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Business Intelligence Brief: May 25, 2017

Short Items of Interest – US Economy


  • Fed Minutes Clarify Intent – Not that there has been that much suspense as far as the intent of the Fed is concerned but the latest set of minutes from their last meeting make it abundantly clear that they expect the economy to perform well enough to justify at least two more interest rate hikes and the next one will be in June. The timing of the second one is still a little up in the air but September is the most likely month for round three. There remains a possibility that another hike would take place in December but much depends on whether the Fed decides to take a breather and focus their attention on getting their balance sheet under control. It has risen from $800 billion at the start of the recession to almost $6 trillion and at some point the Fed has to unwind from that position.


  • Slight Increase in the Job Claims Numbers – This is not causing even a slight stir in the markets as the trend has been solid for weeks and there is no signal suggesting that anything significant has changed in the labor market. This is mostly seasonal activity and reflects some of the slowdown in auto manufacturing. There will be more periods this summer as the new model changes start but the bigger issue is that demand for cars is down and that has been affecting production demand. There continues to be job growth in construction and summer hiring will soon start to affect these numbers although the retail sector looks reluctant to add that many to the payroll.


  • What is Limiting Growth? – The stated goal for the administration is 3% growth but almost every economist or analyst has indicated that this is not very likely and there is not all that much the White House or Congress can do about it. The most worrisome issues are long term – labor shortages as far as the skills needed in today’s economy and a productivity gap that has lasted for over a decade. The gains in productivity have been hampered by that labor shortage as new hires are not able to contribute much for the first year or so. The tree sectors that have been dragging overall productivity down include health care, education and the government in general.


Short Items of Interest – Global Economy


  • China Pegs Yuan to the Dollar – For all intents and purposes the Chinese have been doing this for years but the peg has been made more or less official now by the Bank of China. Last year the yuan weakened against the dollar by over 6% and this year it has strengthened a little – 1%. The market jitters that have affected China have been tempered by this connection and it takes a little of the pressure off currency manipulation talks as the Chinese are now starting to behave like many other states – connecting their currency movement to that of the dollar. It has made things a bit more predictable for the investment community but they are well aware that this peg can be removed in an instant if China needs it to.


  • Some Comity in Brussels but Not Much – It has been pretty apparent that there is a campaign Trump and a White House Trump when it comes to a variety of issues. The challenge now is separating the two. During the campaign, there was much bashing of the EU as Trump praised the Brexit decision and suggested that Marine Le Pen was on the right track. The Europeans took a dim view of this and there has been open hostility between Trump and Angela Merkel. The meeting in Brussels has been a chance to get a real sense of the Trump of today and it seems a little calmer but with lingering issues around trade and climate change.


  • US Challenges China Again – Earlier in the year the US declared that it would try to thwart Chinese ambitions in the South China Sea but then that posture reversed and the US indicated that it was going to stop challenges. That policy has now reverted back to the previous one as the US is now sailing a warship straight through the contested territory and this has provoked the Chinese to send out its own ships to challenge the challenge.




World Trade Patterns Suggest Solid Growth

The growth of the US economy has been solid if not spectacular thus far this year and there has been much speculation as to why this is taking place. There are assertions that it is all due to the enthusiasm over potential changes under the Trump administration and others assert that this is consumer sentiment driven. There is another motivation and it has been somewhat overlooked. The global economy has been looking far healthier than it has in past years and there has been a boost in global trade despite the fact many countries have been pursuing policies that are protectionist and defensive. Given the US depends on exports for roughly 14% of its GDP (about the same level as Japan at 14.7%), the health of the global economy is important to the growth of the US.


Analysis: Trade flows last year were as low as they had been since the start of the recession but that pattern abruptly changed at the very end of the year. The last quarter of 2016 saw significant growth and that pattern has continued into 2017. The latest monthly gain was 1.5% and the quarter has been up by 1.4% over what it was at the end of last year. The companies that handle the majority of global freight activity have also seen a significant increase in business with air cargo up 11% and several of the ocean freight operations citing gains of between 8% and 17%. There has been talk of capacity shortage for the first time in several years and this will likely start to show up in higher freight prices at some point.

Theories abound as to why there has been a sudden boost in trade after the sluggish performance over the last decade. There has long been a connection between investment levels and trade and it has been noted that investment has been more active in the last few months. This is related to expectations to some degree. Those in the manufacturing sector assume that there will be more demand for their machines and output and they are doing their best to get ready for that expected surge of interest. The question is whether this enthusiasm will last if the expectations regarding tax reform, regulatory relief, infrastructure development and health care reform are not met or are deferred.

The most basic explanation is that there has been economic recovery in Europe and China. For the last decade, these countries and regions have been extremely stressed and their volumes of trade have fallen dramatically. The EU has been shaken hard by the collapse of the southern tier states, the growth of populism in France, the Netherlands and elsewhere and then by the Brexit decision in the UK. These countries are heavily trade dependent (Germany relies on trade for around 55% of its GDP annually) and when there are economic issues in one country it affects all the others. China has also been trying to get back in gear with some success. The export sector has grown as the US economy has recovered as there has been more demand for the consumer goods that China produces.

There remains concern about the protectionist tendencies that have manifested in the US as well as parts of Europe and even Asia. The logic is always that when there are economic issues the best thing to do is to circle the wagons and fend off imports for the sake of domestic producers but that logic is always flawed. The fact is that economic growth and expanded trade always win. It makes logical sense that an expanded market is more lucrative. The expansion of both growth and trade should give protectionists pause but they rarely alter their opinions. For the US, the desire for expanded growth should reinforce support for more open trade but there are still many proposals out there that call for trade restrictions, high tariffs and limits on foreign activity. The bottom line is this line of thinking is inconsistent with a desire for expanded growth.



Debt Limit Debate

For the entire duration of the Obama Presidency there was a rock-ribbed position taken on debt by the majority of the GOP. Every time the US Treasury wanted to expand the debt limit so that the US could borrow more money to pay its bills there was ferocious opposition and generally speaking the fight took the government close to defaulting on its obligations. On three occasions this battle resulted in the US being downgraded by the rating agencies. It was as much a part of GOP orthodoxy as anything they stood for. It now appears that this position is not shared at the executive level.


Analysis: Treasury Secretary Mnuchin wants an end to the debt ceiling debate as he wants no more restrictions on how much the US can borrow. In truth, the US is somewhat unique among major industrial states in that permission has to be granted by the legislature to raise the debt limit. In most other states that question is addressed in the context of setting the budget and making appropriations. It is assumed that if the decision to spend was made the country would either get the money through revenue or would borrow what is needed. It is also true that many of the former Treasury Secretaries have expressed opposition to the ritual of asking for more debt room.

What makes this unusual is that it is part of a general sense within the executive that debt and deficit issues are not as important as they were once. The majority of the Republicans in the House and Senate continue to worry about these twin concerns but that worry is not shared by the White House. The supposition is that any and all debt and deficit will be wiped out when the US is finally able to grow consistently at between 3.0% and 4.0%. The problem is that the US economy has struggled to hit 2.3% over the last decade and it is hard to see where that additional growth is going to come from. The intent is to deficit spend to boost the economy but much of the budget that has come from the President is unrelated to stimulation and few think there will be the boost the White House expects. The deficit hawks in Congress are not on board with this budget or the debt plan.



Is Economic Dynamism Fading in US?

There are many measures designed to determine just how dynamic a given economy is and they are often at odds with one another. There are studies that focus on harbinger sectors such as transportation on the assumption that business has no interest in moving freight around in the absence of demand. There are studies that look at housing as this is a sector that affects a great many other sectors and housing is where most Americans have their greatest investment. One study looks at factors like business start-ups and the overall mobility of the workforce. It is assumed that the mist dynamic economies will see lots of new business and there will be lots of labor mobility as people will be attracted to the growth. By this measure the US is far less economically dynamic than it used to be.


Analysis:  The Economic Innovation Group has concluded that dynamism has been failing since the 1990s and this pattern has worsened in the last few years. There are parts of the country where this lack of dynamism has become acute and seems to be connected to lower growth trends and pervasive issues such as unemployment and poverty. The parts of the country that have seen the largest declines in dynamism are predictable – the so-called “rust belt” of the Upper Midwest. Not surprisingly these are that states that have embraced aspects of populism and generally supported Trump. They are worried about their jobs and the future of their communities in a world that seems to have left them behind. The assertion is that since the 1990s the country has become more “static, top-heavy and concentrated”. This is not just an issue of government but of corporate concentration squeezing out smaller competitors and regional players. Each time there is a merger or acquisition there is streamlining and loss of redundant jobs. This is good for the company that is doing the acquiring but is generally not so good for the communities that lose their source of revenue and for the people whose jobs have vanished.

The states that still have a certain level of dynamism would be considered slow even a few years ago. Compared to the states that have suffered the most loss they look good but they would not be considered leaders a decade or two ago. The dynamic states (relative to the less dynamic) are those that garnered a score of at least 40 and they include North Dakota (44), Nevada (50.5), Florida (45), California (40.9), Texas (43.5), Colorado (44.9) and Utah (45.9). All the others score far lower. A third of the states saw their dynamism fall by over 50% since the recession and those that were heavily dependent on manufacturing had the most difficult experience. Seventeen of the states fell to an all-time low in 2014.

There were two interesting factors as far as dynamism was concerned. The first is that the most dynamic states are also the ones with the largest population of foreign born workers. The fact is that many of the new arrivals are very entrepreneurial and do a lot to stimulate new growth. In the ten most dynamic states over 13% of the population is foreign born and those states that are the least dynamic the foreign born population is less than 6%. The other key factor is youth as the dynamic states have younger populations than the country as a whole.



British Object to US Intelligence Leaks

The British intelligence community is angry with the leaks that have been compromising their investigation into the Manchester bombing and it is expected that PM Theresa May will bring this to the attention of the President and his staff. It is not clear where these leaks are originating but the British assert that members of the US intelligence community have been sharing information with the US media without permission from the British authorities and it is likely that further intelligence information will be withheld from the US. This would be a major break in the tradition of sharing data between the two nations.


Analysis: The most glaring breach was the release of the terror subject’s name. The British press had been asked to keep the identity secret while further arrests were being planned and then it was suddenly released by the US press. This may well have allowed others in his network to go into hiding. Then there was the publication of detailed photos from the scene prior to the notification of all the families involved. At least one family learned the fate of their daughter through the photos. This was considered extremely insensitive and the British are furious with the response from the US and the media. The cooperation between the US and the UK has been taken for granted for years but now this relationship seems strained. The British intelligence community is closing ranks and is no longer sharing much with their US counterparts.



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 and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.



Font of Wisdom

There is nothing quite like the conversation that one hears between those with expertise. I get around people who really study their favorite sport and I am agog at the arcane knowledge displayed. The chance conversations overheard at an airport illustrate just how intricate and complex business can be as I am quickly lost in the details under debate. There is a similar sharing of specific knowledge between those of us that travel a lot and Southwest makes it so easy for us to connect as those at the top of the A-list line are by definition the road warriors.

The casual conversation between strangers quickly centers on travel strategies. What website offers the best data on flights in progress, what to bring on board to while away the time, best hotels for the weary traveler, the best places to sit on the plane, favorite airports and so on. Those around us who don’t fly so much are likely assuming that we have no lives to speak of given our preoccupation with issues like airport plug-in locations and what kind of headphones best drown out screaming children.

The overwhelming preference for the frequent flyer is predictability and routine. The folks on vacation are all about new experiences but the road warrior craves routine – hotels that they know by heart, patterns that reassure that things will go as planned. New and different is not good – just stressful. The highest priority in a hotel room for me is a good desk chair. I can sleep in any bed and I can tune out noisy air conditioners and my neighbors. But I spend two or three hours every morning sitting in that chair banging out this publication and when that chair is a broken down piece of junk (as it usually is in those “luxury” hotels) I am not all that productive.


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


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Border Adjustment Tax In Trouble – This was never a new concept – it has been brought forward a number of times over the years. The simplest description is a tax system that treats imports and exports differently than they are currently dealt with. It means lower taxes on the exports and higher taxes on imports. Since this idea was broached again there has been intense and active opposition from the corporations that would be seeing higher taxes as well as from those in Congress that are just not fans of taxes going up. It doesn’t have much support in the Senate at all with most in the GOP skeptical about it., That has not stopped some in the House from pushing it but it doesn’t seem all that likely to pass.


One of the most persistent problems posed by this attempt to shift the tax burden is the impact this has on the value of the dollar and that has been the major inhibitor when this has been suggested in the past. The fact that exports get a tax break means growth for those exports and that provokes a stronger dollar as investors get encouraged. This stronger dollar inhibits the exports that investors are responding to and this reduces the advantage that exporters might have had from the tax change. This plan has been trotted out over and over through the years and sometimes even the suggestion that it might be implemented has been enough to boost the dollar. There are many in the Senate that have been down this road before and they know where it leads.


This is not to say that there is no way to bolster exports and these plans may start to make their way forward. One of the simplest is to simply use the President as “salesman in chief”. Many world leaders are quite blunt about this and bring a business delegation with them when they travel. Germany’s Chancellor – Angela Merkel – famously refused to leave the airplane when her Asian hosts showed up with a Lexus to pick her up. She demanded a Mercedes be sent and only then did she leave the plane.



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Business Intelligence Brief: May 24, 2017

Short Items of Interest – US Economy


  • Border Adjustment Tax In Trouble – This was never a new concept – it has been brought forward a number of times over the years. The simplest description is a tax system that treats imports and exports differently than they are currently dealt with. It means lower taxes on the exports and higher taxes on imports. Since this idea was broached again there has been intense and active opposition from the corporations that would be seeing higher taxes as well as from those in Congress that are just not fans of taxes going up. It doesn’t have much support in the Senate at all with most in the GOP skeptical about it. That has not stopped some in the House from pushing it but it doesn’t seem all that likely to pass.


  • Sharp Decline in New Home Sales – There has been a decline of 11.4% from March sales and that has many worried. For months it has seemed that the housing sector was able to defy conventional wisdom. Usually when the prices of homes hike and mortgage rates get higher one can count on reduced sales but for month after month this has not been the case as demand just continued to hold steady. Are there signs that this sector is returning to “normal”. It seems that higher prices are the biggest factor – many homes are getting priced out of range for the new homebuyer. Then there is the fact that construction has been inhibited by the lack of skilled workers and the slowdown in building to existing demand as a result.


  • Can $15 an Hour Change the Economy? – It can most certainly change the economic future of the person receiving the raise but only if other factors change alongside it. The most damaging part of the hike for those who are earning minimum wage now is that some will be fired when the management decides that it can’t afford the raise. The longer term issue is longevity. In the vast majority of cases the minimum wage is the starter wage and people move up over time to better jobs that pay more. The challenge is to find a way to keep creating starter jobs with potential to be better jobs as opposed to locking people in low wage occupations.



Short Items of Interest – Global Economy


  • Latest on Manchester Bombing – Over the next few weeks there will be a steady dribble of information on this latest atrocity as people try to piece this all together. We now know that the suicide bomber was a recent convert to radical Islam and was in a violent gang prior to that conversion. It is expected that he did not act alone as credit has been claimed by the Islamic State and there have been additional arrests. The UK is at critical alert at this point as there is fear that other attacks might occur.


  • Duterte Declares Martial Law – The President of the Philippines has declared martial law in his home state of Mindanao and that has even more people worried about the autocratic tendencies of this mercurial leader. The rationale for the move was ostensibly to address drug crime but it has already been noted that many of the targets have been political enemies with no connection to drugs in any way. His actions have polarized the country but he remains popular in the poor parts of the country and in regions that have been affected by drug and gang violence.


  • Fighting Oil Theft in Mexico – This is not a small issue. The gangs that are stealing oil from Pemex are costing the company over $1 billion a year. In a recent case the Pemex drones photographed a line of 148 trucks lined up to siphon gas from a break in the pipeline. The same collusion that drives the drug trade exists in this illegal venture as well. The local authorities look the other way and even assist as they see this as little guys stealing from the big guys. The prospects for stopping this trade look dim and the government has not offered a lot of assistance to this point.




Saudi Arabia Pushes Extended Production Cuts

The meeting of the OPEC members doesn’t cause the global financial community to stress out the way it once did. Not that these oil producers are not important but the stranglehold they once possessed is long gone. Once upon a time the OPEC states easily controlled some 60% of world oil output and they could set the price anywhere they preferred. That was back in the day when the US relied on imported oil for 65% of its needs. Those days are gone as well. Today the US is producing more oil than it has since the 1960s and is usually the number one or two producer in the world alongside other non-OPEC states like Canada and Russia. The meeting of OPEC no longer strikes fear in the heart of the oil consuming public but that doesn’t mean their decisions have no impact.


Analysis: Towards the end of last year OPEC elected to reduce their production of oil in order to reduce the size of the oil glut and get prices back up from the collapse that took place in 2014. That was when the price per barrel fell to $28 and threatened to drive many countries out of oil production as they simply could not keep output flowing at these prices. The per barrel prices have doubled since then but they remain far from the days when oil was selling for $120 and $130 a barrel. Today analysts assert that oil prices will remain more or less steady in the $60 a barrel range for years. The oil glut is persistent and there is little to keep producers from stepping up their output when and if the price should go up a little. The conversation now is about peak demand instead of peak supply. The assumption has been that consumption has leveled off and that there is more than enough oil to go around. Critics of that position assert that demand has been down because overall economic growth has slowed and they assert that when that growth picks up so will demand for oil.

As OPEC meets, the Saudi position is that production reduction should be extended by another nine months at the very least. They want oil prices back up to respectable levels for a wide variety of reasons but at the top of the list is their desire to support the public offering of the state oil company – Aramco. The goal has been to drain around 2% from global oil supply so that the glut will not weigh on prices. The sense is that OPEC states are supportive and there has been agreement to back the extension by several of the non-OPEC producers such as the Russians. The problem for OPEC – as is nearly always the case – is that many members cheat and produce more oil than their quota is allowing. Russia has routinely produced more than they promised they would. The stated goal has been to limit output to 1.8 million barrels a day and there has been far more than that produced regularly.

The discussion itself has driven the price up slightly as it closed at a little over $53 a barrel this week. The problem is that Saudi Arabia really needs the per barrel price to be around $80. They have a much more significant budget than was once the case as they have a more extensive welfare system, pension system and they are now fighting an expensive war in Yemen. The other OPEC states are even more desperate for those higher prices. Venezuela could use every dime it can get and the same can be said for Ecuador, Nigeria and others. Russia has been hoping that OPEC pressure would have an impact on prices as they need these higher levels if they are to make a dent in their persistent recession.

The problem for OPEC is the US and to a degree – Canada. These two states are now near the top as far as oil output is concerned and they can turn on the spigot at will. If the price per barrel reaches $60 or $65 these oil states will ramp up almost immediately to take advantage of the higher prices and that fuels the return of the glut and prices will fall again. The oil markets expect a little bump due to the OPEC decision but nothing permanent or that significant unless there are other issues such as weather or geopolitics.


Budget Pushback from All Directions

The process is a familiar one although one wouldn’t know it from the histrionics that has ensued – but even that is somewhat predictable. The President’s budget is a starting point and a declaration of philosophy more than a well-thought out strategic document. The plan as laid out by the Trump White House is a challenge to the status quo in that it attacks a series of sacred cows and outlines some radical assumptions. The only thing that is certain about this budget is that it will soon be torn to pieces and the finished product will bear little resemblance to what was proposed.


Analysis: There are organized opposition factions in both parties. The Democrats will oppose the deep cuts in the social safety net programs the government has traditionally provided. The Trump plan is radical and has been characterized as “get a job”. There is quite a bit of support for making these social programs more motivating but there is no support for the complete dismantling. The GOP is split over the issue of deficit and debt. This budget doesn’t cut into the entitlement programs like Social Security and Medicare and as long as these are off the table there is not going to be much progress on either debt or deficit. The GOP likes the increased support for the military but the deficit hawks want more cuts in other areas to offset the hike. There are plenty of supporters for almost everything the government funds and they will be out in force.

In past years, the President was called upon to charm and cajole the members of Congress to see things their way. This is not a good time for Trump in that regard. He has not been very good at building alliances and all the controversy that has been swirling around the Russia “thing” has made him radioactive for some in his own party. His ability to move legislation has been a weakness thus far and the budget discussion is not likely to be his first big win. The arguments will come right down to the wire and most expect last minute hysterics.



Tories Likely to Win Coming Election Soundly

Since Prime Minister Theresa May declared an early election, the polls have indicated that she was going to win as the Tories would do well in the majority of the vote. In recent weeks it has been apparent that the voters are waffling a little and the Labour Party has been slowly closing the gap. It appears to most that there will not be enough time for Labour to win but they may be bringing more pressure than was the case before. Election analysts assert the Tories have some advantages that do not always appear in these polls and many still expect a fairly dramatic victory for May and the Conservatives.


Analysis:  Analysts assert that the Conservatives traditionally do better in the elections than the polls suggest. There are voting groups that do not respond to the polls very well and there are others that tend to vote for the Tory candidate but don’t assert they are going to do so until the last minute.  The sense this time is that polling has been more or less accurate and the historical bias towards the Conservative Party might play a diminished role this time.

The second major factor is the personal popularity of the party leaders and up to just recently Theresa May held a 24-point lead over Jeremy Corbyn but that lead has eroded somewhat over some of the abrupt policy changes that have taken place in the May government. Her lead is likely to be reduced and it doesn’t translate to a 24-point lead for the Labour Party as a whole. She has benefited from the collapse of UKIP. They banked their fortunes on the Brexit vote and once that was won they had little to do. May was originally a skeptic as far as Brexit was concerned but she has won over the “leave” faction with her statements and actions and the majority of the UKIP voters have returned to the ranks of the Tories.

The third factor that seems to favor a big Tory win has been the local elections that have been taking place of late. The results have been very good for the Conservatives as they have trounced both Labour Party candidates and those from the Social Democrats. The wins in traditionally Tory regions have been convincing and there have been some unexpected victories in places where the opposition as thought to have advantages.

The bottom line is that the Tories will win convincingly but probably not as overwhelmingly as originally thought. The enthusiasm for the Brexit decision is still there but tempered now as people realize what this is going to mean for the British economy. The latest terror attack will have an impact on the vote as well. The suicide bomber was a young man recently converted to radical Islam and not an outsider or immigrant. This further polarizes a country that has been on edge anyway. Some will react strongly and will demand an angry response from government and that generally pushes people to support the Conservatives.


Is it the Moment for Kazakhstan?

The Central Asian state is as big as all of Western Europe but has been bumping along on the margins of global attention since the fall of the USSR. To most it remains an unknown, another country ruled by an autocrat and a former part of the old Soviet Union that remains very closely tied to Russia and way too dependent on a single commodity – oil. The fact is that Kazakhstan is very different from the other “stans” in the region. Its population is still over 60% Russian and it has been far more stable than the others in the region despite the despotic tendencies of its leader – Nursultan Nazerbayev. He is the undisputed leader and has been since the breakaway from the USSR but he has been shrewd when it comes to sharing power and wealth. Those who might have been a threat are usually co-oped instead and those who insist on fighting him vanish one way or another.


Analysis: The country has some significant economic problems but these have not slowed the interest in Kazakhstan as an investment target. The collapse of global oil prices hurt badly and there has been a 57% decline in exports since 2014. During that same period, there has been a 43% decline in imports. Not only has the oil sector weakened but there has been a severe reduction in the industrial capacity of the country. It still aims the majority of the manufacturing activity at Russia and much of that is in support of a Russian company, it has little global connection. Debt service is almost 20% of the national budget and this gets more expensive every day.

This new found investor enthusiasm is based on support for the reform agenda that has been set out by Nazerbayev’s advisors. It is geared towards higher budgets tied to growth and management of debt based on the creation of a sovereign wealth fund of some $62.5 billion. It is not easy to pull this off in a commodity dependent state but the effort has attracted attention.



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 and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.



The Little Things that are Not Really so Little

Another rant – oh boy! You knew I was overdue for one of these, didn’t you? In the last few days there has been steady drip of irritation caused by “little stuff”. I know that we are all urged to not sweat the small stuff but I really don’t agree with that assertion. I think it is the small stuff that most needs to be attended to. I remember well the speech given by a Navy Seal commander who pointed out that the first thing a Seal learns is how to properly make their bed. If you can’t get the small things right how are you to be trusted to get the big things right?

I started with my wife’s schedule. She had arranged for a furnace inspection and it was to be on Tuesday. They didn’t show. She called and they had the date wrong. Really? Has nobody instructed the staff in how a calendar works – the sequential nature of the thing? This kind of error happens far too often as people get in a rush and lose accuracy. No big deal unless one is working with a very tight schedule. My contribution to this litany is the number of times that groups fail to arrange my hotel after assuring me that it has been done. I end up arriving late at night and facing a fully booked hotel. Once had to shift to a hotel that was 25 miles away from where I was to speak at 7:30 in the morning. This stuff happens to all of us and all the time. We don’t get the sandwich we ordered or we get stood up by the repair guy. None of this is earth shattering and mostly we just let it go but my irritation is that this shouldn’t be all that hard. It just requires a little concentration and some review.

I have taken to writing a lot down so that I don’t forget and miss things. It seems a little silly as surely I will remember but life gets hectic and it is easy to get distracted. The little note pad helps manage that distraction – at least if I remember to write it down in the first place.


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


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Terrorism and Business Risk –  The horrible events in Manchester from last night are all over the news.  And most good media sources are jumping to the same conclusions we are: if this is a new tactic that will be used by terrorists, how do businesses cope with the risk? The terrorist, Salman Abedi, waited until a music concert was over before walking into the exiting concert-goers in a lobby area and detonating what appears to be a “nail bomb”. At the writing of today’s brief, 22 people had been killed and 59 more had been wounded.


Since security has been tightened at the entrance to most major public venues, preventing would-be terrorists from getting into a major sporting event or concert, this may be the new wave of imposing terror.  Hitting people standing in lines or exiting an event may be a means of trying to instill fear into the general population. This is the second major attack where terrorists got inside a structure in the buffer zone between the general public outdoor area surrounding the structure and a secured zone inside the facility. The airport attack in Brussels showed the vulnerability of a commons area.  Unfortunately, these are choke points where people are forced to congregate in small areas together as they come and go from secured/public areas.


There’s not a movement yet to try and secure building lobbies, luggage areas of airports, outdoor areas where lines form, etc. When that happens, your business world will likely change again. You will have to rethink the flow of people, security perimeters, your liability, etc. And maybe there’s nothing to do about it today. These activities unfortunately have happened going back to the earliest days of human civilization where crazy individuals attacked innocent people at an event. The only difference today is that a single individual can inflict so much death and destruction by themselves in a concentrated area with modern devices.


A terrorist expert today reported that there is evidence to suggest that armed security personnel can be a deterrent against many types of terrorist attacks and general crime. That might be the biggest trend changer here – is that we see a wave of changes in corporate security whereby more armed and uniformed guards are on premises in many areas that don’t have them today. It will change insurance risk and liability concerns for certain, and could increase the cost of doing business. But, rest assured that many security experts are reviewing the risks today of a similar event taking place in any lobby in the United States – and what it would mean for workers and visitors.  That’s not to mention the public relations nightmare that would also come along with it – unfortunately teams of people have to consider that.  Horribly, terribly, and unfortunately, ask Ariana Grande’s team and the Manchester Arena’s management team about that today…KP


Business Intelligence Brief: May 3, 2017

Short Items of Interest – US Economy


  • Have We Reached Full Employment? – It would seem that this would be an easier question to answer but it isn’t and there is considerable difference of opinion among analysts. The notion of full employment is that all the people who want jobs can find one but there are still some 9 million people out of work and presumably most of them want jobs. The BLS has many different interpretations of their data with U-3 being the most commonly quoted. This is 4.4% but U-6 is about twice that and some studies suggest that unemployment could be as high as 13% or 14% if one counts all those people who are essentially part of the grey economy. This matters as full employment generally starts to spur inflation and we have not seen much of that so far.


  • Budget Priorities – It is important to remember the President’s budget is little more than the opening salvo of a long battle and that the real work will be done in Congress (specifically the Senate). The priorities as set out by Trump will inform the initial discussion. The plan calls for a cut of $3.6 billion and the majority of the reduction will be to social welfare programs aimed at the poor while other sectors will be protected or expanded – entitlement programs and the defense sector primarily. The Senate appears to be on board with what to expand and protect but there is far less consensus on what to cut.


  • What Really Matters as Far as Debt is Concerned – There have been many of the usual howls of outrage over the latest budget and what it will mean to debt and deficit numbers. It has been taken as truth that debt is bad and that the mission of government is to pay it off. That is really not the case – this debt is not meant to be paid off if that means compromising overall economic expansion. The fact is that government tax policy has very little impact on tax revenue relative to other factors. The number one impact on tax revenue is the business cycle and overall economic growth and budget balancing has to come second to promoting that growth.



Short Items of Interest – Global Economy


  • Greece Still in Crisis – Greeks creditors have been unable to reach an agreement after marathon meetings and that leaves the country in a highly vulnerable position as they have to come up with a new agreement prior to the July deadline or they face repayment terms that will cripple the already staggered economy. The total collapse of the government and economy are very real possibilities and the talks will have to come to some kind of agreement in the next few weeks.


  • Mexico Does Slightly Better than Thought – The revised numbers for the first quarter GDP in Mexico rose just a hair – from 0.6% to 0.7%. This is still very far from robust and is still a worry for Mexico as the growth is not exactly matching what is happening in the US. For obvious reasons the Mexican economy is tied to the US and there was an expectation that growth in the US would stir more in Mexico. On the other hand, the US first quarter numbers were also low at 0.7% and perhaps as the US moves ahead, the impact on Mexico will be more apparent.


  • India Worried About OPEC Cuts – For many decades the Indians have relied on oil from the OPEC states – for political reasons as well as convenience given where the oil is coming from. The Oil Minister for India has expressed concern over the plans to reduce production in the OPEC states and he has started a concentrated search for alternative sources. The top of that list is the US now that the US is able to sell crude outside its borders. The Indians have long been very price sensitive to oil and the US is now producing at costs that compete with OPEC. The US oil market has been steadily expanding and having the ability to add Indian demand would be a major boost. The most important consideration will be transportation as this oil will likely be shipped out of the Gulf of Mexico.




Dramatic Shift in European Mood

The long awaited recovery may actually be at hand in Europe as analysts have been describing the mood as “euphoric”. There is a general sense that the region has been dodging political bullets throughout the last few months with the most important being the French election. There was genuine fear the European Union would be shattered by a victory of the extreme right under Marin Le Pen. Her campaign softened some of the more radical positions as she tried to expand her popularity but she never left her critique of the EU behind and a “Frexit” seemed a distinct possibility. That she was trounced by Emmanuel Macron caused France and the whole of Europe to heave a sigh of relief.


Analysis: The latest data from the Purchasing Managers’ Index for the Eurozone was very strong and many of the business sentiment readings are as good as they have been in over a decade. The IHS Markit reading for this month’s PMI was the same as it was last month – 56.8. This is the highest reading in six years and it is significant that it has held steady through a tumultuous month. There had been concern that all the political drama would drag the numbers down as companies exercised caution. It appears that there was considerable confidence that populism would not engulf France and the rest of Europe just yet. In France, the PMI number improved from 56.6 to 57.6, signaling that business was well pleased by the political outcome. There were gains in Germany as well but these were not across the board as some of the sectors showed some signs of strain – mostly those that are geared more to exports than to the domestic economy in Germany.

The Ifo Institute in Germany saw a boost in its already high confidence readings. It went from 113.0 in April to 114.6 in May and that is as high as it has been in over seven years. Consumer confidence levels have also been rising in Europe and in many countries they are as high as they were prior to the recession in 2009. The mood has been characterized as everything from “euphoric” to “exuberant” and seems to be rooted to a significant degree in a sense of pent-up demand. The economic news has been negative for a long time and the consumer has been waiting for things to get back to what used to be “normal”.

Now there are some new issues surfacing due to that stepped up demand. The majority of the business community adopted a very cautious and careful strategy with little expectation of rapid growth and that has now come to create a series of shortages and backlogs. The slack that was in the manufacturing sector has largely been used up and now there are concerns that shortages will spur rapid inflation. For the last few years there has been little inflationary pressure from commodities or from manufacturing itself and that could soon change considerably.

One anticipated change would be the European Central Bank policy regarding stimulus. If there is really this kind of growth and consistently, the ECB will not have the same pressure to keep rates low and engage in more quantitative easing. The ECB will soon face an awkward dilemma and one that has faced it before. The big states (and many smaller nations in the north) are doing pretty well but the southern tier countries like Spain, Italy, Greece and Portugal are not nearly as healthy. Does the ECB shut down its stimulus plan to accommodate the fear of inflation in countries like Germany or does it keep this in place until the southern states can get their act together?



Terror in the UK

There is not much that can be said at a moment like this and the tragedy is compounded by the fact there have been so many moments like this. The suicide bomber killed 22 people – mostly young teens – and injured hundreds more. The timing was deliberate and designed for maximum carnage. The statements from government officials have become familiar – declarations of unity and vows to resist the divisive reactions that inevitably follow such an assault.


Analysis: In the days and weeks that follow there will be many reactions. The families of those who have been traumatized will grieve and most of the world will share that grief. There will also be anger and this is what most concerns the authorities from this point. The terrorist has been identified but the name has not been released as yet. There has been no formal acknowledgement of responsibility but it is expected to come soon and if it is, as expected, a group connected to Islamist extremism there will be reaction. There will be those who seek revenge and they will target people who have nothing to do with these attacks.

There will be more calls for more security but there is really little that can be done to stop these attacks as long as people have a right to attend concerts and go about their business. The people will demand a response to the attack and the government will want to offer solutions. The grim reality is there are no solutions as long as there are deluded fanatics willing to abandon all shreds of humanity to kill utterly innocent people. The long process of learning about this latest atrocity has begun and police have already arrested somebody with connections to the attack. There will be more and the pattern will be as it has been before.

This leaves the rest of us in shock and deeply saddened. What do we do with this? We know that it has happened before and we know that it will happen again. Our responses seem so feeble. We can only reach out to comfort those who have lost so much and we can only try to remain strong in our own beliefs. The aim of the terrorist has been described many times before. They want these supreme acts of cowardice to divide and destroy. They want the way of life they so despise to end. They want us to abandon our freedoms and to cower in fear and distrust. We all fight back by not giving up that way of life.



The First Foreign Trip

Every President has this moment and some are better prepared for it than others. It is the first official trip outside the borders of the US and as such it takes on a great deal of symbolism. It is not like Trump has been shunning foreign contact as he has met with dozens of leaders already – but all of these have been on our home turf. Now he is in the other court and this can be challenging and instructive.

Thus far the impression of Trump is that he is unpredictable and he likes it that way. This is the behavior of a business person in competition with rivals. One doesn’t signal moves and intent and one changes tactics and strategy quickly as conditions seem to warrant. It is not clear that this approach works very well in terms of diplomacy and international relations. The demand in this world is for predictability and stability so that each nation knows where it stands. Is the US an ally or rival? Is the US going to back a policy developed by another or not?


Analysis:  Four impressions have been left thus far in this trip. The first is that the US has clearly taken sides in a long running sectarian conflict. Not that this is a shock or even much of a departure from past policies but the US has firmly and decidedly taken the position it will support the Saudi Arabians and therefore the Sunnis over Iran and the Shiites. The US has been at odds with Iran for decades and the reasons are patently obvious given the many times that Iran and the US have clashed. The difference is that the US embrace of Saudi Arabia is far closer than it once was. This puts the US firmly in league with an autocratic regime that faces internal upheaval and which has been very engaged in the politics of its neighbors (such as Yemen).

The second impression is that Trump’s position on Islam is situational. At home the plan is to ban Muslims from entering the US for fear they will foment terrorism and in Saudi Arabia Islam is described as “one of the great religions”. It is hard to reconcile the two positions and this will create confusion in many Islamic populations. There has been some attempt to divide the debate but there have been errors already. Many western states try to make a clear distinction between the extremists and the millions of ordinary Islamic faithful and one of the key phrases is “Islamist extremism” vs. “Islamic extremism”. It seems like a case of splitting hairs but it is vital to the Islamic world. The use of “Islamic” implies that extremism is part and parcel of the faith itself and “Islamist” means that extremists are exploiting the religion for their own purposes. Trump stumbled in this distinction more than once and the local press was aflame at various points.

The third impression is that a deal between the Israelis and the Palestinians will be as difficult as it has always been. The US is very openly siding with Israel and again that is not a great shock. The Obama approach didn’t yield much either – other than to make Benjamin Netanyahu furious. The Palestinians are not hopeful and have all but abandoned hope for a deal that recognizes them. They distrust Trump more than they distrusted Obama.

Finally, there is the fact that every nation in the region still hangs on every word uttered by the President of the United States. There were those who wondered whether the controversy in the US would affect this trip but the reality is that other leaders could not really care less about these domestic concerns – unless they so weaken the President that he loses effectiveness. These nations need the US and in many respects. They want to hear what the US has in mind for them and what the US can do for them.



Minimum Wage Fight

The labor unions in the US have taken a major step in a new direction and analysts are not convinced this will pay off for them. The focus for the last year has been the “Fight for Fifteen”, an effort to demand the minimum wage be increased to $15 an hour nationwide. This is risky as the vast majority of these workers are not in a union and will likely never be. They are not paying dues and not supporting the unions that are championing the effort. The unions hope that this stance will lead to more union engagement as they have been watching their numbers dwindle for years.


Analysis: There are two major obstacles to overcome. The first is that the industries that employ the majority of these low wage workers are very hard to unionize as the tenure of most workers is very short. These are not long time or career jobs. The second issue is that current members of the union are wondering what they are getting for all this. The millions poured into the minimum wage fight means that millions are not being spent on the issues that matter to them.


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  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.



How to React

The bombing in Manchester is all over the news today and I wrote about it earlier in this issue as well. As with most people I am grappling with what to feel and what to do. I am saddened and outraged, angry and confused. I can’t even begin to understand the motivation for such a depraved act. I actually understand the ISIS fighter in Iraq doing battle with soldiers. This is war and at least involves combatants. Blowing up a bunch of teenagers attending a concert is pure evil.

I want to do something but there is nothing to be done. I want to reassure the people I love but I can’t do that either. The fact is that these attacks are random and anyone can be a victim. I do not dwell on this but I spend a lot of time on airplanes and in airports and in crowds that have come together for one reason or another. I do not think that terrorists want to target a bunch of accountants or manufacturers at a meeting in Cleveland or Omaha but one would not have thought that a concert by Ariana Grande in Manchester would be high on the priority list either.  We all just live with that fear in the back of our heads and maybe that is what we need to focus on to some degree.

It is trite to say but life is often shorter than we thought it would be. It may be disease or injury or being the victim of some natural disaster or the actions of a cowardly fanatic but we have no guarantee of tomorrow. We need to make the most of today. Never miss an opportunity to tell people what you feel about them and try to live a life with no regrets. That may be all we can ever really do in the face of uncertainty.


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


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Velocity of Money Update – There is a fundamental premise in economics that the faster money changes hands, the better the growth of the economy should be. In our view, when you look at the velocity of M2, you get a fair representation of what is happening to the velocity of economic activity.


A debate is raging among economists about the validity of the velocity of money. Some believe that it doesn’t matter because after all, the economy is growing. I like the way Steve Ladd coined a response to this when he said that “if the increase in money is matched by a decrease in velocity, GDP stays flat. He continued, “reduced velocity keeps the economy from heating up, which precludes price inflation”.   In other words: too much money is still sitting idle and the economy is still way underperforming.  That’s why the Fed has not had to react more drastically to inflationary pressure to raise rates – money is still sitting.













There’s been no change in the velocity of M2…in fact, it is still slowing. Some blame too much money sitting with the wealthy; some blame corporations not investing cash that they are sitting on; some still want to point to too much money being pumped into the economy by the Fed in the 2009-2011 period (too much money printed to get it moving back to historic levels). It’s probably partly all of the above.  The bottom line is that if the Trump Administration wants to get economic activity flowing faster, it needs to focus on items that can increase the velocity of money.


The latest M2 Velocity of Money ratio showed that it came in at 1.428 in Q1 of 2017 (slightly slower still than the 1.436 in Q4 of 2016).  This remained the absolute lowest velocity recorded since the series was started in 1959.  Some analysts want to point to an economic environment where we are growing at 2-2.5% and call it good. It’s not bad, but as long as the velocity of money is still stagnant, we don’t know how fast the economy should be growing. Let’s see money start to change hands faster…and then see what GDP looks like. Maybe it won’t change.  We believe it will.


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Business Intelligence Brief: May 22, 2017

Short Items of Interest – US Economy


  • Why the Slowdown in Core Inflation? – It is hard to overestimate the importance of some key economic areas as far as the consumer is concerned. The expectation had been that inflation rates would continue to rise at the start of the year. After all there had been gains in terms of jobs and even wages. There was overall consumer confidence and all that generally adds up to higher inflation at the core rate. The hikes in energy prices were short term and besides the cost of fuel is not part of the core inflation number. The factor that pushed core rates lower than expected was the launch of unlimited data plans by the cell phone companies. It really seems to be that simple given the amount of money that is normally spent by people on their data plans.


  • Saudi Arms Deal Near Completion – The agreement to sell more weapons to the Saudi Arabians has not been without its critics. The aim of the deal is to cement the relationship between the US and the Saudis and this is a partnership that has been frayed of late. The prime target for these weapons will be Iran and to a lesser extent Yemen. The critics assert that this just reinforces a dictatorial regime and heightens tension but the US is not willing to lose this ally right now. Much has been made of the “millions of jobs” the deal will provide the US but the reality is that most of the jobs will be in Saudi Arabia as most of the equipment will be partially built there. The US gains are very limited outside the diplomatic ones.


  • Next Stop for Trump will be Awkward – Israel is the next destination for the Middle East tour and that is no shock as Israel remains the best ally the US has in the region – despite the very contentious nature of that relationship. The statements are as they always are, an assertion that a peaceful solution will be developed for the area. The reality is that there is no interest on either side of the conflict to compromise and there is precious little leverage for the US. The Palestinians distrust Trump and Israel is not all that convinced although they clearly see Trump as more of an ally than Obama was.



Short Items of Interest – Global Economy


  • Clean Air Push in China – The US has been trying to blunt the impact of the Chinese steel industry for years. The latest tactic has been the imposition of high tariffs designed to reduce the import of that steel. These measures have not worked as planned and mostly put pressure on consumers in the US. Now the Chinese may be putting that pressure on their own industry through the new demands as far as clean air is concerned. The new rules will make it very hard for either steel operations or aluminum smelters to operate and many will be forced to shut down. The steel sector is going to shrink and fast if the Chinese really do enforce these new rules as they state they will.


  • Coalition in Mexico? – It seems very unlikely but the two opposition parties in Mexico are considering a broad coalition in 2018 designed to defeat the PRI candidate. The combination of the left and right would be highly unusual and it would seem that neither party has a platform that would appeal to the other. The reason for the combination is the need to fight the local power of the PRI as they clearly have the best opportunity to get out the vote. The PAN is very business oriented and dominant in the north while the supporters of AMLO are in poor regions in the south and Mexico City.


  • Food Prices in Africa – The famine in Africa has also affected the price of food and that has created a political crisis. The inflation has been serious and many are demanding the governments of their countries take action to stop the price hikes. This only results in farmers reluctant to grow more food and the famine issue gets ever more serious. It is a vicious cycle and one that has been repeated too many times in past years.




Most Americans Assert Happiness with Financial Situation

The Federal Reserve released its latest Survey of Household Economics and Decisionmaking on Friday and the results were a bit of a surprise given all the economic angst that has been expressed of late. The first time the Fed did this survey was in 2013 and a significant minority of the respondents were feeling quite uneasy. Only 62% reported they were “living comfortably” or were “doing ok”. It would have been interesting to know how many would report this during the heart of the recession but since 2013 there has been a pretty steady increase in the number of those expressing optimism. The number was up to 69% last year and last Friday the number was up to 70%. Despite all the worries and concerns that have been expressed by the average consumer there has been a sense of improvement for most. The optimism is not universal however – there are definite differences between those with higher incomes and more education and those with lower salaries and less education.


Analysis: Those with a high school education or less are considerably less satisfied with their financial status with only 60% reporting that they were financially ok – down from 61% in 2015. Meanwhile those with a college education were far more confident and satisfied – 82% felt they were financially secure. Education was not the only factor that divided respondents as ethnicity played a big role as well. Those white respondents with high school or less were feeling less financially secure than either black or Hispanic respondents – 20.5% of whites felt worse off, 20.2% of Hispanics and 18.6% of blacks.

The survey tries to get at the day to day financial stress that people experience and the biggest fear is the unexpected expense that has not been budgeted in. The survey found that 44% of the respondents would be challenged to handle a $400 unexpected car repair and only 52% of those with less education would be able to pay their other bills should such an expense appear. Those with more education were in better shape with 70% able to handle their other bills.

The fact is that many Americans remain very vulnerable to sudden shifts in what they owe or their income. The crisis in the beginning of the recession was amplified by the fact that few people had the ability to keep pace with their obligations if they lost their jobs or encountered some kind of unexpected financial stress and the loss of billions in retirement funds would certainly qualify for the majority of people. Those who emerged from the crisis in better shape were those who had options and were able to find another job in fairly short order.

The fact that education is important is no surprise but the real connection can be a little obscured. The power of an education is the flexibility that is offered to the person holding the credentials. The vast majority of those who have limited education have few options when they lose a job – most are employed at a place that knew them in some way prior to being hired. The path to employment for the less educated is generally through a friend or family recommendation and that means they do not have to compete with others who have diplomas and other credentials. The HR person who is staffing a given business is mostly engaged in a process of weeding out people and will use education and experience as a tool to work through a stack of applications. They are less likely to be affected by recommendations from friends and family so these applicants are fighting an uphill battle.

Add in all the other reasons that people are unable to take a new job and it is easy to see how people can get quickly trapped in a position of consistent unemployment or low paying jobs. The workers on the low end of the pay scale are not able to relocate to a new community in search of a job because of the lack the money to make that move and there may well be many demands that make it hard to leave. The top of the list is a need to support elderly family members and right behind this motivation is the fact that divided families make it hard to move if one wishes to maintain child custody arrangements.



Budget Plan Expected to be D.O.A

The 2018 budget plan will be submitted to Congress this week and absolutely nobody thinks it has even the faintest chance of passage. There are far too many cuts and the expectations for economic growth and revenue growth are far too ambitious. The truth is that no Presidential budget ever gets very far in Congress and all Presidents know this. The budget is entirely political – a statement of policy and intent that everyone understands will be largely ignored when the real battles begin. This is true for no other reason than it has to be passed by the Senate and that means at least 60 votes in a legislative body that has 52 Republicans (not all of whom are on the same page).


Analysis: That the budget has no chance does not mean that it is unimportant. It is a statement of Presidential intent and is used to attract support from the public as a whole. If there are cuts that voters support it will be hard for the legislators to ignore that desire and if there are tax cuts that appeal these will be likewise hard to ignore. The problem is that for every group of voters that approves of a certain budget cut there is another that opposes it and even tax cuts have their supporters and opponents. The first iteration of a Trump budget did not go well for the administration as the Democrats got far more than the GOP did in the temporary effort designed to keep the government from shutting down. The budget process is largely out of the hands of the White House unless the President has the ability to strong-arm and cajole the members of his own party as well as some in the opposition. Right now Trump is exceedingly weak when it comes to this ability.



Reformers Win in Iran

In the weeks prior to the Iranian election the polls suggested the race would be very close as the hardline candidate was expected to do very well in the rural areas and in the older population. The expectation was that Hassan Rouhani would win but by a narrow margin as it appeared the hardline supporters were rallying around the candidacy of Ebrahim Raisi. The vote was a stunning repudiation of the hardline position as Rouhani swept to victory with 57% of the vote. The expected support was there – he won in the cities and the young population turned out strongly in his favor. The surprise was that he polled well in the rural areas as well and among the older population. The message of this election seems to be that Iranians support reform and change although what that mean varies from one person to the next.

Rouhani made this election about economics and that was what resonated with the voters. The majority of those expressing an opinion are demanding more jobs and more opportunity for growth. They are tired of the restrictions that have been in place due to the pariah status of the nation and they hope that Rouhani can do something about this. At the same time, there was an acknowledgement that he has not been able to deliver all that much so far. The nuclear deal was expected to yield more than it has thus far – the expectation was that many of the sanctions would be lifted but they haven’t and the Trump administration has been far less willing to engage with Iran.

Right on cue the Trump trip to the Middle East became an opportunity to attack Iran. That much was expected given the fact Trump has been visiting the nations that have been most at odds with Iran historically. The Saudi Arabians and Israelis would not have been too pleased with any sort of Trump overture to Iran but there is hope that at some point the US and Europe decide that Iran is worth the risk. The hardline position is hardly missing in Iran as long as the conservative clerics hold the majority of real power but they can’t help but notice the mood of their country these days.


Analysis:  Does a Rouhani win change things drastically in Iran? That is not likely as long as Ayatollah Khameini and the other clerics hold the real power. Is Iran going to disavow groups like Hezbollah or Hamas or the Shiite militias that operate in Iraq and elsewhere? There is little chance of that either. The Iranians are not supporters of either ISIS or al-Qaeda as these are Sunni extremists and Iran is Shiite. The sectarian battles will not cease and there will be continued antipathy towards both Saudi Arabia and Israel and by extension the US and Europe but there is a bigger demand in Iran that can lead to some rapprochement. The voters in Iran called for economic growth and that doesn’t happen without cooperation with the western states.



Economic Impact of Deportation

There are many dimensions to the immigration issue. The majority of the debate has centered on the impact of the immigrant as worker. There are many companies that desperately need the immigrant (legal or otherwise) as they do not see the domestic US workers flocking to these positions. Then there are the US workers that see that immigrant as a very direct threat to their jobs as these people will work for far less and that drags the wages down for everybody. The part that is often overlooked is the role the immigrant plays as a consumer. The money spent is substantial and there have been observed declines already. In parts of the country where the Hispanic population is significant there has been a decided decline in the level of economic activity as many are staying away from situations that could result in an encounter with the authorities.


Analysis: It is still hard to quantify the levels of spending by immigrants – especially those who are not legal. The best that can be done thus far is to observe the levels that took place prior to the additional pressure and the situation now. The spending levels are way down. That is likely to be due to at least three factors. The first is that many illegal immigrants have now lost their jobs as employers are fearful they will be caught and fined. The second and related factor is that many illegal migrants have elected to return home on their own terms as opposed to being deported. The number of migrants making it into the US illegally has dropped and that means a smaller population in any given community. The third factor is that many immigrants (both legal and illegal) are sending more money to family back home as they are not sure if they will be able to send in the future. The issue is uncertainty and that generally means that people are unwilling to make plans and keep commitments. That additional economic concern is serious and has affected many communities negatively already.



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  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.



Simple and So Effective

The story of the day was another blow to retail. We are all well aware that the big department stores we grew up with are fading fast – annihilated by the on-line option. After all, the variety is far greater on-line and one is ignored by both the brick and mortar staff as well as the on-line order takers. That is the key as far as I am concerned. If the store is offering nothing other than a bored checker and some stuff on shelves – what is the appeal?

Saturday was errand day. Two very different experiences. My wife was looking for a specific shampoo which the beauty products store appeared to be out of. She asked if there was any more in the back and the cashier wandered over to the shelf we had just looked at and reported that there was none in the back. Really? You could see back stock from where you stood and somehow you assumed that we were blind and could not see for ourselves the empty space on the shelf. Not very helpful and a good reason to shop on-line in the future.

Next stop was the GNC store to load up on all the stuff that keeps me reasonably healthy with my wild travel schedule. We hit the place every other month or so but the guy working the store recognized my wife and immediately asked if he could help find stuff – he remembered what we usually buy and knew where it had been moved. He treated us like the most valuable and loyal customers he has and that is the reason we shop there – exclusively. If retail wants to be saved that is the way it will happen.




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



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Recession Risk Low There are many anecdotal ways to speculate on recession risk, we mentioned a new one in yesterday’s Black Owl Report. But we like to primarily go right to the data. We look at the relationship between GDP and the Financial Stress Index.


The St. Louis Federal Reserve releases a Financial Stress Index that gives us a view of how much recession risk exists in the broader US economy. It’s comprehensive.  The index is constructed from “18 weekly data series: 7 interest rate series, 6 yield spreads and 5 other indicators. Each of these variables captures some aspect of financial stress.”


A reading of “zero” in the index suggests perfect balance between ‘no stress’ and ‘excessive stress’. In periods when we have seen the Financial Stress Index reach into the .5 to 1.5 range, we have seen recession risk increase.


We pulled the data showing the index through May 12th, and the index has actually fallen further, hitting -1.496.  Again, the further from “zero” that it gets, the further from recession risk we go.


Also, as mentioned in the last NESE, we normally have a strong warning before we see recession risk. In the 2008 recession, it took more than 2 quarters of increasing financial stress before we got our first official recession indicator. Our only caveat to point out is that in the 2008 lead up to the financial crisis, the Financial Stress Index moved from -.6 on July 27, 2007 to +.8 by September 7th. So, historically, the index can move quickly but as mentioned, actual recession usually follows more slowly after.




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Business Intelligence Brief: May 19, 2017

Short Items of Interest – US Economy


  • Consumer Sentiment – Much is made of consumer confidence polls and surveys and for the most obvious of reasons. We are a consumer driven economy after all. What is used to measure the mood of the consumer and how reliable is it? The polling techniques are good and there is effective gathering of that information. The challenge is that consumers don’t know all that much. They can really only speak for themselves and frankly we know their attitudes can shift very quickly. It has been noted in the past that changes in the price of gas would be enough to plunge people into despair or stimulate exultation – even when the change was less than ten cents a gallon. The problem now is that people react to what they see and hear and that means that media strongly influences their perceptions.


  • Budget First and Then Tax Reform – There is one rather significant barrier to significant tax reform and that is the need to figure out a budget. If the little crisis of a few weeks ago is any indication, the budget battle shaping up a few months from now will be vicious. The government shutdown was imminent and it took last minute maneuvers to avert. The next round will be tougher yet and there have been assertions by Trump that a shutdown might be a good plan. That is not a sentiment that is shared by those who depend on government money. Any talks on the tax reform issue will have to wait for this other issue to be settled.


  • Laptop Ban – It seems that there will be no end to the effort to make flying as unpleasant as possible. The US is now considering a total ban on the transport of laptop computers in the cabin of an airplane flying to the US from anywhere in the world. The risk is that terrorists may have developed a bomb that can be hidden in a laptop. The “solution” is to ban them from carry on but allow them in the checked baggage. Does a bomb going off in the cargo hold not cause damage? What about the very real threat of fire from lithium batteries that are too close to one another? The fact is that security analysts are suggesting that all electronics of any kind be banned from all flights and that will most certainly mean a lot less flying for people who wish to remain in the 21st century.



Short Items of Interest – Global Economy


  • Brazil Bribery Scandal Escalates – Michel Temer has declared he has no intention of resigning over the latest assertions of bribery and corruption. This may not be a choice that is his to make given the residual anger that exists over the impeachment of Dilma Rousseff. There were many among her supporters who felt that he failed support her and that he was far too eager to take her place. Now that the scandal has come around to him there are those who smell blood in the water and will want to bring him down as well. The opposition also sees an opportunity to make inroads.


  • Rouhani Holds Lead – The polls suggest that incumbent President Hassan Rouhani holds a solid lead on the eve of the Iranian election but this is anything but secure. The hardliners still have very solid support from the rural areas and these have been traditionally hard to poll. The good news for Rouhani has been that his supporters are active and committed as well. There was some concern that too many would be staying home as there had been frustration that more reforms had not taken place but it seems that reformers really fear the return of the hardline leaders.


  • Confrontation in the Air – If there were lingering doubts as to how the US and Chinese militaries feel about one another it may have been dispelled yesterday when an American “sniffer” jet was aggressively buzzed by two Chinese fighter jets in international airspace. The US plane was on an intelligence gathering mission in legal territory and the Chinese came extremely close in an attempt to ward the US plane off. These gestures can end very badly.




Conference Board Numbers Look Good

There may be growing doubts as to the staying power of the current economic recovery in some circles but the data that has come from the Conference Board of late has been very solid. For the fourth straight month there was an improvement in this data and now the index is sitting at 126.9 – 0.3% higher than it was the month before. The index is one of the more comprehensive looks at the US economy as it is essentially an index of indices with ten components added together to paint a whole picture. There is an examination of factors such as initial claims for jobless benefits to track whether companies are hiring or firing, factory orders to get a feel for the demand that is presenting itself from the consumer, the performance of the S&P 500 to gauge what is happening in the markets and so on. The other seven indicators include the average number of hours worked in manufacturing, manufacturers new orders in consumer goods and materials, the ISM index reading of new orders, nondefense capital goods orders, building permits for new private housing units, the Leading Credit Index, the interest rate spread between ten year Treasury bonds and federal funds rate, and the measure of consumer expectations for business conditions. There were reported improvements as far as the lagging indicators and the coincident index as well.


Analysis: About a week ago we reported a similar set of gains for the index of indices we prepare for the Chemical Coaters Association. The data for many of the measures these days have been trending in a positive manner and that seems to belie the assertion that an economic swoon is imminent. Granted, these situations are always ephemeral and it doesn’t take a lot to set the economy on edge but for the most part the antics of politicians will not be sufficient to halt a real recovery or expansion. It is true that business prefers stability and predictability but that has been a rare commodity in the political world for quite a number of years. For the most part the business community and the consumer will shrug off what happens in Washington as atmospherics.

The assertion at the start of the year was that the economic growth we have seen was being driven by expectations. That has been true to some degree as there have been plenty of surveys and polls suggesting that the enthusiasm demonstrated by the business community and the consumer was rooted in the belief that a new regime would sweep through and accomplish everything from tax reform to deregulation to revamping health care and reworking trade. It soon became apparent that none of these moves would be simple or swift and that was expected to drag on people’s confidence. It may have to a degree but there have been other factors that have helped people stay upbeat.

At the top of the list is consumer confidence. It is a little simplistic to assert that everything about the US economy revolves around the consumer but it wouldn’t be all that inaccurate given the impact on the national GDP. This is an economy that relies on the consumer for some 80% of its growth. For several reasons the consumer is in a good mood and has started to extend that mood to action. For a few months at the start of the year the surveys were not really matching up well with reality. Consumers said they were confident but retail sales lagged. Now those retail numbers are up and revisions to the old data shows that there was more activity in the retail sector than had been noted before. There is even evidence that older millennials are starting to emulate their elders as they begin their families and buy homes and all the other things that having children demand.



Nafta Negotiations to Start Soon

The formal start of the negotiation process may start as soon as the end of summer and observers are already asserting that this process will be a very challenging one if the Trump White House tries to adhere to the assertions that were made during the campaign. There is generally consensus that the pact needs to be updated but there is extreme reluctance to do anything that will compromise the benefits that have been achieved by companies that do extensive cross border business. It is a pact that has led to the development of a multi-billion economy between the US, Mexico and Canada.


Analysis: From a purely political perspective changes will be hard to pull off as there are already several members of the GOP in the Senate that are ardently defending the pact. There are those in the Democratic Party who back a significant renegotiation but it is not clear that enough of them will cooperate with the Trump White House to offset the opposition coming from the pro-trade Republicans.

The split in Congress mirrors that in the Trump team itself. There are those who adhere to the more business friendly approach towards trade and those who are rooted in elements of economic nationalism. They see trade pacts as dangerous to American workers and want to see a far more protectionist policy. As is usually the case both sides have a point. It is quite obvious that Nafta has led to jobs being shifted to Mexico over the years but it is equally obvious that Nafta has led to the creation of jobs. Unfortunately, those who lose their jobs are rarely the ones who get the new ones. Nafta has been very good for the US consumer as it has allowed access to less expensive goods and services. The most controversial aspect of US-Mexico trade has involved manufacturing as many operations have been setting up south of the border. Once upon a time most of these were operations that moved from the US but for the last decade the movement has been from Asia to Mexico as these companies sought better access to the US market. The costs of production and transportation are now lower than in many parts of Asia and that has drawn a lot of activity to Mexico. The US has a lot at stake when it comes to this relationship and there will be many that will be defending these relationships very aggressively.



Relentless Pressure of Demography

Both Asia and Africa are facing demographic threats and from opposite directions. The Asian states are getting very old and have no way of replacing their populations short of mass immigration and that has long been resisted. Africa has the opposite problem of far too many young people with nothing to do and no future. These are the people who get recruited by terrorists and criminals. The patterns are very hard to break but if they are not these two parts of the world will be in near permanent economic crisis and there will be continued social unrest.


Analysis:  Demographic pressures are relentless – the only positive aspect of such a challenge is that one can see it from a long way off. Asia did not suddenly get old, this has been developing for decades and there have been periodic attempts to do something to reverse the trend. These have mostly been incentives for families to have more children but this is not often effective. The middle-class women are not interested in large families as they have other ambitions and in many countries it is exceedingly expensive to raise children – even in those countries that offer assistance and child care help. People need bigger apartments and these do not come cheap and then there is the whole issue of education. The bottom line is that Japan and South Korea and China are getting old fast and have even been joined by states like Vietnam and Malaysia. The solution that has been employed in the US and Europe is not as readily accepted in these countries as immigration is generally frowned upon. There is fierce protection of native culture and little tolerance of even Asian migration – much less movements from other parts of the world. This rejection of foreign culture makes it the more difficult for parts of the world that have the opposite problem. Africa would dearly love to export its manpower but there is no demand. In fact, the majority of the nations that African migrants try to enter are more interested in blocking their arrival.

Major economic and social issues emerge with this kind of imbalance. The Chinese and Japanese are already having issue with labor supply as the older workers retire. Those who are replacing them lack the skills their predecessors had and there are severe breaks and dents in the labor pipeline. The African workers can’t find work and the training they have been getting is not all that relevant. The people without work become targets for radicals and militants who will exploit their desperate status. The issues cascade in on one another.

The solution has to be some kind of shift in production from the countries losing their workforce to those that have the workers but the politics of this can be extreme. There is very little support for the idea of relocating work to other countries or to bringing workers to where they are needed. But if this doesn’t happen the demographic crisis just continues to relentlessly escalate.



Corruption in Brazil

This is turning out to be a bad day for Brazilian investors as yet another scandal has engulfed the leadership. A recording has surfaced that shows the current President – Michel Temer – engaged in bribery. This has once again shaken the confidence of the business and investment community and much of the recent progress made has now halted. The sense is that nothing is going to change until all vestiges of the old regime have been purged. The problem is that the opposition has not been all that clean either. This is a nation where petty corruption and graft is common and the way things are done.


Analysis: All eyes seem to be on the new mayor of Sao Paulo – João Doria. He has not really declared his willingness to be a candidate but he has been running his city like somebody with bigger plans. He is a millionaire businessman who compares himself to Michael Bloomberg in the US. He has attacked the corrupt practices in this sprawling city with some success and has inspired the engagement of the local business community in everything from infrastructure to social programs.

Brazil is not the basket case that its northern neighbor has been and has a far more diverse economy with everything from agriculture to manufacturing as well as raw materials. It had consistently been its own worst enemy with widespread corruption and a public sector that is grossly overpaid and woefully inefficient. Changing that culture will be anything but easy but there is a level of frustration in the population that could herald real change. The overarching issue is that Brazil is deeply divided between those who have and those who do not. The gap between rich and poor is immense and there are no easy solutions as far as bridging that gap. Most of the efforts have been based on some kind of government largesse and this has not made much of a permanent impact. It remains a country of immense potential that always seems just beyond reach.



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  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.




I have long had a complicated relationship with storms. On the one hand they are utterly fascinating. The power of nature unleashed is a wonder and I am well aware that many share this fascination given the extensive reporting and coverage on the Weather Channel and elsewhere. When I was younger I dreamed of storm chasing and did more than a few risky things to get a closer look. Age tends to change priorities however.

There was a dandy hail storm last night – fully ten to fifteen minutes of hail that ranged the size of a quarter to the size of a golf ball. It covered the ground and it was more than interesting but all I could think of was the state of my roof and what all these rocks were doing to the flowers that my wife had been planting for the last week. The hosta plants will have been shredded and some of the plants will have been pummeled into pulp. Not so interesting to me now.

I still look at tornado activity with awe but I know people who have been devastated by these storms – watching as everything they own is wiped from the planet. I look around at my home and all it means to me. Everything in this home has meaning and value and I would much rather not see it torn to shreds. I worry about my ability to protect my feline family and we have conducted drills on how to get all five of them to the basement (food dish noises are remarkably effective).

I am still impressed with storms but much prefer watching from a significant distance these days.




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


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A Different Recession Indicator – and What It Shows.  James Picerno wrote an article in Seeking Alpha that discussed various recession indicators. His point is that it is probably risky to put too much emphasis on a single indictor for recessions. Certainly. But in his article, he pointed out another indicator that is generally correct – so we wanted to bring it to your attention.


The Chicago Fed National Activity Index is generally spot-on when it comes to recessions. When it dips below .35, we typically see the recession risk rise – especially if it sticks there.


Remember the charts we have been showing you on Gross Private Domestic Investment and its ties to recession. It showed the same dip late in 2016 that the CFNAI was showing. So, we are all correct in speculating that the US economy is (or was) teetering on the edge of recession late in 2016.


But, as we have said, sentiment can be your friend, and it can also sink you. If current economic momentum is being built upon animal spirits, then national conditions need to stay positive enough to keep those animal spirits flowing.  And it seems obvious that geopolitical events have the potential to begin to weigh on that sentiment.


Right now, the Chicago Fed National Activity Index is trending positive. We only have the Chicago Fed Index through March at this stage – so we need to see if it continued its positive momentum in April and May (and most of us believe that it did).




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Business Intelligence Brief: May 18, 2017

Short Items of Interest – US Economy


No Rust Belt Recovery – One of the points made often by economists is that the US is a very large and diverse country. This makes it hard to make definitive statements about the economy that would apply to every part. The data is national and rarely reflects local reality. The jobs numbers are a great example. The current rate of joblessness (according to the U-3 measure of the BLS report) is 4.4%. That is great but it reflects the fact that some fast growing states have even lower unemployment and obscures the fact that many of the cities in the “Rust Belt” have much higher rates and have not recovered from the recession in any significant way. Employment levels in 23 states (18 of which are in the Northeast and Upper Midwest) are still lower than they were in 1990.


Nafta to Include Rules on Currency Manipulation? – There is a plan to include rules on currency manipulation to the Nafta agreement in the current round of renegotiation. This is interesting as neither Mexico nor Canada have ever attempted any kind of currency manipulation while the US has been accused of doing so on some occasions. The intent seems to be to have a set of rules that can then be applied in other trade agreements – such as those that would include China and Japan and other Asian states. It is not clear that such a limitation would even be allowed under Nafta rules but there are certainly explorations under way.


Ford Cuts Jobs – It was only a few months ago that Ford stated its intent to save US job and to limit the number of layoffs. It was presented as a reaction to the demand from the President – elect at the time. Now Ford has announced that it will lay off 1400 workers and there are hints of more downsizing to come. For all the political bombast and positioning the reality is that publicly traded companies answer to shareholders and they demand profits and revenue. Demand for cars and trucks has sagged for the last four or five months and the automakers have no alternative but to reduce costs and that means fewer employees.



Short Items of Interest – Global Economy


  • Thug Nation – This is how Venezuela is now being referred to – outside the country and within. The grinding economic collapse has plunged the country into despair and has forced many to turn to criminal activity just to survive. It has to be understood that only a decade or so ago the nation was thoroughly middle class, thriving on the back of high priced oil. Even the idiotic policies pursued by Hugo Chavez were not enough to ruin the system – there was always oil money to paper over these issues. Now that oil has collapsed and Chavez is no more, the country is well on its way to becoming a failed state on a par with some of those in Africa. It is estimated that over 80% of the population has been victimized by crime at some point in the last year and Caracas is now the murder capital of Latin America.


  • GM Pulls Back in India and South Africa – General Motors has elected to stop selling in India and it will stop production in South Africa. These are weak markets for GM and the company has decided to cut ties so that it can focus on more lucrative sectors. India is very hard to sell in as the rules discriminate against foreign operations. The issue in South Africa is that it has become hard to find workers and security has been an issue as well.


  • Another Corruption Crisis in Brazil – This is turning out to be a bad day for Brazilian investors as yet another scandal has engulfed the leadership. A recording has surfaced that shows the current President – Michel Temer – engaged in bribery. This has once again shaken the confidence of the business and investment community and much of the recent progress made has now halted. The sense is that nothing is going to change until all vestiges of the old regime have been purged. The problem is that the opposition has not been all that clean either. This is a nation where petty corruption and graft is common and the way things are done.




Is This the End of Patience?

It seems like just yesterday that I was writing that the business and investment communities were basically ignoring the antics in Washington. Oh wait – it WAS just yesterday. That may yet be the case but the markets tumbled yesterday and suddenly there is a lot of angst. The actual transgressions of the Trump administration may not be the actual issue – at least if one looks at the commentary from those business leaders willing to talk. There is indeed concern that Trump has been cavalier about national security – especially given his commentary on Clinton during the campaign but most in the business world. But this is not the trigger for the sudden sense of angst and concern. The markets fell by over 300 points today and the dollar sagged more than it has all year. This may simply be a knee jerk reaction and the markets and dollar could easily recover in the days or weeks to come. The worry and angst seem to be rooted in something bigger however and that could signal a persistent downward trend.


Analysis: This is a very anecdotal commentary drawn from the observations that have been made by some of the business people I have been meeting with lately. These are mostly small and medium sized business owners. Many have been in their leadership roles for a long time and have seen many Presidents and leaders. Many of these people voted for Trump or at least they voted against Clinton. They would not be comfortable describing themselves as Trump fans but they have been willing to give him the benefit of the doubt. They understand that he is not a politician and that there is a very steep learning curve. That said they are not willing to be patient forever and they have raised three points of concern.

The first is that he can’t seem to separate the petty from the important. These business people voted for him because they wanted regulatory relief, tax relief, attention to bad trade deals, a revamp of the health care law and less preoccupation with climate change. Not every one of these business people would rank these equally and not all would agree that change is needed on all of them. They agree that Trump needs to pick his battles and focus on these – not non-issues like voter fraud or what the FBI is saying about Russia or what the media thinks about him.

The second comment is that he has been unwilling to work effectively with his own party and his allies. When Senate Majority leader McConnell states that Congress could do with less drama this is the voice of frustration. The war that needs to be fought is one that affects growth and the entire business community and the President has a GOP House and GOP Senate. This should be a period when legislation is pouring out and yet there is more gridlock than ever. The make-up of the Congress could be very different at the end of 2018 – parties in power nearly always lose seats. Now is the time to accomplish and we are stalled.

Finally, there is the deep concern that Trump will so alienate middle of the road voters that they will tilt to the left in 2018 and 2020. There is very deep concern that the next President would be someone like Elizabeth Warren. The center of both parties seems to be broken and inept and that leaves nothing but the more extreme. They crave the kind of middle of the road stability they once enjoyed and many now look back fondly on George Bush. In truth, the majority of the people I spoke to were Kasich supporters in the primary with a few oriented towards Rubio and Bush.


Household Debt Reaches New Record Levels

It has been a long time since US households have taken on these debt levels – over eight years. The last decade has been marked by an attempt to engage in extensive deleveraging as many people wanted to be sure they would never face that kind of crisis again. The lessons have not really been ignored this time but the structure of that household debt has altered and presents different challenges this time. The fact that households are less leery of debt has been a good thing as far as retail activity is concerned but nobody wants to repeat the credit crisis of 2009.


Analysis: The low point for household debt was in 2013 and it was fully 12% less than at the peak in 2007. This was considered an aberration by most but there are those who were convinced that the consumer had finally learned their lesson regarding profligate activity. It seems not as the debt load is now higher than it was in the pre-recession years. The reason for the high debt is different though and that will affect how it is handled from here.

In the 2007-2008 period the vast majority of the debt was mortgage debt and a close second was credit card debt. Today the dominant debt is from student loans. The auto loan debt is also climbing fast while credit card debt has been more or less steady. The mortgage debt is still the highest in terms of dollar amount and it has been gaining fast but remains under what it was in 2007. For 63 years household debt has grown and it now seems that the recession impact has been reduced and the trends are back to where they have been historically.

This is not the crisis it was eight plus years ago as this has not been tied to an unrealistic housing bubble. The threat is less urgent but there is still worry as this level of debt makes people vulnerable if economic conditions change. The average person in 2007 had about three days of float if they lost their jobs and at one point that had improved to perhaps a few weeks. Now the float is back to days and that leaves people vulnerable to the loss of a job or some sudden expense as most do not have the credit they would need to get past the crisis.


Mexican Drug War Back with a Vengeance

Nobody is quite sure why the drug violence has suddenly escalated in Mexico but thus far this year there have been over 6,500 murders and if this rate keeps up the annual total will exceed the darkest years of the anti-drug crusade. In just the last few weeks there have been murders of several prominent journalists who had been trying to expose the extent of the problem. The Mexican government is as worried as it has been in years due to the imminent round of regional elections. This has been widely interpreted as a kind of clue as to the national elections scheduled for 2018. The Peña Nieto regime has its hands full with trying to figure out the policies of the Trump White House and he would like to get back to the issue of economic growth.


Analysis:  There are varying theories as to why this issue has become so out of control so fast. One holds that successful attempts to arrest and eliminate some of the major cartel leaders has backfired. The empire of Joaquin Guzman (El Chapo) has been fragmented by his arrest. Those who would seek to replace him are at war with one another and the bulk of the killings this year seem to be related to that turf war. Guzman was careful never to anoint a successor as he didn’t trust them. Now they are all killing one another. There was once a school of thought that asserted that it would be better to support one or two of the major drug kingpins tacitly so that would be able to hold the violence to a minimum. It has been pointed out that when this tactic has been tried it has not stopped attempts to overthrow that anointed leader and more often than not that leader abused his semi-protected status.

Another theory is that drug cartels are worried about further efforts to legalize drugs in the US. This is taking some of the power away from illicit drug dealers and cutting into profits. That has made gangs that much more sensitive to turf battles and networks for the distribution of drugs into the US. There is little evidence that cartels are worried about the “Wall” or any of the stepped up efforts to block the border. They are supremely confident they will find ways past the barriers and the very fact they will have to work a little harder will allow them to hike prices.

The third theory regarding the increased level of violence is that government corruption has worsened – at least at the local level. There have always been areas where local police have been compromised and collude with the drug gang. Some are motivated by fear and others by greed but the authorities do little to stem the growth of the gangs and they become part of the turf war. The bigger issue is how this affects Mexico as a whole.

Frustration with Peña Nieto is at a record high and this endangers his ability to anoint a successor for the election next year. Just how weak the PRI has become will be revealed in this summer’s elections. The most likely beneficiary of the current mood of angst is Andres Manuel Lopez Obrador (AMLO). Not that he has any magic solution to the drug issue but he is a candidate of the left and has pinned the blame on the US and its drug laws. He will attempt to push the issue away from Mexico and to the consumer of these drugs.



Japan on a Growth Run

Don’t look now but Japan has been growing – and consistently. For the last five quarters in a row the Japanese economy has been notching respectable levels of growth and the latest numbers are as good as they have been in some time. The first quarter saw growth of 2.2% after expectations were for only 1.7%. The long run expectations have been for growth under 1.0% but the global growth opportunities have allowed Japan to consistently exceed expectations. The weak yen has boosted the level of exports and the Japanese consumer has been sufficiently stimulated to have pushed the economy into growth at a decent pace.


Analysis: Much of the Japanese economic challenge was self-inflicted but policies have been a little more coherent of late. In 2014 there was the much discussed Abenomics plan with all of it stimulative intent but right on top of that plan came a massive consumption tax to offset the spending that was being carried out by the government. It was essentially trying to go both ways at the same time and it was a disaster. Whatever stimulus that was created by government spending was offset by the tax that sent consumers into hibernation. Now the country has focused on actual stimulus and the growth in the export community has provided enough consumers with the money needed to get out and spend. The question is whether the growth is long lasting enough without additional stimulating. The Bank of Japan doesn’t yet plan to pull back on their efforts



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  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.



They Are Out to Get Us – I Just Know It

I have written frequently about my relationship with technology. It has never been a close one – more of a necessity than a joy. I am a creature of my history and remember hammering out papers on an IBM Selectric with a 55-gallon drum of white-out on hand. Not that I am advocating a return to that technology as I value my word processor. Much of the rest of tech is a series of frustrations and failures.

Yesterday I was once again at the mercy of my GPS and that always invites disaster. I was ordered to turn into a shopping center and then informed that I should “proceed to the route”. What route? Siri – you are planning the route and you chose to dump me in a parking lot – am I supposed to drive through the Dollar Tree? I finally wandered on to another road and waited for the “rerouting”. Even the car radio proved too much as I could not get it to quit returning to its favorite station, one that featured gangsta rap. As one might assume this is not my favorite genre so I just drove in silence for an hour or so (it was actually kind of nice).

Then I was on the plane for a flight that was delayed by about two hours. I was trying to let my wife know when to come fetch me and noted the plane had wifi so I would just give her a progress report once we were airborne. That didn’t happen – the wifi failed. I arrived 30 minutes earlier than expected and got to hang at the airport as she made her way according to the time indicated when we took off. (sigh). All of this leaves me with a deep and abiding skepticism regarding the next wave of innovation. I will not get in a driverless car and I don’t want robots doing surgery on me. When the tech wonders figure out how to keep calls from dropping and make remotes that work – I will be willing to take the next step.


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


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German ZEW Index and Dollar Flight:  The German ZEW Indicator of Economic Sentiment is one that we have watched for years, it gives us an idea of what to expect in the German economy over the next 6 months. But, it might be the attention being paid to international investing and the movement of money that is most important.


One of the reasons why the US dollar has remained so strong is that foreign investors have flocked to the dollar for safety – because foreign markets were volatile, economies were struggling, and the outlook was not stable. That’s changing.


The ZEW index showed that corporate business leaders see the German economy as doing very well today.  The current conditions index rose to 83.9 in May, the highest reading since July of 2011!


The future conditions index came in at 20.6 in May, the highest reading in nearly 17 months.


The US dollar has been softening ever so slightly over the past month, the dollar index slipping 2.8% since April 7th (Bloomberg chart at right).


As foreign economies start to rebound (specifically in Europe), foreign investors may start to look more aggressively for deals (valuations of assets in those markets are relatively low after several years of economic malaise). If we see some acceleration of confidence in those markets, watch for changes in the dollar, offset by moves out of the Federal Reserve.


Also keep an eye on commodity prices as a result, a weaker dollar would push many of them higher as we have stated in the past.




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Business Intelligence Brief: May 17, 2017

Short Items of Interest – US Economy


Housing Starts Fall in April.  Housing starts fell by 2.6% month-over-month in April, but remained slightly higher by .7% year-over-year.  Current starts are running at 1.172 million units a year, down from a rate of 1.203 posted last month. On a historical basis, housing starts are still lower than what we saw in the pre-recession era – dating back to the early 1990’s. The trend since 2009 has been generally upbeat and climbing steadily as we can see in the graph. The bottom line is that housing has not yet seen a significant change in either direction.


New Housing Metric to Throw in the Mix.  This is not a new metric to the Fed, but nobody talks about the number of housing units currently under construction. This would add an important component to the housing story. Current housing units under construction were running 1.074 million in April. This was flat month-over-month against March and slightly lower than rates in February. A survey taken in 2014 by Census Bureau showed that the average time to fully construct a brand new home in the United States was 7 months. That’s start to finish; the actual time that the home was under physical construction was about 6 months. We also know that many homes are built quicker than that – but this national figure would incorporate large mansions in the mix that take up to a year or more to construct.


Fascinating Discussion on the Prediction of Next Recession: March 2019.  Seeking Alpha ran an article about Intensity Corporation’s Artificial Intelligence prediction for the next recession. Their model currently has it baked for March of 2019, but they admit that this is a moving target and it can change as market conditions change. You already understand the punchline – current forecasts by Intensity have the next recession projected for March of 2019.  There you go.



Short Items of Interest – Global Economy


  • Brazil Faces Unpleasant Reality – The key to getting the Brazilian economy back to some semblance of health is getting the public sector under control. The Temer government has pledged a plan designed to introduce a 20-year cap on spending and to accomplish this the country is going to have to go after its pension system. It is one of the most generous in the world and it has been used to keep the public sector workers in line with the government for decades. It has to be cut and significantly but doing so is far easier said than done and there are already massive street protests. In country after country the most obvious third rail for politicians is messing with retirement and pensions.


  • Submarine Race Underway in Asia Pacific – It is estimated that another 250 to 350 submarines will be deployed in the Pacific in the next five or six years. Most will be Chinese but they are not the only ones as Japan, South Korea, India, Australia and Pakistan have big plans as well. The fear is that these fleets will come in contact in unexpected ways and the very nature of submarine activity makes the chances of confrontation that much more likely. These will be very sophisticated machines and some may even have extensive missile launching capability. The combined operations will dwarf the number of subs the US now employs in the area.


  • Demographic Challenges – Both Asia and Africa are facing demographic threats and from opposite directions. The Asian states are getting very old and have no way of replacing their populations short of mass immigration and that has long been resisted. Africa has the opposite problem of far too many young people with nothing to do and no future. These are the people who get recruited by terrorists and criminals. The patterns are very hard to break but if they are not these two parts of the world will be in near permanent economic crisis and there will be continued social unrest.




Truisms are no Longer True

Once upon a time it was assumed that the markets were driven by extremely skittish investors that would panic and run at the very hint of disruption. It was confidently asserted that the one thing one could count on was that business abhorred disruption and confusion. The search for stability was driving business and investor decision making and the political world tried to tiptoe carefully on most issues for fear of spooking these quivering beasts. If this were as true today as it was once assumed to be the economy of the US and the world would be in serious crisis by now. In just the last few weeks President Trump has been embroiled in the kind of crisis that would have once sent the business and investment community reeling – major legislative failures, dramatic departures from campaign promises, probes into Russian ties, the firing of the FBI director over these probes and now the issue of leaking intelligence data. The White House has been in a chaotic and defensive position almost from the start and yet the economic data has been largely unaffected. Analysts are, as usual, puzzled. What happens from here? Does the business and investment community continue to essentially ignore the antics in the political world or does there come a point when all this chaos affects them.


Analysis: The bottom line is that most of the reasons for the business community to be upbeat are still in place although there are growing concerns that expectations may not be met after all. At the time of the campaign last year the overall sense of the business and investment community had been that Obama-era strategies had been detrimental to growth in a number of ways. The regulatory environment had become strict and largely punitive (especially in terms of banking and finance), the tax code reforms suggested were aimed at getting more from the corporate community, priorities included large minimum wage hikes and strict environmental controls and attention to social issues. Not that these priorities were all bad and many in the business community supported them to one degree or another. The real issue is that not enough attention seemed to be devoted to growing the economy through business expansion. The election of Trump provided a set of expectations as far as policy change was concerned.

The question now is whether that set of expectations will be met. Many of the statements made during the campaign have been reconsidered since. The rejection of Nafta has become an attempt to renegotiate it, the virulent criticism of China has cooled, the withdrawal from global institutions like the WTO or Nato have been shelved. Strict trade policies have been tempered. On the other hand, there have been moves to reduce regulations in a variety of areas and there has been talk of infrastructure development and tax reform. This is the problem thus far – it has mostly been talk. Will these promises be kept? Can they be kept in a system that requires far more coalition building and cooperation than Trump has been accustomed to?

The campaign last year was waged on many levels and there were many reasons to vote against or for either Trump or Clinton but one of the rationales for supporting Trump was that he was an outsider as far as politics was concerned and that he would bring his experience as a business man. The challenge is that there are lots of kinds of business person and little in Trump’s background prepared him for this job. His business was always a closely held and private concern where his decisions were his own and final. Nobody else had any real power. In a publicly traded company the CEO always has to consider the shareholders and the investment community as a whole. Other executives have to contend with powerful consumers and buyers, some have unions as part of the mix. The point is that Trump has never had to work in an environment where he was not the only boss. His role now is sharply curtailed by everything from Congress to the courts to power of bureaucracies that have long known they will be in place long after the politicians have come and gone. It is a very steep learning curve and it is not guaranteed that this administration will be able to keep up.



Big Jump in Industrial Production

The last few months of industrial production activity has been missing something. This is a three-legged stool and when one of the sectors is down the whole measure looks weak. For the last few months the manufacturing part of the trio has done pretty well and that has been about the only factor that has kept the measure from tanking. The utilities numbers have been weak because this was a warm winter and the demand on them was much reduced. The mining sector was also weaker than usual as this includes oil development and the worldwide glut of oil has tempered the overall growth of the industrial sector. This month the reading seems to be hitting on all cylinders.


Analysis: The gain of 1.0% is the strongest showing in over three years and this tends to reinforce the notion that there is an overall economic recovery underway and perhaps one of some strength and staying power. It is consistent with readings that have come from other measures. The surveys from the Institute for Supply Management and the National Association for Credit Management are both predictive and both have been strong. There have been gains in terms of capital investment as well as capacity utilization. Even durable goods and factory numbers have been stronger of late. Perhaps most important has been the recovery of the consumer as measured by both their confidence levels and actual retail sales.

This growth is not yet boundless and there is little threat of an inflation surge although some sectors look pretty overheated at the moment. The biggest concern may be housing as the rise in prices has been reminding people of the bubble that burst back in 2007. The difference this time is that prices are rising for the “right” reasons. The big issue is that housing remains in short supply and until that gap is closed prices will spike in many areas of the country.



The Issues in the Iranian Election

By the end of the week the Iranians will have made their decision as far as their leadership is concerned. The polls that have been taken in Iran point to a narrow victory for the incumbent – Hassan Rouhani. The problem is that polls are not all that reliable in the rural areas of the country and this is where Rouhani is weakest. The rural communities are far closer to the clerics and distrust the reformers as “city people”. They have been supporting hardliners for years and are likely to come out for Ebrahim Raisi strongly. The hitch for the conservative candidate is that he is fighting a man who is not even on the ballot. The former President is still very popular in these rural communities as he played to their fears and concerns and shoveled a lot of state largesse their way. The Guardian Council essentially kicked Mahmoud Ahmed-Nejad to the curb a few years ago and refused to let him run again. That has not stopped him from agitating and challenging Raisi.


Analysis:  Many domestic issues separate the candidates and Rouhani is trying to protect his record as a reformer and moderate. The problem for him has been the slow response from the rest of the world to these overtures. The promise of economic growth was always dependent on the willingness of the Europeans and Americans to engage. This has been far more hesitant than was expected and Rouhani has not been able to point to startling success. The hostility that has been expressed by the Trump team has done Rouhani no favors as voters question whether his approach is bearing any fruit at all. The nuclear deal was supposed to be the end of the crippling sanctions and an opportunity to enter the normal world but it has not played out that way so far.

The one thing that all candidates are in agreement on is the need for an aggressive Iranian foreign policy and the need for the state to focus on its own protection. This is where the hostility of the western states becomes a major concern. The US and European leaders have expressed their displeasure at what they term Iranian interference in the region and this has been a barrier to better relations. Iran sees these moves as vital to its own security and there is no support at all for abandoning these positions. Iran is still focused on what is happening in Syria, Lebanon and Iraq but they have also tried to play a role in Yemen and Libya. The Iranians support Hezbollah and Hamas and that puts them at odds with Israel. They have been opposed to the growth of ISIS and that should make them something of an ally to the US but their position has been to back the Shiite militia against all Sunni groups and they are hostile to the Kurds. The US has been backing and arming the Peshmerga and that has created animus within both Turkey and Iran.

Iran is willing to back down somewhat as far as developing nuclear capability (although this less popular with the hardliners). They are not willing to weaken themselves in other ways and it is the stated policy of both the reformers and the hardliners that security will be a paramount motivator. They do not trust the US or Europe and they really don’t trust the Saudi government or the Israeli leaders.



More Worries Regarding Polish Government

The Law and Justice party has been in power for just over two years and has been at the center of controversy from the outset. It is a very nationalist and populist party and is leader is a man bent on creating an autocracy. The first years of the party’s rule have seen an attempt to bring the judiciary under the control of the party and the media has been largely squelched as well. The opposition political parties have been under intense pressure and have found it hard to function normally. The latest move has once again provoked outrage in Europe and within the ranks of the opposition. There has been a massive purge of the military with most of the ranking officers removed and replaced with those that have strong ties to Jaroslaw Kaczynski. The move has shocked the country as the military has long been seen as an independent entity that can restore balance.


Analysis: The Poles are well aware that it was the army that led their break from the USSR even before the wave of revolution in the 1980s. General Jaruszelski was the last gasp of the old regime but he was also the man who stopped the Russians from intervening by threatening to resist their “help” with military might. He gave way to the revolution that followed without bloodshed and the army has been seen as a vital guarantor ever since. This move by Kaczynski has many convinced that he plans to become a complete dictator and as soon as possible but the move may have been too much for the Poles if the street reactions are any indication. It has also become obvious that many of the officers that have been sacked still have the support of many of their troops. The opposition is trying to rally behind this issue but their room to maneuver is limited.



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 and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.


Planes, Trains and Automobiles

OK – There were no trains involved in this latest sojourn but there was plenty of driving. It is about 135 miles from Minneapolis to Alexandria and I made that drive twice in one day. Then there was the 50 miles I drove after flying to Milwaukee as the program was in Lake Geneva. Lots of time on the highway this time. I really kind of like driving as opposed to the flying routine – much more freedom and less inane conversation and commentary. It is fun to observe the world as I speed past and when time permits I can even stop and wander a little – not that this trip afforded that luxury.

I have always enjoyed the opportunities to speak in “Alex” as many of the attendees have become old friends by now. My biggest fan in Minnesota is Jim Conn and this time he made an offer that I am going to try to follow up on. He is a private pilot and has offered to be my wings in Minnesota when the opportunity arises. I have spoken all over the state in the past and used a rental car to get to places like Roseau, Thief River Falls. Duluth, Bemidji and the like. I relish an opportunity to make that tour in Jim’s airplane! The conversation alone would be worth the trip as he has led a most fascinating life.

Speaking of conversations there was the opportunity to visit with Virgil in Alexandria as well. I had not met him before but he reminded me once again to look closely at everyone we meet. He is an older guy and too often we dismiss these people – a really foolish decision. It turns out that Virgil was an engineer who worked for years at NASA and programs from the shuttle to the space station. His breadth of knowledge was impressive and I could have spent hours with that man.


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


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German ZEW Index and Dollar Flight:  The German ZEW Indicator of Economic Sentiment is one that we have watched for years, it gives us an idea of what to expect in the German economy over the next 6 months. But, it might be the attention being paid to international investing and the movement of money that is most important.


One of the reasons why the US dollar has remained so strong is that foreign investors have flocked to the dollar for safety – because foreign markets were volatile, economies were struggling, and the outlook was not stable. That’s changing.


The ZEW index showed that corporate business leaders see the German economy as doing very well today.  The current conditions index rose to 83.9 in May, the highest reading since July of 2011!


The future conditions index came in at 20.6 in May, the highest reading in nearly 17 months.


The US dollar has been softening ever so slightly over the past month, the dollar index slipping 2.8% since April 7th (Bloomberg chart at right).


As foreign economies start to rebound (specifically in Europe), foreign investors may start to look more aggressively for deals (valuations of assets in those markets are relatively low after several years of economic malaise). If we see some acceleration of confidence in those markets, watch for changes in the dollar, offset by moves out of the Federal Reserve.


Also keep an eye on commodity prices as a result, a weaker dollar would push many of them higher as we have stated in the past.




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Business Intelligence Brief: May 16, 2017

Short Items of Interest – US Economy


  • Home Sales Surge – To be honest this is not the behavior that would be expected at the moment. There are many factors that would seem to mitigate against a big surge in demand for housing. The prices have been going up and steadily. Mortgage rates are higher than they have been (although not as high as some had been predicting). There has been a shortage of homes available and builders are struggling to find the people they need to build to that demand. All of that said, the sector is on a roll and sales are as high as they have been in over a decade. The 5.62 million homes sold is a greater number than anything since 2007 and there is no end in sight. Even the millennials are starting to buy homes.


  • JOLTS Report Remains Steady – The primary report from the Bureau of Labor Statistics showed a small decline in the pace of job growth but the Job Opportunity and Labor Turnover Survey showed a steadier level of progress. The most encouraging part of the report is that the pace of quitting has improved and is now over 2.0%. This is significant as it signals that people feel confident enough about the economy to quit their jobs in search of something better. The details of the quit rate are interesting as there are more highly paid quits than before. The usual pattern is for lower paid service sector workers to seek better pay and conditions – high turnover in the food service sector as well as in retail and general maintenance jobs.


  • Retail Stress – The numbers just get worse and worse as far as the traditional stores are concerned. The latest data on retail activity showed an improvement as it has been clearer that consumers are starting to get in the mood. The unfortunate reality for the traditional store is that all this activity has been aimed at the on-line option. Every day there is another story of distress as far as the big department store is concerned and these closures are gutting the retail workforce. That is another example of the limited options for those with less education or skill. The retail sector is changing profoundly and many of the old reliables are not going to last much longer.



Short Items of Interest – Global Economy


  • Macron Reaches Out to Center Right – The new President of France has to cobble together some kind of coalition in the National Assembly if he is to have any hope of leading the country. Right now, there is not one single member of his party in office other than him. He was once a part of the Socialist government under Francois Hollande but it seems that he is courting the center right now. He has named Edouard Phillippe to be his Prime Minister. Like Macron the new PM is young and not always in sync with his main party members. If this pattern keeps up, France is looking to have one of the youngest and most independent of governments in many years.


  • Brazilian Reforms Starting to Take Root – After three years of a miserable recession Brazil seems to be pulling itself out of the mire. The reforms that have been put in place have been enough to ignite the capital markets again and investment has started to flow. The point is that investors remain ever hopeful when it comes to Brazil. It is just too big and promising to walk away from despite the challenges. The expectation is that new leaders will carry on with the development projects and the anti-corruption drive but there is also the knowledge that Brazil has been here before and has managed to fail over and over again.


  • Iran Likely to Keep Sanctions Relief – At one point the Trump White House had declared that Iran would be stripped of the sanctions relief and the nuclear deal was derided as one of the worst in history. Now it appears the deal remains secure and the sanctions will be not be tightened. The analysts for the US have been suggesting the US remain connected while President Rouhani seeks another term. The elevation of a hardliner like Ebrahim Raisi would be a very bad development for the US.




What Stops the US From Growing at 3%?

The US has been stuck at around 2.0% to 2.5% growth for the last decade. This is now considered a normal rate of growth for this economy and few analysts have expectations of consistently faster growth. The third quarter of last year saw an expansion of 2.9% (after revisions) but after that flirtation with 3.0% the fourth quarter fell to 2.1% and we know how miserable the first quarter numbers have been this year with growth of only 0.7%. That faster growth has been hard to achieve despite the many promises and declarations of the politicians. The fact is that growth is not achieved with the simple flicking of a switch. What stops the US economy from emerging from its rut? There are many issues mentioned by analysts at one time or another. There may be too many regulations or taxes may be too high. There may too many imports or not enough in the way of exports. The list can be exhausting and every analyst seems to have a favorite.


Analysis: There is one factor that most agree has been crucial and can be blamed for much of the sluggish growth. The speed of an economy’s expansion is heavily dependent on the efficiency of its labor force and right now there are two serious issues as far as that labor force is concerned. The first is that there are too few people to do the jobs and secondly those who have been hired are less productive than has been the case in years. The two issues are somewhat related although not completely twinned.

We have been harping on the job shortage issue for years. The changes that have taken place in the economy have created a crisis for man companies as they simply can’t find the workers they need to do the jobs that need to be done. The manufacturers have placed themselves in a bind. They struggle to hire the talent they need so they have become much more capital intensive and are buying machines and technology but as they shift towards robotics and automation they need even more talented and skilled people and that search gets that much harder. The lack of a talent pool reverberates through the business community. The new hires take far longer to be useful than was the case before – most companies assert that it can take between 18 and 24 months for the skill level to reach acceptable levels. If there was some assurance the company could keep the newly trained people employed that wait might be worth it but the pattern now is for companies to poach each other’s workers. This means that the two year investment in training a person can be for nothing as that employee walks away. The poaching also drives up wages. The company that is doing the poaching generally offers a higher wage and the company that is threatened by the poaching also drives wages up in an attempt to hang on to the people they have already trained.

The ratcheting up of wages in select sectors has also been a factor as far as lowered productivity. There are many reasons that productivity might suffer but the rate of productivity is defined as output per hour and is connected to how much that hour of work costs. If the wages are going up and the production isn’t there is a productivity issue. The US has been watching overall productivity decline for years and for a variety of reasons. This is a service economy and technological advances do not have the same impact as they have on manufacturing. The machines that have been employed in the industrial community are not being put to use as they should be – capacity utilization has been under 80% for many years now and this is the lower limit as far as efficiency is concerned. The technology that has been adopted has not been the world changing version enjoyed in previous years. The cell phone was a revolution but apps that allow one to play “Angry Birds” isn’t.

The Trump plan was to boost growth to 3.0% or 4.0% in the first year in office. This was supposed to take place through tax cuts and deregulation but both of these have been hard to accomplish and it can be argued that they are not really enough in any case. The labor force and productivity are the real issue and changing these circumstances will be far harder to alter than even taxation or regulation.



TPP’s Ghost Lives On

This trade deal was killed by Congress last year and the Trump team put the finishing touches on its demise on day one of the term. It was a very ambitious plan that had as much to do with politics as trade but it also contained a lot of advantageous provisions for the US and now there is an attempt to preserve or resurrect these provisions. The TPP would have benefited the US in a number of ways.  It would have opened up many high-level service sectors such as finance, marketing, law, accounting and others. It was to have opened several agricultural markets that had been previously closed. There were provisions that protected US tech companies from “data localization” and there were more provisions to protect trade secrets. Two big parts of the deal would have been the impact on Nafta and the relationship with China. It would have been a simple way to renegotiate Nafta as both Mexico and Canada were parties to the TPP and most of all the TPP plan was designed to isolate China and pull the Asian states closer to the US.


Analysis: Not that TPP was without its problems. The liberal objection was that it seemed to weaken labor rules and environmental standards in other nations and the conservatives objected to opening more of the US market to member states. There would likely have been more migration of jobs to other nations as it would have been easier to invest in other countries. On the other hand, there would have been more jobs created here by foreign companies seeking access to the US market. The bottom line is that much of the TPP is back on the table – not as one big multilateral deal but as part of several smaller efforts that surround a single industry or a select group of states. That works but is not nearly as efficient as the multilateral approach.



New Wave Emerging in Brazil?

After 13 years of left leaning governments under “Lula”, Dilma Rousseff and now Michael Temer the mood of the average Brazilian is angry and frustrated. The lack of growth has plunged the country into one of its worst recessions in decades and there is widespread fury over the rampant corruption that plagues everyday life. The sense is that Brazil completely ruined its moment on the global stage with botched World Cup sponsorship followed by a near catastrophic Olympics. The Rousseff regime was ousted over allegations of corruption but the real motivation for her impeachment was frustration with what had been happening in the country over the last few years. The once revered Lula now faces his own trial for corrupt activity and there is nothing much left of the movement that propelled him to office a decade ago.

The new face of Brazilian politics may well be the recently elected mayor of Sao Paulo. João Doria is a billionaire who likes to compare himself to the former Mayor of New York – Michael Bloomberg. He is the son of a Brazilian politician but has never run for office prior to this race and he has tried to emphasize his management skills. The aim is to start running the city as a business leader would as opposed to a politician that is constantly trying to curry favor with one group or another. Many of his first moves have been more symbolic than practical but he has taken steps to speed up the health service by engaging the private sector. He has started a whole host of infrastructure projects that are designed to bolster economic development.


Analysis:  At this point Doria is not declaring his desire to be the leader of all Brazil but he has not exactly denied this ambition. The mood of the electorate is hard to read past the anger. On the one hand, there is a strong desire to leave the left behind and move in a new direction.  But when people are asked what they are prepared to give up from the old system there is not much consensus. The largesse provided by the state is something most want to keep but nobody seems to have a plan to pay for all this. The population just wants something different than they have had in the past decade and they want an end to the corruption that snarls almost every effort in the nation. Part of the appeal of Doria is his wealth as the assumption is that he will less likely to try to use his political power to gain more. If wealth was his goal he would do far better out of the government than in.

It is a safe bet the left will lose big in the next election but that fact has a wide variety of right and center right politicians seeking the chance to be the next leader and they will be tripping all over one another as they seek the right to run and win. Doria is a dark horse right now but success in Sao Paulo would go a long way towards elevating his chances.



Ebola Threat Returns

The outbreak of Ebola three years ago killed over 11,000 people and terrified the world as a whole. This brutal and nearly always fatal disease triggered one of the most massive interventions in history by the World Health Organization and others. In the end the disease was controlled but not before the massive death toll and major economic disruption for most of western Africa. The ability of people to move freely around the world was sharply curtailed and many of these nations have yet to fully recover. Now the Ebola virus has been found again in parts of the Democratic Republic of the Congo and this is a very serious threat.


Analysis: There are very few states in Africa that are as ruined by turmoil and war than the DRC. There are estimated to be as many as 15 different militia groups operating and the government can be said to control no more than 20% of the country. The civil wars make it nearly impossible for any aid agency to function. The Ebola outbreak of three years ago took place in countries where there was relative peace and that made it possible for the health officials to operate. It was possible to quarantine and to interfere with the ways that people handled the afflicted as well as those that had died. This will not be possible in the DRC.

This is an isolated nation and that may keep the disease from spreading to the world as a whole but there is nothing to keep it from affecting most of the DRC and surrounding nations. There are already plans to close borders if there is an epidemic and that is what health officials are already calling it. The death toll in a place like the DRC would likely dwarf the impact of three years ago and most assert that this will be much harder to stop or contain. The government in Kinshasa has been refusing help as the leaders are unstable and fear that intervention could weaken their position even further. The World Health Organization is trying to martial the resources needed but their latest reports are not encouraging.



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 and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.



Varying Intelligence

We know full well that people are not all endowed with the same level of intellect. There are those of us who are as dumb as paint and most of us have our random “paint” days when we can’t seem to figure our way out of a paper bag. It should not come as a shock to know that there is much variety in the animal world as well. Some creatures are just smarter than others – even within the same species. I have all the proof I need in my own household.

We have five cats and all differ widely as far as smarts. Perhaps the brainiest is the newest addition. He was my mom’s cat for 15 years and became a part of our crowd upon her death. He learned the ways of his new home very quickly – shocking for a cat that old. Within weeks his behavior was altered and he discovered new ways to interact and get what he wanted. He really is a problem solver. On the other extreme is my “daddy’s cat”. Scoot was nearly dead when she was found in a park and suffered a little brain damage. She is far less coordinated than the others and is far clingier. She needs constant human attention and becomes distressed when she can’t find one of us. Her routines are unwavering as it helps her stay focused. Smoky is the thinker and the contemplator. No decision is made swiftly and he considers all options prior to action. Spike is all energy and reminds me of a hyperactive teenager. He darts around like a cat on fire and then stops and stares with a goofy look on his face. That is usually followed by one of his patented “high fives” as he has figured out this gets him attention every time. Finally, there is Snip – the cat that may be from another planet. She is in her own world with its own rules and on occasion she deals with us earthlings but always on her terms.


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

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North Korean Ambassador Rattles Saber, Market Responds.  The North Korean Ambassador to the UK said in an interview that the North will be conducting its 6th nuclear test when “the supreme leader sees fit” (reference to Kim Jong Un). When SkyNews first broke this story today, it created a small panic across markets as market sources jumped the gun and reported that a 6th nuclear test had already been conducted. That wasn’t the case as of our writing late in the afternoon.


It was interesting that the markets dipped, the dollar fell, and the VIX (volatility index) short up  in the first few minutes after that report came out – which suggests just how jittery the market is. It also shows just how quickly social media and digital news can create movements in financial markets. Some analysts believe that we need something to give the market a shakedown. They believe that the market is way overbought and that some investors need an excuse to take profits and reset conditions. That’s why some of this volatility will continue.


On the North Korean front, there is a very real situation that can happen which could push conditions further/faster – based on the limited information that we have.  When the North conducts nuclear tests or large ballistic missile tests, it has a limited amount of time to actually conduct its tests once it fuels the device or rocket. Once fueled, it can’t sit in perpetuity forever – there’s a shelf-life and a basic point of no return that can force its hand once it makes the decision to try and attempt a test. We’ll see if that holds true this time.  But, there has been activity in and around the test site where previous nuclear tests have been conducted. This is perhaps the most dangerous situation on the planet. There is nothing imminent on the horizon between North Korea and the US/Western forces. But, it has the potential to spiral out of control perhaps more so than areas around the Middle East.


That’s why news about North Korea carries a lot of market panic with it.



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Business Intelligence Brief: May 15, 2017

Short Items of Interest – US Economy


  • Consumer Prices Rise Moderately – Granted, the Consumer Price Index is not the favorite indicator as far as the Fed is concerned (they prefer the Personal Consumption Expenditure Index) but there is still some attention paid to the CPI by the Fed and to many others. The latest iteration shows a very modest gain of just 0.2% (only 0.1% at the core). In general, the rate of inflation has been subdued as compared to what was seen in February. The annual rate of increase then was 2.8% and that is the fastest seen in several years. The annual rate now is just 2.4% and the annual core rate was below 2.0% for the first time since October of 2015. The main reason for the slip has been an easing of fuel prices but there have been price reductions in other areas as well. This is not enough to get the Fed to pull back on interest rate plans but there is certainly less urgency than before.


  • Improved Trade Relations with China – It would be safe to say that China bashing is no longer in vogue at the White House. The campaign rhetoric has been abandoned on such issues as currency manipulation and the US is no longer really contesting China’s intentions as far as the South China Sea is concerned. Now comes word of a trade agreement that gives the US access to the Chinese market in a variety of ways. US beef producers will sell more and there will be additional opportunities for several service oriented sectors. In return, there has been little talk of expanded tariffs aimed at Chinese exports. The US once again discovers they need Chinese help on issues like North Korea.


  • Did the US Get Played on This Deal? – There have been many critics who assert that the deal just struck with China was very one-sided and not in favor of the US. Some of the key advisors on the Trump team that had been advocating a tough stance are disappointed and have been expressing their anger. The promises made by China are vague and the concrete ones were agreed to last year. China will continue to trade as they always have and many in the US still believe the practices to be illegal. Dumping continues to be a big concern and there are few that have heralded this deal in the way the White House has chosen to.



Short Items of Interest – Global Economy


  • Another North Korean Provocation – Another week, another ballistic missile test. This time it actually left the launch pad. The motivation for North Korea is murky as each new effort to flaunt the will of the world invites more sanctions. The problem is that there is nothing much that anybody can do with the Kim regime at this point. The pressure will have to come from China and thus far that has been weak. It was thought that Kim Jong-un might back off and see what the new South Korean regime might do but that has not been the case.


  • Iranian Hard Line Candidates Try for United Front – The current President – Hassan Rouhani – has been going on the offensive and has been working to rally the liberals and reformists. He as taking advantage of the divisions within the ranks of the hardliners. The former mayor of Tehran has now dropped out and thrown his support behind Ebrahim Raisi in an attempt to reduce internal competition but the real threat to unity is coming from a man who was not allowed on the ballot. Former President Mahmoud Ahmedi-Nejad has been a vocal critique of the whole process and he still has significant support in the rural areas.


  • Mexican Gangs Expand Their Operations – The drug cartels are branching out and stealing oil. The number of pipeline attacks has been on the increase and these gangs are selling the oil illegally on the spot market – usually to interests in Latin America. It has been reported that Cuba has been a big buyer as well as other states that are considered pariahs in the world as a whole. The drug gangs are diversifying and entering sectors that are part of the legitimate economy and this makes them even harder to deal with. The money is still in the drug business but there are rival sources now.




The Very Real Threat Posed by Cyber Crime

It has been a rough couple of days for much of the world and there is no real end in sight. The ransomware attack called WannaCry has infected millions of systems throughout Europe and the US and is now spreading to Asia. The attacks are as insidious as any that have been launched as they are designed to hold a computer or system hostage. The message is clear enough – pay the ransom or lose all the data on your computer. This attack has come from a criminal organization as opposed to some malevolent government or terrorist organization but this in no way lessens the impact. The systems that have been targeted are essential services such as those engaged in the health sector and transportation. The intent on the part of the criminals is to get their ransom as the organizations involved do not want to lose their data and will likely give in to the extortion – it is a modern-day equivalent to a protection scheme. Once infected there is nothing left for the owner of the data to do – they are forced to pay.


Analysis: There are three primary concerns as far as business is concerned and each of these are increasingly disruptive and expensive. The first and most obvious is the ransom itself as WannaCry is demanding at least $300 to “unlock” a computer or system and that could easily end up being a several thousand dollar payment if there are multiple affected machines. While the system is under attack there is no way to function and whole organizations have been stymied. Hospitals have been forced to delay or cancel surgeries, patient records have not been accessible and companies in general have lost their ability to carry out even the simplest day to day activity.

The second major expense is the subsequent search for protection from future attacks. This kind of protection is very costly and not foolproof. Those who are hit by ransomware usually get a message or file they foolishly download but this attack has been more sinister and has been aimed at entire systems. The attack was designed to get past standard protections and this means that organizations will have to invest heavily in systems designed to blunt attacks that change and morph every day. The IT function becomes a major investment and one that really never ends.

The third impact may be the most expensive in the long run. The only sure way to avoid this kind of vulnerability is to eschew this vulnerable technology altogether. This compromises the overall efficiency of the business or organization as people no longer trust the systems that are in place to store data or communicate. The advances that have been made available by technology are abandoned in fear of being compromised. This forces a return to more rudimentary systems and the attendant problems that had been solved by the technology that few think they can still trust.

Those who are trying to go after the perpetrators are at a loss. They do not know precisely who is behind this and that means that more attacks are very likely. Stopping the spread is the paramount goal at this stage but even this course of action has proven to be very complex. The threat from cyber-crime has grown exponentially – along with the use of technology. The expansion of systems into every business and home means that nearly everyone is vulnerable. The most telling comment from a cyber-crime expert when asked what people could do to protect themselves was that they “try to be lucky”.



Maybe Consumers Are Back in the Game After All

For the bulk of the year there has been a disconnect between what the consumer has been telling pollsters and what they are actually doing. The consumer confidence surveys have been stronger than they have been in years but retail sales numbers have not been all that impressive – in fact they have been deteriorating. This has been giving analysts a lot to work with as one group asserted that the surveys were inaccurate and reflected consumers with no real clue while another group asserted that at some point the confidence levels would be enough to bolster sales. It appears this month’s data provides ammunition for the latter interpretation.


Analysis: The gains in retail this month were the most impressive all year and an added bonus is that prior month’s data was revised upward so that the pronounced decline that had been so worrying was reduced considerably. The growth this month was 0.4% and that is best number this year. At the same time, there was another boost in confidence as recorded by the University of Michigan. The index crested in January with a reading that the highest in 13 years and the current reading of 97.7 is very close to that record level.

Not all the news in retail is good as the consumer has continued to change the way they shop. This was a miserable month for many of the traditional stores as their earnings numbers came in well below what had been hoped. The three strongest sectors were sales at gas stations, spending on the Internet and the annual splash out on garden supplies. The increase in activity at the gas station was due to both higher gas prices and the start of the summer driving season. The garden spending is predictable and generally temporary. The Internet boom is the worrisome part for the traditional retailers.

It was not that long ago that analysts dismissed the rise of on-line sales and pointed out all the reasons that consumers would reject the option. There were plenty of polls that suggested that people worried about their security on line and there were thought to be many product areas that would never lend themselves to on-line sales. People would not want to buy clothes they would not be able to try on and certainly they would avoid groceries. It turns out that people will buy anything on line and this has steadily chewed into the traditional store’s sales. Shopping has become far more utilitarian and people are not as willing to spend time and effort in a store. The single biggest objection to the traditional store is that the sales help available is very poor and people feel they get more assistance from the on-line purveyor.



European Divisions

At the start of the year the most pronounced threat to the future of the European Union was coming from countries that were once considered stalwarts. The British decision to withdraw was not all that unexpected given the frosty relationship the UK has long maintained with the rest of Europe but the prospect of both the Netherlands and France pulling out had many declaring that the EU was “dead man walking”. As it turned out both Geert Wilders and Marine Le Pen fell short and the EU was saved. At least that has been the general assessment from a relieved establishment in western Europe. The problem now is the “other” Europe. The former eastern European states were once assumed to be wildly enthusiastic about Europe as they all hastened to join after the collapse of the USSR and the whole notion of the Warsaw Pact. That enthusiasm has waned considerably and now there are significant divisions between the states of the west and those in the east.


Analysis:  Two of the most ardent critics of the EU are Viktor Orban – Prime Minister of Hungary and Jaroslaw Kaczynski – President and former Prime Minister of Poland. Both are ardent nationalists and on the far right of the political spectrum. They are consistent critics of the EU although both have been all too eager to accept EU money. They resent the rules that are imposed by the EU and that is a complaint they share with nations in the western European group but they also resent the attitude of the other European nations. Both are well aware that the UK has been objecting to Polish and Hungarian workers entering the country. The comments by both men can verge on the hysterical and incomprehensible and reference things that have taken place decades and even centuries ago. They both have plenty of critiques but neither has offered much in the way of solutions.

The Balkan region is also a concern again but few think a return to the days of all-out war is likely. The issue for the EU is that several of these states had indicated a desire to join the EU but now there is doubt the EU would want them. Croatia was the last state to enter and that was in 2013. The Serbs have become more aggressive again and there continues to be talk of a “Greater Albania” that makes the leaders of Kosovo nervous. Macedonia has deteriorated into a crime fueled syndicate.

Now that France is not preoccupying the analysts, there is an attempt to turn to other matters. The recent surprise win by Angela Merkel’s party in a region that had been seen as a stronghold for the Social Democrats makes it all the more likely that she will win another term and that ensures a certain amount of stability in Germany as well. This elevates the issues of Eastern Europe to the top of the agenda. This includes the potential for Russian interference in the Baltic States of Estonia, Latvia and Lithuania. The President of Estonia – Kersti Kaljulaid – will hold the rotating EU Presidency from July through the end of the year and she has already indicated that EU unity will be high on her list.



Tensions Between Africa and China

The Chinese have been exceedingly active in Africa over the last several years. There has been a great deal of investment and almost every project of note has involved the Chinese. The advance was initially welcomed by African states that still distrust the Europeans and have not seen the support they hoped from the US. Now these countries are starting to question the Chinese and their strategic intent. As has been the case for decades the interest in Africa is centered on the commodities that can be obtained from the continent and little else. China is being called the “new colonialists” as they are interested in exploiting oil and minerals and in selling Africa the cheap consumer goods that China exports. The Africans want China to buy other things and they want help developing an industrial base that allows real economic development.


Analysis: Calls from various African leaders have started to become more insistent and there are hints that China will see far less cooperative governments in the years to come. Uhuru Kenyatta of Kenya has become the latest to criticize the Chinese and threaten reduced access to his country. Given the importance of Kenya in the region this could be a serious blow to Chinese strategy but there is one factor that is likely to keep assisting the Chinese.

Africa has no real alternative as there is no other state that has been willing to commit resources to African development. The Europeans have backed off as they have issues of their own and the US has never been willing to do much other than lip service. The one possibility might be enhanced interest from India but that is a slow build at best.



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 and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.



The Eternal Conflict

…or so it would seem. Not a day goes by that we are not exposed to yet another episode of “anger in flight”. I know full well that flying is hardly the joy it may have been once and I have heaped my share of criticism on the TSA, the airlines and everybody else that somehow combines to make this more of an ordeal than it needs to be. I think we are going too far with this and by “we” I mean the media – social and otherwise. Every episode is depicted as those evil airlines mistreating hapless passengers but in many cases the truth emerges slowly and those “innocents” do not look so blameless.

I have long asserted that the most miserable part of flying is my fellow passengers. Most of my cabin mates are good, decent people just trying to get someplace. All it takes in a tight space with 130 people is a few and they can make life unpleasant for all concerned. I am astonished at how rude people can be on a plane and many save the rudest behavior for the flight attendants. There are rules that are to be followed in a plane and these are not created at the whim of the crew. If one is irritated at these requirements take it up with the FAA – not the person whose job is to follow the rules as set out. The latest fracas was over a family and their birthday cake. They decided that it would be a good idea to put this cake in the space where the emergency equipment is stored. They fought with the crew over this and were booted off. What about “emergency” escaped their understanding. Should someone who is experiencing a heart attack or other injury be required to wait for somebody to remove a cake first? If one has ever seen somebody in this kind of distress it is obvious that seconds count. The rules are as clear as they can possibly be. DON’T PUT ANYTHING IN THIS COMPARTMENT. If you can’t follow that simple instruction you have no business flying in the first place.


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


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Food Price Index and Global Instability.  There’s a direct relationship between global stability and food prices. Time and again over history, we can point to periods of time when primary resource prices were high and generalized global instability increased. When people are hungry, they get desperate and they do extreme things when that starvation initially hits them.  Over time, if their actions are unsuccessful, they lose their will to fight – and they yield to their fate.


If you look at the UN’s Food and Agriculture Organization’s Food Price Index, we can see that the last real spike in food prices came in 2010/2011.  Ask yourself what happened in that period?  We saw the Arab Spring erupt in 2011. Many people will point you to other factors that led to the Arab Spring, but when you cut to the heart of what really kept it going, people were starving and seeing their economic fortunes being eroded in Oligarchy’s.  Those small groups of people seen as not only making self-interest decisions were also not starving as the common person was. And it led to unrest.


Look at what is happening in Venezuela at this time with massive riots and protests all starting to erupt. People are now willing to put their lives on the line to create change in the country – because their families risk starvation. They can’t afford the food in stores and inflation is at a run-away pace. Unemployment is climbing, foreign investment is flying at an accelerated rate, foreign companies are pulling out, etc. But, much of that wasn’t creating a massive destabilization toll until food prices started to skyrocket and food stuffs were in short supply.  That’s when the rioters really started to show their face.


The latest FAO Food Price Index for global food prices showed in March that they were elevated, but falling into a cycle matching that from 2015.  The chart above from the FAO as previously mentioned shows the nominal and real (inflation adjusted) indexes.  We can see that the index for food prices is still materially lower than it was during the height of price inflation in the 2010-2011 period.


So today, we would say that one must watch the individual markets to predict where unrest might erupt – and you can do that with street-level food price inflation.


Looking forward, watch what happens with inflation. With increases in global demand for a variety of food products, the current plentiful supplies could start to diminish. Unexpected snows across the US grain belt may have damaged crop conditions – and impact wheat output. That could have an impact on food prices worldwide depending on how wide-spread that impact was. We will know more about crop conditions in the next week or so when the FDA releases its weekly crop reports.


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Business Intellgence Brief: May 11, 2017

Short Items of Interest – US Economy


  • Import Prices on the Rise – The shift in import pricing has been swift and impressive. There are many moving parts as far as this data is concerned and the situation may be enough to change some strategy as far as the Fed is concerned. It is also changing business strategy to an extent. The prices are higher overall than they have been since 2002 and this is despite a fall in oil prices. Some of the hike may be attributed to the fact the dollar has weakened by 2.6% since the start of the year. The greenback is still strong relative to past years but it is not quite the powerhouse it was. These higher import prices have an impact on the data the Fed looks at as far as inflation – the personal consumption expenditure numbers.


  • Big Budget Surplus in April – In most years the government runs a surplus at the start due to the quirks of spending and tax collection. This year that surplus is unusually large – about $182 billion. This will not last all that long and by the end of the year the deficit will have widened unless there are some significant changes as far as spending and revenue is concerned. What worries the deficit hawks is that nothing in the current budget makes any inroads into the budget long term. The Trump budget makes few real cuts and asks for more spending in a wide variety of programs.


  • Era of Gas Guzzling Over? – For over a century of oil production the issue has been peak supply – when will the world run out of oil? That fear has been held back by a succession of discoveries and techniques that allowed more output but now the issue is peak demand. The US driver is simply not consuming like they used to and that is having an impact on plans for the oil industry. The motorist is in a far more fuel efficient car and they are driving far less. The technology favors frugality and that has meant consistently lower prices for a commodity that is still in the middle of a glut.



Short Items of Interest – Global Economy


  • Macron to Face Budget Realities – The EU has studied the attempts by France to control its public sector spending and has concluded that it hasn’t been as effective as hoped. The first order of business for Macron will be to get the national budget under control as France is very close to violating EU rules as regards deficits and debt. This is going to be doubly hard with the demands that are being made for economic growth and more jobs. The government doesn’t have much ammunition to employ as stimulus with a deficit/debt crisis to deal with. The growth is going to have to come from the private sector and it needs to come sooner than later.


  • Crisis in Zambia – The election in Zambia was close and of course it was corrupt. The winner was the current leader – Edgar Lundu – but his opponent was far closer than anyone expected given the ability of the Lungu government to influence the polls. Hakainde Hichilema is contesting the outcome and the wealth that has accumulated as a business leader in Zambia has been financing the protest. He is now accused of treason because he refused to move his car from in front of a Presidential motorcade – an offense that usually gets a $50 fine.


  • Moon Wastes No Time – The new leader in South Korea has made it clear that North Korea is a top priority and it has also been made clear that the bellicose reaction from the US has been wholly rejected. Moon Jae-in has already been in contact with China over what to do with Kim Jong-un and it appears that an olive branch will be offered and soon. Moon wants to resume trade and aid and wants to reopen the “friendship” facilities that were controlled by both the North and South. The US was not invited to engage with these calls and neither was Japan. Both of these nations have essentially been frozen out and that is likely to be the strategy going forward. Moon sees no upside for his country from confrontation and has been pointed about this. The US has little to lose from confrontation but that is not the case for the South Koreans.




OECD Asserts No Breakout Year in 2017

The latest report from the OECD is not exactly negative but it is less upbeat and positive than it has been in the fairly recent past. At the start of the year the opinion of the OECD analysts (and many others from the likes of the IMF, World Bank and others) was that this was a year that would finally see dramatic growth. The expectations were high not just for the US. The Chinese economy was starting to show some signs of its old growth patterns and Europe was considerably less sclerotic than it had been. The UK was handling Brexit better than had been anticipated and all this led to the conclusion that global growth would get back to its more robust ways sooner than later. Now the OECD and others have started to temper their assumptions and the current assessment is that global growth will be more tepid.


Analysis: At the heart of this reduced set of assumptions is a reevaluation of the US and Chinese economies. Both are expected to grow and at a steady pace. That is certainly good but it is not enough to pull the global economy along very far. The US started the year poorly again with a GDP of just 0.7%. This has become a familiar pattern and in past years the economy has perked up in the second quarter and then there is really robust growth in the third and a slight reduction in the fourth. It all adds up to growth at around 2.5% and that is not bad exactly but it is a far cry from the 3.5% to 4.5% that has been promised and would be necessary to break the global economy out of its funk.

The same situation seems to be facing China. The country is seeing better growth than was the case a year or so ago but it is still far from the numbers that were seen just a few years ago. This is a country that will likely hit 6.5% growth this year but this is the same country that was in double digits not that long ago. The Chinese growth remains dependent on several factors that are beyond its control – notably the health of those economies that import from China. The Beijing leadership has pushed hard for the country to be more internally focused and more attuned to the domestic consumer but this is a slow process and China remains an export driven nation where these overseas sales account for almost a third of the national GDP. (The US is 14% dependent on exports, Japan is 14.7% dependent and Germany is 52% dependent.)

The assessment of the UK has weakened as well. Early on there was some hope that Brexit would not be so divisive and many talked about the role of those cooler heads. Surely the Europeans would not carry a grudge and surely the British would see reason and demand less. That has not happened and it looks like this will be a bitter divorce even if that means bad news for everyone concerned. The UK economy is going to be hit far harder than many assumed at the beginning and now the OECD has reduced its expectations.

The good news in the OECD report comes from Europe as the expectation is that growth will exceed the expectations set at the start of the year. The big news has been the blunting of populist movements that were threatening to severely distort trade relations and possibly lead to the destruction of the EU altogether. France dodged a bullet with the defeat of Marine Le Pen but they now have a very young and untested President with not a single member of his own party in the National Assembly. Lately the news from France has been better than expected but big challenges lie ahead. The Germans are growing at a respectable pace however and it looks better and better for Angela Merkel and that suggests economic stability. Even the struggling peripheral countries have started to see a light at the end of the economic tunnel.



Fears of a “Robot Apocalypse” Unfounded?

It has become quite fashionable to declare that robots and automation is taking over the world and that soon there will be no jobs for the majority of the population as machines will have them all. There has been abundant evidence to show that robotics has emerged as the major motivation for job loss (as opposed to outsourcing jobs to other nations). There is also evidence to show that there has been more positive influence than people assume.


Analysis: A report issued this week from the Information Technology and Innovation Foundation asserts that much of the assessment of technology’s impact is inaccurate and that the idea of robots taking over most jobs is a myth. Much of the evidence points in a far different direction. It is not that technology is not affecting jobs, it is that these impacts are far less dramatic than changes in the past have been. The most convulsive period in the nation’s history was when the agriculture economy gave way to the manufacturing economy in the 1800s. Prior to the changes in history the farm sector employed over 40% of the population and today less than 2% of the nation’s employees are directly engaged in farming.

There have been other convulsive periods that have been more recent. The report points out that in the 1960s the rise of office work and the arrival of the Baby Boom generation meant the addition of some 600,000 high school teachers and 700,000 maintenance people for these new offices. Women were scarcely 25% of the workforce in 1970 and in 1999 the percentage peaked at around 60%. Today it has declined a little to just over 47%. It would be expected that churn would be more pronounced with all the new technology but the fact is that churn is lower than it has been in decades. The machine has indeed taken over routine and mechanical jobs but at the same time the consumer has been gravitating to the kinds of service offerings that can’t be automated or mechanized and there is abundant evidence that new technologies generate need for new workers with new skills. It becomes a matter of getting these skills into the hands of those that are seeking jobs.



What is the Appeal of Russia?

I suppose I should preface this piece with a confession of sorts. I started my academic life as a Soviet and East European specialist – getting a Master’s in the field, learning Russian and all that. I was prepared to spend my adult life studying the “Evil Empire” but then the USSR went out of business and I metamorphosed into a more traditional economist. The point is that I was raised a Cold Warrior and in my heart I still think of the leaders of Russia as the same “godless commies” we thought of them as in the 70+ years of the Union of Soviet Socialist Republics. This colors how I look at the issues surrounding Russia today. There are those who question whether the Russians tried to influence the election in the US and I can only laugh at the skepticism as the Russians (and Soviets) have been trying to influence, infiltrate, attack and disrupt the US from the very moment that regime came into power.


Analysis:  The Russian reaction to the issue in the US has been telling. Sergei Lavrov is the Foreign Minister and is considered a bully by even those who work for him. His latest quote was asserting that it must be “humiliating for the American people to realize that the Russian Federation is controlling the situation in America”. It was said with only a slight tongue in cheek. There is a good domestic reason for the Trump team to want this issue to go away as it undermines his victory to some degree. Clinton won the popular vote and that has already provided some reason to challenge Trump’s win but if it was proved that Russia really did do enough to throw the election his way there is another blow to the legitimacy of the vote. Not that any of these revelations would really change anything as Donald Trump will remain in office for four years regardless of how people think the vote went.

The real question is why the Trump team seems so interested in Russia in the first place. The overtures and the thaw have continued through the crisis. It would be understandable if we needed something from Russia as we do with China. The thaw with Beijing is simple to understand. We need their help with North Korea and we need their economy and have very complex business ties with them. There is no such need with Russia. It can be asserted that we want to be better placed to deal with Syria by being closer to Russia but thus far our aims have been diametrically opposed. Europe wants Russia out of Ukraine and it seems we no longer care.

Russia under Putin is an autocracy and in some ways a complete dictatorship. We also know that criminal gangs operate with impunity in Russia and that many of them target the US with cyber assaults that go directly at our financial system. There is a modicum of cooperation over terrorism but Russia has just as much at stake in this fight as the US and is not engaged as a favor to the US. Our allies in Europe dislike and distrust the Putin regime and remain confused as to why we are trying to make nice. Even the majority of our military has a healthy skepticism as regards Russian intent. It remains very hard to see what the US thinks it can gain from a closer relationship with Putin and Russia. But I have to come back to my own history as I can’t stop seeing this as cuddling up with a rattlesnake – it is unlikely to end well.



Rouhani Goes on the Offensive

The President of Iran walks a tightrope on the best of days. Hassan Rouhani is a moderate in a nation that is still largely under the control of the hardline clerics that ultimately oversee the political situation in the country. As he has been seeking another term he has been pitted against a far more conservative opponent who has the blessing of the Ayatollah Khameini. It is a significant development in Iran that this is no longer enough to ensure victory. The vote in Iran is mostly fair although the media is tightly controlled and people are not really free to speak out. For months Rouhani has been low key and careful but in the final weeks of the campaign he has turned aggressive as he has been watching the hardline candidate stumble.


Analysis: Rouhani has the support of the young and the educated and the urban elite as well as the business community but their support can be lukewarm as compared to the rural and pious who will act in whatever way the clerics demand. The key to Rouhani‘s reelection is motivating these supporters and now is the time to do this. The hardliners are still divided despite the support that Khameini has thrown behind Ebrahim Raisi. The former President continues to play a disruptive role despite being denied an opportunity to run again. Mahmoud Ahmedi-Nejad retains immense support in the rural communities and even though he is not on the ballot he has an influence as his most ardent supporters are boycotting the election in protest. That takes votes from the hardliners and that bolsters Rouhani.



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 and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.



The Cartoon is Real!

I grew up on the adventures of the Road Runner and Wil-e-Coyote. I learned that the most elaborate plan can be doomed to failure and that speed is a good thing. Until this morning this was simply a cartoon and seemed to have little to do with reality but all that changed as I gazed out my hotel room window. I am in a Hyatt resort just outside Albuquerque and it is the boonies to be sure. Desert landscape all around.

As the dawn arrived I noticed movement on the golf course and I realized that it was a Road Runner being chased by a coyote! Actual scenario in front of my very eyes and it gets better. The coyote was making its way across the green and seemed to be gaining on his prey when it stepped in the hole that golfers are aiming at. The coyote face planted and slid on its stomach for about ten feet. I am sure that I heard “meep meep” and laughter as the bird scampered away from the now embarrassed coyote. All that was missing was a box labeled “Acme”.

So now I am thinking that those other cartoons might be based on reality and that gives me a whole new appreciation for Rocket J. Squirrel and Bulwinkle Moose.


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


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Mississippi River Flooding to Impact a Number of Industries.  The Mississippi River is expected to flood over the next month. As flood waters make their way from north to south, flooding moves downstream. It’s like a slow, rolling disaster. Accuweather is showing the following areas to be at significant risk of flooding over the month of May. Watch for a couple of impacts to hit several industries.


1) Farmland up and down the fertile Mississippi River will see flooding that could wipe out crops. Not only will it potentially destroy or damage current crops, but it could delay a follow-on crop that needs to be planted this summer. Agricultural prices will likely be impacted by these conditions – along with damage that is now showing up along key wheat markets in Kansas, Colorado, Oklahoma, and Nebraska after late season snows worked to deteriorate crop conditions.

2) Barge traffic up and down the Mississippi could also be impacted. It would seem that flood waters would add draft levels to barge traffic – and actually enhance it.  But, strong moving flood waters can create unpredictable river conditions, debris, and shifting sand bars that can impact traffic and make travel unsafe. If that happens, watch for commodities that would normally move up and down the Mississippi to get diverted to rail and truck. As capacity in those modes tighten, it will push other smaller modes down into LTL. The bottom line is that it could tighten capacity all along the supply chain up and down modes.

3) Insurance companies are going to see some impacts from this flooding. Flood damage can be some of the worst – because it inundates every inch of the area it impacts. Damage from wind (such as a tornado) are hit and miss. Even a direct hit on a home may destroy it, or just inflict damage on one section of the home. Flooding gets into every inch, nook, and cranny and creates damage.

4) It will positively impact the construction sector and as recovery activity starts, it will push more demand for construction materials and labor in those regions (on top of construction activity that was already robust in some areas). Worker shortages will ensue.


Fortunately, we have not experienced wide-spread damage from environmental disasters this year. We’ll see what happens as flood waters rise and we get into hurricane season to see if those fortunes change.




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