Business Intelligence Brief: September 19, 2017

Short Items of Interest – US Economy

 

  • Puerto Rico Suffers from Lack of Investment – Once again the Puerto Ricans are facing a disaster and are no more prepared than ever. The lashing from Irma forced many to evacuate and shut down power for most of the territory for days. Now another storm looms and this one is likely to do more damage than Ima as it will make landfall. The power grid will be slammed again and there will be more damage to everything from roads to the seaports and the airport. The island has been neglected for decades when it comes to infrastructure investment and this was taking place even before the latest financial crisis. As the discussion on how to rebuild the territory’s finances this issue of infrastructure and investment will have to take center stage but there are no simple solutions in sight.

 

  • Oil Price Expectations – The latest survey of expectations regarding oil pricing suggests that these current low prices will extend into next year and likely far beyond. The oil industry itself seem to be anticipating these continued trends of oil between $50 and $55. The days of $100 a barrel are long gone unless and until there is something that would break the consistent oil glut. At this point there seems only two developments that would have that impact. The first would be some major geopolitical upheaval in the oil states that forced a major shutdown and that means a crisis that would affect Saudi Arabia. The second development would be a stunning increase in demand from the consuming states like the US and Europe and that means overall growth that exceeds 4.0% on a consistent basis. As we have seen, even major hurricanes have not been able to dent the glut these days.

 

  • Brain Drain – For decades this was an issue the US was somewhat responsible for. The best and the brightest from all over the world were eager to attend US schools and receive training in a whole host of professions. The US gained and the rest of the world lost in the competition for doctors and engineers and other specialists. Now the brain drain is happening in reverse as many of the students who once considered the US are turning to other countries or staying home – unsure of what kind of welcome they will receive in the US. These students often remained in the US and filled needed positions and now that contribution will be rarer.

 

Short Items of Interest – Global Economy

 

  • Distributing Refugees – The Germans are actively trying to send the refugees to parts of the country that have experienced loss of labor. This makes a great deal of sense from an economic point of view but is a challenge as far as social issues are concerned. The areas that are labor short are often rural and trend more conservative in terms of culture and they have been far from enthusiastic about the newcomers. The growth of populist groups like the AfD has been in these more remote areas and they think they are being dumped on rather than given new opportunities for growth. It is nice to see people in places where there has been population decline but they now need jobs.

 

  • National Front Starts to Fray Internally – As expected the defeat suffered by Marine Le Pen has given rise to all manner of in-fighting within the ranks of her party. Each asserts that the others were responsible for the resounding defeat to political newcomer Emmanuel Macron. The splits have taken on extreme pettiness as one-time chief advisor Florian Philippot has been enduring attacks for having been spotted eating in a North African restaurant. He has now been removed from his position and even Le Pen has questioned his loyalty.

 

  • Reaction to Rohingya Crisis – The leader of Myanmar has finally started to formally react to the exodus of Rohingya people as they flee attacks. Aung San Suu Kyi has been slow to react and that has shocked many given her role as the conscience of the Burmese people. She has even gone so far as to place some of the blame for the crisis on the Rohingya themselves.

 

 

 

What to Learn from the Data This Week

There will be quite a bit of activity with the central banks this week as most of them are in the process of shifting their focus to a “post stimulus” world. Some announcements will be coming from the Bank of Japan as well as the Federal Reserve and the ECB and the Bank of England have already held forth on this topic. There will be some data from the realtors as far as the housing sector is concerned and at the end of the week the preliminary Purchasing Manager’s Index will be released by Markit. Not the busiest of weeks as far as data is concerned but much of what is being discussed is significant to the performance of the economy going forward.

 

Analysis: On Wednesday, the Fed will release a statement at the end of their two-day meeting. It was not that many months ago that September was considered a very significant meeting – one that would include another rate hike. That possibility began to dim as early as May of this year and there is no chance at all of a surprise rate hike now. The Fed is not even talking another rate hike for the year although there remains a dim outside chance should there be a surge in inflation. This meeting will focus on other issues related to the stimulus effort – namely the immense balance sheet the Fed has accumulated due to three rounds of quantitative easing. There remains considerable difference of opinion as far as their efficacy but it is undeniable that the effort has presented the Fed with a dilemma. The balance sheet consists of both treasuries and the collection of mortgage backed securities the Fed acquired in order to get them off the commercial bank’s books. Most assert the first round was the most successful and that rounds two and three were less efficient. The Fed now wants to sell off a significant amount of that collection but they do not want to upend the bond market in the process and will be talking about how they plan to ease themselves into the market. There will also be careful parsing of anything that might indicate future plans for a rate hike. This will also be a meeting where the Fed will submit economic projections that go out as far as 2020.

The Bank of Japan will release a policy statement of its own on Thursday but few are expecting any sort of significant change despite the fact growth in Japan has been proceeding at a 4.0% annualized pace. The BoJ is likely to keep doing as much stimulating as it can and that means continued low rates. They are well aware that much of that recent growth has been driven by expanded exports and higher rates in Japan would interfere with that expansion.

The US real estate situation will be somewhat clearer with the release of data from the National Association of Realtors. Last month the data indicated one of the slowest months in years for the sale of existing homes and this month is not expected to be markedly improved. There are many reasons that existing home sales can be down and most of the time the issue is demand – too few people interested in buying at any given moment. That is not the issue this time as there are signs that demand is on the increase. The issue now is that there is too little inventory available to meet the demand and that looks to be an issue for quite a long time to come. The millennial buyer is not all that attracted to the new home market in distant suburbs and prefers the existing home in the city or at least the inner ring of suburbs.

There will some preliminary data coming from the PMI produced by Markit and it is expected to show some slight gains. That would continue the positive run of data that has been coming from the PMI’s of late. The likelihood is that readings are about as high as they are going to get for a while and there is some concern that new orders numbers have been dipping and that is a signal for readings to come. This will also be a week that will see some initial impact from Irma and Harvey as it is expected that jobless claims will be up significantly. If past patterns are any indication that pattern will reverse in the coming months as the reconstruction starts in earnest.

 

Lighthizer Comments on Trade

There was little in the commentary by Robert Lighthizer that would surprise given his previous positions and statements. He has long been a critic of China and has repeatedly asserted that they have been a major impediment to global trade. This is not a new assertion and it has been made many times as China is unique among world economic leaders. It is a hybrid of two systems – state-run and market capitalism. The majority of Chinese companies are independent but they get a great deal of help and subsidy from the government. Not that governments around the world are not similarly engaged but the scale of that help is different. The comments from Lighthizer reiterate the position that has been taken by the Trump team since the campaign started last year – China is the root of all US economic problems. This is an extreme overstatement but it plays well with voters as China has been a juggernaut economically and it has consistently been a diplomatic opponent of the US.

 

Analysis: Of more significance than the anti-China tirade was the fact Lighthizer never made mention of the Nafta talks in this speech. This may simply be so that he could focus attention on China but given that Nafta has been coming up at every other opportunity it is a little confusing. It may signal that negotiators are starting to move past the bombastic statements and towards setting up some realistic goals. The plain fact is that all three nations have become dependent on aspects of Nafta and undoing these relationships would be bad for all three. This is not to say that adjustments could not be made as there is always room for improvement. The point is that talks may now start to drop the extreme rhetoric and start to get into the weeds of a real negotiation that would preserve the parts that are working and the parts that are not living up to expectations.

 

Will Coal Make a Comeback?

At the center of most national policies will be energy. The eternal question is where the power is going to come from to run the industrial society as well as the homes of hundreds of millions of people. Each passing decade sees increased demand for power as electronic devices continue to emerge. Even energy conservation in one area can mean more demand in another. If everyone in California elected to drive an electric car the utilities would need to add several more power plants to provide the needed power. The question that hovers over all these utilities is what they would plan to use to generate that power in the future. Will it be fossil fuels like oil and coal and gas or will it be some combination of renewables like solar and wind and geothermal. Will nuclear power make a comeback? Right now, there is much conversation regarding the future of coal.

 

Analysis: There are several reasons that coal is unlikely to stage a major comeback as far as an energy provider. Part of the issue is projected demand. This is a highly variable estimate and depends on a lot of economic factors. Just a few years ago the prediction was for coal demand to be up by 39% by 2040 and now the same group (Energy Information Agency) predicts growth of maybe 1%. A big part of that decline is due to changes in the way that China consumes. They have been reducing their coal use dramatically as they try to tackle the pollution that stems from their power plants. They are already seeing drastic reductions in steel output and there have been reductions in the amount of power needed for the urban population. Coal use in the US and Europe has been on the decline and only India is seeing an increase in demand that is worth mentioning.

Even though there has been an uptick in coal production in the US in the last 18 months the share of US power production attributed to coal has fallen to all-time lows. It is now just 30% of total power production and most analysts see only very modest improvements – perhaps to 32% by 2019. The good news is that coal prices have been going up in response to the higher prices for natural gas. This has long been an important factor as far as coal demand is concerned. Gas prices have been notoriously volatile and that drives the utilities nuts as they struggle to predict the costs of that fuel. The confident assertion that gas prices would stay low for an extended period of time was based on the assumption that oil production would continue to be aggressive and that has obviously not been the case.

The most important consideration as far as coal is concerned is that the utilities are just not all that focused on coal as their future as coal has become politically unpopular. The focus is on gas and renewables as these are less of an issue from a climate change perspective. This is not to say that they are without their problems but these are being sidelined while the problems that stem from coal use get all the attention. Coal may account for over a quarter of us power production but almost none of the new investment and development in the last several years and that is unlikely to reverse.

World Expects Little from Trump’s UN Speech

The outlines of the speech that have emerged contain little that would shock or surprise and the majority of the delegates to the UN have adopted a somewhat bored attitude. It will be a speech that is heavy on nationalism and “America First” with very little discussion of the US role as idealistic nation-builder. Frankly that approach has been vanishing from US policy for years. Those who wanted to push the US ideal were dominant during the Bush Presidency. The neo-conservatives such as Paul Wolfowitz, Donald Rumsfeld and Dick Cheney were convinced that the US system of democracy and the free market should be everybody’s system and worked to transform the world in the US image. Obama largely rejected that approach and pursued a far less interventionist strategy and Trump has taken that isolationism one step further.

 

Analysis: Over the last century the US has waffled back and forth between isolation and intervention and Presidents since the turn of the century have reflected these abrupt changes. The interventionists like Teddy Roosevelt and Woodrow Wilson and Lyndon Johnson were often replaced by those who placed US interests ahead of all others (Nixon, Carter, Clinton). There were also many who tried to balance the ideals with pragmatism (Truman, Kennedy, Reagan, Bush I). The US is now less interested in trying to shape the world as previous efforts have been less than satisfying. We have been in Afghanistan for 15 years and in Iraq even longer and it is hard to point to anything like a lasting success. The countries that have been receiving aid from the US are often the same ones that bite the hand that fed them and this breeds resentment in the US population as they worry about where the money will come from to meet their needs. The US will not surprise the US at the UN but the US will not be shocked at their reaction either.

 

The Black Owl Report – An Executive Intelligence Brief

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Advancing Age

All of us are dealing with this – after all there is no reversing the process. Even those seemingly indestructible teens only get older. The interesting part is the series of revelations that come with this journey and recent conversations were a reminder. The first observation of this group of men and women of late middle age was that they were not capable of those late night revelries they took part in during their younger days. We were in the Big Easy after all and the night life beckoned. Some succumbed and were now paying the price while others were congratulating themselves for grasping their limitations.

The commentary on resilience soon turned to whether they really missed those days. Most asserted that they really didn’t. What used to seem like a great night out now just qualified as an unwelcome interruption to a favored routine. One guy asserted that he was not a great golfer to begin with – much less with a hangover. He enjoyed the links more than the party. Another confessed to being drawn to the World War II museum as opposed to the French Quarter. We do slow down but more importantly we start to determine our own likes and dislikes and pay less attention to the demands of our peers. We have lived long enough to know real friends when we see them and understand that we need not do anything to impress them – they like us just fine as we are. That is certainly worth aging for.

      

This is a commentary 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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North Korea Tested Gas Rationing Weeks Ago to Prepare for Sanctions.  North Korea must have known what kind of sanctions were on the way.  They held a strategic test of gas rationing in a province near the border with China in August, and the reaction was interesting and telling of what might come.

 

A report on the event was written by RFA, here’s part of the account:

 

“Gas stations closed without explanation for a few days late in August in a North Korean province bordering China, sparking concerns over possible austerity drills and causing prices to double when sales finally resumed, sources in the region said.

 

Speaking to RFA’s Korean Service, residents of North Hamgyong province said that the province’s densely-populated Chongjin city was especially hard hit, causing widespread confusion and fears of imminent war.

 

“Gas stations throughout Ranam, Songpyon, Sunam, Pohang, Sinam, and Chongam districts were all closed,” one source told RFA, speaking on condition of anonymity. “Gas prices then doubled, and it was chaos.”

 

Travel was made particularly difficult in parts of Chongjin not served by trains, buses, or other public transportation, he said.

 

“There was a rumor for a long time that the gas supply would be cut, but no one expected the stations would be closed all at once,” the source said, adding that speculation quickly spread that gas sales had ended because of international tensions over North Korea’s illicit nuclear and missile programs.

 

Also speaking to RFA, a second source in North Hamgyong said that when gas sales stopped, “residents were frightened because they thought a war was about to break out. Their fears were relieved when sales resumed shortly afterward. But then the gas prices skyrocketed,” the source said, also speaking on condition he not be named.

 

Many now think that the brief interruption in gas sales may have been a fuel-saving drill conducted by the state to prepare for the impact of reduced fuel imports under harsh new U.N. sanctions punishing North Korea for its nuclear program, sources said.

 

– Reported by Jieun Kim for RFA’s Korean Service. Translated by Leejin Jun. Written in English by Richard Finney; AFP

 

There is also some possible evidence that North Korea could be preparing for another nuclear test.

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