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Business Intelligence Brief: March 21, 2017

Short Items of Interest – US Economy

 

 

  • What Does Business Expect? – Much has been made of the improved confidence levels in the business community and among consumers. The majority of this confidence remains rooted in what is expected to happen as opposed to anything that has yet to take place. What areas do the business leaders think will change the most? According to some recent polls the top six areas of change and reform include changing the health care law, renegotiating trade agreements, reducing regulations at the federal level, immigration reform, reduced restrictions on energy development and tax reform. In this week’s Black Owl Report we look at each of these to determine how likely these changes will be and what will have to happen for them to come to pass.

 

  • Weather and the Economy – By now we are used to the dire predictions that come with forecasts of bad winter storms. We know that flights will be canceled and that transportation in general will be affected. What is not so obvious is the impact of nice weather when it comes at the wrong time of year. As mentioned yesterday the rate of industrial production fell in the US over the last two months and almost all of that decline was due to the warm winter and the significant reduction in demand for electric output. This has ramifications beyond this season as it can easily lead to requests for higher rates given the fact that utilities lost money this winter.

 

  • Why Do People Quit? – The latest JOLTS report showed that the quit rate has risen to around 2.2% and that is higher than it has been in several years. Why do people quit in the first place? As one would expect the primary reason is to look for a job that pays more but among millennial workers this is often the number two reason. It is often more important for this cohort to work in a place where they enjoy the people and the work environment – even if the pay is lower.

 

Short Items of Interest – Global Economy

 

 

  • Twenty Million at Risk of Starvation – The current food and famine crisis is the worst seen since the end of the Second World War and it is estimated that over twenty million people are at risk. The main factors have been political conflict and drought. The most affected nations include Sudan, Somalia, Yemen and Nigeria but every state in the Saharan region has been affected. Millions of people have been displaced by war and that has kept them from farming their fields. The lack of rain has affected millions more as the desert of the Sahara expands by hundreds of miles each year.

 

  • Indonesian Criticism of US Trade Policy – The Finance Minister of Indonesia has been blunt of late and has accused the US of switching from being a trade advocate to the most protectionist state. This is a little overblown given the kind of trade strategies that have been pursued by Indonesia over the year but the point is well taken. The US has left the majority of the world in limbo and that has affected their strategies as far as trade and therefore the strategy for development.

 

  • Liberal Leader Likely to Win in South Korea – Now that Park Geun-hye has been impeached her center-right party has all but vanished in the polls as even conservative regions have been distancing themselves from the corruption that destroyed her regime. The front runner to replace her is from the more liberal Minjoo Party. Moon Jae-in would be the first liberal leader the country has had in decades and this could usher in some major changes if his party wins enough support in parliament. This could change business and economic policy and there could even be shifts as far as North Korea is concerned. Not that Moon has been a fan of the Pyongyang regime but the liberal position is generally far less bellicose than the right has been. This could pose a problem for the US and Japan as they would not have a leader in South Korea that would back their more aggressive plays.

 

 

 

Trade Policy – The Ultimate Football

There are few topics that garner as much political attention as trade policy. The challenge is that there are always winners and losers when it comes to this kind of international exchange and the losers are far more specific and identifiable than the winners are. The two prevailing theories behind trade are absolute advantage and comparative advantage. Nobody has a problem with the former as this is when one trades for something that is not obtainable any other way. The US doesn’t have the ability to produce enough bananas to satisfy demand so the US buys them from somewhere else. The comparative advantage argument is far trickier as these are goods that can conceivably be made in the country but it just isn’t efficient to do so. The US is quite capable of producing tube socks and t-shirts but why should it. These are low value goods that can be obtained elsewhere at lower cost and that allows the US to put its resources to more valuable items. The political challenge is that this is not the way a domestic tube sock producers sees things.

 

Analysis: During the campaign both the candidates turned their backs on trade as a general concept although for both this was a fairly recent conversion. Hilary Clinton opposed the passage of the Trans Pacific Partnership but in previous years she had referred to it as the gold standard of trade agreements. Donald Trump has taken advantage of many trade agreements over the years and commented more than once on the effectiveness of deals like Nafta. These were inconvenient positions in a campaign and were abandoned. This is not uncommon in the heat of political battle but once the race is won the President usually shifts back to a more generally pro-trade position and there are several reasons for this reversal.

Despite the headlines proclaiming the perils of a large trade deficit the US economy often gets more benefit than it loses from having that deficit. It is important to note that the vast majority of what the US imports is either consumer goods or commodities such as fuel and food. The US imports a great deal of oil still – even as the US has become a major producer again. The US also imports lots of food so that grocery stores can be full of out-of-season produce. The consumer is the net beneficiary of those consumer product imports as this saves them a lot of money. It has been asserted that an average consumer would spend around $8,000 more on the things they normally buy if these imports were not available. The US has become an exporter of services and high value manufactured goods and the jobs these exports support are far higher paying than the jobs that were lost in manufacturing cheaper consumer goods. This is cold comfort to those who had jobs producing these less valued products as they have seen their jobs vanish overseas.

Thus far the Trump administration seems to be sticking to the campaign rhetoric as far as trade is concerned. There is talk of very high tariffs on imported goods – especially those from Mexico and China. There has been a breakdown in talks over any new trade pacts and promises to tear up existing pacts like Nafta and Cafta and others. There has been development of an old concept with a new name – the Border Adjustment – and there have been all manner of assertions that trade is going to be reworked so that the US has an advantage. The truth is that has always been the goal and much energy has been spent on trying to eke out a better deal for the US. The problem is there is never a trade deal that is good for everyone. The TPP has been roundly assailed as bad for the US because it would have granted access to the US market for a lot of manufacturers in Asia. It is absolutely true the TPP would have cost more manufacturing jobs but that is not the whole story.

The TPP would have opened up several important markets for the US and one can argue that these are even more important than the ones lost. The agricultural sector would have seen far greater access than was present prior to the TPP deal and the services sector would have gained a lot of ground – especially law, accounting, banking and marketing. There would have been many jobs lost and fewer gained but the ones added would have been higher paying in general.

The border adjustment tax is a new version of an old concept that would essentially reverse the current tax advantages for importers and exporters. Changing the way these are handled would mean that exports would get a tax break and the importers would not. The problem that has developed every time this has been talked about is that these changes serve to make the dollar that much stronger and that essentially wipes out the advantage exporters would have had and continues to make imports lucrative.

It is hard to determine just what the trade situation will look like in the coming months. There have been some executive actions thus far – such as backing away from the TPP. But that was an agreement that had been killed in Congress last year. There is talk of revamping Nafta but nothing formal has begun. The additional tariffs and taxes will have to work through Congress and there is nothing to suggest they are on the same page with each other -never mind the White House.

The best guess at this point is that there will be targets as far as trade sanctions are concerned and other nations that will get very little attention. Mexico is in the cross hairs for a wide variety of reasons. It has become the whipping boy for many of the ills of the US economy regardless of the facts. It has been fifteen years or more since there was an exodus of jobs to Mexico from the US – today it is China that loses jobs to Mexico. Immigration has been blamed for many things but few grasp the economic benefit the US has received. The point is that Mexico is a target and there will be restrictions and tariffs that are directed specifically towards Mexico.

China will also come in for extended criticism and with greater justification. This is a country that overtly supports its manufacturing and export economies with every tool in the trade arsenal and the US has seen a lot of business decamp for the low costs environs of China. At the same time, there are many companies in the US that derive a great deal of benefit from working with China and they will defend that relationship.

The regions the US will continue to favor will be Europe (especially the UK). The US wants new deal with the British and others in the EU that have chafed under the rules of the EU. Look for the US to back Japan and South Korea as counterweights to China. There will be interest in working with Russia but they have little to sell other than their commodity wealth and right now the US has less need of that.

 

 

German Election Heat Up

The role played by Germany in Europe is hard to ignore and the same can be said for Angela Merkel. Throughout the past decade the Germans have been either driving events or they have been at the center of the discussion. The economic collapse of 2008-2009 hit the rest of Europe harder than it hit Germany as the German banks had not indulged in the kind of risky behavior as those in France, Spain, Italy, Greece and many others had. The Greek crisis with its threat of Grexit landed in Germany’s lap as they were the controlling factor as far as EU and ECB bailouts were concerned. It was Germany that pushed hard for the provision that so irked the UK that they decided to split from the EU altogether. Germany was once again at the heart of controversy with its decision to allow millions of refugees to enter from Syria and elsewhere in the Middle East and North Africa. In all of these situations and more Angela Merkel was at the center. She is either loved or hated in Germany and the rest of Europe for that matter and she is now facing the most severe test of her political career as she tries for a fourth term as Chancellor.

 

Analysis:  Three month ago she did not really have a challenger as the Social Democrats had a lackluster leader with barely the votes to hold his party position. This was before the somewhat shocking decision by Martin Schulz to take the helm of the SPD. He had been the head of the European Parliament and had been considered an ally to Merkel. In a European context he still is but not as far as Germany itself is concerned. He has resurrected the Social Democrats and has managed to chew into Merkel’s lead every week. He even has coat tails and has been able to improve the competitiveness of SPD candidates in other races.

The message thus far has been clear enough – Merkel is too imperious and too blind to the real needs of the German people. He has attacked the immigration issue without reversing the SPD position supporting the idea of resettling the refugees fleeing the war in Syria. His attack has been focused in Merkel’s method – not really engaging with the legislators when the program was being launched. It was more edict than anything else and that has been her style. Schulz is proposing a more engaged leadership and one that pays attention to the working population and the poor. It is not quite a populist message as Schulz has a very government centered pedigree – it is more of the traditional center left approach that had fallen out of favor in France, Spain, Italy, Greece and others.

In many respects the campaign has become about style. The Merkel approach has been more and more “my way or the highway” and she has been impatient with those who have attacked her from within her own party on issues like immigration. Schulz has been the one preaching inclusion and that has allowed him a more nuanced position on immigration. He acknowledges the fears and concerns of the working class population that has the most contact with the new arrivals and he has managed to take some votes away from the xenophobic AfD. He still has a long way to go to defeat Merkel as her lead remains substantial in most of the country.

 

 

New Travel Restrictions Raise More Questions than Answers

The fact that electronic devices attract security attention is nothing especially new. The majority of travelers have been taking their laptop computers and devices out of their bags for screening for years. These devices can be rigged to be bombs and fairly easily. It has been deemed sufficient to subject them to scans and inspections but the latest edict from the US will require that passengers from eight Islamic states be prohibited from bringing them into the cabin. This has outraged the flying public given the ubiquitous use of these devices for business and entertainment purposes.

 

Analysis: The real issue is that these have only been banned in flights that originate from Saudi Arabia, UAE, Egypt, Jordan, and four others although there was a message released that suggested that there would be twelve states affected by the ban. The question is why other flights from other nations are not affected if there is a danger from these devices. Is it expected that a terrorist will not fly from Spain or France or Norway or any other nation. The security for airlines in Saudi Arabia has been ranked as the best in the world and Jordan is also considered as tough as Israel as far as protection is concerned. The ban applies to only states with a Muslim majority and seems to tie into the other travel bans the US has tried to impose and this has thus far been struck down as discriminatory and illegal. The reaction to the device ban has been a mixture of outrage and surprise and it is clear that there will be far more reaction down the road – especially if the ban is extended.

 

 

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.

 

 

Why is it So Hard to Separate Facts from Opinion?

To be honest facts are not really a lot of fun – they just are. Something either happened or it didn’t and something either exists or it doesn’t. There is nothing all that interesting about this. The good part is that facts matter far less than their interpretation and meaning. The sun comes up at a specific time each morning – whether that is a good thing or bad depends on the individual and their desire for more sleep. There is really no such thing as a universal bad or good as it all comes down to the impact on the individual – the old Scottish adage that it is an ill-wind that blows nobody good. The tornado that rips your house to pieces provides work for those that will fix it or haul it away. To be sure there are tragedies that are good for nobody but in the political world there are always two sides (at least) to every story.

Right now, there are people that are strenuously arguing the existence of “alternate facts” and “fake news”. There is indeed a certain amount of outright fabrication but on closer examination this is really about interpretation. Many of these stories are not about the hard, cold facts but about what these mean. For example, there is verifiable fact regarding the Russian and Chinese efforts to penetrate US cyber security. What is not verifiable is intent. Why were they doing this and what impact did they intend to have? This is where opinion and analysis and argument come in and well it should. We have a great deal to argue about as we all have different opinions, preferences and beliefs. We just need to be honest in these debates and admit that this is what we are arguing about.

 

 

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The Most Important Statement from the Fed.  It’s a bit like ‘Captain Obvious’ to say that the Fed raised interest rates by another quarter-point. That’s old news. But, there are two things that are important to take away from the committee’s comments. First, to all consumers: “the simple message is that the economy is doing well”. And second, from Richard Fisher (former CEO of the Federal Reserve of Dallas), that the Fed is now “doing a good job” and is finally on track to get interest rates into a range that it should be in.

 

Can’t Believe What I Just Heard. O.K., we promised to try and cut down on the political side of our writing, and we’ll continue to shoot straight down the middle and remain business focused. But, I heard something today in a White House press conference that I can’t believe I heard. When asked about the current budget proposal cutting all funding to the UN – and the reporter asked what the administration’s position on the growing starvation problem (now hitting 20 million people across five countries in the Middle East and Africa) was, Mick Mulvaney (Omnibus Budget Director) said that “the President is focused on people in the US”.

 

Third Case of Bird Flu in Tennessee.  A third facility has tested positive for Avian Influenza in Tennessee. The birds at the facility will be culled, just as they were at the last two facilities that had outbreaks earlier this month.  Officials are still trying to “officially” let us know why the chickens are getting the flu – most of the facilities are fairly “sealed” from outside viruses. That being said, migratory birds can easily spread the highly contagious disease. But, there are two things we need to know about the virus – and one conspiracy theory to add-in.

 

Dutch Dodge the Populist Bullet.   Analysts will be frantic for the next few weeks. Right up to the day of the election it was predicted that the ruling party VVD Party of Mark Rutte would be in a virtual tie with the insurgent populists of the Party for Freedom led by Geert Wilders. The VVD was expected to take perhaps 27 seats and Wilders would take 22. In the end, this was not the scenario that Dutch voters supplied. Rutte’s party won at least 33 seats and Wilders took just 20. That still makes the Party for Freedom the second largest in the Netherlands, but all of the other parties had already indicated that they had no desire to ally with him to form a coalition. Now that his party is 13 seats behind, there is even less reason to associate with him.  Just like that…the populist wave in the Netherlands has seemingly peaked and dissipated. What does this mean for US business leaders?

 

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Business Intelligence Brief: Mrch 20, 2017

Short Items of Interest – US Economy

 

 

  • Bad Year Expected for the US Tourist Sector – This is not expected to be a banner year for the US tourist industry – at least as far as the foreign tourist is concerned. The bookings have been well below what they would normally be at this point and two factors are playing the major role. The first and most important is that the strong dollar has made visiting the US expensive and tourists on a budget are looking elsewhere for their escape. The second factor is the tightening of immigration rules in the US and the growing perception that the US is not a very welcoming place right now. This has been apparent in those regions that are largely Islamic or are ethnically different but it has affected other nations as well. The good news for the tourist business is that domestic demand is likely to be better than usual as people have more money to spend.

 

  • Industrial Production Flat – The number for industrial production remained flat this month after a slight decline the month before. This is despite the consistently better news that has been coming from the manufacturing community. The latest numbers from the Purchasing Managers’ Index have been as strong as they have been in years but industrial production also includes output from the utilities and from the mining sector. The warm winter has sharply reduced demand for electric power and there remains a healthy oil glut that has kept many of the oil operations on the sideline.

 

  • Latest Odds on Rate Hikes – The consensus view has altered a bit but not drastically. It is now expected the Fed will hike rates in June and September and possibly one more time in December. The motivation for the rate hikes will be more traditional than has been the case for the last decade. The three factors to watch will be inflation rates, the state of the job market and the overall growth of the economy. It is now expected that by the end of the year the Fed Funds rate will be between 1.5% and 1.75%.

 

 

Short Items of Interest – Global Economy

 

 

  • US- German Relations Not Very Good – The meeting between Angela Merkel and Donald Trump went about as expected – very badly. There is palpable dislike between the two leaders and neither makes any attempt to conceal the contempt they have for the other. Diplomatic niceties have been abandoned altogether with Trump refusing to shake her outstretched hand at several points and she made no attempt to conceal her facial expressions. In fact, world leaders do not have to like one another and Merkel was no fan of Obama either. The two states do have to find a way to work together on common goals and right now that seems a difficult task.

 

  • Iran’s Reformists Are Worried – Few have ever asserted that the Iranian government would change quickly. This is a long battle between the reform elements that want to rejoin the rest of the world and the hardliners that want to continue their antagonistic policies towards the western nations. The elevation of Hassan Rouhani was seen as a victory for the moderates and he promised a new relationship with the US and Europe so that the economy could grow. That progress has been halted with the election of Trump and the US return to hostile relations. This has meant a stronger hardline approach in Iran as well and the moderates may well lose what control they have in the upcoming elections. The US is Great Satan again and Rouhani is left with little to offer.

 

  • Guyana Center of Oil Dispute – A few years ago ExxonMobil made some significant discoveries of off-shore oil in Guyana but some of these wells are claimed by Venezuela and that has set off a wave of protests and claims. The Maduro government needs every dime it can get from oil and is trying to get its hands on that oil by pressing ExxonMobil over the oil areas it controls in Venezuela and of course Guyana is resisting all these efforts.

 

 

 

Lots of Reference Items This Week

There will lots of new data points this week for those who are trying to figure out what is going on in the industrial nations. These are coming on the heels of the G-20 meetings and may inform some of the policy discussions. The enmity between Trump and Merkel has grown more intense and that is not reassuring to the other members of the European Union. The path forward for the majority of the developed nations is less clear than it seemed just a few months ago.

 

Analysis: The statements from the European Central Bank last week suggested they are looking forward to meeting their inflation goal in the not distant future (same as the one for the Fed – 2.0%) but there is big question to be addressed first. The bulk of the inflation that Europe has seen this year has been attributed to higher energy prices and these are not expected to remain this high much longer and could even start to fall again. The ECB wants to see hikes in wages throughout the EU and that has not been happening – at least not across the membership. The rate of joblessness has been going down in much of Europe but thus far this has not contributed to overall wage gains. There have been some wage hikes in Germany and the other northern states but the southern tier states are still facing high levels of unemployment – at least they are a bit lower than they have been but not low enough to start provoking significant increases in wages. The data this week is expected to continue to be anemic but there will be hopes for some small progress.

Another central bank that will be eagerly anticipating data will be the Bank of England. They will be looking at the latest consumer price index readings to see if there has been any real gains as far as inflation is concerned. The BOE left rates where they were last week but there was commentary as to how close the UK economy is to what some would refer to as normal. If there is real gain as far as inflation is concerned the desire to start hiking rates will get stronger. The rate of inflation went up to 1.8% in January and is expected to be in the same vicinity this time. Most of the major central banks are in the same position as the Bank of England – very close to pulling the trigger on higher rates when and if the inflation numbers suggest the time is right.

Good news is expected from Japan this month as they will be getting their latest trade data and it will probably show a nice surplus as compared to what it was last year. The expectation is that Japan will sport a surplus of around $7.5 billion based on better sales to the US and Europe. The weak yen has been a big factor and that has combined with the strong dollar to make the US market that much more attractive. The key now is for Japan to keep this momentum but they are well aware of the challenges. Thus far Japan has not been a particular target of the Trump administration but general attacks on trade will have a major impact on Japan given what the US buys from this economy. The Chinese are also a key market and Japan needs that relationship to remain strong in the midst of the disputes over North Korea.

Markit releases the latest collection of purchasing managers’ indices for the Eurozone on Friday and they are expected to continue their upward trend. The consensus view is that the Eurozone numbers will be down very slightly from the 56.0 level notched in February but they will still be up in the mid 50s and that is far better than these numbers looked just a few months ago. The recovery in Europe has been spotty and there are wide gulfs between the nations of the north and those in the south but overall progress has been consistent and expected to continue.

Finally, there is the good old US of A and there will be some additional housing data to look at this week. There will be data on existing home sales on Wednesday and some data on new homes by the end of the week. Thus far there has been little reaction to the higher mortgage rates or the higher costs of homes but the recent rate hike by the Fed may have affected buyers as well as sellers. The buyer may now finally believe that rates are not getting any lower and the sellers may be hitting a wall as far as prices are concerned as they start to see some stress in the potential buyer.

 

 

Rates on the Way Up – Do Financial Markets Care?

This is the way that things are supposed to work. When the central banks start to slash interest rates the investment community gets more excited by the possibility of more money floating around in the system and over the last few years it has been pretty obvious that low rates stimulated a significant amount of activity in the equity markets. When interest rates are headed back up the expectation is that financial markets will cool as more investors find themselves attracted to bonds. The fact that most of the central banks are not contemplating higher rates would seem to suggest the time is right for a market slump. It has not happened and there are few signs that such a development is imminent.

 

Analysis: What seems to be propping up the investor’s confidence despite the imminent threat of higher borrowing costs? It all seems to come down to confidence in the global economy and the belief that most companies no longer need to rely on that cheap money to motivate their expansion plans. The overall level of enthusiasm is based on several factors and it is hard to pinpoint which of these are the most important. The US looks set to have a decent year of growth (around 2.5%) but it could get a lot better if some of the promised reforms take place. Europe is not booming by any stretch but there has been steady progress and it appears there has been enough to encourage the central banks to hike rates a little. Japan and China are expected to recover some of their momentum. There has been less enthusiasm for the emerging markets but at least they are not sliding as rapidly as they have in the last few years. The most important factor seems to be a general sense of confidence and enthusiasm.

 

 

Immigration Changes – More Jobs or Less

The proposed changes to the H1B visa program are supposed to help the US create or at least keep more of those high paid technical jobs but most of the analysis points in the opposite direction. Every year the US issues around 85,000 H1B visas to those who have skills that employers are unable to find in the US. The vast majority of these are for those in the IT industry. The assertion has been that US workers with these skills are being replaced by the foreign workers and that the existence of the program has kept wages down for those in the IT field. The latter assertion has been questioned by many who point out that IT jobs are among the better paid positions throughout the country. The employers have long asserted that there are simply too few people in the US with the right training and education and they have to look outside the US to find the people they need.

 

Analysis:  The assertion is that a reduction in the availability of these visas will mean that US companies will need to hire more Americans and to some degree that is likely true. The problem is that there is already a shortage of available workers with the talents needed and restricting the use of foreign workers only makes that problem more acute. It is expected that unqualified workers will be hired more often and that business will need to spend a considerably larger sum than before to train those who are not as qualified as those they can employ now.

The bigger issue is that many companies unable to hire the people they need will choose to outsource instead. India is the state that has provided the bulk of the workers sought by those in IT and they have reported a sharp increase in the number of companies contracting with Indian companies to get the work they need. The bottom line is that US companies are unlikely to hire more untrained and unskilled workers to replace the ones that once worked through an H1B visa, they will simply shift the whole operation to another country where they can obtain the skills needed. This gains the US nothing as far as jobs are concerned and robs local economies of the financial impact of these workers as they will no longer be paying taxes in the US or consuming in the US. It stands to be a significant net loss to the US.

 

 

Modi Still a Radical Nationalist?

When Narendra Modi was running for the top post in India he had to remake his reputation from being an ardent and radical Hindu nationalist to somebody with the interests of the entire nation at heart. He became the modernizer and the talk was of the Modi-fication of the country. He still talks in these terms but has yet to break away from the nationalism that was at the center of his political appeal earlier in his career and there are those who worry about the potential for more conflict along religious lines in the country.

 

Analysis: He has just appointed a radical Hindu cleric head of Uttar Pradesh – the most populous state in India. Yogi Adityanath is a long- time critic of the Muslim minority and has called for India to become an exclusively Hindu state with very limited rights for Islam. He is trying to sound like Modi with his speeches devoted to development and growth but his track record is as a rabble rouser who has advocated violence against those of the Islamic faith.

Since the election of Modi and the Bharitiya Janata Party there has been a sense of wait and see. The BJP was the opposition party for most of its existence and advocated a policy of Hindu nationalism to set itself apart from the dominant Congress Party as they tended to embrace both the Hindu and Muslim voter. As the Congress Party hold weakened under the constant pressure of corruption trials and failed policies the BJP saw an opportunity to take power and that was when it started to broaden its appeal with the transformation of Modi into the modernizer. The nationalism was shoved to the back burner but it is by no means a dead issue.

The fear is that nationalism is taking root again and this could stir up much of the country – the last thing India needs as it tries to proceed on its path towards modernization and economic growth. Analysts are convinced that this is essentially a political ploy as Modi has been seeing his popularity slip due to the fact that economic changes are anything but swift. He may be trying to shore up his support with an appeal to the extremism that has been the hallmark of the BJP. The Islamic community is the minority in India to be sure but the fact remains that there are more Muslims in India than in any other nation and the enmity between Hindu and Muslim always seems to fester.

 

 

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.

 

 

Baseball Thoughts

By now alert readers of the BIB know that I am fan of baseball – more than other sports. It is not that I don’t follow others – I grew up with an avid football fan for a father and my allegiance to the Green Bay Packers has never faltered. It is just that baseball has the ability to serve up so many stories of redemption and failure, of struggle to succeed and stories of the unexpected. The talent to play football is either there or it isn’t – one is big and fast or one is not. The basketball star needs to be reasonably tall and have an eye to shoot. It is not that one can’t be coached to be better and motivation plays as big a role as in anything else but every year there ae those baseball players that suddenly emerge as major leaguers due to some small adjustment or another. The pitcher who changes a grip or a stance and is unhittable for the first time. The batter that changes the way their hips close or their footwork. It is just like our real lives – small changes that can make a huge difference.

This is also the game that allows all kinds to succeed. The big guy and the little guy. The athletic specimen with the rippled muscles and the guy that looks like the one sitting at the end of the bar. It is a team game that is played like an individual contest and this gives every player that opportunity to sink or swim on their own. Spring training nears an end and soon the real work begins – I can hardly wait. My loyalties are more nativist as I am a Royals fan through and through.

 

 

 

 

These are quick summaries of articles that appear 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/trial

 

Quick Review of Where Jobs Were Created in February.  Most of you know already that 235,000 jobs were created in February, this was well ahead of analyst estimates and we got a January revision that pushed job creation from 227,000 to 238,000. The unemployment rate fell to 4.7% and the U6 (which is what we prefer to watch) moved down to 9.2%. The Labor Force Participation rate remained unchanged at 63%.

 

CBO Report on the American Health Care Act – the Real Story.  To the degree possible, we wanted to try and give you the straight answer as to what the CBO report on the AHCA said – and what it didn’t. Many analysts are going to be fighting for days over the impact of the AHCA with many opinions (both pro and con) being weighed in on the issue. In our own bi-partisan way, we’ll try to offer up some bulleted-takes on what we think is really being said by the CBO.

 

Producer Prices Higher in February.  Core producer prices rose the most in more than 10 months according to the Labor Department today. Prices for final goods rose by .3% in February.  This was slightly lower than the .6% jump we saw in January. For the past 12 months, producer prices have risen about 1.8%.  That’s slightly behind where we think the inflation rate is at 1.9% – but both have been accelerating in the past four months.

 

February Transportation Demand Index Breaks Out.   The transportation demand index for February came in surprisingly strong with the composite figure jumping into the expansion zone at 51.1, a 4.1% improvement over January and a 24.6% improvement over February of 2016.  This was the first time since November of 2016 that the composite was in expansion mode.  The transportation demand index shows whether freight demand is increasing or decreasing across four modes of transportation.  And, since it is an early indicator of broader economic activity, we think it’s a strong barometer for good economic activity happening now.

 

 

 

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Business Intelligence Brief: March 17, 2017

Short Items of Interest – US Economy

 

  • Big Jump in Housing Starts – The number of housing starts hit levels not seen in over ten years and this is certainly good news. There are the usual caveats though as there are factors at work that may be temporary and that could mean lower levels down the road. The analysis of this surge shows that three developments have been driving this pace. The first is that this has been a warm winter in much of the country and that has allowed more construction than would normally be the case. The second factor is that interest rates have been scheduled to go up and that convinced many who had been sitting on the fence to buy. The third factor is perhaps the longest lasting of the three. The economy has been improving and wages are going up so more people may be in a position to buy.

 

  • Job Numbers – Real or Fake – The job data is always politicized to one degree or another. That is the nature of politics as there are few data points that matter as much to the public as jobs numbers. It is always in the interests of the powers that be to throw a good light on jobs. The problem is that tracking employment is very hard and that is why so many tools are employed. There is a lot of statistical engagement and estimating and therefore lots of revisions. During the Trump campaign the numbers were vilified as phony but now they are heralded as proof of progress. The system is exactly the same as it was last year – all that has changed is the political needs of the administration.

 

  • Budget Battle Looms – In past years there have generally been two approaches to a President’s budget. There is the “cooperative” approach and the “confrontational” approach. The former involves creating a budget that has a good chance to pass and takes into consideration the needs and desires of Congress. The latter approach is more political and seeks to challenge Congress by pushing a plan that few will really support. Generally, the latter approach is used when the President is from one party and Congress is dominated by the other. The Trump budget is confrontational even though his party is in control of Congress and that will make things interesting.

 

Short Items of Interest – Global Economy

 

  • Will Schulz Undo the Economic Miracle in Germany? – There have been some pretty excited claims as regards the intent of Martin Schulz. The Social Democratic standard bearer is breathing down Angela Merkel’s back and has resurrected many of the liberal positions traditionally held by the SD. If one looks closely at the positions taken it is clear that he doesn’t plan to impact the labor reforms all that much as the strategy seems to be limited to smoothing out some of the rougher edges while leaving the reforms intact.

 

  • Brazil Faces More Problems – The Temer government has been trying to get hold of the country’s economic crisis and the spending that has created a debt mountain. The aim was to cut pensions but this has provoked the kind of reaction one would expect. The transit drivers in Sao Paulo are on strike against the changes and that has shut down the city for the day. At the same time the Justice Department has handed down 84 new indictments on corruption for sitting politicians.

 

  • Remember Mosul? – The massive effort to destroy the last of the key ISIS strongholds in Iraq is still going on – far longer than had been anticipated originally. The city is almost entirely in the hands of the Iraqi government again but the destruction has been considerable and most of the population is now homeless. The street fighting continues and it may well towards the end of the year before the ISIS threat is entirely neutralized. Many of the fighters escaped already and are turning up in other parts of the country as well as Syria.

 

 

 

Long Term Growth Not Assured

When economists are invited to the party one can generally expect them to be the party poopers who will remind the attendees that their good times will inevitably come to an end. Thus it is with assessing the prospects for economic growth. No matter how good it seems right now they will be there to assert the future will likely be worse. At least that is the way it would seem. The latest set of projections for the economy in the short, medium and long term indicates some positive developments for this year and perhaps 2018 as well but after that things are likely to get much more challenging. There are more than a few who have expressed concern about the growth possibilities for this year as much of the enthusiasm so far is built on expectation and some of what has been anticipated is likely to not come to pass.

 

Analysis: We will start with the good news about this year and next. The forecasts right now call for growth of 2.4% in 2017 and 2.5% in 2018. This is not exactly booming growth but it is better than had been anticipated just a few months ago. If these levels are reached they would be on the high side of what has become the norm for the past decade or so but they are far from the levels that have been promised by the Trump administration as it suggested that 3.5% to 4.0% growth was the goal. The reason for the optimism rests on expected changes to the tax structure, regulatory environment and a massive stimulus shot from infrastructure spending. All three of these changes will require a level of political cooperation rarely seen in the US and the mood in Washington is far from amicable right now. If these reforms and programs face stiff resistance in the coming months, the enthusiasm over economic growth opportunity will fade pretty quickly.

The real fears come with the prospects for growth past 2018 as the factors that could drive growth in 2017 and 2018 are at best temporary measures. Even if the US manages to find a trillion dollars to put into infrastructure this year it is not something that can be repeated year after year. The shot in the arm from tax reform could be longer lasting if the reforms are deep enough but the boost from regulation reform is likely to be more of a one-off impact although deep reform could allow many businesses to run their operations more efficiently.

The long-term growth potential is going to be dependent on two prime factors. The first is the size of the working population and here the future trend is bleak. The percentage of people in the workforce has been in decline for the last several years and that decline will accelerate throughout the next decade or so. Right now the percentage is 62.8% and that translates into some 94.5 million people not involved in the current workforce. The vast majority of those people are retired (over 64 million) and this is the factor that will make this reading worse in the future. Right now there are close to 10,000 people reaching retirement age every day – an additional 3.6 million people out of the workforce every year. The question is whether there workers ready and able to replace them. The almost 9 million people out of work have not been able to crack the labor force effectively as they lack the skills needed. This soon becomes a real drag on economic growth. In the past the US has relied on immigration to add to the available workforce but that doesn’t seem to be a good option these days.

The second major factor as far as growth is concerned is productivity and this has been a worry for some time. The rate of labor productivity in the US has been slipping for several years already and what makes this even more worrisome than usual is that conditions should have been ripe for improved rates. During a recession most companies take steps to reduce the size of their staff but the work that needs to be done remains and that means that fewer people are doing that work – a sign of labor efficiency in most instances. Furthermore it has been observed that many companies have invested in machines and technology and that should have boosted productivity as well. That neither of these developments seem to have had the desired impact would suggest that there is something deeper amiss.

 

Good News on Hiring as Well as Quitting

There are many ways to examine the employment situation in the US. The Bureau of Labor Statistics doesn’t just release the unemployment rate and we have commented frequently on the difference between the various cuts of the data. Other important indicators include the number of new applicants for employment benefits as this indicates whether there has been an increase in layoffs. The numbers have been low of late.

 

Analysis: Then there is the hiring rate and the quit rate. The rate of hiring has been rising and in last month’s data there was a rise between December and January – from 3.6% to 3.7%. The quit rate also rose and that is in many ways even more significant as this is an indication of worker confidence. The quit rate as measured by the JOLTS report went from 2.1% to 2.2% and this means there are more people with enough confidence to make the leap into the employment unknown. These are not people who found another job and are simply changing employers. These are people who just think there is something out there that will be better for them so they quit their current job with the confidence they can find another one right away. The vast majority of these “quits” are younger workers but there are a number of people with high level skills that have this confidence. Many of those in IT or other computer related activity can seek and find a new position with relative ease.

 

What Does the End of “Strategic Patience” Mean

The statement by Secretary of State Tillerman is now being assessed and parsed for every iota of nuance. There are few hotpots in the world more dangerous than North Korea at the moment and it appears the US is finished with trying to downplay this threat and finished with any sort of accommodating strategy as regards the regime in Pyongyang. This hard-line stance is also being adopted to a degree by the Japanese and the South Koreans. What is not known at this point is what this all really means. What is the US now prepared to do that it was not prepared to do earlier?

 

Analysis:  The leader of North Korea is a dangerous megalomaniac who seems capable of just about anything. His military provocations have accelerated despite the stern warnings from the US, South Korea, Japan and even China. His latest missile tests show that he has the ability to hit positions in South Korea and Japan and that he can target US troops and naval vessels. He has threatened to do exactly that and at any time.

North Korea has been protected to some degree by three factors. The first and most salient is that they are an ally of the Chinese and an attack on North Korea would be interpreted as an attack on China. The Pyongyang regime would be expected to retaliate against any partial military action but any attempt to neutralize the military in North Korea would provoke a massive response from China. The Chinese are clearly irritated at Kim Jong-un and have been attempting to bring him to heel but he has been largely ignoring them as he knows that even their power is limited.

This is the second protective layer. The one outcome most feared in the region is a total collapse of the Kim regime. China knows that this would mean millions of refugees streaming across their borders and South Korea would expect the same thing to happen with their border. The arrival of millions of starving and desperate refugees would crush these economies. It is also certain that a transition in North Korea would be violent and bloody as there is no clear replacement leader. This is the prime reason that Kim Jong-un ordered the assassination of his older half-brother.

The third protective layer is that no country wants to deal with the aftermath of a conflict. Should the regime remain intact the US and China (as well as Japan and South Korea) would have to determine their relationship to one another. Any action sufficient to end the threat from North Korea would be massive enough to start a real hot war between two major powers and could put much at risk in South Korea or Japan. It is likely that an attack on the North would provoke them to invade the south or launch missiles directly at targets in these countries

The bottom line is that the US is justifiably angry and frustrated with the Pyongyang madman but there are precious few options other than what has been tried already.

 

Meeting Not Expected to be Pleasant

The much anticipated meeting between President Trump and German Chancellor Angela Merkel will take place today and it would be safe to assume this will not be a friendly exchange. Trump has attacked Merkel personally throughout the campaign and as President and has been a harsh critic of many German policies. She indicated she thought he was wholly unqualified to be President during the campaign and has not altered her opinion since. By all accounts she is coming with a long list of complaints and demands. The latest one is from the Economy Minister in Germany (Brigitte Zypries) who has indicated that Germany and the EU would sue the US through the WTO if the proposed border tax was to be put in place.

 

Analysis: The meeting will be essentially an opportunity to air grievances and to play to home audiences. Merkel is in the political fight of her life for a fourth term as Chancellor and Trump is desperately unpopular with most Germans. The tougher she looks the better for her political standing at home. Trump has made the EU a target and he will also stand to gain from a hard-line position as regards Germany, Merkel and the EU as a whole.

The worrisome part is that Germany is the driver of European growth and the US really needs a stronger Europe for trade purposes. Not only would US companies be able to sell more to Europe but a more robust EU means a stronger euro and that takes some of the pressure off the dollar – to the benefit of the export community in the US. It has been noted that Merkel is visiting on a holiday in the US and that may have been to create a bit of distraction.

 

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.

 

Can You Tell I Have Been on the Road a Lot?

It seems that this is all I have fodder to write about of late and here it is St. Patrick’s Day. I can start by assuring readers that I am wearing green for my presentation today but that may be as far as I am able to go. Later this weekend my wife will do her usual menu of Irish delectables – including the Guinness Cake! In the mean time I am at the tender mercy of the travel industry.

I was once young and impressionable and travel was more appealing. Frankly some of those fancy hotels were pretty impressive as compared to my home. Those days are gone – my house is much preferred to even such destinations as the Ritz Carlton or some resort. Beyond the fact these hotels have a serious lack of cats there are the simpler things. I miss the shower I have at home with the extra jets and the large space. I miss my view of the lake and my wife’s gardens. I miss my adjustable bed. Do I sound like an old fuddy-duddy or what?

At the end of the day I think we all value routine. Not that we want to be stuck in a rut forever but it is reassuring and comforting to be able to count on things being as they have always been. I find that I still want to explore and try new things but I also love going to the same restaurant where I know them and they know me. I enjoy the morning BIB routine at home more than on the road. I have my preferred blend of coffee at hand, my music in the background and my reliable Scoot lounging on the desk. For those hours, all is well and as it should be.

 

 

These are quick summaries of articles that appear 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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Quick Review of Where Jobs Were Created in February.  Most of you know already that 235,000 jobs were created in February, this was well ahead of analyst estimates and we got a January revision that pushed job creation from 227,000 to 238,000. The unemployment rate fell to 4.7% and the U6 (which is what we prefer to watch) moved down to 9.2%. The Labor Force Participation rate remained unchanged at 63%.

 

CBO Report on the American Health Care Act – the Real Story.  To the degree possible, we wanted to try and give you the straight answer as to what the CBO report on the AHCA said – and what it didn’t. Many analysts are going to be fighting for days over the impact of the AHCA with many opinions (both pro and con) being weighed in on the issue. In our own bi-partisan way, we’ll try to offer up some bulleted-takes on what we think is really being said by the CBO.

 

Producer Prices Higher in February.  Core producer prices rose the most in more than 10 months according to the Labor Department today. Prices for final goods rose by .3% in February.  This was slightly lower than the .6% jump we saw in January. For the past 12 months, producer prices have risen about 1.8%.  That’s slightly behind where we think the inflation rate is at 1.9% – but both have been accelerating in the past four months.

 

February Transportation Demand Index Breaks Out.   The transportation demand index for February came in surprisingly strong with the composite figure jumping into the expansion zone at 51.1, a 4.1% improvement over January and a 24.6% improvement over February of 2016.  This was the first time since November of 2016 that the composite was in expansion mode.  The transportation demand index shows whether freight demand is increasing or decreasing across four modes of transportation.  And, since it is an early indicator of broader economic activity, we think it’s a strong barometer for good economic activity happening now.

 

 

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Business Intelligence Brief: March 16, 2017

Short Items of Interest – US Economy

 

  • Mixed Messages from Housing Sector – Housing starts were up by 3.0% last month but the number of permits issued was down by 6.2%. Analysts had been expecting the number of starts to be lower than this and they expected more permits to have been issued so there is some debate over what state the housing sector is really in. The higher number of starts is partially the result of a warmer winter and an extended construction season but the slowdown in permits is of more concern as there had been an assumption there would be more demand for homes as wages went up and as people tried to get into a mortgage before rates started to climb.

 

  • No Need to Stimulate – This is essentially the message the Fed has sent with the latest comments over the quarter point hike. There is no guarantee of any kind – that would not be the way of the central banker but it is pretty obvious that none of the concerns of the last few years are all that relevant now. The unemployment numbers are where the Fed would like them to be, inflation is finally getting close to that 2.0% goal and there is nothing the Fed can really do to push growth much faster without risking an overly stimulated situation. The consensus view is that rates will come up twice more this year but that still leaves them around 1.5% and that remains historically low.

 

  • Trump Budget Goes After Select Agencies – It must first be acknowledged that a Presidential budget proposal is really a “shot across the bow”. The determination of a budget is in the hands of Congress and the spending decisions require more than simple majorities. It will take 60 votes in the Senate to pass anything at all and there are only 52 members of the GOP (and they are not all on the same page). The priorities for Trump are Defense spending and preserving Social Security and Medicare. His targets are the State Department, foreign aid and the environment as well as most of the smaller welfare programs and support for the arts. Each of these have ardent defenders in Congress and the budget process will test the power Trump has to sway his own party.

 

Short Items of Interest – Global Economy

 

  • Bank of Japan Stays Put – The Federal Reserve remains all alone as far as central banks are concerned. The rates may be coming up slowly in the US but there is no sign of this anywhere else. The Bank of Japan met this week as well and they elected to keep rates right where they are – at record lows. The rate of inflation is still not where the BoJ would like it to be and the recent surge in export activity is related to the weak yen and the BoJ is reluctant to mess with this right now.

 

  • More Pressure on Duterte – The President of the Philippines is facing more intense opposition and calls for his impeachment. Thus far he has benefited from the fact that his opponents have been fragmented and have spent as much time attacking each other as they have attacking Duterte. Now they are starting to band together – at least temporarily and they may have the votes needed to oust him. The danger now is that he may refuse to go and that would provoke a civil war of sorts.

 

  • Travel Ban Struck Down Again – The second attempt to bar immigrants from select Islamic nations has been struck down by the courts in the US on much the same grounds that were used to block the first ban. The nature of the ban is discriminatory on religious grounds and that is fundamentally unconstitutional. Other nations have tried to address the issue of terrorist threat by identifying characteristics of such a threat. The individual is examined for risky connections and behaviors and is blocked accordingly – regardless of where they come from. The US ban lumps everyone from a given nation in a single category and at the same time seems to ignore that all of those who have attacked the US have come from countries that are not on this list.

 

 

Which Wins? Expectation or Reality?

There arrival of Donald Trump on the political scene has preoccupied the press for over a year and to some degree this attention has obscured patterns. The focus for business and economics has been the dramatic rise in confidence levels with consumers, the business community and investors and this has been treated as something unique and attributable to the populist appeal of the new President. In fact, this is not all that unusual when it comes to transitions in the political world. There was a great deal of enthusiasm and confidence expressed when Barack Obama first took office after eight years of George Bush. He was going to end the recession and bring in a whole new era of inclusiveness. There was wild enthusiasm when Bush first became President as he was going to undo the damage of the Clinton years but Clinton was a breath of fresh air when he won as well. We place a great deal of trust and responsibility in the hands of the President – whether they really have that much power or not. In every case that wave of enthusiasm and confidence fades under the harsh light of reality and there are signs that this process is occurring again.

 

Analysis: The levels of confidence and enthusiasm as expressed by the consumer, business and investor are universally high according to the polls but the facts don’t quite support the assessment. Part of the problem with surveys has been that they are often inaccurate and reflect what people would like to see as opposed to what is really happening. Consumer polls are often the least reliable. The latest analysis from the Conference Board or the University of Michigan asserts that consumers are confident and ready to resume their traditional role as driver of economic growth but then comes the latest retail data which measures what that consumer is really up to and it is weak – a gain of just 0.1% for the slowest growth since last summer. The consumer cut back on everything from clothing to restaurant meals and electronics. The spending for Valentine’s Day was the most anemic seen in years.

The trade deficit worsened and mostly because there was a big drop in exports although there was a gain in the level of imports to consider as well. The strength of the dollar had a lot to do with this but so did the poor economic performance of many of the US trading partners and there was evidence that some states were shifting their trade emphasis in reaction to the recent anti-trade rhetoric. The home sales data weakened with a reduction in pending contracts and a general cooling of some of the hottest markets. The level of durable goods orders crashed but a lot of this was attributable to the volatile aerospace market. The level of capacity utilization remains stubbornly below the normal levels (80% to 85%) as it has retreated once more under 75%. The levels of capital investment are also declining even as business leaders express confidence.

It is also true that some of the economic measures are showing positive trends – most notably the Purchasing Managers’ Index and the Credit Managers’ Index. The stock market has been roaring along but much of this growth has been attributed to the influx of foreign money as global investors seek returns in the US that are not available in their own countries. The various assessments of potential growth for the economy this year have been ratcheted down. Macroeconomic Advisors now asserts that growth in the second quarter will be 1.3% rather than their previous estimate of 1.4%. The estimate from Barclays Bank went from 1.6% to 1.4% and the Federal Reserve in Atlanta went from 1.2% to 0.9%. This is a very long way from the promised 3.5% that was the centerpiece of the campaign.

What has changed? For the most part it is simply reality settling in. The proposed path to economic growth required massive expenditures on infrastructure and now it is obvious that finding this money will be very hard. The confidence was based in part on promised deregulation and tax reform and both are going to take time. The expectation was that a GOP President and a GOP dominated Congress would ensure a business-friendly policy set but now it is more apparent than ever that Trump is anything but a traditional Republican and the GOP is as split as ever between factions that oppose each other more than they oppose Democrats.

 

Oil Prices Edge Upward

The per barrel price of oil has gained a little due to the statements issued by the Saudi Oil Ministry. The truth is that Saudi Arabia is essentially indulging in idle threats and the impact on oil prices will likely be short lived. The issue is supply and there is just not that much that can be done about it. There is a persistent oil glut as new technology has allowed many marginal oil producers to play a bigger role. The US was not competitive as far as oil output even ten years ago and is now the number one producer when it wants to be. OPEC is no longer in control of the price per barrel as the members no longer control the bulk of global output.

 

Analysis: To the oil analysts the concern now is peak demand and not peak supply. The Saudi warning to the other OPEC members will not be taken all that seriously as they have lost their ability to enforce these rules. In the past, the Saudi tactic was to flood the market with cheap oil and put pressure on those nations that could not compete with their prices. Today there is a glut and they can’t dump oil any longer.

Realistically the only way to bring the price of oil back up is to find a way to promote demand. This is harder than it seems as many nations have been taking steps to reduce fossil fuel consumption for reasons other than fuel efficiency. The Chinese have started targeting taxis and mass transit and there has been global growth in electric cars. The Trump administration has indicated that it wants the CAFÉ standards for fuel efficiency lowered but the carmakers are still convinced that consumers are paying attention to mileage even as they look at larger cars. The demand side of the oil business remains volatile.

 

Has the Populist Wave Crested in Europe?

The analysts will be frantic for the next few weeks. What does the Dutch vote mean? Right up to the day of the election it was predicted that the ruling party of Mark Ruppe would be in a virtual tie with the insurgent populists of the Party for Freedom led by Geert Wilders. The VVD (Volkspartij voor Vrijheid en Democratie) was expected to take perhaps 27 seats and Wilders would take 22. In the end this is not the scenario that Dutch voters supplied. Ruppe’s party won at least 33 seats and Wilders took just 20. That still makes the Party for Freedom the second largest in the Netherlands but all of the other parties had already indicated that they had no desire to ally with him to form a coalition. Now that his party is 13 seats behind there is even less reason to associate with him and just like that the populist wave in the Netherlands has peaked and dissipated.

 

Analysis:  This does not mean that the issues that Wilders campaigned on have lost their importance. The stance that Ruppe took during the race edged closer and closer to the positions stated by Wilders – anti-immigrant and anti-Islam, suspicious of the EU and opposed to the decisions that have been made to bail out nations such as Greece and Spain and Italy. The question now is whether Ruppe will shift back towards the center and that will depend on what the next coalition looks like. The real games now begin as there are many paths to holding control of parliament.

Ruppe has declared there will be no coalition with Wilders although in the previous government there had been tacit support for Rutte by the PVV (Partij Voor de Vrijheid). The third-place party is the center right CDA (Christian Democratic Appeal ) which gained 19 seats and enjoyed a surge in popularity as they adopted some of the populist positions taken by Wilders (demanding that school kids sing the national anthem every day). If they join the VVD they will have 52 seats and a slim majority. Almost more important is the shift in the support for the left. The Labour Party was once the ruling party in the country and they have all but collapsed with just 9 seats (a loss of 29). The smaller leftist parties took those seats with the Greens taking 14 seats – a gain of 10.

The European reaction has been generally exuberant as this has been interpreted as a defeat of the populist and perhaps a signal that Marine Le Pen will start to lose support in France. More significant perhaps is the fact that populist demands forced many of the mainstream parties to adopt these positions – once deemed radical. The coalition that forms in the Netherlands will be hostile to immigrants and especially those from the Islamic community. There will be far less desire to cooperate with Europe although there is no chance now of a “Nexit”. The Dutch have seen a rise in nationalism and xenophobia and all the major parties have been forced to take note. That same process continues in Europe as a whole.

 

Reactions to a Rate Hike

There is generally a lot of misunderstanding when a central bank raises or lowers rates. The fact is that this adjustment is made to the rate that banks use to borrow from one another and there is nothing direct or automatic about the move. It is now up to the banks as to what this means to their rate policies. This time the banks have been waiting for a long time and their reactions have been swift. Several have already hiked their prime rate and most of the others are expected to follow suit and soon. What does this all mean to the average consumer?

 

Analysis: The prime rate is moving from 3.75% to 4.0% and the most immediate impact will be on credit cards and home equity loans as these are generally pegged directly to the prime rate. It is estimated that consumers will pay an additional $1.6 billion in credit card charges this year. The most serious concern is the delinquency rate as this is already at 3.21% and that could go up sharply without much warning as banks are not required to tell consumers the rates are going to get higher if the move is prompted by Fed action. The auto sector is also worried as the average loan is now over $30,000 and will go higher. That could affect consumer desire to buy a new car.

This would all be a bit more tolerable if there was a corresponding increase in the returns that savers receive but that is not expected to take place any time soon. The rise in interest is far slower to emerge than rises in interest rates. There will have to be a perception that savers need to be lured into putting money in the bank and right now there doesn’t seem to be much of that pressure. The rates are still very close to historic lows and the majority of the consumer population will be affected only in a minor way but there will be many at the lower income levels that might be pushed into crisis.

 

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.

 

More Observations

I seem to be in one of those moods this week – noticing the good and bad as far service and treatment is concerned. I know that I tend to harp on this but I remain astonished at how these encounters can change an attitude – positively and negatively. I dropped by the bank to deposit a check and that is generally not a fun-filled and exciting experience but the guard who works at this branch of UMB bank always holds the door open for people as they come and go – just a nice gesture and it is always accompanied by a cheery hello. Yesterday I saw what else he does. A woman came in with a fussy young baby but she needed to meet with a bank officer despite the crying. He scooped the baby up and displayed his obvious grampa skills as the child calmed down and the woman was able to go about her business. This bank is always open and friendly and seeking to make the most routine of tasks more pleasant.

In contrast, there was the restaurant last night. When we arrived, there were at least 30 empty tables and yet we were told there would be a wait of around ten minutes as they didn’t have enough servers. Several irritated thoughts went through my mind. How does a manager not have enough servers to handle more than ten tables? Beyond that – why am I required to stand in the doorway waiting when I could be seated and wait there instead. I can understand being short staffed for whatever reason and I can be patient enough if I can be comfortable and able to converse with my wife while waiting. Being told to stand in a cold and drafty doorway while staring at an empty restaurant seemed pretty dumb.

One business looks at the people who come in as valuable and wants to make things as pleasant as possible and the other gives the impression that customers are just an inconvenience. I love my bank – not so much that restaurant (although the server we eventually saw made a great impression).

 

 

 

 

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Quick Review of Where Jobs Were Created in February.  Most of you know already that 235,000 jobs were created in February, this was well ahead of analyst estimates and we got a January revision that pushed job creation from 227,000 to 238,000. The unemployment rate fell to 4.7% and the U6 (which is what we prefer to watch) moved down to 9.2%. The Labor Force Participation rate remained unchanged at 63%.

 

CBO Report on the American Health Care Act – the Real Story.  To the degree possible, we wanted to try and give you the straight answer as to what the CBO report on the AHCA said – and what it didn’t. Many analysts are going to be fighting for days over the impact of the AHCA with many opinions (both pro and con) being weighed in on the issue. In our own bi-partisan way, we’ll try to offer up some bulleted-takes on what we think is really being said by the CBO.

 

Producer Prices Higher in February.  Core producer prices rose the most in more than 10 months according to the Labor Department today. Prices for final goods rose by .3% in February.  This was slightly lower than the .6% jump we saw in January. For the past 12 months, producer prices have risen about 1.8%.  That’s slightly behind where we think the inflation rate is at 1.9% – but both have been accelerating in the past four months.

 

February Transportation Demand Index Breaks Out.   The transportation demand index for February came in surprisingly strong with the composite figure jumping into the expansion zone at 51.1, a 4.1% improvement over January and a 24.6% improvement over February of 2016.  This was the first time since November of 2016 that the composite was in expansion mode.  The transportation demand index shows whether freight demand is increasing or decreasing across four modes of transportation.  And, since it is an early indicator of broader economic activity, we think it’s a strong barometer for good economic activity happening now.

 

 

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Short Items of Interest – US Economy

 

  • More Inflation Noted – The consumer price index rose by 0.1% in February and the core rate rose by 0.2%. This is not a massive jump by any stretch and the Consumer Price Index is not the Fed’s favorite indicator but it is one more factor suggesting that inflation is here and likely to become a bigger issue in the coming months. Some of the gain was due to the rise in fuel prices but this did not play as big a role as it has in past months. These price hikes are coming from a wide variety of sectors – everything from apparel to services.

 

  • Fed Meeting – Not a Lot of Suspense -This meeting will certainly be significant as rates are going to rise but this move has been signaled for months and the markets have most certainly priced it in. The real interest will be focused on the commentary that comes with the decision. Will Yellen and the others reiterate what they have been saying for the last quarter? Will there be clues as to when the next hike will arrive and how many there will be for the rest of the year. The standing consensus holds that there will be two more and this is one more than had been assumed at the start of the year.

 

  • Winter Storm Impact – This year’s storm impact has come a bit later than has been the case in the last few. It will have a similar impact economically and may affect the numbers for the second quarter. The most obvious impact has been in the transportation sector due to the flight cancellations but a bigger concern is that consumer activity halts for days and there is disruption in freight deliveries as well. The burden of snow removal will hit city and state budgets and most are not in a great position to absorb these costs.

 

Short Items of Interest – Global Economy

 

  • Antagonism Grows Between Europe and Turkey – Prime Minister Erdogan has been sliding swiftly towards pure authoritarianism and has now set about antagonizing those in Europe that have been opposing his moves. The insults to the Dutch and Germans have gone too far in the estimation of these countries and retaliatory moves have been made. The accusation of “Nazi tactics” in reference to Germany hits a very sore point and Germany has now banned rallies by Turkish politicians seeking to gain votes from the Turks that live and work in Germany.

 

  • Disney Refuses to Bow to Malaysian Censorship – There is a gay character in the new version of “Beauty and the Beast” and there is a moment when that character expresses affection for a male. That is enough for the Malaysians to demand its removal and Disney has refused. The film will not be released in Malaysia and this is just the latest example of a clash between the highly conservative regimes in some states and the US entertainment community.

 

  • Libyan General Retakes Oil Ports – A month or so ago the renegade general that has effectively seized control of eastern Libya lost his stranglehold on two of the major ports used to ship oil from the country. It has been reported that Khalifa Haftar has regained control and once again has the oil sector in Libya hostage. The country has deteriorated into a set of warring fiefdoms and the ultimate prize is the oil sector as it is the only source of cash in the country. The oil fields are spread throughout contested territory but the ports are the only way to get the oil to market. The expectation is that output from Libya will be halted again and that could create problems for the Europeans this summer given the fact they import the majority of Libyan oil. The government is far too weak to take on Haftar effectively and his reach continues to expand. His forces now occupy more than a third of the country and almost a quarter of the country’s population.

 

 

 

Business Roundtable Optimism Rallies

The Business Roundtable CEO Economic Outlook Index just surged by 19.1 points in a single quarter – reaching a reading of 93.3. Anything above 50 signifies expansion and this surge is second only the one seen at the end of 2009 when it was clear the economy had started to exit the worst of the recession.  As with all the other confidence readings for the last several months the bulk of this enthusiasm has been based on expectations. There is not yet a lot to react to as the majority of the policy changes that matter the most are just starting to make their way through Congress and they will be altered and in some cases abandoned in the months to come.

 

Analysis: The three areas where the executives are expressing the most confidence include capital investment, hiring and sales growth but thus far there has not been as much immediate movement as would be expected with this level of enthusiasm. For example, the latest monthly numbers on capital investment are down sharply from almost $12 trillion in December of last year to just above $6 trillion in January of this year. Throughout 2016 the average was around $8 trillion a month and that was slower than it was in 2015 or 2014. There may be intent to invest but there still appears to be a lot of “wait and see”. If there is the economic growth that has been promised it appears that many companies are ready to invest but that remains a pretty big “if”.

There are some caveats as far as hiring is concerned as well. The challenge for companies now is finding the people they need and that has been harder and harder to accomplish. Nearly every company has indicated that they would hire the qualified worker if they walked through the door but very few of those available to hire have the right skills and/or attitude. The lament now is that most of the applicants fail the entry tests so the company ends up hiring the least bad and hope they can be trained to necessary standards soon enough. The unemployment rate is at 4.7% at the U-3 level and that means about 7.5 million without jobs (1.8 million have been without work for over 27 weeks). This is a group that looks more and more unemployable and that makes hiring decisions challenging. Even if a company is ready to hire there are not enough qualified people to fill the open positions.

The last of these motivations is sales growth and that is obviously all important but it is also the most variable. This is the consumer’s call and this can be a fickle factor. Right now, the consumer confidence levels are higher than they have been but nearly all of this new- found optimism is based on expectation. The factors that have brightened the consumer’s outlook include promises of tax relief, a revamping of the health care law, reduced regulatory interference and presumably lower prices. The reality is that most of the tax adjustment is coming at the corporate level and most taxpayers will see little change. The health care law is under attack but few are confident that a replacement has been developed that will meet standards. The report from the Congressional Budget Office has been attacked in some circles but even these have not questioned the numbers – they just don’t like the conclusion that some 24 million people will lose access to insurance. The regulatory changes will be slow as there will be court cases and plenty of bureaucracy to wade through and the hope for lower prices is less realistic than ever given the rise of inflation and the stronger dollar as it makes import prices higher.

The optimism expressed may yet be justified as there was a perception that the Obama White House was either indifferent to the needs of the business community or actually opposed to them. The enthusiasm is partly due to the expectation that a GOP led Congress will do what is needed to boost the economy but it is already evident that unity in the GOP is not quite intact. The Trump influence thus far has been a mix of good and bad and many are still waiting to figure out the actual plan and policy that will be pursued by the White House.

 

G-20 States Will Demand Clarification

The meeting of the G-20 nations is a big deal – even if it is not altogether clear what exactly comes out of these sessions. These are the 20 most important economies in the world and collectively they account for over 80% of global GDP. The members are diverse (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, UK and US). Their leaders are democratically elected in some cases, tyrants and strong men and everything in between. They know full well that what leaders say in public may be just for domestic consumption and that real positions are revealed more privately.

 

Analysis: Treasury Secretary Steve Mnuchin will be facing these leaders and they will be looking for that private conversation regarding what the US really intends as far as trade policy. The statements that have come from the White House suggest the beginning of an isolationist policy and one hostile to trade and globalization as a whole. The comments from Mnuchin thus far suggest that he doesn’t exactly share all of these positions. It is hard to argue that the US has always been treated fairly in terms of trade. It has been the US that has been the champion of free trade and has tried to push that agenda even when it comes at its own expense. Is the US planning to reverse course now or is this an attempt to rebalance the system? This will be the big question Mnuchin will be tasked with addressing. The world doesn’t have a clue what to expect from Trump at this point. Some are horrified and others encouraged. The US has good relations with some of these states and very bad relations with others. The expectation is for lots of side conversations and moves to determine what is policy and what is rhetoric for public consumption.

 

Era of Peak Demand at Hand?

There has been a significant change in the energy sector taking place over the last few years. It was not that long ago that every article regarding the oil business pointed out the imminent arrival of peak supply. For years the fear was that there would not be enough oil available to accommodate the growing needs of emerging market populations that wanted modern transportation and modern power demanding products. The studies all agreed that before long the per barrel price would be in excess of $200 and the price at the pump would be $5 or $6 a gallon. The peak supply dilemma would radically alter the way that everyone lived and it would herald the arrival of mass transit and redesigned cities. That is yesterday’s fear. Today the energy sector is most concerned about peak demand and many are preparing for that day.

 

Analysis:  One is reminded of the old adage – be careful for what you wish for, you might get it. The world has changed drastically when it comes to the issue of fuel consumption. It would have been assumed that a dramatic drop in the price for oil would have reversed the trend away from energy consumption. In some respects, it has. The American car buyer has lost all interest in small, fuel efficient cars as they return to the larger SUVs and trucks they have always coveted. But even here there has been a subtle change. These big vehicles are more fuel efficient than they used to be – lighter weight materials, better engines and even expanded use of hybrid technology. The rest of the world has been even more aggressive in pursuing more efficient cars and trucks because the issue of fuel costs is not the only motivator of change.

China has been dealing with deadly and atrocious smog in its big cities for decades and the population is getting angrier by the day. It has now been decreed in China’s largest cities that all new cabs must either be electric or powered by natural gas. The drivers are not happy as the range is limited, there are not enough charging stations or enough places to get the natural gas – familiar complaints from anyone who has tried to adopt these newer technologies. The difference here is that China is solving the issue of which comes first – demand or availability. It has been the position of the US that alternative vehicles will develop as fast as the opportunity to find fuel and that requires someone take a leap of faith to provide that fuel in hopes there is demand. The Chinese just created massive demand and this will force a response.

Not everyone thinks that peak demand is here or that it will be a major issue. The International Energy Agency asserts that peak supply remains an issue and expects that consumption will continue to grow as the price per barrel stays low but this is a big change from the assessments of the past that asserted that higher prices would dominate and people would still have to pay whatever was required.

 

Dutch Political Battle Just Beginning

It is rare that Europe pays this much attention to what is going on in the Netherlands. They have been that quiet efficient little nation for a long time but times change. As the voting gets underway it is clear that no party or existing coalition will have enough support to form a government on their own and that means some frantic alliance talks.

 

Analysis: As the vote starts the party leading in the polls is not that of Geert Wilders as there has been a surge in support for Mark Ruppe’s Peoples Party for Freedom and Democracy – which he describes as a “conservative liberal” party. He has shifted to the right when it comes to immigration and his party is on track to win 27 of the 150 seats in parliament. The Party for Freedom of Geert Wilders is likely to take 22 seats. The recent surge of the Christian Democratic Appeal has them winning 19 seats. They also take a strong position on immigration but are not as anti-EU as Wilders. The GreenLinks Party is the hope of the left and is expected to win at least 17 seats – five times what they won in the last election. The centrist party – D66 – is looking at securing 18 seats and the big loser in this contest will be the Labour Party – it is expected to win no more than 11 seats and in 2012 it took 38. It has been in coalition with Ruppe’s party but that link will be severed as Ruppe and Wilders contest with one another to bring others to their side. Right now, the odds are the Ruppe will link with the other two conservative groups to squeak ahead with a bare majority in parliament but there is still some hope for a more left leaning coalition if the Greens, Labor and D66 combine with their 46 seats. They would still need at least five defectors from other parties. The Dutch can upset all these plans with just a few changes in preference at the last minute and most expect support for Wilders will fade at the last minute.

 

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.

 

Does Nobody Read These Books?

As readers know, I do a lot of speaking at various forums and that means I get lots of exposure to presenters who are advocating the best ways to run a business and live one’s life. There are dozens of magazines on the shelf with the same advice and every bookstore I pass has numerous volumes on every aspect of business life. It is my considered opinion that few listen to these talks, read those articles or even open those books.

The same theme is presented every time. It comes down to taking care of customers and taking care of those who work for you. It is vital that people focus and execute and stay connected to what is important. Good advice. How come it is so often ignored completely? Every single day I encounter numerous examples of inept and uncaring “service”. It can be little things like getting the wrong order at a restaurant or a bigger issue like a doctor with no clue as to who they are dealing with and why. It makes me a little nervous when I am asked if I have had problems with my pregnancy. The average experience with a merchant is unsatisfactory and usually worrying as they often make errors so it is clear they were not taking notes at that motivational seminar.

The treatment of the employee is often even worse as managers mouth the right platitudes but then fail to back this up with action. I used to wonder why these talks were so common and why so many books and articles are written on the subject. I am beginning to get it. The speakers and authors are hoping that someday people will actually get the message. For the most part it hasn’t happened yet.

 

 

China Retail Sluggish, But Industrial Production Accelerates

 

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China had slightly disappointing retail sales growth in February; retail grew at a 9.5% rate compared to expectations for growth of about 10.6%.  This was during the Chinese Lunar New Year which represented the height of their retail shopping season – so consumer spending was a bit weaker than expected. In better news, industrial production in China picked up in February, rising by 6.3% M/M which was stronger than expectations for 6.2% and better than December’s 6%.

 

It’s important to throw in the mix that private investment in structures and equipment came in at an annual growth rate of 8.9%, which was much better than the 8.2% expected and the 8.1% we saw in the Chinese market last year. That suggests that there is enough optimism in the Chinese economy that companies and consumers alike are investing in longer term assets.

 

What to make of the China news?  We need to be quick to point out that the timing of the Chinese New Year each year can create some wild swings year-over-year in activity. Month-over-month can be affected as well depending on when exactly the New Year celebration falls, but it gives us a little more consistent reading than we get with other metrics.

 

The long and short of it is that the industrial production data is bullish for a better global economy. Demand is driving production for Chinese goods – and that’s bullish for the rest of the globe.

 

Not to dispel the retail data, but Chinese consumers are just like other developed nation consumers – we can all be fickle. Our attitudes about several things can sway whether or not we spend.  So, there isn’t too much of a reason to try and get into the head of Chinese consumers to figure out why spending was a little lackluster.

 

 

 

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Business Intelligence Brief: March 14, 2017

Short Items of Interest – US Economy

 

  • CBO Predictions as Regards Health Care – The Congressional Budget Office is a reliable and non-partisan organization that has provided a great deal of solid budget analysis over the years. Their latest examination of the GOP health plan as it exists right now holds that some 24 million people will lose access to health insurance but that the plan would reduce the federal deficit by some $337 billion. It would likely mean that premiums would rise in the short term and would decline later. The CBO has been criticized by some as there was a big miss as far as their last assessment of the costs of Obamacare but it has to be pointed out that their assessment was made prior to the ruling by the Supreme Court that altered eligibility and costs. The CBO is generally regarded as very accurate and reliable and this latest analysis has worried some of the more moderate members of the GOP.

 

  • Atlanta Fed Gets New Leader – The retirement of Dennis Lockhart will be challenging as he had developed a solid reputation as a moderate between the hawks and doves. He was a banker but had a nuanced view of the role of the Fed. He will be replaced by the first black regional Fed President. Rafael Bostic was with the Department of Housing and Urban Development and worked as an economist for the Fed between 1995 and 2001. There have been many complaints over the years that the Fed was not nearly diverse enough with only three black members of the Board of Governors in the last few decades. There have been more women engaged than in the past but the numbers are still far less than male members. Of the 12 regional Fed Presidents there are women leading in Cleveland (Loretta Mester) and Kansas City (Esther George). On the Board, there is Janet Yellen as the Chair and she is joined by Lael Brainard.

 

  • Mnuchin Plans to Push G-20 Members – The next meeting of the G-20 nations will provide an opportunity for the Treasury Secretary to outline his and the Trump administration’s goals. He is expected to focus on issues of fair trade as well as currency policies that are seen as discriminating against the US. The rules are generally in place but are not adhered to as far as the US is concerned.

 

Short Items of Interest – Global Economy

 

  • Germans Go After Fake News – The German government is seeking to impose fines of at least 50 million euros on those that distribute false and slanderous material or fake news on social media. This has become a major issue in many nations as consumers of news and information have seemingly lost the ability to separate fact from fiction. The nonsense that has been disseminated in the various social media forums have been inspiring a whole host of anti-social attacks and the Germans are getting ready to crack down hard.

 

  • Russian Whistleblower was Poisoned – In 2012 Alexander Perepilichny fell dead while jogging. He has been an ardent critic of Putin and had been using his investment fund to finance those who wanted to unseat him. His death was originally ruled as natural but a subsequent investigation in the UK has revealed that his stomach was full of a toxic plant that was used in a soup. The number of Russian critics that have been killed continues to grow.

 

  • Dutch Frustration – The decision by the UK to pull out of the EU was not a big shock as there has always been some ambivalence and nobody has been too shocked by the populist rise in nations that have suffered financial reversals but few expected the Dutch to be in this category. Geert Wilders is set to win the majority of votes in the coming election and the motivations for his support range from anger and concern about immigrants to the financial issues brought forward by the EU. The bailout of Greece was not popular at all and there has been general resentment that nothing has been done for the Dutch. The chances of a “Nexit” still look remote but there will be little cooperation with EU goals.

 

 

The Index of Indices from CCAI and IHEA

Each month we look at a series of indices that are considered important to the members of the Chemical Coaters Association International and the Industrial Heating Equipment Association – both groups are engaged in all manner of heat treating and coating of metals for industrial use. This means they are connected to everything from automotive to appliances and heavy equipment.

This has been a year of expectation thus far. The rebound in the stock market, improvement in consumer confidence and the general sense of satisfaction in the overall business community is largely rooted in what people think might happen in the next few months as opposed to what has actually happened thus far. There has been a great deal of anticipation regarding tax reform, deregulation, infrastructure spend, health care reform and other issues. The problem is that none of these will be quick fixes and that could well test the patience of the public and the business community. The growth lately has been best labeled anticipatory and this is reflected in the index readings as some are getting far stronger and others are flat or receding despite the sense of optimism regarding the future.

There are eight sectors that are trending positive and only four that trend negative but the four that are headed south are important as far as future growth is concerned. The eight that are continuing in a positive direction reflect some of that future anticipation and will be watched closely for signs of retreat. Auto sales have largely recovered but there are signs that the current level will be about as high as it gets for a while. The sector appears to be quite close to a plateau. New home starts are also up but this appears to be partly connected to the warm winter and the extended building season. There is also a division between the high-end buyer and those that would favor the starter home. The regional variations continue to be a major factor and that could mean more to the data as the year progresses – much of the growth is still in select parts of the country.

The metal markets are diverging to some degree with steel consumption up dramatically but prices also rising fast in copper, aluminum, nickel and steel itself. This seems to be related to decisions the metals producers made some time ago. Unlike the oil sector the metals producers have been able to reduce their output in response to limited demand and now that there is growth and demand there is room to hike prices at least in the short term. It is likely that production will increase as demand continues to solidify but that doesn’t automatically mean lower prices as the metals sector will try to make up for the low prices that dominated over the last few years.

One of the most robust readings came from the Purchasing Managers’ Index – both the overall and the new orders version. The PMI reading in total is over 57 and that is as strong as this has been in close to two years. The New Orders index is over 65.0 and that hasn’t been the case for an even longer period of time. The fact that the new orders numbers are the more forward looking suggests that the year ahead is likely to be an improvement over last year. The other sectors showing good progress include factory orders as they started to trend positively again this month. The data from the Credit Managers’ Index was solid again as well – matching the progress seen in the PMI. Transportation has been performing well – especially in the dominant rail and truck sectors.

Not everything has been positive and the three that are the most worrisome include capacity utilization, capital investment and durable goods orders. The capacity numbers are not awful as they have been hovering around 75% for most of the last year. It would be nice if these numbers were closer to the normal levels between 80% and 85% however – this is when there would be more purchasing of new equipment and more hiring. The decline in capital investment is related to the reduced activity as far as capacity is concerned. The business community is encouraged by what they are seeing but they are not yet ready to start investing and at some point that could slow down the recovery. The durable goods decline is not quite as drastic as it appears as this is largely related to a slowdown in the aerospace sector. The volatility of durable goods data always makes month to month assessments tricky. It will be important to see if this bad performance extends into subsequent months. The overall assessment this month remains very positive but the caveats are important. At some point the promise of progress on taxes, regulation, infrastructure and the like will have to become reality if there is to be solid business expansion and the reality of how difficult this will be is starting to settle in.

New Automobile and Light Truck Sales – The recovery in sales this month is likely to be due to some of the traditional year-end sales and incentive programs. The bigger news comes from some of the data that has been released by the Center for Automotive Research. The CAR projections show a plateau developing as far as sales are concerned and that is both good news and bad. The expectation is that sales will settle into a pattern that will look a lot like it did between March and November of last year. There may well be dips on occasion that relate to the vagaries of consumer interest but they will not likely last very long. By the same token there will be fewer surges and they will not last all that long either. The demand for the larger car and truck is continuing with almost all the sales growth in SUVs, crossovers and trucks. The sedan and the small car are not seeing much in the way of market expansion and it is doubtful there will be gains until the price of gasoline starts back up. Given the per barrel prices have continued to bounce around the $50 mark in reaction to the continued glut of oil that doesn’t seem to be a development with imminent implications.

Metal Pricing – For the last several months the prices for industrial metals had been rising and all of a sudden that trend has reversed and they are starting to come off their recent highs. This is not too alarming at this stage as the price for copper and aluminum are still pretty close to the highs that have been noted thus far this year. The price of nickel is a bigger deal as this price was definitely a plunge. This seems related to supply as opposed to demand as there has been lots more nickel on the market than would have been expected. This is related to the economic issues in Russia right now as they continue to be a major supplier globally. The Russians are in the third year of a serious recession and they need foreign income badly – they are selling what they can for whatever price and have therefore flooded the market.

 

CCAI and IHEA Index Readings

New Home Starts – The housing sector has been volatile of late and there are several reasons that can be cited. The most important development over the last few months has been the split in the sector as a whole. There has been considerable interest in the larger home and relatively little in the starter home. This is likely due to the fact that new home buyers are the ones that are being affected by higher mortgage costs and higher down payments on more expensive homes. There has been some discussion of a fundamental change in the way that people live and this could have profound implications for the housing sector. The trend has been towards moving back to the urban core and away from distant suburbs. The homes are likely to get smaller and the McMansions are starting to go out of fashion. This is not just the millennial that is making that choice, it is the Boomer that is moving to assisted living and senior living. The majority of the growth has been in these categories although location remains the most important determinant. The hot markets in the US are driving up the costs of housing nationally but that obscures the fact that other parts of the country are seeing prices fall dramatically.

Steel Consumption – The level of steel consumption is hitting high points not seen in many months and if this pace continues the growth will be the best in over two years. Some of this demand seems to be anticipatory – a reaction to what has been discussed as far as infrastructure growth. Steel supply centers are noting that many companies are adding to their inventory levels as quickly as they can as they anticipate the rapid expansion of these public projects. The pattern is often the same as far as public sector is concerned. The project finally gets approval and there is an immediate demand to start and only those companies that have the equipment, manpower and raw materials are going to get the contract. There has been some expansion of demand from the automotive and transportation sectors but these are likely to level off in the coming months. The steel issue has also been complicated by the threat of high tariffs on imported steel. The fear among those that are consuming steel is that prices will ratchet up and fast and therefore it would be wise to lay in some additional inventory.

Industrial Capacity Utilization – This has been a measure that has been up and down for many months but the good news is that the fluctuations have been within a fairly narrow range. The bad news is that this range has been short of what would be preferred for this measure. As we repeated too many times to count the ideal is between 80% and 85% as that means there is little spare capacity to drag down prices but at the same time capacity is not so tight that price hikes and other reactions take place. For the bulk of the last year there have been readings between 75% and 76% and that means too much spare capacity – affecting demand for additional machines as well as hiring. Over the last few months there has been much discussion of the “animal spirits” that have been driving the economy and especially the stock market. These numbers suggest that the industrial sector is not yet ready to go “all-in” and that they are waiting to see if this enthusiasm actually sustains a consumer response that will justify expansion.

PMI New Orders – The Purchasing Managers’ Index has been on a tear and that is perhaps the best news that has come out of this month’s data. The overall index is now past 57.0 – a level it has not seen in over two years. The reading for the New Orders Index is even better as it is now over 65.0 – a level not seen in four years. As has been pointed out this is the most forward looking of the PMI indices and seeing numbers like this suggest that the overall index is going to be solid through the bulk of this year. In addition to these index readings there was good news in all the others – hiring, exports, capacity and the like. The overall sense is that manufacturers and others in the industrial community are geared up for a better year than they have had in some time. The new orders numbers are harbingers of things to come and when they are this high the news is good.

Capital Expenditure – The one measure that truly disappointed this month has been capital expenditures. With all the good news coming from the PMI it would have been assumed that more investment would be taking place but this has not been the case at this point. There is some expectation that next month’s numbers will look a little better but the slow response in capital investment has been somewhat worrisome. Anecdotally, there have reports of interest on the part of buyers and many companies have just started to see a recovery in demand. There is some sense that business has been waiting to see what really happens with the new administration and especially with the new GOP-led Congress.

Durable Goods Shipments – This was quite the crash but there is less here than meets the eye. The aerospace sector was active a month or so ago and this contributed to the growth seen towards the start of the year. Then there was an abrupt drop in output from the likes of Boeing and others in aviation and it appears that the bottom has dropped out. The decline that is of more concern is in business and industrial machines – a decline that has already been noted in the capital investment numbers. The conclusion that can be drawn from all this is that there remains a lot of caution in the business community and a reluctance to commit until some of the political promises can be kept.

 

The Black Owl Report – An Executive Intelligence Brief

There are a number of publications 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.

 

The Good Old Days of Being Sick

Remember the days of yore. One got sick and a whole series of events unfolded. It meant laying on the couch watching the Andy Griffith show and Leave it to Beaver. It meant getting 7-Up and crackers and staying home from school with nary a care in the world. Of course, in my household my mother quickly grew tired of seeing me laying around and started to find housework duties but for a while I was basking in the glory of illness. Today there is no such luxury.

In the first place, it has been harder and harder to identify maladies. A couple of weeks ago, I was pretty sure it was the flu and I thought I had recovered. This weekend part of it made a resurgence and suddenly I was without energy and needing extensive sleep. Had it returned? Did I get something new? Am I just old and decrepit? My wife and I seem to get low-level versions of things – not enough to warrant the whole chicken soup and daytime TV treatment but enough to put a crimp in one’s plans.

The worst part is that there is no staying home when one works at home. The office beckons and one feels compelled to try to keep up. At least there is no travel to deal with until later in the week. I am slowly getting back to normal but I am not going to fully recover until I see an episode of Sky King.

 

 

Interesting Insight on Micro-Economic Factors

 

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I have written a lot about the “thousand points of economic light” – the notion that many small industries are seeing surging growth.  It’s difficult to put your finger on and list all of the sectors seeing improvement, but collectively it adds up to a big economic impact.  There was a report today about supplier impacts from Boeing 737 demand that was interesting. A study conducted in 2013 showed that just in the State of Washington, every one job directly in aerospace created 1.7 jobs elsewhere in the economy. More importantly, for every million dollars spent on an aircraft, it created 5 jobs.

 

The big Boeing and Airbus story is that supply chain dynamics are making it really difficult for the companies to keep up with demand. Even if they wanted to increase production significantly to meet demand for their aircraft, their thousands of small suppliers would have a difficult time keeping up with that demand. As mentioned, the problem isn’t just in the US, it stretches across into Europe.

We saw in the February ADP report that goods-producing sectors added more than 100,000 jobs last month. With thousands of suppliers for Boeing being pressed to increase output of products and to keep pace with Boeing demand, it would have an impact on broader macro-economic factors. Especially if we agree that this is just one micro-sector out of potentially hundreds that are all experiencing these nice little green shoots.

 

 

 

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Business Intelligence Brief: March 10, 2017

Short Items of Interest – US Economy

 

  • Net Worth Surges – The net worth of American households surged in the last month to record territory in the back of the stock market. The total now is $92.8 trillion and in just the last month there was an additional $780 million coming just from the stock market. The bulk of the households in the US have the majority of their wealth in their home and many have been assisted by the steady rise in the value of that home. It is assumed that this additional wealth will translate at some point into more consumer spending activity.

 

  • Changes Ahead in the Auto Sector – For the last few years the automotive sector has been expanding and that has underpinned the growth the US has experienced of late. The good news is that there is no expectation of a crash in demand but the bad news is that there is a plateau developing that suggests that what we see now is what we are going to see for a while. This means respectable sales each year but an end to the surges that drove the industry. There is a lot at stake in the auto sector as trade discussions continue and many fear that current ideas could throw this entire industrial community into a tailspin. The three factors that will be watched most closely will be the consumer demand for cars going forward, the impact of trade decisions and the price of fuel going forward.

 

  • The Numbers – Later in this issue we discuss the kinds of things that have to be examined when the jobs data is released. The actual numbers have been released and generally they are better than many had expected. The estimate had been that around 183,000 jobs would be created and in the end there were 235,000 – a much more robust number. The unemployment rate fell to 4.7% and that suggests that fewer of the discouraged workers came out of the woodwork than anticipated.

 

Short Items of Interest – Global Economy

 

  • ECB Policy Decision Encourages Markets – The decision on the part of the ECB to leave rates where they are was no surprise and this is not what the markets reacted to. The comments by Mario Draghi suggested the ECB had won the battle against deflation and that attention will be focused more on the threat of inflation going forward. The assertion is that the quantitative easing did what it was designed to do and that normal economic conditions can now be expected to prevail. There is no hint that major policy changes are on the way but it is considered likely that shifts will show up by the end of the year and that has been enough to boost confidence in some investment circles.

 

  • Nigerian Leader Returns – Muhammadu Buhari has been out of the country for over six weeks seeking medical treatment and he has now returned to Nigeria and faces intense concerns regarding the economy and the growth of Boko Haram. The slide in the price per barrel of oil has gutted the budget and that has affected the ability of the military and police to deal with the Islamic terrorists. It is estimated that almost a fifth of the country is off-limits to the government as these regions have become Boko Haram strongholds.

 

  • Did Big Tobacco Get Us Here? – This has become a very strange political year with references to “alternate facts” and relentless attacks on the “lying media”. How is it that so many people are willing to believe the most outlandish assertions and at the same time ignore the facts of a situation? There are some analysts who point to the campaigns of Big Tobacco over the years. There is not a study in existence that contradicts the fact that cigarettes are dangerous to one’s health but the relentless spinning of lies and deceptions from the industry kept control efforts at bay for decades. The same techniques pioneered by this industry are in daily use now and serve to convince people that lies are truths and vice versa. Eventually the public saw through the smokescreen on tobacco – maybe there will some revelations coming in the months ahead.

 

 

 

Jobs Report

The latest report on the jobs situation will be released today and it will garner the usual intense observation. There are good reasons for all this attention and some that are not all that good. The status of employment is a statistic that most can grasp intuitively – more jobs and higher wages are good and fewer jobs and lower wages are bad. In truth, the status of employment tends to be more of a lagging indicator when it comes to economic growth as hiring doesn’t occur until there is enough growth to justify the additional workers. The data remains significant as it is a final signal of economic health and recovery. There are characteristics of the hiring and firing process that are important to note. The majority of businesses do not like to do either one until they are sure of what the economy will bring – firing is harder than hiring as companies do not relish losing the investment they have made in training and educating their workforce and the majority of business leaders do not wish to impose the trauma of dismissal unless they have to. Today’s data will confirm some of the trends that have been noted in the economy thus far this year and might presage some of the changes yet to come.

 

Analysis: One of the key questions to answer will be whether wages have started to go back up. The expectation last month was that wages would rise and sharply in the 19 states that saw their minimum wage rate improve at the start of the year. There was not the expected bump and many are still wondering why. The best guess is that there really aren’t that many people getting that minimum wage (less than 4% of all wage earners) and this was not a large enough population to make a real dent in the numbers. If there is no big jump in wages this month either it will be assumed the minimum wage hike is not as influential as many had assumed it would be. The other concern with the job numbers is that there are too many low paid positions being added and too few high paid jobs and that is not good for the long term.

There will, of course, be interest in the number of jobs added and the expectation is that it will be somewhere around 190,000. This would not be as robust as the 227,000 hired in January and would be closer to the latest three-month average of 183,000 per month. This is not as fast as job growth was in 2014 and 2015 but one could argue that the economy is far closer to full employment than it has been in the last few years and that it is natural to assume the pace of hiring would be slower than it has been. If the numbers are significantly higher or lower than expected there will be some need to reassess the situation to determine what sector or sectors are reacting differently than expected. One of the issues that has been having a consistent impact on hiring is the lack of qualified applicants. After years and years of complaint and comment from a wide variety of sectors (manufacturing, construction, transportation, health care etc.) there has been very little done to address the situation.

Another component that will be looked at closely will be the overall unemployment rate and by extension the workforce participation rate. These are both numbers that have to be teased out to a degree. The unemployment rate will likely be close to what it was last month but if it goes up a bit from that 4.8% level it would be seen as a good thing. There are always considerable numbers of people categorized as “discouraged workers” and counted by the BLS in their U-6 designation. As the job market improves there will be number of these workers that will elect to get back into the formal search for employment and they start to be categorized as U-3 instead. This makes the unemployment rate look worse but for the right reason. The level of workforce participation has leveled off a little but this will only be temporary as the numbers of retired workers will continue to expand every year for several more years.

 

Salesman in Chief

The latest statements from the White House regarding the trade deficit may signal that the US leadership plans to emulate other countries when it comes to promoting national output. Over the years there have been Presidents who have tried to promote the US export sector and many who have not been all that engaged. Few have been as determined as leaders like Germany’s Angela Merkel as she once refused to exit an airplane until her hosts arranged to pick her up in a Mercedes as opposed to a Lexus. “if you are seeking our help and money you must do something for us”. Most of her overseas visits include members of the German business community and it is expected they will have high level meetings as well.

 

Analysis: The specifics have not been released at this point but it appears that the US will be asking its allies and others to engage with the US business and export community if they expect support from the US. This is a form of leverage that would be far less hostile than the imposition of trade barriers and tariffs and would ultimately do less damage to the US consumer. Tariffs and regulatory restrictions only serve to raise prices for the US buyer. An effort to use a “charm offensive” will yield results without the imposition of costs on the US buying public.

The fact is that most nations need access to the US and most nations need the US to continue supporting everything from military protection to economic growth. The US has considerable leverage and in the past it has been rarely used for business purposes. The sense is that Trump will be far more overt. There are some risks of course as other nations may not be prepared to offer what the US demands and there will be some testy exchanges. There are some that will resent the pressure but at the same time they will understand they are asking for US help and should be prepared to reward.

 

South Korean Leader Impeached – Now What?

The impeachment of Park Geun-hye is final now that the high court unanimously upheld the action by the national legislature. This decision provoked riots and demonstrations by her supporters as well as the opponents and thus far there have been many serious injuries and two deaths. The governmental crisis in South Korea has been part of the regional instability for months now and many have asserted that North Korea has been engaged in its provocations as Kim Jong-un is well aware that there is a crisis in Seoul. The current President is nothing but a caretaker and nobody expects him to retain power long. Park is the daughter of former leader Park Chun-hee and has been accused of trying to run things the way he did as dictator. Her government was engulfed with corruption scandals almost from the start and she was tied to everything from organized crime to fortune tellers. The investigations found ample evidence of influence peddling that was tantamount to selling favors and government access. She has come under the thrall of a confidante named Choi Soon-sil, a woman who had been labeled “Park’s Shaman”. It came to a point that Park was unable to make a move without consulting her and all the while Choi was extorting money from many Korean businesses and funneling it into shady foundations connected to the cult her father founded.

 

Analysis:  New elections must take place within 60 days and right now the leading candidate is Moon Jae-in. He is a former human rights lawyer and a member of the opposition Democratic Party. His popularity is with the young and those who have been on the wrong side of the influence peddling but he is not popular at all with the business community. Many of his views are still unknown and developing but it is assumed that he will be far to the left as compared to Park and those that preceded her. The fear in South Korea is that he will lurch to the left and take his eye off the economy. The growth that had been propelling the country has faded in recent years as the won has appreciated and damaged exports. The key markets of Japan and China have slowed and the US has not picked up the slack as yet.

At the top of the list of concerns will be the relationship between North and South Korea. Park took a predictably hard line position and one that almost seemed to relish in confrontation but Moon has been more conciliatory over the years as he prefers negotiation and promises of aid and assistance. The fear is that Kim Jong-un is not remotely sane and will not respond to these peace offers – seeing them as signs of weakness that he can exploit with threats and more attacks.

The US is not expecting a closer relationship with Moon either. The Democrats have been critical of the Trump administration and there has been no suggestion that Moon will wish to get closer. At one point, it seemed that the former head of the UN – Ban Ki-moon would be a favorite to take power but he was wholly unprepared for the vicious nature of Korean politics and withdrew after what he described as “character assassination” in the press.

 

France and the Future of Europe

The assessment of the upcoming French election has become as unsettled as it has ever been. There is a very clear path to power for the National Front and Marine Le Pen as the latest polls show that she will pull over 26% of the national vote in the first round and perhaps as much as 40% in the second. If the losers in the first round rally around Emmanuel Macron he would have 60% of the vote and would become the President. The problem is that many of those who support the left candidates (Benoit Hamon and Jean Luc Melanchon) are not prepared to support a former Rothschild’s banker – even though he was Economy Minister under the Socialist government of Francois Hollande. That connection to the Socialists makes him unacceptable to some of the supporters of the center right candidate Francois Fillon. Le Pen only has to hold her base and snare a few from the camp of Fillon to win.

 

Analysis: The National Front supporter is young, relatively uneducated and often from the rural areas. It is their sense that they have been dismissed and ignored by the urban elites on a variety of fronts. They have not seen job or wage growth and their financial positions get more tenuous every day. The young can’t find work and there is deep resentment of the immigrants that have arrived in France as they are accused of taking the jobs and of trying to change French culture. Evidence for this is non-existent but the perception lingers. The support for Le Pen is as much a protest against the status quo as it is support for her policies. In almost every interview or poll the respondents can’t really identify most of Le Pen’s platform other than her desire to pull France out of the European Union and her desire to end immigration into the country. The plans for economic revival have not been developed or at least they have not been communicated.

 

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.

 

Seeing from Other Eyes

I had an opportunity to talk with a young German woman who has been dispatched by her family to start the American division of their business. She is the third generation of the firm and has already had a very interesting set of experiences in her own country and in the US. She was very active and successful in German politics as a member of the Christian Democrats (Angela Merkel’s party). She is in her early 30s and has crammed a lot into her resume. There were several observations of the US that I found fascinating. She elected to locate in Charlotte, North Carolina after checking out several cities. This was due to the obvious vitality and growth found in that part of the country.

She noted that Americans have more sense of community than Germans – in general. People note what is going on with their neighbors and colleagues and want to engage. Germans are far more prone to stay completely out of other people’s business. This willingness to meddle can be maddening or it can be beneficial – it all seems to depend on intent. She was surprised that people asked such personal questions such as why she and her husband had no kids. But she also observed that people took care of each other more readily. The German position is that government will do that and neighbors don’t need to.

She also commented that Americans seemed willing to celebrate the victories of others and didn’t seem to resent others when they had success but the German attitude is often less supportive – “what makes you think you should have that”. More envy and rejection of those who want to stand out. I would agree that both of these are common traits in the US but I would also argue they are not as common as they once were.

 

 

Deep Splits Over Health Care

 

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As predicted the repeal of what has been referred to as Obamacare will be the easy part. The challenge is how to replace it and the divides are getting deeper by the minute. The differences between the Democrats and Republicans have been apparent for some time but now the bigger issue is the divisions within the GOP. The aims are almost mutually exclusive as it is very hard to reconcile assuring access with reducing costs. It all comes back to the core issue. How does the US reduce the cost of health care? Without solving that problem, it is nearly impossible to figure out what to do with insurance and how the population plans to pay for the health care desired.

 

From an economic standpoint, there are several issues that stand out. There are many more concerns about a health care plan as this is usually very personal and emotional stuff. The business community has consistently had different concerns about the ACA and the request from the corporate community differs considerably from other groups.

 

The number one issue is the overall cost of health care. The US spends over 25% of its GDP on health care and still ranks far below the other industrial nations as far as life expectancy and overall health. The US system looks a lot like everybody else’s until the last year of life and then the costs accelerate dramatically. The business community wants these costs addressed before there is another system put in place to pay for something that is too costly. Thus far it has been a matter of putting the horse before the cart.

 

The second issue is the cost of providing insurance for employees. The premiums have continued to rise and managing the system has become ever more complex. Too many companies are still making decisions based on health care and insurance decisions rather than on what is good for the business. There are those that limit the number of employees so that they can stay under the 50 cut-off that requires them to have insurance for the employees. The majority of companies want to be engaged with providing health care as this is part of compensation and part of the way they compete for employees and retain the ones they want to keep

 

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Business Intelligence Brief: March 9, 2017

Short Items of Interest – US Economy

 

  • Who is Hiring and Why? – Tomorrow will see the release of the latest job numbers and by most accounts they will be good and maybe even excellent. The private sector appears to be hiring aggressively – at least according to the data provided by ADP. The government sector has not been contributing all that much lately but there has been strong sector activity. The service economy continues to be the place for expansion and that is both good news and bad. It is nice that hiring has increased but these are often not the highest paid jobs. The expansion of retail and food service jobs rarely presage a big economic surge. Part of the issue is the lack of skills – people taking these low paid service jobs as they don’t have the qualifications to take the higher paid positions.

 

  • Deep Splits over Health Care – As predicted, the repeal of what has been referred to as Obamacare will be the easy part. The challenge is how to replace it and the divides are getting deeper by the minute. The differences between the Democrats and Republicans have been apparent for some time but now the bigger issue is the divisions within the GOP. The aims are almost mutually exclusive as it is very hard to reconcile assuring access with reducing costs. It all comes back to the core issue. How does the US reduce the cost of health care? Without solving that problem it is nearly impossible to figure out what to do with insurance and how the population plans to pay for the health care desired.

 

  • Competition and Productivity – There are many factors that affect levels of productivity. It is the measure of output per worker but that simple discussion gets complicated quickly as determining service sector output can be challenging. One of the crucial issues is that redundancy kills productivity. The sectors that are identified as the least productive are education, health care and government and all three have managed to dodge competitive pressures to some degree. The long and the short of it is that there are too many schools and too many health care facilities and too many government bureaucracies and they tend to trip all over one another.

 

Short Items of Interest – Global Economy

 

  • Greens Stand to Gain in Dutch Election – The upcoming election in the Netherlands has riveted the attention of nearly all of Europe. This is a rich nation with a robust economy but this has not stopped the population from becoming uneasy and ready to engage in drastic change. It is unlikely that any of the parties will emerge with enough votes to avoid a coalition but the leaders are all parties that would once have been considered fringe players. The far-right Freedom Party of Geert Wilders will probably be the largest when the vote is over but not strong enough to rule. The left leaning Green party may end up second or third and will play a major role as somebody’s coalition partner.

 

  • Nigerian Policies Benefit Agriculture – The collapse of oil prices threatened to destabilize Nigeria completely and the government took steps to deal with the threat. The decision was made to protect the foreign reserves of the country by limiting the allocation of dollars for imports. This meant that domestic producers were going to have an edge and that has boosted the growers of rice and other products. The state still need a recovery in the per barrel price of oil but the farm sector is providing more income for the population and the country as a whole.

 

  • Japan Threatens Aggressive Response to North Korea – Japan is deeply concerned about the activity in North Korea and has suggested strongly that they will take steps to stage a pre-emptive strike should they deem it necessary. The Defense Minister is a hawk and Tomomi Inada has reminded people that Japan has the ability to develop nuclear weapons very quickly if that should be required.

 

 

Minimum Wage Impact

Along with the report on employment this week there will be reports on wages. At the start of the year there was an expectation that wages would show some pretty solid gains simply due to the fact that 19 states had elected to raise their minimum wage. Included in that group of 19 were big states with large populations of low wage workers (California and New York) and the wage hike for these states was in excess of 5%. The expected jump did not take place as there was only a 0.1% increase over the previous month and 2.5% in year over year analysis. What happened and will the minimum wage hikes show up this month?

 

Analysis: There have been several theories as to why this overall hike didn’t show up. There has been some evidence suggesting that a significant number of those that would have received higher wages lost their jobs instead. Business that didn’t want to pay the higher wage simply reduced the size of their staff to keep labor costs where they had been before. This has not been a complete answer as there did not seem to be a surge in the number of layoffs overall.  It has also been suggested that the surveys taken did not have time to catch up with the reality of the additional pay and that when the January revisions come in the wage hikes will be easier to see. The expectation for February is that wages will increase nationally by around 0.3% and that was the projected increase for January.

There were some other factors to consider as well. Some of the higher paying sectors saw a decline in wages and these can have a disproportionate impact on overall wage growth. For a variety of reasons there was a big drop in the pay for the usually high paid financial sector.  There were definite gains in sectors that have many of the lower paid workers – sectors such as retail and food service. Beyond all this there may be another factor at work and one that seems to have been overlooked throughout the debate over whether or not to hike the minimum wage.

The fact is that few people earn the minimum wage or below in the US and therefore a change in that rate doesn’t have the widespread impact that some assume. Data from the Bureau of Labor Statistics holds that roughly 58% of the US workforce earns an hourly wage and that means that 40% are salaried or otherwise compensated. Of that 58% the percentage that earns the minimum wage or below is about 3.9% and that number has been falling for the last few years. This amounts to about 1.3 million earning the federal minimum of $7.25 and another 1.7 million earning less than that. Those earning less than the national minimum are largely concentrated in seasonal jobs and agricultural jobs. Those sectors that generally employ low wage workers such as retail and food service pay wages that are well above the national minimum – average wages in most states are between $10 and $15 an hour.

The point is that there are not enough people earning the minimum to affect the statistics when they get a pay hike. The focus on this population is somewhat distorting as the minimum wage worker is a very small percentage of the total workforce. The bigger employment issue is that some 8 million to 9 million people are struggling to get back in the workforce despite a low level of joblessness and a confirmed shortage of workers in dozens of industries.  There are tens of thousands of job opportunities in manufacturing, construction, transportation and others. The people who are out of work now do not have the skills they need to take those jobs and that leaves the employer in the lurch along with the job seeker.

 

No End in Sight for Global Oil Glut

The data came in as far as the size of the US oil supply and the price per barrel crashed to levels not seen in months. The expectation was that oil inventories would increase by about 1.7 million barrels but the actual increase was considerably more than this – a gain of 8.2 million barrels. The efforts by OPEC and Russia have not been at all successful thus far and for all the expected reasons. It was just a few months ago that the OPEC states managed to agree on production cuts and when the Russians indicated they would support this strategy the oil markets began to anticipate the end of the oil glut. That is not what has occurred thus far.

 

Analysis: From the start of the effort to reduce output there were concerns. The first is that there are many states that produce oil these days and OPEC lacks the clout it once had. The US, Canada, Mexico, Norway, the UK and many others simply never agreed to corresponding cuts. They have continued to add to the glut as they seek to maintain market share. The second issue is that OPEC members are legendary as far as their willingness to exceed their quotas and cheat. There has been better compliance than many expected but this doesn’t mean that some additional oil has not been making it to market. Finally, there was deep suspicion of Russia. Would they really cut back on production given the acute need for that oil revenue? Russia is in the third year of a deep recession and relies on that oil money. There is little evidence of a production cut and Russia is no longer even pretending that it plans to fully comply with OPEC guidelines.

Beyond the production issues there is demand and thus far this has not grown all that much. The winter has been warmer than usual and that has reduced demand for certain kinds of oil. The recovery in the US manufacturing sector has just started and thus far energy consumption is not picking up the pace. This is not the time of year for the consumer to drive – that doesn’t really begin for a couple of months yet. The energy markets were in a bullish mood last year when it appeared that many states were willing to do what it takes to get production down and prices back but as the per barrel price has fallen under $50 a barrel and seems headed further south that bullish attitude has been rapidly fading.

 

Enough Inflation in the Eurozone to Change Course?

The European Central Bank meets this week and there is likely to be more pressure than ever to start emulating the actions of the US Fed – at least from the Germans. The fact is that inflation levels have now exceeded the levels the ECB had set for itself and it has been suggested that once this occurred the chances for an interest rate hike would increase significantly. Thus far there has been no suggestion that Mario Draghi is thinking this way although there have been hints that policy changes could be on the way sooner than had been expected earlier.

 

Analysis:  As would be expected the pressure to shift away from stimulus is coming primarily from the German hawks. They have yet to really demand that rates go up but they have been agitating for an end to the asset purchase effort that has been the ECB’s version of the Fed’s quantitative easing program. The counter argument from Draghi has been that core rates of inflation have not exceeded 0.9% despite the rise in headline inflation rates. Much of the recent gain in inflation has been attributed to the higher costs for imported oil but as of today, the price per barrel has plummeted back to the high 40s. The persistent glut of oil suggests that fuel will not force prices up consistently and will likely have little long term impact on core inflation numbers.

As of this moment the Draghi plan remains intact – a continuation of the quantitative easing strategy of buying 780 billion euros worth of bonds. This will continue to be combined with a low interest rate policy. The remarks that have come with Draghi’s opening of these meetings over the last several years have been consistent and there is deep interest as far as what might alter this time. The past commentary has been gloomy – focusing on all the issues of an economic slowdown and the need to continue pumping support into the economy. This time there are those who expect a more upbeat assessment of the European economy and hints that it might not need all that life support for much longer. On the other hand, the growth seen in the Eurozone of late has been anemic and subject to big shifts downward.

There will be new forecasts issued for both inflation and growth but the big question is whether these will be altered in the months to come. The current inflation expectation is for a rate of 1.3% this year, 1.5% in 2018 and 1.7% in 2019. This benign outlook has been challenged by the Germans and they assert that these should all be altered by as much as half a point upwards to 1.8% this year, 2.0% next year and 2.2% by 2019. That is high enough to cause some ripples in the financial community. Thus far there has not been a revision of growth forecasts. It is expected that Eurozone growth will be at 1.7% this year and around 1.6% in both 2018 and 2019. This is truly anemic and is being counted upon to keep inflation at bay. On the other hand, this excruciatingly slow pace creates real issues as far as employment and business expansion. To see these growth numbers improve will require solid expansion in both Germany and France and that is still something of a toss-up.

 

How Bad has the French Economy Been?

The future of the European Union and the economy of this part of the world is as dependent on France as it is on the Germans. This is the other “big dog” in Europe even as it has struggled since the recession. The plain fact is that Germany can’t shoulder the burden of Europe on its own. The economic crisis is what made Francois Hollande the least popular President in recent history and what caused him to step down as party leader. The question is how bad are things really and what will the next President have to contend with?

 

Analysis: In most respects the situation is not as bad as many would paint it. The recovery since 2008 has been steady but slower than the states that France compares itself to (Germany, US, UK). Last year the country finally grew at a pace of 1.3% and that was better than had been reached in years. The problem is that overall Eurozone growth was 1.8%. The major issue throughout his time in office has been employment and the story remains challenging as unemployment rates are still over 10%. There have been efforts to make hiring easier but most of the labor market reforms fizzled and France remains a very tough place for employers to navigate. The two-tier system remains and so does the 35-hour work week.

The rate of public spending remains very high – 57% of the national GDP and that is among the highest levels in Europe. The debt load continues to grow as the state continues to spend heavily on pensions and health care and other social programs. If there have been any attempts to cut the impact has fallen on infrastructure development and that sets the country back to a degree. The economy is not in a state of utter collapse but the next President is not going to have all that much wiggle room.

 

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.

 

Report from the Front

I have been spending the last few days in New Orleans with the folks who attend the annual meeting of the Fabricators and Manufacturers Association. I am their economist and against all odds they still listen to me. This attests to their patience at least. I have known many of these people for many years now and this gives me a chance to catch up and lean about what is happening in the “real” world. Statistics are nice and data is swell but it helps to hear the real story.

Three things are standing out thus far. The first is that most are feeling much more confident than was the case a year ago and even a few months ago. They are seeing more business than expected and it feels like many of the companies they sell to are gearing up for a better year. Some of this is attributed to a new political reality but more seems to be credited to a rejuvenated consumer and they trace that back to the middle of 2016. The second observation is that worker shortage issues are bigger than ever. Now that this expansion is taking place they need people and simply can’t find them. Some are being adversely affected by the immigration policies that have been put in place.

The last observation is that most are skeptical about the promised changes. They know that changing tax laws, changing regulations and developing big infrastructure projects will take time and few have any illusions that Trump will be more successful than others in the past. This means that most here expect the burden of growth and expansion will fall on them and their decisions. The good news is that everybody seems willing to shoulder this task and get on with it.

 

Rail Service Deteriorating

 

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Railroad service performance continues to deteriorate with dwell times and network speeds both getting “worse” week-over-week. Although this is usually a sign of increases in demand for rail capacity, there are environmental factors that have weighed on service in the past two weeks. Flooding in California has impacted rail service in critical areas that serve as massive feeder lines to the rest of the US (mostly those originating at West Coast Ports).  On a positive note, if this deterioration in service isn’t solely weather related, then this is a true sign that the US economy is materially (main street growth) picking up momentum.

The rail sector is going up against a much easier comp year-over-year.  But, despite that overtone, the Association of American Railroad chart at right shows that all but 5 categories of commodities are now showing growth YTD.

 

Total carloads are up 4.8%, and intermodal is now flat (it was down through week 7 YTD). That pushes total traffic up 2.3% YoY YTD.

Among commodity groups of interest, coal shipments are up 15.5% – and could be the biggest disruptor of service.  Coal shipments don’t necessarily follow the same commodity distribution patterns of other raw materials.  Pulling rolling assets used to move coal will create capacity issues in other parts of the country, and that can slow down the system.  Don’t misread us, if you are shipping intermodal via rail – there is ample capacity. But, it’s going to start to tighten if we think about week 8 as perhaps the low point of 2017.  If shipment volumes accelerate from here – capacity will tighten far more than it is.

 

Some of the raw materials used in manufacturing are up.  Metallic ores and metals and nonmetallic minerals (both of which are used in manufacturing and other applications). That’s an interesting find in the AAR Carload report.

 

Grains are still strong as well, and we have to hope that much of this is helping to empty full grain silos across the country so that the farming community will have room for new crops and see prices stabilize for their products. The farming sector is reeling right now and need a financial boost this year to help stabilize many private and commercial farming operations. The Trump Administration will have to keep a close eye on the farming sector in 2017 – many farms will need help or they will fail if we don’t see a turn in the market.

 

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Business Intelligence Brief: March 8, 2017

Short Items of Interest – US Economy

 

  • Battle Brewing Over Budget and Debt – The GOP leaders in both the Senate and House remain determined to lower the national debt or at least not add to it. They want any tax breaks to be offset so that the budget is revenue neutral. This has not been the position of the White House as Trump has expressed a willingness to expand the debt and deficit in order to get the tax reform and stimulus he seeks. The budget coming from the administration has big increases for defense and infrastructure and some other programs. The suggested cuts will not be enough and several of the targeted areas will be staunchly defended by both Democrats and some in the GOP.

 

  • Productivity Still Low – In the fourth quarter the rate of productivity in the economy rose by 1.4% and that was the fastest pace all year. It was not enough to boost the annual rate as it is still at 0.2% and that is the lowest rate seen since 2011. The rate was rising by 0.9% in 2015 and 0.8% in 2014. The reduction is partly due to the faster pace of hiring but that doesn’t explain it all. The challenges are especially acute in three sectors – health care, education and government. These are sectors with extensive redundancy and inefficiency and they are all major parts of the total economy.

 

  • Closer to Full Employment? – This is the week of the monthly labor report and in advance of that comes the various assessments by other organizations such as ADP. The payroll company does not report on government employment and their latest report suggests that the private sector is adding jobs faster than has been anticipated. The primary motivation has been the unusually warm winter as it has allowed an earlier than usual start for construction and that is generally a boost to hiring. The fear remains that some 7 million people are all but unemployable and may never get back to the workforce.

 

Short Items of Interest – Global Economy

 

  • Financial Battle in Ukraine – As the war drags on in Ukraine the two sides are becoming more and more entrenched. Supporters of the Kiev government have taken to blocking trade between the two sides in Ukraine and this has started to adversely affect the already strained budget. Coal shipments that were destined for that territory now held by separatists have been blocked and that means less money for the government in Kiev. It has also resulted in retaliation from the rebels as they have been seizing the assets of companies based in western Ukraine. This is likely more than this fragile economy can handle.

 

  • Wikileaks Strikes Again – The release of documents that detail how the CIA gains access to devices like Smartphones, internet TV and other devices threatens to expose the techniques the agency uses to gather intelligence. The targets of these cyber-attacks have not been revealed but the assumption is that these are people connected in some way to terrorist threats. This release once again begs the question as to why Wikileaks continues to focus on western intelligence systems and seems to avoid any effort to expose the cyber warfare techniques employed by China or Russia or the terrorist organizations themselves.

 

  • Three Options for the US as far as North Korea is Concerned – Option one was broached by Trump on the campaign trail when he offered to sit down with Kim Jong-un for a hamburger and a deal. The US could indeed strike a deal that would involve an end to the missile development but verification would be nearly impossible. The second option is a set of talks that offer both opportunity and threat. For every step forward the North Koreans get something they want and for every step backward they risk sanctions and further punishment. Option three is a pre-emptive strike but this is considered unacceptably risky as the North would immediately retaliate with attacks on South Korea, the US troops stationed along the border and probably Japan. It has yet to be a serious option although the bellicose behavior of the Kim regime has forced people to think about it.

 

 

 

Trade Deficit Big as it has Been in Five Years

Yesterday we discussed whether or not a trade deficit was necessarily a bad thing. As with most things in economics there are those that benefit from such a development and those that are damaged. The position of the Trump administration thus far has been that trade deficits are bad and must be countered in some way. The latest data on the trade deficit will not be welcome news for those who seek to lower it. The deficit grew substantially from the month before – a gain of 9.6%. It now stands at $48.49 billion and that is higher than it has been since 2012. The irony is that much of the growth of the deficit can be blamed on the overall economic enthusiasm and growth expectations that have been spurred by the Trump administration.

 

Analysis: The growth of the deficit is attributable to two factors and they are the most basic. Exports are down and imports are up. The reason for both of these movements is the strength of the dollar. As the US has begun to show real signs of economic growth and progress the dollar has gained in value. The Federal Reserve has been encouraged enough to start hiking rates and that attracts the overseas investor as they stand to get more return. This investment requires dollars and thus the demand has spiked. It has been estimated that some 25% of the current stock market in the US is foreign money. The high value of the dollar has also made imports cheaper – everything from consumer goods to machines to commodities. The price per barrel of oil has doubled since last year and that adds to the costs of imports as the US continues to rely on that foreign oil for around 24% of its consumption needs. This is the lowest level of imported oil since the 1970s but it still amounts to some 9.4 million barrels a day.

At the same time as the US has been importing cheaper goods and needed commodities, the exporter has struggled to sell due to the high value of the dollar. Everything the US tries to market overseas is higher priced than it would otherwise be and the only way to get around this fact is for the US producer to lower their price and accept far lower margins. That is simply not an option for most. The price is higher in foreign markets and the strong dollar can even drive up costs for the domestic consumer. They may well see imported goods at lower prices in the US than the domestic producers can achieve.

There are not many options available to the US when it comes to adjusting the trade deficit in a period of strong dollar values. The discussion of late has been centering on some sort of “border adjustment” tax – a new name for an old concept. The current system tends to reward the importer more than the exporter as far as taxes are concerned and the idea is to reverse this with a system that provides a tax break for the exporter at the same time that tariffs are hiked on imports. The flaw that has always haunted this plan is that the plan tends to strengthen the dollar – even when the dollar is not already strong. This plan would make the dollar value increase and this offsets the gains that were supposed to be made as far as exports and imports are concerned. The importer is still going to but despite the additional tax and the exporter will still struggle to sell despite the tax break.

It has never been the policy of the US to deliberately try to weaken the value of the dollar and it is not expected to develop this time either. The quickest way to reduce the strength of the greenback is to lower interest rates and that is most definitely not a path the US is going down at this point. The fact is the US needs other nations to undergo economic recovery before the dollar will diminish in value so the trade deficit can begin to erode. Nothing would boost the dollar faster than a rebound in the value of the euro.

 

Going Down a Familiar Path

The approach to trade that has been developing in the Trump White House is looking very familiar to the approach that was evident in the 1980s. The assertion then was that Japan was the major threat to the US and that barriers needed to be raised against the import of goods from Japan. The battles were a series of moves and retaliations as the two states contested with one another for access. The consumer was attracted to Japanese products and US companies struggled to break into the Japanese market. Today the nemesis is China but the policies and the rhetoric is the same as it was.

 

Analysis: The never-ending series of unilateral attacks created trade chaos and rarely did much to protect industry in the US or anywhere else for that matter. Companies were wholly unable to plan as there was always a new restriction or tariff or regulation to deal with. In the long run the Japanese changed strategy and invested heavily in US production. This was certainly good for job creation in the US but may not have been the desired outcome for the US companies that were competing with the Japanese. This period of uncertainty and confusion eventually led to the formation of the World Trade Organization as a means by which to exert some control.

Right now, the Trump administration seems opposed to the WTO and seeks to move back to the unilateral approach. If the result of this shift is a repeat of the 1980s it can be expected that support will start to increase for the WTO but what form this takes remains a mystery. The WTO works because its members want it to work. The alternative is constant trade warfare and at some point the business community objects to the constant uncertainty. If the members of the WTO do not trust the process or each other the system fails. The US is now pursuing a full trade advantage and that will prove to be an elusive goal. Many in the Trump administration still seem centered on the industrial exports and tends to ignore the massive advantage the US has in the service sector. This is where the trade advantage lies but in time this will be challenged as well and the US has not done a great job of promoting it. The TPP was shot down as it was not good for the industrial sector but it would have been good for the service sector and the farm sector.

 

How Likely is a Fourth Term for Angela Merkel?

The decision to go for a fourth term was apparently a tough one as she wavered for several weeks over what she intended to do. This has been part of her problem as far as winning the Chancellor’s job again. There are many within the ranks of the Christin Democrats and the Bavarian Christian Union that wonder if she really wants the job anymore. The last few years have been very tough for Merkel and she has lost much of the support she once commanded – not just in Germany but in the world. She has tense relations with leaders in Poland, Russia, France and the UK. The relationship she had with the US has also crashed as Trump dislikes her and she is no fan of the US President. Her core supporters are still not ready to turn away but their enthusiasm levels are low and that could affect turnout.

The rival party is the Social Democrats and until recently they have been hampered by their cooperation with Merkel on a number of key issues. They have supported the refugee plan put forward by Merkel so they are unable to draw a distinction between themselves and the Merkel administration. They have not deviated much from the positions taken by the CDU on taxes or core business policy. They have tried to promote more attention to social programs but not all that aggressively. The advantage the Social Democrats have right now is that their leader is far more energetic than Merkel and appears to want the job more.

 

Analysis:  In January the deeply unpopular Sigmar Gabriel was pushed out of the leadership position by the former head of the European Parliament – Martin Schulz. He has worked very quickly to rally the Social Democratic faithful and has drawn differences between his policies and that of the CDU. He has skillfully used the rise of the populist right to bolster his credentials and has asserted that he is the man who can keep the radical ideas of the AfD (Alternative for Germany) out of the debate – hinting that Merkel would need to capitulate to them in order to keep her own right wing connected.

Polls still show Merkel with a slight lead in most of the country but it is far less than it was before Schulz came on the scene. The Social Democrats have been a demoralized party and much of their local clout has been lost. This race is coming down to which party can motivate its core. The Social Democrats have to be convinced their party is relevant again and the Christian Democrats have to be convinced that their leader still wants to do the job.

 

China Tries to Settle Region

For many years it has been asserted that only China has the ability to control the actions of the North Koreans. The dependence that Pyongyang has on China is profound and it was assumed that at some point the Chinese would use that leverage. That time may be coming swiftly. The leaders in Beijing have never sounded so worried about events spinning out of control. The assertion is that Washington, Seoul and Pyongyang are on a collision course that could spell disaster for the whole region.

 

Analysis: In just a few months the situation in this area has worsened dramatically and China is not at all sure of the motivations of the key players. The cautious actions of Barack Obama have been replaced by a far more bellicose attitude from Trump. The political crisis in South Korea has meant the resignation of the Prime Minister and the elevation of a man who is clearly a caretaker. The regime of Kim Jong-un has become more destabilizing by the day as he has proven to be a megalomaniac. The South Koreans are now convinced that he will attack and they are installing a missile defense system provided by the US. This system not only provides protection against a missile attack; it provides intelligence on what is happening in North Korea as well as China. The strenuous objection to the system is based on the spying capability the US will acquire.

The Chinese want to defuse the tensions without causing a collapse of the Kim regime. This is their biggest fear as they are not prepared to accept the millions of refugees expected. They will have to clamp down on Kim in some way but that has proven very difficult and that could lead to a Chinese attempt to unseat him. The assassination of his older half-brother suggests that Kim thinks the Chinese intend to do just that. If certain key generals start to become victims of a purge the Chinese will have to act fast and decisively. The rhetoric is escalating and troops are massed on the North Korean border and this could be prelude to a major intervention. The expectation is that the US will control South Korea in return and work to avoid a spreading conflict. Thus far nobody knows where Trump will come down on all this but the comments from Defense Secretary Mattis indicate a willingness to let China take the lead but with the understanding that more provocations will not be tolerated.

 

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.

 

Communication

A good friend of mine (Wade Mullins) sent me a funny little commentary this morning. The set-up is that women were asked to send a sweet text to their husbands for no reason and the responses they received were then read aloud. They ranged from “Who is this?” to “What have you done now?” and “How much money do you need?” The joke reflects reality perhaps more than we would like to admit. The fact is that we don’t communicate all that much with loved ones and friends. Yesterday I wrote about the fact that life can change so very quickly and not always in a good way.

It is awkward for a good Midwestern guy like me. We are not generally an effusive people and not prone to wearing our feelings on our sleeves. I had both experiences growing up as my father was very demonstrative and rarely missed an opportunity to tell me I was his pride and joy while my mother was extremely uncomfortable with affection and did not praise. I took after my father in this respect but I have to be careful that I do not take people for granted. I have some truly valued friends like Wade. I fear that I get too busy and that I neglect them at times. Just recently I rekindled a long friendship that had suffered from my travel and work schedule and it was as if there had not been a five year gap. I resolve to be more mindful of these relationships. Communication is crucial and when we forget to tell people what we feel we rob ourselves and we rob our friends.

 

 

Iditarod Route Altered for Only the Third Time in 45 Years

 

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If you are a global warming fan, don’t get excited when you see the headline across the media that lack of snowfall has forced officials to alter the Iditarod path. That’s a true headline. Certain mountain passes are down in snowpack and that has forced the route of the Iditarod to be altered for just the 3rd time in 45 years. But, temperatures across the region were 2.7 degrees colder than normal and most of Alaska has experienced snowfall that is higher than normal. It’s just that one region of the route is lacking snow this year.

 

The problem in Alaska this winter is the variance in temperatures and precipitation. Areas of Alaska have seen temperatures well above normal throughout winter – some well below. Some areas likewise are seeing well above average snowfall, and others well below. That’s not surprising, it happens in many regions.

 

Overall, Alaska meteorologists reported that 2016 as a whole was the warmest on record. And ironically, it’s the northernmost regions of the state that are seeing temperatures up to ten degrees above normal.

 

Before we get excited about ice melt and a problem with global flooding from Alaska’s “warming trend” …ten degrees above normal for this region still means that the daily high won’t get above zero.

 

The Iditarod will end in Fairbanks. The temperature in Fairbanks on Monday had a high of zero…with lows to -20 F.

 

 

 

This piece is from the Black Owl Report. For a FREE TRIAL go to www.armada-intel.com/trial

 

Business Intelligence Brief: March 7, 2017

Short Items of Interest – US Economy

 

  • Why is a Strong Dollar Bad? – In truth, there is really no “bad’ or “good” when it comes to the value of a given currency. As the old Scottish proverb says – “it is an ill wind that blows nobody good”. The strong dollar can be a great thing for some companies and a very bad thing for others. By now we understand the impact that dollar value has on exports and import but an issue that doesn’t get as much attention is the impact on other nations – especially the emerging market states. The majority of these countries have substantial dollar denominated debts that have been incurred during the years of cheap credit. They now face the prospect of paying these debts in higher value dollars and that will be a huge drain on their foreign reserves. If the US wants to boost exports, it is going to be very hard to fight high dollar values at the same time that countries that buy from the US are struggling to pay their debts.

 

  • Delaying Retirement – One of the proposed solutions to the retirement crisis is to encourage people to stay in the workforce longer. The logic seems sound enough as there is a shortage of talent in many industries and the work that is done now doesn’t require as much physical ability as in the past. The pressure on social security would be reduced if more people remained on the job. The problem is that age discrimination remains a massive issue and is especially pronounced for older women. Once people pass the age of 50 they find it very hard to get a new job and even to hang on to their old one.

 

  • Immigration Issues – The US high tech sector is worried. The pattern of fast tracking H1B visa applications has been suspended and this will very quickly put a dent in the recruiting process for many high-tech positions. The US struggles to fill these posts anyway and the recent series of attacks on people from South Asia has created yet another barrier. The US simply does not produce the workforce needed and if this source of talent is cut off the US falls even further behind.

 

Short Items of Interest – Global Economy

 

  • Brazil Faces Worst Recession in Decades – The Brazilian economy has now contracted for eight consecutive quarters and there is no reason to expect this streak to end soon. The new government of Michel Temer has been powerless to stop the decline but there has been little from the opposition parties to suggest that they have any better ideas. The country has been hammered by a drastic decline in the value of their exports on top of a budget crisis that has nearly bankrupted the country. As predicted the Olympic Games were an unmitigated financial disaster that accelerated the decline as opposed to halting it.

 

  • US Response to North Korea – Despite strenuous objections from China the US is moving quickly to install the missile defense system promised to the South Koreans and there have been assertions that it will be used aggressively. If this system had been in place at the time of the latest North Korean launches these missiles would have been shot down. The US is making it clear to everyone involved that such provocations will not be tolerated and this is as much to put China on notice as it is directed at Pyongyang.

 

  • US Loss of Global Share Much Less than Europe’s Loss – It is consistently asserted that the US has been the major loser as Asia has grown but the data has not backed that claim. The US share of global output has fallen from 28.5% in 1997 to around 24% this year. In contrast the Europeans have gone from 29.1% in 1997 to less than 20% this year – a decline of 30% as compared to the 15% decline for the US. The key metric here is that the US has gained far more from business contacts with Asia than has Europe or any other region of the world. The difference is in how the US has sold its service economy. The Asian states count on the US for a wide variety of services – banking, insurance, telecommunications, marketing, accounting, law and others. The dominant companies in Asia are generally from the US and Europe brings up the rear.

 

 

 

Are Trade Deficits Bad?

It would seem this would be an easy question to answer. Isn’t deficit a bad thing in general? There have been arguments against running budget deficits for years and all agree that spending more money than has been taken in can’t last forever. Wouldn’t a trade deficit be the same thing? In fact, the term is a loaded one and not very accurate as trade is not a simple zero-sum game. The US does not automatically win through exporting nor does it automatically lose from importing. There have always been a variety of reasons to engage in trade and theories to go along with them. The “best” reason for trade is when a nation lacks the good or service and needs to obtain it from somewhere else. The US is not positioned to grow its own bananas or coffee and doesn’t have enough of the industrial commodities it needs (such as oil). This is called absolute advantage – a country trades what it has to those that need it. Comparative advantage is when a nation chooses to produce and sell what it does best and buys the rest from somewhere else. The US is quite capable of making virtually everything it would ever need but why produce t-shirts and socks that will cost the consumer far more than if they were imported from elsewhere.

 

Analysis: The head of the newly created National Trade Council is Peter Navarro and he has been a long time critic of trade deficits for any reason whatsoever. His assertion is that the US should not be dependent on any other nation for anything that could be considered important to national security. That includes food, machinery, technology, services or anything else. The US should strive to run surpluses with every nation and should take whatever steps are necessary to avoid deficits. That includes everything from promoting exports to limiting imports through tariffs and regulation. To him the world is not full of potential trading partners but enemies that threaten the US directly and indirectly and are bent on eliminating US business competition. Lately he has taken to attacking those economists who do not see things his way and has questioned their patriotism. Given that the vast majority of economists disagree with his assessments this has become a big group.

The counter arguments include the impact of cheaper imports on the US consumer as well as the impact of current account surpluses in other countries. The US consumer is the global consumer that nearly every country targets. This has created the lifestyle the US population enjoys. The availability of cheaper imports means that the consumer’s income goes further. The imported goods are nearly always cheaper or they wouldn’t have a market in the US in the first place. If these goods were not available in the US, the estimate is that every consumer in the US would be paying around $8,000 more each year for the basket of goods and services they now consume.

Beyond the consumer impact there is the fact that countries that make money from selling to the US have uses for that money that benefit the US economy. The money earned is very often invested back in the US through the stock market or through direct investment as people buy everything from property to businesses. In any assessment of the global economy the US comes out ahead of the other states one way or the other.

The assumptions made by Navarro have been questioned broadly. Has trade reduced the number of jobs in manufacturing or is this the result of automation and robotics? Would companies that compete with foreign operations thrive if that competition was eliminated or would they lose their consumers because the price for the good was too high? Would exporters thrive in an environment where they would get preference and imports would be limited or would this simply trigger retaliation from other states that reduced the opportunity to trade? The point is that there is no simple answer. Do companies get hurt when there is open trade and foreign competition? The answer is yes. Do companies make money and thrive and hire people due to the ability to import? The answer to this is also yes.

 

Are Jobless Claims and Layoffs Matching Up?

The number of people applying for jobless benefit has rarely been lower than it has been lately. This would be great news were it not for the fact that layoffs have not slowed down as much as this would imply. The fact is that people are still losing their jobs but for some reason they are not signing up for the benefits they are entitled to and that is causing a disconnect as far as the data is concerned.

 

Analysis: It is not altogether clear why this taking place. There are several theories in play at the moment. One suggestion is that going through the process has become much more complex and daunting and people just give up. This is especially the case when the applicant is not educated or struggles with language. The second theory is that many people have tenuous relationships with their employer as they are essentially contract labor or temporary. They don’t know from one week to the next if they are actually employed. A third theory holds that people don’t expect to be out of work all that long and don’t want the hassle of applying for benefits for just a few weeks.

If the reason for fewer claims is worker confidence, there is not much to worry about but if the issue is that people are being denied the benefits they are entitled to this is a very different situation. Many agencies have put the whole process on-line to improve efficiency but that also means that those who lack computer access or literacy will be at a disadvantage. The disconnect between the claims and layoffs means that there are likely far more people dealing with unemployment than current statistics would suggest. This has become an issue that warrants a closer look and it is one that will become that much more important to understand as the gig economy continues to expand.

 

Disconnect Between Business Confidence and Forecasts for Growth

There is a growing disconnect between the reports of business and consumer confidence and the actual performance of the economy globally and this has been worrying the likes of the OECD, IMF and others. The latest expression of that concern comes from the OCFEC as they issue their latest forecast for growth this year. The underlying economic factors have not altered as much as the expressions of confidence would suggest and the forecasts for the year remain anemic.

The expectation is that overall global growth will only get back to what it has been for the last decade or so – 3.3% this year and maybe 3.8% in 2018. This is almost two full points off the pace that was considered normal before the recession hit. The US is expected to see slightly higher rates than has been the norm for the last few years – somewhere close to 2.8% as opposed to the 2.5% average since the end of the recession. Europe will struggle to keep growth above 1.5% and is not expected to exceed 1.7%. China will slow to 6.3% and that is barely above what the Chinese would consider a recession. The assertions that the US can and will grow by between 3.5% and 4.0% seem pretty far-fetched at the moment.

 

Analysis:  Why is there such a disconnect and what could be done to eliminate it? The first step is to examine the origins of the surge in business confidence. There are generally two reasons that confidence levels improve. The first is that there is suddenly more activity to report and more opportunity for business to expand. This is what buoyed confidence in the period from 2002 to 2007. The consumer got very active and that became a driver or even more growth. The surge in home building underpinned a great many sectors and then there was the energy sector boom. This is a situation in which the actual performance of the economy results in greater levels of confidence across the board.

The other motivation is far more fragile as it is based on expectations and anticipation. The surge in confidence within the ranks of the US business community is based on what they think and hope will happen as opposed to what has actually happened. The Obama administration was judged to be hostile to business interests in many respects and the mood of the business community changed when Trump won the election. During the campaign, Trump addressed many of the frustrations expressed by the business community – everything from regulation to taxes and the need to spend on projects that improved the nation’s infrastructure. The issue now is that none of these changes will be easy. The process of deregulating could take years, tax reform is already bottled up in Congress and the spending on infrastructure requires some solution to the budget crisis as there is no stash of one trillion dollars lying around. The next several months will test the patience of the business community and the consumer. If the past pattern of “instant gratification isn’t quick enough” holds there will a swift slide in the confidence level and perhaps support for the President and the GOP leaders in Congress. If the business community and the consumer understand that these changes will take time there is an opportunity to keep confidence levels relatively high.

The OECD report has asserted that for there to be real progress and growth the developed nations will have to continue to focus on stimulating at various levels. Their point is that now is not the time to abandon that support as many of the nations in the developed world remain stagnant and in a low growth trap.

 

European Concerns Over Chinese Technology Push

It is not just the US that has issues with China as far as their industrial policy is concerned. The Chinese have unveiled a plan to create ten technology champions in the next ten years. These are companies that will be expected to take the Chinese ahead in the market for high tech and it is abundantly clear that these national champions will be getting a great deal of help from the government. This is causing a lot of concern in Europe and the US. These companies will be well positioned to dominate many of the new high tech sectors and could easily drive their competitors out as long as the US and European companies lack the same support offered to the Chinese companies.

 

Analysis: The sectors that China intends to focus on will include electric cars, solar energy, medical technology, battery technology, semiconductors, robotics, aerospace, artificial intelligence, wind power and telecommunications. These are all sectors that China is already active in and the expectation is that government help will boost that engagement dramatically.

 

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.

 

Perspective

It all turned out ok but for a moment there was real dread. Last night storms ripped through my city and we watched the local coverage until it was clear that we were no longer in the path. It was a fast moving and violent set of storms that stretched from Iowa to Texas and as they moved through it was no more than an hour of drama and life went back to normal. That was when the phone rang at an hour when the phone rarely rings. It was my step-son calling to report that a tornado had touched down barely a mile from where they lived.

The twister was a big one and destroyed many homes and businesses in the community where they live. They escaped the damage but the whole incident reminded me of how tenuous everything really is. That storm could have hit their home – could have destroyed everything and maybe even injured them or worse. There were neighborhoods that were destroyed and people hurt. Every day we run risks that could change everything. It can be the weather or simply a bad driver on the highway. With my natural grace, I am surprised I have not become a statistic already. I have fallen through garage ceilings, walloped myself in the head with a post driver, tripped over cats, slashed my leg with a carpet knife (twice) and so on. I have friends who passed far too soon from sudden heart attacks. We can’t very well go around expecting our imminent demise but we also need to appreciate every day that goes as planned.

Perhaps the most important lesson is that we really don’t have any control and we need to react accordingly. Tell the people you love that you love them. It isn’t that you are being morbid, just that you want them to know. If you and your loved ones make it to 106 – what does it hurt that you reminded them every day that they were important to you.

 

 

Garlic in Short Supply – Prices Up

 

This piece is from the Black Owl Report. For a FREE TRIAL go to www.armada-intel.com/trial

 

Who knew that garlic was one of the items in short supply – enough so that it is affecting manufacturing activity?  Production problems (including rust infections) in California, Argentina, New Zealand, and China over the last year have impacted output of garlic. Analysts believe that the 2017 global crop will start to bring prices down, but near term impacts are keeping supply chain managers scrambling to find quality supplies at affordable prices.

 

When we looked at the detail in the ISM report on manufacturing, it surprised us that garlic was listed as the only commodity in short supply.  So, we did some research quickly and found out that garlic has had a supply problem.

 

Much of the supply problem has been highly circumstantial and cyclical – not structural.  Rough weather conditions and a rust outbreak problem led to a reduction in output in 2016. As a result of higher prices, farmers in many markets started to plant additional volumes of garlic and expect to start harvesting much of it in March. That’s especially true in China where farmers see an opportunity to capitalize on strong demand (planted acreage is up 10% over last year).

 

Crop volumes will rebound in 2017 based on output forecasts and a general increase in producer plantings of the crop. Prices shouldn’t remain high for very long as March harvests start to come in, and analysts report that prices in China have already started to drop in reaction to a better crop forecast.  The price per kilogram in China has dropped from 51 cents to 44 cents in just over a month, a drop of 13.7%.

 

 

This piece is from the Black Owl Report. For a FREE TRIAL go to www.armada-intel.com/trial

 

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