Business Intelligence Brief: July 12, 2017

Short Items of Interest – US Economy

 

  • Near Universal Opposition to Steel Tariffs – The plan was broached in last year’s campaign and it played well with some segments of the population and especially with Trump’s base. The US was once a major steel producer but the business has struggled against cheap imports of steel from around the world. The tariff was to be very stiff (40%) and it was based on security assertions. The US would be weakened if the steel industry was any smaller than it already is. The last several White House economists (both Republican and Democrat) have publicly stated that these tariffs would be a bad idea for the US economy. They assert that the time to rescue the steel sector was decades ago and it is essentially too late. While most of the attention has been focused on imported Chinese steel they only supply a little less than 3% of US imports – Canada is the number one contributor with over 17% of the total.

 

  • Yellen Asserts a Slow Approach – The fact is the Fed is not facing an urgent situation when it comes to rates and the economy and that makes policy setting more challenging than usual. There is no deep recession to fight and thus no reason to pull out all the stops as far as stimulus is concerned. At the same time, there is no imminent inflation threat that would justify yanking rates up sharply. It is a middle ground situation and the Fed comments suggest a very slow pace of minor rate hikes for at least the next few years. Of course, there are all kinds of scenarios that would change this perception but for now the watchword is caution.

 

  • JOLTS Report Shows Progress – The latest iteration of the Job Openings and Labor Turnover Survey shows more aggressive hiring coupled with more challenges in terms of finding the workers needed. The rate of hiring went up from 3.5% to 3.7%. This is an impressive rebound from where the data was a few months ago but not as robust as it was in 2015 and 2016. The quit rates have continued to rise and that indicates that people are confident enough to just abandon their current job in search of something else. The majority of the quits have been in the low paid service sector however and that has hampered the pace of wage growth.

 

Short Items of Interest – Global Economy

 

  • China Moves Quickly in Djibouti – China is setting up a major military base in this tiny African state and it marks the first time the Chinese have established a post like this since the Korean War. This is the region where the US has been very active and it is a region where many of the UN peacekeeping operations have taken place. It sits right on top of flashpoints in Somalia, Ethiopia and Eritrea. The Chinese have also been engaged in activity in Yemen. The US has bases in this region and so do the Europeans and that makes the potential for accidental engagement a much bigger concern. It is part of a much bolder strategy by the Chinese military.

 

  • Fifth Largest Oil Field Discovered in Mexico – It was just a few years ago that Mexico opened its oil sector to foreign investment and now that measure seems to be paying off. An international consortium that includes the US and the UK has found a field they assert will be the fifth largest in the world. Its development may be slowed a bit by the low prices for crude but there is an incentive to get it running and make up the investment. It is in the Gulf of Mexico and the majority of the oil will end up in the US as it is the nearest market.

 

  • Confidence is at Low Point – A survey of the populations in the Asean nations shows that most people have a poor opinion of their leaders and now expect things to get worse. The optimism that greeted the start of the year has faded and there has been a dramatic crash in the popularity of Duterte in the Philippines. He has the lowest scores of any leader since Ferdinand Marcos but none of his opponents are faring much better.

 

 

 

G-20 Post Mortem

What exactly is the G-20 – what is it for and what is expected from it? This is an informal association of the 20 largest economies in the world. Periodically the leaders of these nations get together to discuss the state of the world. It is not an old organization as its first meeting was in 2008. Prior to its formation, the focus of international diplomacy was the Group of Seven but this was considered less relevant than had been the case before as there were too few nations involved. The G-7 still exists and meets but is seen as something of a rich and western nations club. The G-20 involves a wider variety of countries (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States and the European Union. Obviously, there are nations that have more influence than others but they are all there and the issues the G-20 deals with are those that affect the entire international community.

The expectation is the G-20 is to be a forum where diverse countries can try to agree on common issues and find ways to cooperate with one another. There is no enforcement power whatsoever as no nation is willing to concede sovereignty to anything like this kind of organization. Many of the issues that arise create a situation where the member states simply have to agree to disagree and it is something of a big deal when the whole group gets behind something.

 

Analysis: Over the last few years the focus has often been on the global economy as the G-20 started at about the same time the global recession reared its ugly head. There was not much the group could do other than to promise some coordination on development plans but the one strategy they were unanimous on was the need to avoid tumbling into a protectionist mode. Granted, almost every nation tends to try to manipulate the system to favor their exports and limit the amount of imports coming in but these have generally been subtle and there is usually offsetting efforts to promote free trade. This has not meant an absence of conflict as there have accusations of currency manipulation directed at China and others and there have been tariff and non-tariff barriers erected. The point is that the G-20 was generally supportive of free trade and this was particularly true of the major players. The sense at the end of this last meeting is that the US has pulled out of that tacit agreement as the Trump position has been aggressively protectionist and fundamentally anti-trade. This has been a very worrisome trend as far as the rest of the members are concerned and it is prompting many to start making their own deals that exclude the US and are designed to replace the business that is being lost as the US retreats.

The second issue the G-20 has generally united around is climate change – at least to the point that it has been recognized as a major problem for all the members. There is considerably less unity around what should be done about it but there has been fundamental agreement that it can’t be ignored. The issue of how to react has been muddied by the conversation over who should bear the brunt of the cost. The developing nations within the group assert that the developed states created the bulk of the problem and built their economies on the back of fossil fuel consumption so they should foot the bill for reducing the impact on the environment and needless to say that is not the popular position as far as the developed states are concerned. The US has been especially vexed by the demands made on its economy while changes in India and China will be delayed by decades. To be honest, the climate change conversation at the G-20 has never been much more than that – a conversation. There have been very few goals set other than some vague promises of improvement in the decades to come. What has been disturbing about the Trump position is the active opposition to the existence of the issue in the first place – despite the mountains of evidence. During this meeting Trump was highly isolated on the issue.

The bottom line is that Trump was thoroughly out of sync with the other leaders and the US was not in its customary leadership role. The members eventually began to just ignore the US and began to pursue their own agendas. The US was once the dominant player here and in the global community as a whole and today is on the sidelines and virtually ignored. That is not good for the global community and it is not good for the US either.

 

More Signs that Cartel is Losing Steam

The days of OPEC’s dominance in the oil world are long gone but it still functioned as a brake on oil output from time to time. It was strongest when the members accounted for the majority of the oil produced in the world but the major players are not even members of the cartel these days (US, Canada, Mexico, Russia etc.). The Saudi Arabians remain the dominant member of OPEC but they are not the dominant oil producer anymore and their decisions do not reverberate as they once did.

 

Analysis: There was an attempt on the part of Saudi Arabia and OPEC to limit the production of oil so that the prices might start to climb again and for a while it appeared that the markets were reacting. Soon enough it became obvious that non-OPEC members were going to make up the difference and the levels of oil production remained essentially the same. Now it appears that Saudi Arabia is throwing in the towel as they are producing more oil than they indicated they would as part of this OPEC inspired deal. The output last month was 10.7 million barrels a day and that is 12,000 more per day than was agreed to. This additional output is not due to some heretofore unexpressed demand, in fact demand has not been as robust as it has been in previous years. This is the summer driving season in the US and that is usually accompanied by higher fuel prices but not this year. There remains a serious oil glut and demand has not risen to the point that it has diminished. The Saudi decision is based on the fact they need to make more money from oil sales, regardless of the per barrel price.

 

China and Africa

The Chinese are on the edge as far as Africa policy is concerned. They have long had an attitude that was essentially “hands off” when it came to African politics. They were simply engaged in efforts to obtain resources from African states and were content to let their money do the talking. It seemed a fairly straight forward proposition as China simply wanted the oil and raw materials needed for their own economy and had the cash to pay for it. The engagement started to expand as the Chinese sought to make Africa a market for their exports. The Africans in general were a bit suspicious of the Chinese when they were focused on exploiting the resources of the continent and many leaders in the region started to refer to China as the “new colonialist” but that critique expanded as the Chinese started to usurp the position of domestic business. It was a case where Chinese workers pulled materials out of Africa for China while Chinese companies sold their goods to the Africans. There was precious little room for the workforce in Africa itself.

 

Analysis: China now has more peacekeeping troops in Africa than any other member of the UN’s Security Council. There are at least 2,000 troops in places like Liberia, South Sudan and the Democratic Republic of the Congo. There have been casualties along the way and that has not been well received in China itself. The engagement is part of an expanded interest in these states and in Africa itself but it also threatens to end the old policy of non-engagement and that has serious implications.

The Chinese are now clearly taking sides even as their peace keeping troops are not supposed to. The actions in South Sudan support the government against the rebel factions that seek to take power. China has invested very heavily in the oil business in this brand new country and their troops are far more protective of that development than other parts of the country. There are 750 troops in South Sudan alone and this is where the casualties have been taken. This engagement is designed to keep their allies in place but it could also backfire should this very weak regime fail and one of those rebel factions emerges as the new leadership.

The other challenge for China is that this engagement brings them into conflict with other nations with claims to Africa. The US has weak relationships with most of the region but the ties between Europe and Africa remain strong – especially between France and the former French colonies. There is some resentment of Chinese influence in those states already and that confrontation is only expected to ratchet up. The Russians also have designs on some African states and their agenda may not match up very well with China’s.

Finally, there is the fact that terrorism is rife in Africa and thus far China has managed to stay at arm’s length from most of the conflict. That may not be the case for much longer. The Chinese are at odds with the Muslim population in the western regions of China (the Uighurs) and they have had some incidents to deal with already. Getting engaged with Africa will bring them into conflict with ISIS, Boko Haram, al-Qaeda and the Salafists (among others). This makes China a target in Africa and perhaps at home as well.

 

IMF Pushes for Change in the DRC

The Democratic Republic of the Congo has been a failed state for decades. It began as a nation divided and has only become more so over the years. As it broke free of the haphazard colonial period under the King of Belgium it was led by Patrice Lumumba who elected to side with the USSR – a decision that contributed to his death as the US and Europe wanted him gone. He was overthrown and the country was divided between provinces with Moise Tshombe leading a movement in Katanga province. This has been at the heart of the troubles since as Katanga is where all the valuable materials lie. The country was united for a time under the despotic rule of Mobutu Sese Seko. His overthrow only intensified the civil war and that rages today.

 

Analysis: The government of Laurent Kabila barely controls a few square blocks of the capital city but none of the competing warlords have any more influence and the country survives on the largesse of the international community. The IMF has run out of patience and is demanding Kabila leave and that some new leadership emerge before they elect to give the country any more money. Without IMF aid what is left of the economy will fall apart and everyone realizes that. The problem is that this money is the only leverage anybody has as far as change is concerned. As always, the crux of the leadership issue is that there are far too many factions and none of them are in a position to form an inclusive government. The other factor that always complicates this country’s future is that all those valuable resources are still there and many nations want them. This is the main reason that China has such a large peacekeeping presence in the war ravaged state.

 

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 was a Weird Meeting

One can always tell that one has been working too hard and that there has been a bit too much stress. It started off as just a normal get together for the vast Armada staff (Me, Keith and Karen). Lots of planning and discussion of what our next assignments should be and then it suddenly veered in a very strange direction as we started to consider what an economic program would look like if we emulated our cats and dogs.

I would start to talk and then abruptly turn my back and look preoccupied with a spot on the wall. I would be unable to concentrate on anything if I had a laser pointer in my hand and any movement in the room would utterly distract me. Keith would be running back and forth across the stage and periodically stopping at the lectern to jump up and down for no apparent reason. As I talked he would be hovering at my feet and biting my shoes – I would then respond by hissing loudly.

We spent the better part of 30 minutes on this topic and just about had ourselves convinced it would be a YouTube sensation but then we looked at Karen’s face and realized that to the rest of the world we are just loons. We got back to work after that but I still find myself thinking about it!

 

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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Area in Atlantic Likely to Fizzle.  The area in the Atlantic not far from the Leeward Islands is running into a period of high-level wind shear – and it will likely get torn apart in the process. The National Hurricane Center has stopped predicting that it will become anything more than just a tropical depression at this point.

 

There is a small chance that this system will get through the wind shear stream and emerge on the other side somewhat intact.

 

If that happens, there is a chance that it will redevelop (conditions on the other side of the wind shear are conducive to development).

 

Areas around Florida and the Caribbean are being reminded to pay attention to the system over the next three to four days to see what happens as it goes through this period of shear.

 

Other than this system, the Atlantic is clear.

 

There is a system that has a 90% chance of becoming a tropical cyclone over the next 5 days in the Pacific. Based on the current movement of the storm, there is little chance that the storm will impact the Mexico or US West Coast.

 

Even from a shipping perspective, there is very little to suggest that the storm will have a material effect on supply chain activity as a result.

 

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karen

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