the rest of Europe and especially France now that it has a business friendly and centrist President. Italy has been likewise enthusiastic about this growth. If the pace is as rapid as is predicted the rest of Europe will start to see increased German development outside its own borders and that will be a welcome change for the countries of eastern Europe.

More Wealthy Chinese than Ever

The numbers of wealthy Chinese have expanded dramatically in the last year or so but the ranks may start to thin in the future as property prices fade. A great many of the 1.5 million who are said to have over Rmb 10 million are paper moguls as the bulk of their wealth is tied up in property holdings. The high prices have made them wealthy for the moment but there are deep concerns about the bubble that now exists in the Chinese property markets – should these burst, the people who are now considered wealthy will slip out of that classification.

 

Analysis: There are at least two issues facing China as far as this wealth is concerned. The first is the same as faces any country and this has to do with the stability of that wealth. A sudden drop in their asset base will rob the country of some investment capital and will accelerate the overall plunge of the economy. The more unique challenge in China is ideological. It still creates tension in China for there to be rich people alongside those with less. The majority of those that are wealthy have gained that distinction through investment and that seems awfully capitalistic. There are many within the ranks of the Communist Party that remain uncomfortable with their status and do not wish to do anything to protect them.

The paper wealth in China has boosted consumer activity but mostly at the higher end. There has been a lot of luxury purchasing but the demand from the middle class remains somewhat anemic. The stores that have been doing well in the big cities are those that cater to this elite – not the stores aimed at the middle class.

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

Contempt

This is the definition of contempt – “the feeling that a person or a thing is beneath consideration, worthless, or deserving scorn.” It is a miserable feeling to be held in contempt by someone or some institution but that is exactly what many of us feel when interacting with government or other institutions. The day becomes a series of insults and dismissals and the poorer one is the more this is the case. I have seen far too many people treated badly and disrespected simply because they seem to be “undeserving”. The cleaner at the airport who is dealing with people throwing trash in their face or the person shopping and trying to figure out whether they have enough money to pay.

The rest of us get this as well – too often. The government official who reacts in an imperious manner when we have an issue that requires their engagement. The fact is that nothing makes us angrier than being disrespected and dismissed. We know full well that we are important to our loved ones and friends and that we matter and it is insulting to be treated shabbily by those who are supposed to be paying attention to us.

      

This is a commentary by Keith that appeared in this week’s Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

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General Producer Prices Unchanged M/M, Higher Y/Y.   The Producer Price Index showed that it was flat month-over-month, but was 3% higher year-over-year for manufacturers. Commodity prices used in the manufacturing process were up 4.6% year-over-year and were down slightly by .3% month-over-month.

 

Just a few more highlights and areas of interest from the report:

 

  • Cement prices were up 3.3% M/M and 7.1% Y/Y. That’s a substantial price increase for a key construction commodity.
  • Frac Sand (using in oil production) was flat M/M but were up 8.8% Y/Y
  • Plastics and Resins used in manufacturing were up 2.4% M/M and 8.4% Y/Y
  • Grocery Stores -.7% M/M and down -.6% Y/Y
  • Bankruptcy Lawyers up .9% M/M and 6.2% Y/Y
  • Warehousing and Storage flat M/M and up just 1.7% Y/Y
  • Book Publishers down .1% M/M, but up 2.2% Y/Y (is print really dead – or are just the print brick-and-mortar retailers dead?)

 

I know that we have a very diverse reader base. We have worked with clients to use this data in sales presentations, industry benchmark studies, etc. It can even help in strategic assessments of new industries (see if there is price stability), older mature markets, etc.

 

 

 

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Business Intelligence Brief: June 19, 2017

Short Items of Interest – US Economy

 

  • “America First” Bites – Up to this point the majority of the trade plans that were put forward by the Trump campaign have been either stalled or abandoned altogether. It has been too hard to battle those who opposed the new restrictions or the ideas have otherwise lost support. The tariffs that have been based on “national security” issues are the ones that may be able to get enough support to pass although trade advocates point out that these motivations are not generally the best from an economic point of view. The steel tariff is a case in point as the rationale has been to preserve the steel business in the US for the purposes of national security although the tariffs will have a negative impact on the users of that steel. The tariff has opposition but it also has a lot of support these days.

 

  • Farmers Hit by Nafta Uncertainty – This has not been a banner year for the farm sector at this point. The high dollar has affected the ability to export farm goods and the weather has been too nice in too many places. There is an oversupply of food and the markets are saturated in the US. Add to these issues the problems that have arisen as far as shipping to Mexico as well as taking in imports. The fact is that Mexico buys a lot of agricultural production from the US – everything from corn and wheat to cheese (65% of all the cheese produced in Wisconsin goes to Mexico). The Mexicans are angry with the US and have started to impose their own restrictions in reaction to the attacks on Nafta.

 

  • Large Disparity Between Labor Rates – It is always something of a misleading statistic. When we are told that the unemployment rate is 4.3% or 4.4% the statement is almost meaningless from a practical standpoint as there is no state in the union that has the same rate as the national rate. The states are all either higher or lower than this rate. The states that have the lowest rates are the ones that have had many jobs on offer and too few people to fill them. California’s rate is now 4.7% and they were in double digits just a few years ago. North Dakota is still among the lowest at 2.5% and Oregon is at 3.6%. The states that are struggling are largely in the industrial Midwest – states like Illinois, Ohio, Michigan and Indiana. They are all seeing higher rates than the national average.

 

Short Items of Interest – Global Economy

 

  • Unity at Stake in Middle East – It is a little hard to talk about unity when discussing the Middle East – it has been more than obvious that divisions are profound. The fact is that there has been more unity than not when it comes to the Gulf oil states as they have much in common due to their shared commodity dependence and their shared culture. The challenge now is that Qatar finds its policy of mutual appeasement hard to maintain. The Saudi led region objects to the support that Qatar has given to the Iranians and Islamic extremism. The position of Qatar has been to appease everyone and now this policy is under extreme stress.

 

  • Less Unity in Syrian Conflict – The US and Russia are clearly on opposite sides in this war and that just became more obvious. The US just shot down a Syrian plane that had been attacking positions that belong to US backed rebels. The Syrians had been warned repeatedly not to engage and this was one infraction too many and now the Russians have indicated they will attack aircraft that are connected to the rebels and technically that includes US airplanes. That gets very nasty very quickly.

 

  • Nato Allies Object to Steel Tariffs – If the US actually goes through with the tariffs on steel there will be intense opposition to the plan from Nato allies. This is just the latest provocation as far as the allies are concerned and it is likely there will be some kind of negative reaction designed to impact the US. This will soon escalate into a real trade war.

 

 

 

 

Housing Data Looks Pretty Stressed

The housing sector is not in crisis exactly but it has certainly looked healthier than it does now. This is a sector that gets a great deal of attention from economist and forecasters and most of that focus is deserved as the state of the market really does play a major role in the underlying economy – at both the macro and micro levels. To the consumer it matters as this is the primary way that people store wealth in the US and for the economy as a whole it matters as it involves dozens of ancillary industries in the construction phase as well in financing and maintenance and the like. Most economies in the world are also dependent to some extent on the housing sector but no country has the level of home ownership that the US has. The scrutiny that is applied to the housing sector is therefore well deserved.

 

Analysis: Last year the housing sector seemed to be one of the key drivers as far as the health of the economy was concerned – alongside the surge in interest in new car sales. Now it seems that both of these sectors are struggling to keep up that pace although neither has really crashed either. The latest data on housing starts shows that they dropped by 5.5% from May and there has been a corresponding dip in the number of permits issued which indicates that there will be fewer starts in the months to come. The decline in permits was 4.9%. What makes this data even more distressing is that both had been predicted to go up this month – the consensus view was that starts would be up 3.4% and permits would be up by 0.8% at least. This optimistic assessment was based on the fact that demand has been up and rising fast. How is it that demand is accelerating and supply is not keeping up? There are several reasons suggested and they range from the fact that those in the market for a new home can’t afford the current prices or they are not getting the mortgage they can handle. It has also been pointed out that it has been increasingly difficult to find people to build the homes and that creates a major backlog in many markets.

On Wednesday the data on existing home sales will be released and the expectation is that the numbers will have declined but perhaps not as precipitously as they did in April when the fell by 4.3%. The same issues that are affecting the new home buyer have been affecting the existing home buyer. This has been frustrating to those in the housing market as there has been evidence that the millennial has started to come into its home buying period at last. The problem is that the majority of these buyers are struggling to get the down payment they need for the homes that are on the market at the moment. The majority of the millennials are still living in multi-family units and the majority have not yet started families and this is the factor that generally provokes people to start the search for a single-family unit.

 

Consumer Confidence Starts to Fade

There has been an anomaly evident in the consumer data of late. Since the start of the year there has been a strong sense of consumer confidence as expressed by the various surveys from the likes of the Conference Board and the University of Michigan (among others). This has been all well and good but it seemed that all this confidence was not translating to the retail sector as over the last few months these sales have been anemic at best. One of these two would have to change. Either the level of confidence would have to fade or the sales would have to go up.

 

Analysis: The University of Michigan reading is now 94.5 and that is as low as it has been since November of last year and a considerable drop from the 97.1 that had been registered a month before. Although this was a significant decline, the numbers are still higher than they were a year ago (by 1.1%). The problem is that this reduction was unexpected as most analysts had expected a very minor retreat to perhaps 97. It is always hard to tell what is troubling the consumer and these surveys are very often volatile. In past months they have been profoundly affected by the rise and fall of gas prices or some geopolitical development that threatens to alter business. Given the stability of gas pricing lately and the relatively good news as far as hiring and overall economic growth the search is on for something else that might be spooking the consumer.

One factor that plays a role is politics. At the start of the year there was lots of enthusiasm as the new Trump administration promised an end to many of the economic issues that had been vexing the voter. We were going to see a swift end to the ACA as it existed, massive deregulation, infrastructure repair, reworked trade deals, tax reform and a host of other changes. These have all proven far harder to deliver than many had expected and now there seems to be disillusionment and frustration setting in. The Trump White House has been embroiled in scandal and controversy from the very start and the public is losing patience as indicated by the slumping popularity of the President.

Not that this process is unusual. Every President is faced with the reality of US politics and how long it takes to get anything accomplished. Every President comes to power with the campaign fresh in everyone’s minds and that means that promises have been taking center stage – most of which will be difficult to deliver on. Approval ratings always fall as the bulk of the population has unrealistic expectations as far as what a President can accomplish. The additional factor that has consumers worried is that they are not sure that Trump can play the necessary games to get his agenda passed. His style courts antagonism and even alienates would-be allies and that makes progress exceedingly hard. The consumer is a fickle creature and today’s angst could reverse in a month if there is some unexpected good news.

Macron Has All the Tools

The question now is whether he will be able to accomplish what he has indicated he wants to do and whether the French public will allow him the time to do this. The country that was teetering on the brink of handing power to a right wing ideologue who wanted to pull out of the EU, expel immigrants and institute populist nostrums that would have destroyed the French economy is now in the hands of a brand new party and a President that is overtly pro-business and has a very ambitious reform agenda. When Macron became the youngest President since Napoleon and without a speck of experience in elected office, the expectations were somewhat minimal. He had no support in the National Assembly as his party was created just in time to allow him to run for office. The pundits all declared that he would be a weak President as it was unlikely his brand new collection of politicians would be able to pull off a significant win. That assessment turned out to be incorrect as his Republique en Marche now holds 350 seats in the National Assembly and that is more than enough to exercise control. The party that literally fell apart was the Socialists as they only managed to retain a fraction of the seats they once had. Le Pen’s National Front also lost a lot of their seats. The major problem as far as setting out a new agenda is that the voter turnout was at a record low – 57% elected to stay home as they did not really like the options they were faced with and/or they just got tired of the whole thing.

 

Analysis: Now what? The platform as set out by Macron was more detailed than many had expected from a candidate but he is a technocrat running for office and really had no track record of politics to refer to. Le Pen was full of rage and fury but her plans were massively vague and changed with every speech as she tried to broaden her coalition. The other candidates essentially relied on what they had done before and the party platforms that had developed over the years. Macron had a different approach and it was one that many thought would doom him as it gave opponents something to grab on to. Apparently it was something the voter could grab on to as well.

At the top of his agenda is labor reform and most analysts assert this will be his make or break issue. He pledged reforms during the campaign and asserted they would be in place by September. He will have to make maximum use of his “honeymoon” period. The details will be worked out in the next few weeks but the plan in essence is to destroy the sclerotic labor system in France. Business would be given far more flexibility to hire and fire according to business conditions and the economy. They would be able to negotiate over working hours, overtime rules, wages and the like. The system now is heavily oriented towards worker protection and once hired people are very difficult to fire. The problem is that business becomes very reluctant to hire in the first place as they feel they will not be able to reduce staff later. The young worker finds it very hard to get a job and unemployment is a far bigger issue than it should be. The unions will aggressively oppose these reforms as they have in the past and Macron will need lots of skill to keep France from being overwhelmed by strikes. If the reforms pass he will have to hope that business responds and starts to hire aggressively – the whole balance is very delicate.

 

Retaliations

In the aftermath of the terror attacks that have erupted in the UK the police indicated that their biggest ongoing concern would be retaliatory attacks from the extremists seeking to attack the Muslim community and there has been such an incident over the weekend as a van plowed into a group of people leaving a mosque. One has been confirmed dead and many have been badly hurt. This brand of terror is even harder to impact than that of Islamic extremism as these perpetrators can be anyone with a grudge and in the vast majority of cases they have no background that would make them suspect.

 

Analysis: This has not been the only attack – far from it. There have been assaults and at least three suspected murders of someone of the Muslim faith simply due to their affiliation with Islam. The law enforcement community fears these rounds of attacks will continue and will escalate as each set of extremists seek to assault one another. The overall sense is that violence will beget violence in an ever expanding cycle of rage – each side accusing the other of fomenting it. The only response is for those who do not support the violence to speak out in greater numbers.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

I HATE Tech

If I am to be honest I hate the lack of reliability. I face every interaction with the tech world with great trepidation. Will it work this time? What do I do when it doesn’t and I know that will happen more times than not? I find that raging is somewhat cathartic but accomplishes little. Just in the last week I have been treated to the wonderful world of frustrating technology. The internet connection has been extremely spotty – cutting out ten to twenty times a day despite near constant re-booting and all kinds of “helpful” advice from Spectrum. The garage door opener doesn’t work and neither does half the other electronic tools at my disposal. My cell phone periodically decides not to capture a voice mail and invariably these are the ones I need. I understand that my experiences are anything but uncommon and that begs the question – why?

Why is so much attention focused on “new and improved” when the real desire is for reliability? The fact that we collectively tolerate this nonsense is bizarre as we would not be so forgiving with many other things. I have spent half the morning fighting this and I dearly love wasting time trying to make something work.

 

These are parts of the commentary that appeared in a recent Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

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Nuclear “Dirty Bomb” Scare in Charleston, SC.  There wasn’t a tremendous amount of detail released by the FBI or US Coast Guard regarding an incident on Thursday morning involving Maersk’s Memphis container ship.

 

The FBI was tipped off to intelligence that led them to believe that a potential “dirty bomb” (radioactive material used as a terrorist weapon), was imbedded in one of four containers on the Maersk Memphis ship.  After portions of the port were evacuated and crewmembers on the ship were moved to safety, the ship was scanned and cleared.

 

We don’t know if the intelligence was Humint (human intelligence) or Sigint (signals intelligence).  We would assume that it was Humint – because they didn’t find anything that would be throwing off a false radioactive signal. And, being human intelligence – it can produce false flags or erroneous threats – which this appears to be.

 

Unfortunately, with tensions growing between North Korea and the US, threats like this one will be growing. The threat of a dirty bomb may be more prevalent than other types of risks to the US, and North Korea has a plethora of material that it could use to produce just such a bomb.

 

It will intensify the need for US Homeland Security to expand its ability to scan inbound cargo for potential radioactive material (which it does well today), but broadened to hit all US borders and territories.

 

Interestingly, this story didn’t generate any real buzz, nobody is really paying attention to it.  When an incident does eventually occur, unfortunately it will likely work like 9/11 – it will likely change our way of doing business.  Incidentally, the FBI did mention that it was “dealing” with the source of the intelligence – obviously trying to get to the bottom of the false threat warning.

 

 

 

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Business Intelligence Brief: June 16, 2017

Short Items of Interest – US Economy

 

  • Expansion of Apprenticeship Programs – For many years now the most consistent complaint from the business community has been lack of labor. The shortages in manufacturing, construction and transportation have been acute. The new Labor Secretary took over only a few weeks ago but has quickly settled on apprenticeship programs as the key to solving this problem. The approach has been tried before and there were grants awarded liberally during the Obama years and under most of the prior administrations. The key difference this time is that programs will be developed by industries and organizations as well as by schools and these programs will be accredited by the government so that the training is transferrable. There are those who assert this will mean less oversight but the business community is eager to get engaged in training that is relevant to their needs.

 

  • Investors Question Fed – There was always going to be a segment of the investment community that would oppose the hiking of interest rates – they are the ones that have been enjoying the good times of low borrowing costs. The rest of the community has been aware that at some point the rates have to go up and get close to what used to be considered normal. The challenge is timing. The Fed has been sounding quite aggressive of late and there are some who think this may be premature given the fact there has been no real inflation to speak of and the overall growth of the economy has been mediocre at best. Not that this trepidation is likely to slow the Fed – most expect rates to be going up again in September.

 

  • Cuban Opening Stalled – The US relationship with Cuba is beyond doubt one of the most complex in the world and that has long been peculiar given the tiny size of the island nation. During the Cold War the fascination was somewhat more understandable given the efforts by the USSR but over the last several decades it is hard to fathom except for the impact of émigré politics and the ideological challenges. The US under Obama started to open up to Cuba in anticipation of new leadership in that nation someday soon. Now these efforts have been halted by Trump and the US is likely to lose whatever influence it might have had with the next generation of Cuban leaders and it appears that both Russia and China plan to exploit this opportunity.

 

Short Items of Interest – Global Economy

 

  • Is al-Baghdadi Really Dead This Time? – This time it is the Russians who claim to have killed the leader of ISIS – Abu Bakr al-Baghdadi. In the past, it has been the Syrians and the Iraqis and even the US that have asserted that he had been eliminated. Thus far there has been no confirmation of his death and it is not at all clear that it would matter all that much to the ongoing conflict. He has been in nearly constant hiding for years and has been moving from location to location. It is apparent that he has little day to day control over tactics but he has been the titular leader and inspiration. His death would be a blow but hardly the death knell for the movement.

 

  • EU Gains Popularity in Europe – The European Union was shocked and angry at the decision by the UK to withdraw but there may have been a silver lining of sorts. Since the split, the popularity of the EU has soared in Europe itself – at least according to the polls. This new found support within the population may have been a big factor in blunting the rise of populist movements in France, Italy, Netherlands and elsewhere and now there are those who are seizing the opportunity to expand the reach of the EU.

 

  • Bank of Japan Stands Firm – There have been some signals that Japan has been starting to pull out of its slump but it isn’t happening all that quickly and the Bank of Japan is not ready to move away from stimulation as they have decided to keep rates at their historic low and continue to look for other ways to boost growth.

 

 

What is Going On With Trade These Days?

Trade between states has always been controversial – at least in some quarters. The basic idea behind trade is that two or more nations are buying and selling goods to one another because there is some kind of economic advantage to be had. The notion behind absolute advantage is pretty simple as one nation sells something to others that they do not have. The countries that have oil sell to those that don’t as an example. The notion behind comparative advantage is more complex and here is where the controversy begins. The goods and services traded are produced by both nations – or at least they could be. A country decides to buy those things that are better produced elsewhere – either because they are cheaper or better. Each country concentrates on producing what it does best and buys the rest from somebody else. Generally speaking the US is going to buy most of the cheaper consumer goods from somewhere else as it is not really efficient for the US to make t-shirts and sandals. The US manufacturers sophisticated goods like airplanes and road building equipment and sells these.

Unfortunately, the real world doesn’t work as well as the theory suggests. The US sells cars and trucks all over the world and US consumers buy cars and trucks from all over the world. The choice of what to import and export is in the hands of the consumer and the overall business community and the choice of where to make these goods will rest with the business itself. Hence the controversy. If a carmaker elects to take advantage of lower cost labor in Mexico the consumer is very happy as the cost of the vehicle is less but the people who once worked in the US to build that car or supply the parts are not nearly as happy.

 

Analysis: In the campaign last year, trade became a major issue as both candidates asserted that the US was being taken advantage of by other nations as they sold us far more than they bought. The trade deficit has been getting wider and wider and people who once made things in the US lost their jobs. At the same time the consumer was winning as these products cost less than they otherwise would. The Trump approach was geared towards making it harder to import and easier to export by imposing high tariffs on those imports. The companies in the US that made these products would benefit to some degree from the protection but the consumer would lose access to these cheaper prices.

The bottom line is that it is not possible to please everybody when engaged in trade. Bringing products from the rest of the world means intense competition for US companies as most of these other nations have lower production costs to work with. The consumer in the US saves somewhere between $5,000 and $8,000 a year as they are able to buy things cheaper. It becomes a battle between what is good for the majority and what is good for the minority.

At the moment, the trade relationship between the US and some of its more traditional partners has become strained. There is a desire to impose a 20% tariff on all goods coming from Mexico, a renegotiation of Nafta, a tariff on commodities and goods coming from Canada, withdrawal from the TPP, withdrawal from talks regarding a new trade pact with Europe and so on. It would seem that the US is bent on pursuing a far more isolationist and protectionist policy than has been the case in prior decades.

The reality is that these trade patterns are not that easy to disrupt and there have already been retreats from the more aggressive positions taken. It seems that not all products from Mexico will be subject to these tariffs as there have already been exemptions granted for things like cement and sugar. The Nafta withdrawal threat has changed to simply a desire to renegotiate parts of the pact. The US is out of TPP but elements of the agreement are already reappearing. The US has also elected to open up new deals with the UK and parts of Latin America. The situation is fluid to say the least.

What should US business assume about trade patterns in the years to come? Will there be countries the US will engage with more aggressively than others? Are there growth opportunities in some of these nations that will attract more US attention? The answer to all of these questions would be a definitive yes but it is not 100% clear which countries will provide that opportunity as politics will play as much of a role as will economics. In my estimation, there will be three countries that stand to gain the most attention from the US and will offer the greatest set of new opportunities.

The first and by far the most important is India. It has been predicted for years that India would emerge as a challenger to China but it always seemed that India would manage to get in its own way with a burdensome regulatory system and a host of infrastructure inefficiencies. These still exist but the impact is less than once was the case and India has modernized in many regions. It has been a leader in tech for years and that will only expand. Now the growth in India is faster than that in China and the Indian diaspora around the world has given them another major advantage. The US has never quite interacted with India as aggressively as they have with China but that is changing and the reforms that have been instituted by Narendra Modi have been intensely controversial but they have been effective in boosting growth.

The second set of opportunities will be in the United Kingdom. These are not as large and lucrative as those in India but the UK is a well developed and sophisticated nation that will be in a position to buy more from the US. While the US is likely to buy far more from India than it sells, the opportunity in the UK is the opposite. The Brexit decision has all but cut off the British from Europe and they will need new markets and new suppliers. The pound has been weakened and this will encourage US investment in the UK and will make buying from the British easier. The US will still find an export market because the British will have lost their outlets in Europe. The only real alternative for the British is the US and to a lesser degree the other Commonwealth nations like Canada, Australia and India.

 

Trade (continued)

The third set of opportunities is more of a region than any specific nation. The Latin American markets still beckon but they are different than the ones that demanded attention a few years ago. It is no longer Brazil as this state is now wallowing in recession and political chaos. Mexico remains a close trading partners but the enmity of the Trump team will be hard to consistently overcome. The nations that will likely see the expansion will be Colombia, Argentina and Chile. Each has advantages and disadvantages. Colombia has come a very long way from the days when the drug trade dominated but it remains a nation that is dependent on commodities like oil and farm output. Argentina has likewise come out of the cold now that Mauricio Macri has made peace with the global investment community. It is also a nation that relies on commodities but has a manufacturing base to work with as well. There are still holdover issues from the days of Kirchner/Fernandez. Chile is doing well but relies on copper and is still a very small nation.

Trade will remain very important to the US – it consistently relies on exports for 14% of the total GDP. The political attacks on trade will continue but the economic realities will dominate in most cases. The challenge is more intense than is usually the case but there has never been an easy set of trade relationships.

 

The “Other” Central Banks

The decision by the Federal Reserve was not at all unexpected and the markets had this hike priced in weeks ago. The real fun has been taking place in the other meeting rooms of the other central banks – especially that of the Bank of England. There have also been moves at the Bank of Japan and the European Central Bank. In general, the central banker are signaling a major shift in attitude and a move back to the core purpose of the central bank. The hawks are starting to become a factor again – after years of dominance by the doves due to the need to stimulate the overall economy.

 

Analysis: At the last meeting of the Bank of England three members bolted from the others and made their opinions clear – they are no longer willing to tolerate the inflation threats that have been building in the UK economy and they want to see rates go up. Not that they are calling for some massive hike that would send their economies reeling into recession but the commentary has changed in tone. Thus far there has not been any real sign of an imminent inflation outbreak and the fact remains that economic growth has been anemic in most of the developed states. The thinking had been that the British would continue to tilt towards stimulation given the uncertainty that surrounds the Brexit issue and the recent election but it seems that at least some of the decision makers are worrying about factors down the road.

The central banks are well aware that their decisions do not have impact automatically and rarely swiftly. There is always the response of the markets to consider and these are quick but shifts in the rates that banks charge one another have a slower gestation. If there is a desire to lend and expand it is going to take a while for higher rates to curb bank influence. The central bankers know that it will take some time to curb that enthusiasm and that means they need to anticipate inflation and act on it sooner than later. Waiting for inflation to become a major problem will mean the banks will be trying to catch up and they struggle to do this.

The Federal Reserve remains the most aggressive as far as rate hikes are concerned. The Bank of England is just starting to talk about this and the European Central Bank seems to be sidling towards a more hawkish stand but not in the immediate future. The fact is that economic conditions are not sending a clear picture at this point. There is no clear sign of an imminent inflation surge as commodity prices have remained under control and wage hikes have been spotty. This would seem to suggest that leaving rates alone would be a good strategy but there are also signs that economic growth has been picking up and that promises more of that inflation threat.

At the start of the year it seemed there were a couple of trends that could be counted upon. The first was that the US was going to grow and expectations were high. Now the US is mired in one political skirmish after another and those expectations are pretty clearly going unmet. At the same time Europe seemed to be teetering on the brink of a populist debacle with the success of people like Geert Wilders, Marine Le Pen and Beppe Grillo. Now in June that threat has all but vanished with their defeats. Europe now seems poised to grow at the same time the US seems to have lost its momentum. Does that mean higher rates in Europe and a stall in the hikes for the US? Not yet but the conversation has started to shift in that direction. The focus of attention has been on the Fed over the last several years but now it may be the turn of the ECB and the BoE.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

Lots of Jobs I REALLY Don’t Want

The truth is that I really enjoy what I get to do for a living. When one is an opinionated kind of guy who dearly loves to inflict his worldview on others there is nothing quite like being able to make speeches and write as a vocation. Then there is the opportunity to observe the kinds of jobs that other people have and I am even more grateful. Just yesterday I encountered several people I would never change places with – not for a second.

As I dropped off a suit for cleaning it was a hot day – temperatures in the mid-90s. My guy at the cleaners pointed out that it was close to 110 degrees in the back of his shop. No way I could handle that heat and I am really glad he can! As I was stopping by the drug store to pick up various nostrums to combat advancing age I encountered two guys from a road crew. They looked spent but were still laughing and suggesting that they had better get their “heat legs” under them as it was only going to get worse from here. Every time I fly I am grateful I don’t have the job of gate agent or customer service. NOBODY comes to the counter in a good mood and prepared to enjoy their experience. In fact, the majority of those who work with the public are seeing us at our worst. I can plop into my seat on the airplane and clamp the headphones on. The flight attendants can’t and they get to work with the nitwits who have apparently never set foot on an airplane in their lives. Not a job I would ever want.

Hats off to those who do these jobs and even seem to like them (at least part of the time). My life would be much the worse without people who clean suits, repair roads and make the airplane arrive more or less when it is supposed to.

 

These are parts of the commentary that appeared in a recent Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

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Container Shortages in Focus.  The Journal of Commerce ran an article today that focused on container shortages in parts of the country. A report, publicly available from the US Department of Agriculture shows the geographic regions where container availability is sparse, and areas where it is plentiful.

 

Those of you running supply chains, aluminum and steel producers, and transportation firms need to pay attention to this trend, because it is cyclical. A combination of factors is helping to create these shortages (primarily around Kansas City, Tacoma, Dallas, Denver, and Savannah).

 

First, Chinese manufacturers of containers are being forced to use a different type of paint to cover their units.  While they test and convert over to this new type of paint, production will likely suffer. That could create a temporary, but significant shortage in containers for the next 6-10 months.

 

Second, US grain activity across the country has been robust.  Export demand for those commodities have been strong and that has increased the number of containers being used for agricultural products.

 

Third, we have mentioned many times that distribution patterns in the US are changing as ports in the Gulf and along the East Coast are able to take advantage of an expanded Panama Canal. That change just took place last summer, so we are still seeing fairly new distribution trends – and we don’t know if these shortages are due to seasonal, cyclical, or “new normal” types of activity.

 

One of the areas of focus for the Trump Administration is to open up US exports to new foreign markets.  That’s great for the economy and companies love the opportunity. What we will witness as a result, is that there will be imbalances created in some markets as a result – and the national distribution system will need to adjust to it accordingly. It will just take time.

 

 

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Business Intelligence Brief: June 15, 2017

Short Items of Interest – US Economy

 

  • No Change in Industrial Production – This is not what had been expected and there is some concern that manufacturing has started to slow down after having been in growth mode most of the last six to nine months. There is no evidence of a real slide just yet but the sluggish behavior is a concern. Industrial production numbers in the US include the utilities and mining as well as the manufacturing sector and for most of the last six months the problem has been with the former as manufacturing carried the weight. Utilities are seeing more demand as the weather heats up and there has been slightly more demand coming from the energy sector. The slowdown in manufacturing seems to be centered in automotive and to some degree farm machinery.

 

  • Fed Rejects Trump’s Numbers – They are not alone. Very few analysts have any faith in the assertion the economy will be able to grow at a 3.0% pace this year or next for that matter. The consensus view is that growth will average around 2.0% and the Fed has it at 1.8%. Much of the 3.0% growth projection was predicated on being able to push through tax reform, repeal of the ACA, expansion of infrastructure repair and extensive deregulation. None of this is happening very quickly if at all. The sense that growth will be anemic for a long while is dominant and the 3.0% target will be impossible this year and only slightly more likely in 2018.

 

  • Fed Assessment of the Economy is Slow and Steady – The bad news regarding the US economy from the perspective of the Federal Reserve is that growth will be slow for the coming year and perhaps beyond – maybe even slower than the average over the last ten years. The good news is that this growth will be steady and reliable and the risks of a major recession are receding. The Fed has not exactly embraced the concept of “secular stagnation” but they have adopted most of the precepts and assumption. The US is not heading for disaster but the grindingly slow pace of growth is a problem all its own.

 

Short Items of Interest – Global Economy

 

  • Foreign Takeovers in Europe – There has been ongoing concern over the rash of hostile takeovers in Europe. The low value of the euro has made it all the more tempting for US companies and others to invest in these takeovers and then there is the pattern of buying companies in Europe in order to lower the tax obligations of the US buyer. The French President has now added his voice to those who want the EU to establish some authority over these takeovers so as to prohibit them in key areas. He has been joined by leaders in Germany and Italy and that makes these changes more likely.

 

  • African Drought Intensifies – Right now the UN is trying to feed some 8 million people in Ethiopia who are on the brink of starvation due to the expanding drought and that number is expected to double within the year. The agencies that are trying to react will run out of food and money before the end of the summer. This famine is already the worst in twenty years and if it continues to expand it will affect more people than have been affected since World War II. The rain is simply not coming and crops are ruined for the year.

 

  • Japan Passes New Terrorist Law – The new law is modeled on Britain’s “preparation for terrorism act”. It creates a new law against conspiracy and allows the arrest of someone accused of planning a terrorist act. The opposition sees this as an attack on privacy as these arrests will be based almost solely on surveillance and eavesdropping. The fear is that even the most casual and joking threat to “the powers that be” could be grounds for arrest and the potential for abuse is immense. On the other hand, the advocates point out that waiting for a crime to be committed puts many people at severe risk.

 

 

 

Why Aren’t Wages Going Up?

There are very few aspects of the economy that provoke more debate and angst than wages. The majority of people who are earning them are convinced that they should be getting far more than they are and every time the see their employer make a little more money they are of the opinion that largesse should be shared immediately with the employees. A few years ago, there was a movement in the business community called “open source management” and its goal was to educate the people working at a given company so that they could better understand what a company had to spend on and what the limitations are in business. The workforce is just one of the factors as far as budgeting – there are many other obligations ranging from taxes to the need to add technology to improve productivity.

The issue of wage growth has been top of mind for many as it would seem that these pay packets should be getting larger given the fact that unemployment rates have been hitting lows not seen since the recession started. Why have wages been stagnant and is this something that is likely permanent? The last time that jobless rates were this low the wage rate grew at close to 4% but today the wages are rising at an anemic rate of 2.5% at best and have been even lower.

 

Analysis: Why are wages not keeping up with the reduction in unemployment? Isn’t there a shortage of workers? We have been harping on this for months and it would seem that shortages of labor would trigger higher wages as employers seek to get the people they need. In fact, those sectors where there is a shortage of skilled labor have seen significant wage hikes as companies do have to pay a premium to get the people they need and they also have to pay their existing workforce more so that they are not poached by other companies. The problem is that most people lack these needed skills and can’t compete for these higher paying jobs.

There are at least three factors that have been holding wages back. These are not unique to the US either. In many of the developed states there has been a similar pattern of lower unemployment coupled with slower wage hikes. The first of these factors has been the slow progress as far as productivity is concerned. The output per worker has been stagnant and there has even been evidence of decline and that is perplexing at a time when companies have been keeping their businesses lean and mean from a hiring point of view. It has long been assumed that having fewer people producing the same level of output would boost productivity but the most recent period of layoffs and attrition actually cut into the ability of companies to produce. It turns out that asking fewer people to do the work done previously can only work for a short period before they wear out and productivity slumps. It has also been suggested that companies have not had enough access to credit to get the technology they needed to boost productivity. Whatever the reason the level of productivity has stalled and that has compromised growth and the ability to pay higher wages.

A second factor has been the limited pricing power that companies have had during this long period of very low inflation. The absence of even modest inflation gains over the last ten years has meant that prices have stagnated in most sectors. There have certainly been some price hikes but in general inflation has been very low. That has meant that skimpy wage hikes have been slightly less of a problem as prices remain stable but it also means that producers have been unable to scale up their revenues and profits and that limits the wage hikes on offer. There are certainly many high profile companies that have seen big boosts in both profits and revenues but the vast majority of small and medium sized businesses have not and these are still the dominant employers in the US.

The third factor is that demographics has played a role. The aging workforce has been an issue for a long time and now the transition is affecting wage rates. The older workers are often the better paid workers due to their longevity and skill set. As they retire they are generally replaced by much younger and less experienced workers who do not command the same wages and salaries of those that have left the workforce. The wages paid to these workers are substantially less than the wages of the people they are replacing.

 

Upbeat Fed Lays Out a Plan

The comments made by the Fed yesterday were as clear as they have been in a while and seem to lay out a plan for the remainder of the year. The conjecture at the start of the year was that rates would be hiked three times this year but after the first hike there was a sense that perhaps the rate hikes would accelerate a little. With the second rate hike of the year the Fed has indicated that it plans just one more and that it would likely be in September. The Fed also outlined the plan for reducing the size of its balance sheet – standing right now at around $4.5 trillion. This move would take precedence over another rate hike at the end of the year.

 

Analysis: The assertion is that the economy is growing steadily enough to significantly reduce the stimulating that has been part of the Fed’s mission for the better part of a decade. The reduction of the balance sheet will be accomplished through allowing the bonds to mature and electing to roll them off without reinvesting. This is essentially an attrition strategy designed to have the minimum impact on bond markets. There had been concern the Fed would try to reduce this overhang more aggressively by selling off the holdings as opposed to just letting them mature out. This may yet be a strategy to be pursued in future years but for the moment it doesn’t appear the Fed is in a hurry and the same goes for the interest rate policy. There is no real pressure from inflation at this point and that gives the Fed all the time it needs. The rates now are between 1.0% and 1.25% and that remains historically low. If there is another quarter point hike in September the rates will still be low – between 1.25% and 1.5%.

 

What Does the Brexit Look Like Now?

The whole issue of Britain’s role in Europe has been fraught with confusion and concern for many years and that chaos has intensified in the last year. There has always been a sense of distance between the UK and Europe and there has long been reluctance to fully integrate into what would be described as European culture. The UK was slow to join the Common Market in the beginning and never did become a member of the Eurozone. The “euroskeptic” has been present in both the Labor Party and the Conservative Party along with those that supported the EU. There is a widespread resistance to doing things the “European way” and that has always created tension within the business community as well as the voter. Despite this traditional enmity it was assumed the British would continue to support the EU albeit with reluctance and few really expected the voters to opt out the EU. Of course, this assumption was incorrect. Nobody really expected the Tories to lose a 25-point lead and end up having to form a weak coalition government but here we are. What does this mean for the Brexit talks now? There are those who now expect a hard Brexit and those who retain some optimism that a soft Brexit may still be possible.

 

Analysis:  The hardest version of the withdrawal would be a total divorce without any sort of agreement – Britain just tumbles out of Europe and retains virtually nothing from the relationship. This is considered an unmitigated disaster for the UK as well as Europe and most assert that economic growth would tumble in the whole region – perhaps enough to trigger a real recession in both the UK and Europe. The slightly less drastic version of a hard exit would be one that would involve some protection of citizen rights for both those in the UK and Europe but would have little impact on trade. This might preserve the right to work in other states and perhaps protect the ability to live in Europe if one is British. The next step up would be an agreement on free trade in goods but not in services. Right now, this is the most likely option as there are many in Europe who want access to the British market and certainly many in the UK who want access to the Europeans. The practicality of allowing trade in goods will prevail over some of the political objections but this will not protect the role of London as far as being a financial center.

The other options start to trend towards a softer exit and at the moment these seem less likely given the current political positions taken by the British as well as those in Europe. There could be some sort of customs union that would harken back to the days of the Common Market but this means that the British would lose some control over their tariff system and that would mean it would be harder to block imports from Europe. There were those who supported Brexit simply due to a desire to limit these imports into the UK. At the same time this makes the European market more accessible to the British and some in Europe now oppose this. The next step towards a soft exit would be a whole new trade agreement that would allow almost unfettered trade between the UK and Europe but that would mean Britain following European rules and being subject to the European Court of Justice when there were business disputes. That would be a step too far for the majority of the Brexit supporters and this option seems rather remote. A “true” soft exit would not be an exit at all as the UK would essentially capitulate and agree to all the rules of the EU – including the free movement of people and it was the immigration issue that really galvanized opposition to the EU in the first place.

 

Russian Sanctions

There is plenty of confusion these days over the US relationship with Russia and for that matter over the European relationship. For years the Europeans have been calling for the US to step up activity designed to sanction Russia over its invasion of Ukraine and the US has come under pressure as it has appeared that the Trump approach to Russia and Putin is far more tolerant than before. Now comes the Senate decision to step up these sanctions and the Europeans are upset. It seems that sanctions against Russia that will be detrimental to the Europeans are out.

 

Analysis: The issue at stake is the pipeline that delivers gas to Europe – Nord Stream 2. The plan in the Senate is to sanction work on this project but the Europeans want it left alone as this is what will ship more of Russia’s gas to them. It seems that sanctions are great as long as they hurt other nations and not Europe. The Trump White House has not backed the Senate plan fully either and there remains evidence that Trump has been trying to develop some kind of unique relationship with Russia. These sanctions are not likely to make that plan any easier to pursue. The bottom line is as it has always been. Russia is a complex nation and the US is as well. The two agree on some issues and disagree on others, most of all the two are rivals for influence in Europe and elsewhere.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

Waste

This is an incredibly sensitive area for my wife. She just can’t stand wasting things. It pains her no end to throw away food and she works tirelessly to make sure that stuff that winds up in the fridge ends up on a plate and not in the compost. We recycle as much as we possibly can and she takes great pride in having very few bags on the curb on trash day (usually just one and it is mostly kitty litter as there is a limit to reuse). She takes home anything not eaten at the restaurant and we tend to save every scrap of something just in case we might need it someday.

Every time I fly I see things that would send her into orbit. The kid that takes one bit of a hamburger and throws the rest away. The gargantuan salad that ends up in the bin. I understand that places often serve too much and it is a little awkward to carry a “doggy bag” half way across the country but it still bugs me and especially her. She really does practice the “waste not, want not” mantra.

I suppose what amazes me the most is that after years and years of pleas to be frugal and to avoid waste there is still so much taking place. I turn out lights I am not using and don’t run water recklessly. It is no big deal but it seems that few have that orientation and that can be a little discouraging when one likes to assume that people understand the need to maintain some level of parsimony.

 

This is a commentary by Keith that appeared in this week’s Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

To get a FREE TRIAL go to www.armada-intel.com

 

 

Supreme Court Throws Out ELD Challenge – Be Ready.  Supply chain operators and trucking firms alike will need to get ready for the Electronic Logging Device Mandate, set to be enforced on December 18th.  A challenge to the rule that was brought as high as the Supreme Court was thrown out by the court.  Therefore, the Congressional rule will stay in place and companies will be expected to comply after December 18th. For background, Congress passed a rule that will mandate that every Class 8 truck (and perhaps other classes as well) have an electronic logging device (ELD) that keeps track of operating hours when a truck engine is running. It prevents the “forging” of logs that are kept manually today. There are a vast number of speculative impacts to the national supply chain because of this rule, which appears to now be more likely to be enforced at the end of the year after this Supreme Court decision.

 

We can focus on one of two camps – as it pertains to the impact of ELD’s on supply chain operations and cost moving forward. One camp believes that most trucking firms have already implemented the technology and steps have been taken to meet mandatory operating rules, and this will have very little impact on available capacity, operating costs, or supply chain costs. The rule is designed to enforce the 11-hour rule (which limits how many hours a trucker can operate behind the wheel of a big rig) and those adjustments have already been made.  This camp doesn’t believe that available capacity or transportation costs will change because of the ELD mandate.  However, there is another camp that believes that it could strip out as much as 20% of the nation’s trucking capacity.

 

In any event, even if you don’t operate a supply chain, there are a few business impacts that you need to take from this story.

 

  1. Transportation costs are going to rise faster, start building that in to your financial projections and budgets. Any company with a heavy emphasis on supply chain management will see their operating costs rise when the mandate is fully enforced.
  2. A large percentage of the trucking industry has not purchased the ELD’s (although a majority have). Still, there should be a significant boost to the ELD industry and ongoing maintenance and replacement units will become an ongoing source of growth for those companies. Look for a couple to emerge as dominant in the industry (especially those that can multi-task and perform a variety of functions to help the driver).
  3. Eventually, the ELDs will become like other technologies, and simply will come with a new truck. Look at the history of GPS devices for (likely) a similar model.
  4. There are many others.

 

There will be far more discussions on this as we move closer to the mandate deadline.

 

To get a FREE TRIAL go

Short Items of Interest – US Economy

 

  • No Change in Industrial Production – This is not what had been expected and there is some concern that manufacturing has started to slow down after having been in growth mode most of the last six to nine months. There is no evidence of a real slide just yet but the sluggish behavior is a concern. Industrial production numbers in the US include the utilities and mining as well as the manufacturing sector and for most of the last six months the problem has been with the former as manufacturing carried the weight. Utilities are seeing more demand as the weather heats up and there has been slightly more demand coming from the energy sector. The slowdown in manufacturing seems to be centered in automotive and to some degree farm machinery.

 

  • Fed Rejects Trump’s Numbers – They are not alone. Very few analysts have any faith in the assertion the economy will be able to grow at a 3.0% pace this year or next for that matter. The consensus view is that growth will average around 2.0% and the Fed has it at 1.8%. Much of the 3.0% growth projection was predicated on being able to push through tax reform, repeal of the ACA, expansion of infrastructure repair and extensive deregulation. None of this is happening very quickly if at all. The sense that growth will be anemic for a long while is dominant and the 3.0% target will be impossible this year and only slightly more likely in 2018.

 

  • Fed Assessment of the Economy is Slow and Steady – The bad news regarding the US economy from the perspective of the Federal Reserve is that growth will be slow for the coming year and perhaps beyond – maybe even slower than the average over the last ten years. The good news is that this growth will be steady and reliable and the risks of a major recession are receding. The Fed has not exactly embraced the concept of “secular stagnation” but they have adopted most of the precepts and assumption. The US is not heading for disaster but the grindingly slow pace of growth is a problem all its own.

 

Short Items of Interest – Global Economy

 

  • Foreign Takeovers in Europe – There has been ongoing concern over the rash of hostile takeovers in Europe. The low value of the euro has made it all the more tempting for US companies and others to invest in these takeovers and then there is the pattern of buying companies in Europe in order to lower the tax obligations of the US buyer. The French President has now added his voice to those who want the EU to establish some authority over these takeovers so as to prohibit them in key areas. He has been joined by leaders in Germany and Italy and that makes these changes more likely.

 

  • African Drought Intensifies – Right now the UN is trying to feed some 8 million people in Ethiopia who are on the brink of starvation due to the expanding drought and that number is expected to double within the year. The agencies that are trying to react will run out of food and money before the end of the summer. This famine is already the worst in twenty years and if it continues to expand it will affect more people than have been affected since World War II. The rain is simply not coming and crops are ruined for the year.

 

  • Japan Passes New Terrorist Law – The new law is modeled on Britain’s “preparation for terrorism act”. It creates a new law against conspiracy and allows the arrest of someone accused of planning a terrorist act. The opposition sees this as an attack on privacy as these arrests will be based almost solely on surveillance and eavesdropping. The fear is that even the most casual and joking threat to “the powers that be” could be grounds for arrest and the potential for abuse is immense. On the other hand, the advocates point out that waiting for a crime to be committed puts many people at severe risk.

 

 

 

Why Aren’t Wages Going Up?

There are very few aspects of the economy that provoke more debate and angst than wages. The majority of people who are earning them are convinced that they should be getting far more than they are and every time the see their employer make a little more money they are of the opinion that largesse should be shared immediately with the employees. A few years ago, there was a movement in the business community called “open source management” and its goal was to educate the people working at a given company so that they could better understand what a company had to spend on and what the limitations are in business. The workforce is just one of the factors as far as budgeting – there are many other obligations ranging from taxes to the need to add technology to improve productivity.

The issue of wage growth has been top of mind for many as it would seem that these pay packets should be getting larger given the fact that unemployment rates have been hitting lows not seen since the recession started. Why have wages been stagnant and is this something that is likely permanent? The last time that jobless rates were this low the wage rate grew at close to 4% but today the wages are rising at an anemic rate of 2.5% at best and have been even lower.

 

Analysis: Why are wages not keeping up with the reduction in unemployment? Isn’t there a shortage of workers? We have been harping on this for months and it would seem that shortages of labor would trigger higher wages as employers seek to get the people they need. In fact, those sectors where there is a shortage of skilled labor have seen significant wage hikes as companies do have to pay a premium to get the people they need and they also have to pay their existing workforce more so that they are not poached by other companies. The problem is that most people lack these needed skills and can’t compete for these higher paying jobs.

There are at least three factors that have been holding wages back. These are not unique to the US either. In many of the developed states there has been a similar pattern of lower unemployment coupled with slower wage hikes. The first of these factors has been the slow progress as far as productivity is concerned. The output per worker has been stagnant and there has even been evidence of decline and that is perplexing at a time when companies have been keeping their businesses lean and mean from a hiring point of view. It has long been assumed that having fewer people producing the same level of output would boost productivity but the most recent period of layoffs and attrition actually cut into the ability of companies to produce. It turns out that asking fewer people to do the work done previously can only work for a short period before they wear out and productivity slumps. It has also been suggested that companies have not had enough access to credit to get the technology they needed to boost productivity. Whatever the reason the level of productivity has stalled and that has compromised growth and the ability to pay higher wages.

A second factor has been the limited pricing power that companies have had during this long period of very low inflation. The absence of even modest inflation gains over the last ten years has meant that prices have stagnated in most sectors. There have certainly been some price hikes but in general inflation has been very low. That has meant that skimpy wage hikes have been slightly less of a problem as prices remain stable but it also means that producers have been unable to scale up their revenues and profits and that limits the wage hikes on offer. There are certainly many high profile companies that have seen big boosts in both profits and revenues but the vast majority of small and medium sized businesses have not and these are still the dominant employers in the US.

The third factor is that demographics has played a role. The aging workforce has been an issue for a long time and now the transition is affecting wage rates. The older workers are often the better paid workers due to their longevity and skill set. As they retire they are generally replaced by much younger and less experienced workers who do not command the same wages and salaries of those that have left the workforce. The wages paid to these workers are substantially less than the wages of the people they are replacing.

 

Upbeat Fed Lays Out a Plan

The comments made by the Fed yesterday were as clear as they have been in a while and seem to lay out a plan for the remainder of the year. The conjecture at the start of the year was that rates would be hiked three times this year but after the first hike there was a sense that perhaps the rate hikes would accelerate a little. With the second rate hike of the year the Fed has indicated that it plans just one more and that it would likely be in September. The Fed also outlined the plan for reducing the size of its balance sheet – standing right now at around $4.5 trillion. This move would take precedence over another rate hike at the end of the year.

 

Analysis: The assertion is that the economy is growing steadily enough to significantly reduce the stimulating that has been part of the Fed’s mission for the better part of a decade. The reduction of the balance sheet will be accomplished through allowing the bonds to mature and electing to roll them off without reinvesting. This is essentially an attrition strategy designed to have the minimum impact on bond markets. There had been concern the Fed would try to reduce this overhang more aggressively by selling off the holdings as opposed to just letting them mature out. This may yet be a strategy to be pursued in future years but for the moment it doesn’t appear the Fed is in a hurry and the same goes for the interest rate policy. There is no real pressure from inflation at this point and that gives the Fed all the time it needs. The rates now are between 1.0% and 1.25% and that remains historically low. If there is another quarter point hike in September the rates will still be low – between 1.25% and 1.5%.

 

What Does the Brexit Look Like Now?

The whole issue of Britain’s role in Europe has been fraught with confusion and concern for many years and that chaos has intensified in the last year. There has always been a sense of distance between the UK and Europe and there has long been reluctance to fully integrate into what would be described as European culture. The UK was slow to join the Common Market in the beginning and never did become a member of the Eurozone. The “euroskeptic” has been present in both the Labor Party and the Conservative Party along with those that supported the EU. There is a widespread resistance to doing things the “European way” and that has always created tension within the business community as well as the voter. Despite this traditional enmity it was assumed the British would continue to support the EU albeit with reluctance and few really expected the voters to opt out the EU. Of course, this assumption was incorrect. Nobody really expected the Tories to lose a 25-point lead and end up having to form a weak coalition government but here we are. What does this mean for the Brexit talks now? There are those who now expect a hard Brexit and those who retain some optimism that a soft Brexit may still be possible.

 

Analysis:  The hardest version of the withdrawal would be a total divorce without any sort of agreement – Britain just tumbles out of Europe and retains virtually nothing from the relationship. This is considered an unmitigated disaster for the UK as well as Europe and most assert that economic growth would tumble in the whole region – perhaps enough to trigger a real recession in both the UK and Europe. The slightly less drastic version of a hard exit would be one that would involve some protection of citizen rights for both those in the UK and Europe but would have little impact on trade. This might preserve the right to work in other states and perhaps protect the ability to live in Europe if one is British. The next step up would be an agreement on free trade in goods but not in services. Right now, this is the most likely option as there are many in Europe who want access to the British market and certainly many in the UK who want access to the Europeans. The practicality of allowing trade in goods will prevail over some of the political objections but this will not protect the role of London as far as being a financial center.

The other options start to trend towards a softer exit and at the moment these seem less likely given the current political positions taken by the British as well as those in Europe. There could be some sort of customs union that would harken back to the days of the Common Market but this means that the British would lose some control over their tariff system and that would mean it would be harder to block imports from Europe. There were those who supported Brexit simply due to a desire to limit these imports into the UK. At the same time this makes the European market more accessible to the British and some in Europe now oppose this. The next step towards a soft exit would be a whole new trade agreement that would allow almost unfettered trade between the UK and Europe but that would mean Britain following European rules and being subject to the European Court of Justice when there were business disputes. That would be a step too far for the majority of the Brexit supporters and this option seems rather remote. A “true” soft exit would not be an exit at all as the UK would essentially capitulate and agree to all the rules of the EU – including the free movement of people and it was the immigration issue that really galvanized opposition to the EU in the first place.

 

Russian Sanctions

There is plenty of confusion these days over the US relationship with Russia and for that matter over the European relationship. For years the Europeans have been calling for the US to step up activity designed to sanction Russia over its invasion of Ukraine and the US has come under pressure as it has appeared that the Trump approach to Russia and Putin is far more tolerant than before. Now comes the Senate decision to step up these sanctions and the Europeans are upset. It seems that sanctions against Russia that will be detrimental to the Europeans are out.

 

Analysis: The issue at stake is the pipeline that delivers gas to Europe – Nord Stream 2. The plan in the Senate is to sanction work on this project but the Europeans want it left alone as this is what will ship more of Russia’s gas to them. It seems that sanctions are great as long as they hurt other nations and not Europe. The Trump White House has not backed the Senate plan fully either and there remains evidence that Trump has been trying to develop some kind of unique relationship with Russia. These sanctions are not likely to make that plan any easier to pursue. The bottom line is as it has always been. Russia is a complex nation and the US is as well. The two agree on some issues and disagree on others, most of all the two are rivals for influence in Europe and elsewhere.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

Waste

This is an incredibly sensitive area for my wife. She just can’t stand wasting things. It pains her no end to throw away food and she works tirelessly to make sure that stuff that winds up in the fridge ends up on a plate and not in the compost. We recycle as much as we possibly can and she takes great pride in having very few bags on the curb on trash day (usually just one and it is mostly kitty litter as there is a limit to reuse). She takes home anything not eaten at the restaurant and we tend to save every scrap of something just in case we might need it someday.

Every time I fly I see things that would send her into orbit. The kid that takes one bit of a hamburger and throws the rest away. The gargantuan salad that ends up in the bin. I understand that places often serve too much and it is a little awkward to carry a “doggy bag” half way across the country but it still bugs me and especially her. She really does practice the “waste not, want not” mantra.

I suppose what amazes me the most is that after years and years of pleas to be frugal and to avoid waste there is still so much taking place. I turn out lights I am not using and don’t run water recklessly. It is no big deal but it seems that few have that orientation and that can be a little discouraging when one likes to assume that people understand the need to maintain some level of parsimony.

 

This is a commentary by Keith that appeared in this week’s Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.

 

To get a FREE TRIAL go to www.armada-intel.com

 

 

Supreme Court Throws Out ELD Challenge – Be Ready.  Supply chain operators and trucking firms alike will need to get ready for the Electronic Logging Device Mandate, set to be enforced on December 18th.  A challenge to the rule that was brought as high as the Supreme Court was thrown out by the court.  Therefore, the Congressional rule will stay in place and companies will be expected to comply after December 18th. For background, Congress passed a rule that will mandate that every Class 8 truck (and perhaps other classes as well) have an electronic logging device (ELD) that keeps track of operating hours when a truck engine is running. It prevents the “forging” of logs that are kept manually today. There are a vast number of speculative impacts to the national supply chain because of this rule, which appears to now be more likely to be enforced at the end of the year after this Supreme Court decision.

 

We can focus on one of two camps – as it pertains to the impact of ELD’s on supply chain operations and cost moving forward. One camp believes that most trucking firms have already implemented the technology and steps have been taken to meet mandatory operating rules, and this will have very little impact on available capacity, operating costs, or supply chain costs. The rule is designed to enforce the 11-hour rule (which limits how many hours a trucker can operate behind the wheel of a big rig) and those adjustments have already been made.  This camp doesn’t believe that available capacity or transportation costs will change because of the ELD mandate.  However, there is another camp that believes that it could strip out as much as 20% of the nation’s trucking capacity.

 

In any event, even if you don’t operate a supply chain, there are a few business impacts that you need to take from this story.

 

  1. Transportation costs are going to rise faster, start building that in to your financial projections and budgets. Any company with a heavy emphasis on supply chain management will see their operating costs rise when the mandate is fully enforced.
  2. A large percentage of the trucking industry has not purchased the ELD’s (although a majority have). Still, there should be a significant boost to the ELD industry and ongoing maintenance and replacement units will become an ongoing source of growth for those companies. Look for a couple to emerge as dominant in the industry (especially those that can multi-task and perform a variety of functions to help the driver).
  3. Eventually, the ELDs will become like other technologies, and simply will come with a new truck. Look at the history of GPS devices for (likely) a similar model.
  4. There are many others.

 

There will be far more discussions on this as we move closer to the mandate deadline.

 

To get a FREE TRIAL go to www.armada-intel.com

to www.armada-intel.com