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Business Intelligence Brief: July 19, 2017

Short Items of Interest – US Economy


  • JOLTS Report Shows Continued Job Market Strength – The Job Opportunity and Labor Turnover Survey is one of those semi-obscure readings for the economy that gets overlooked to an extent. There is a tendency to focus just on the quit rate and while that is important there are also data points that cover the level of job availability and hiring. The quit rate is the number of people that just decide to quit their existing job as they are convinced that there is something better out there and they are willing to take a chance. The quit rate was very low in the recession years and is now back to the levels seen during the boom. The other interesting point is that the hiring rate in May was at 3.7% – up from the 3.5% level in the previous month. This suggests that employers are still struggling to get the workers they need.


  • Immigration Limits Relaxed – Throughout the summer there has been a consistent demand for temporary workers to fill the empty positions in everything from hospitality to construction and agriculture. The limits that had been placed left a great many companies with little option but to curtail service. Now the limits have been altered so that another 15,000 can work in the US. That brings the total to 81,000 from the 66,000 that had been the previous limit. It is likely that the H1B visa limit will be loosened at some point. The reality is that there are too few people willing to take these jobs and this has left farming, construction and hospitality with too few people to function.


  • New Sanctions on Iran – At the same time that the nuclear deal with Iran was confirmed for another 90 days the Trump White House imposed new sanctions that were aimed directly at elements of the Revolutionary Guard. The sanctions were targeted at specific companies and individuals and will have very little impact on the overall economy. It was essentially a shot at the hardliners and perhaps a warning that if Iran gets any more engaged in backing terror groups the US could react. The nuclear deal was created to separate the actions of the regime from the efforts to build nuclear weapons capability.


Short Items of Interest – Global Economy


  • Spain’s Overture to Catalonia – In a matter of a few weeks there will be a referendum in Catalonia as to whether they think they should be independent from Spain. In reality, this vote is not binding and likely not even legal as breaking away is not allowed under the Spanish constitution. If the vote to secede is overwhelming the authorities in Madrid will be hard pressed to ignore it. At the last minute, there has been an offer made to the Catalans that would grant them fiscal autonomy and allow them more and more freedom from the rules of Madrid. This may be too little and too late but it might appeal to the leaders in Barcelona.


  • Global Reaction to Healthcare Debacle – The majority of the industrialized world has long wondered why the US has been so stubborn on the issue of health care as they long ago made the decision to switch to some variation of a single payer system. That aside, the concern in the rest of the world is that Trump has failed spectacularly as leader. This is a snap judgement to a degree and many in the US would argue that this is more a Congressional failure but the majority of democracies are some form of parliamentary system and when a leader is not able to get their own party to cooperate they are usually replaced in a vote of no confidence.


  • Pressure on Turkey from Germany? – Angela Merkel has been walking a tightrope as far as Turkey is concerned. She has been distressed with the autocratic behavior of Reccip Tayyip Erdogan but Germany needs Turkey to keep assisting the Germans with the refugee issue. The Merkel government has been about as patient as she is willing to be and it is likely that more pressure will be applied as Erdogan keeps attacking opposition members.





Go ahead – try to pronounce this report. I admit that as acronyms go this has to be up there as the most unusual and impossible to read aloud but it is important and unique. It comes out once a quarter from the Fabricators and Manufacturers Association and is one of very few measures that look at the world of the small fab shops and manufacturers. This is the narrative that we write for the report and if you want a look at the whole report go to the website for the FMA – The FFJSCR stands for the Forming and Fabricating Job Shop Consumption Survey – just in case you were wondering.


To note the economic data has been odd and somewhat contradictory would be an understatement. There appear to be several economies all competing with one another to set the tone. If one looks at the markets it would be easy to assume the economy is booming – new records set every week. Then it is noted that retail sales are down and consumer confidence is starting to fade. Industrial production is up but not due to manufacturing but to a surge in output in the oil and gas fields. The Purchasing Managers’ Index has been doing well but has faded from the heights reached earlier in the year. Confidence in the politicians has sagged to lows not seen in several years – less than 36% popularity for Trump and only 41% for Congress. Few expect the promises made at the start of the year to be kept. Where does all this lead? What is the sense of the fabricating community?

One of the more reliable indicators of manufacturing health is capacity utilization. If there is slack in terms of utilization there is little incentive for companies to purchase new equipment or to hire. It is assumed that a rate of between 80% and 85% is ideal as this suggests solid usage but not so much that bottlenecks and shortages start to appear. The level of capacity usage in the fabrication space is now at 67.7 and that is down a bit from what it was last quarter when it registered 69.4. It has been noted that the level of capacity utilization has been lower for this sector than has been observed nationally and that is partly due to the nature of the job shop. Much of the machinery and capacity is essentially “in reserve”, only needed when a specific customer need appears. There is more planned idleness for machines but when they are needed they are needed right away. This slight decline in capacity usage is not yet a major concern as the majority of respondents assert that capacity usage has been steady (over 60%) and just under 40% assert that capacity has increased. There have been more who assert that capacity usage has decreased since last quarter.

The new order data is one that has some predictive qualities. If there are fewer orders planned for the future there will likely be a slump and this quarter the data is a little worrying. Last quarter the percentage of respondents seeing an increase in new orders was 44.7% and those that saw stability in terms of these new orders was 41.0%. This quarter the numbers were a little less encouraging with 35.2 % reporting an expanding new order base and 52.9% reporting the new orders as stable. The percentage of declining orders last quarter was 14. % and this quarter the delcines are only 11.7%. The overall sense is that growth has slowed but there has not been a full-on decrease at this stage.

Another signal of the economy’s overall health is employment and for the last several months the data has been good – rates nationally are just 4.4% at the U-3 level and under 9.0% at the U-6. There have been very few changes as far as employment is concerned in this quarter’s data. Last month the percentage that reported additional hiring was 27.4% and this month the data showed a 27.1% gain. The number that kept employment steady last month was 68.1% and this month the number is 68.6. The number that reported decreased hiring last month was 4.4% and this month that has fallen just slightly to 4.2%. This is as close to steady state as one is likely to get. The really good news is that there is much more hiring taking place than firing. As has been discussed at great length the issues that are plaguing manufacturing as far as labor is concerned is that there are simply too few people available with the appropriate skills.

There have been some changes as far as costs are concerned with a considerable shift showing up as compared to last quarter. The percentage that found the prices of steel and aluminum going up was 59.4% last quarter and it is only 40.1% this quarter. Those that reported stability in the last quarter was 39.8% and this quarter that percentage jumped to 54.7%. The percentage of those that saw decreasing prices was .75% last quarter and 5.1% this time. Clearly the surge in prices seen at the start of the year has faded and that has meant a lot as far as overall costs are concerned. The major fear now is that steel prices will surge dramatically if the US imposes the steel tariffs that have been suggested. The hope is that there will be exemptions for supplier states like Canada and Mexico and others as the real target of these sanctions have always been the Chinese. If the tariffs are more widespread the impact on steel users will be near disastrous.

Another sector that has seen some changes is logistics. Last quarter the percentage reporting an increase in these costs was 29.3% and this quarter the percentage was 30.0% – a slight change. Last month the majority reported that prices were steady – 70.6% and this month the reported stability was 68.4%. There have been few reporting that prices are going up – just .88% this quarter and none reported higher logistics costs last quarter. The transportation sector has been suffering from over capacity for quite a while now and this is unlikely to change unless there is a significant boost to the economy that stimulates the various transportation sectors. Given the fact that transportation is the proverbial “canary in the coal mine” it is concerning that the numbers have looked so bad in the logistics sector but for the moment this has been saving a lot of manufacturers a lot of money.


More From the FFJSCR

As capacity utilization goes – so goes the rate of capital expenditure. The fact is that companies that are not maximizing their current capacity are unlikely to buy more equipment. The percentage that reported that their purchases were on track last quarter was 57.4% and that is only slightly higher than it was this month at 53.8%. The percentage that asserts that they are delaying these purchases by one month was 12.6% and this quarter it is 14.5%.  Delays of two quarters went up from 5.2% to 8.5% and indefinite delays went from 24.6% to 23.0%. The pattern appears to be rooted in caution but there is not yet a wholesale retreat from these acquisition strategies. There has been a considerable difference between sectors as well – automotive is fading a little while oil related manufacturing is recovering somewhat.

Finally, there is the overall business outlook and this can be the most subjective of areas. This is based to some degree on the reality of the current numbers but there is a lot of opinion and gut feeling manifested here. There are those who have been seeing numbers weaken but they remain optimistic and there are those who have been watching their numbers improve but they are still worried. Last quarter 61.9% expressed optimism about the future business outlook and this quarter that number fell to 53.7% with around 35.3% expressing confidence that there would be stability as opposed to 34.3% expressing confidence in instability. The change that has many worried is that last quarter only 3.7% had a pessimistic outlook and now that number is 10.9% – more than double.

This is the battle for the remainder of the year. Will disillusionment set in and drag the economy down? The promises at the start of the Trump term were unrealistic and most acknowledged this. The hope was that by reaching for grand goals there would be progress and improvement from trying. The fear now is that enmity and gridlock have removed all hope of real change. The issues that have preoccupied the media and the politicians are of little or no interest to business and will have negligible impact on the economy but both sides seem to be unable to let these issues go. Thus, the economic goals get more and more distant.


Ukraine Situation Far from Resolved

It seems more than a bit odd to note that the conflict that led to the sanctions against Russia in the first place has all but been forgotten in the last year or so. It has certainly slipped from the global headlines but the conflict over Ukraine is as far from resolution as it has ever been. The Russian incursion into the Crimea and their subsequent support of the separatists in eastern Ukraine led to the imposition of the sanctions the Putin regime has been so determined to have removed. Rebels have been at war with the leaders in Kiev ever since and they have been receiving Russia support throughout. The Europeans are stepping up their attack on Russia for all this and the US will be hard pressed not to join in.


Analysis: The talks that have been taking place in Minsk are supposed to be working towards some kind of settlement between the Ukrainian government and the breakaway region referred to by the rebels as the Donetsk People’s Republic. The leader of these rebels is Alexander Zakharchenko and he has just called for the elimination of Ukraine altogether and its replacement with a new nation called Malorossiya which would be under his leadership. The demand has left the various sides flatfooted and even the Russians seemed shocked at the idea. It will never be tolerated of course but it is also now clear the rebels have no intention of giving up their ground and they clearly want to keep attacking Ukraine. This new country would unite Ukraine again and Zakharchenko has new maps and a new flag at the ready.

The Russians have shown no desire to cut ties with Zakharchenko and that makes lifting sanctions all but impossible. There are rumors that Russia was moving towards trying to accommodate those who are working to preserve Ukraine and the rebels may have been acting in a way that pushes Putin in a corner. If he doesn’t try to control the rebels there is no chance the sanctions will be lifted but if he does try to step on them he will lose support from hardliners in Russia as well as eastern Ukraine. This also creates an awkward situation for the US as it could face the possibility of helping Ukraine contend with an outright invasion by the rebels and possibly with Russian support. The possibility of a direct confrontation between the US and Russia would then exist. The move by the rebels is putting Russia in a box and doesn’t leave Putin with any good options. The participants at the Minsk talks have chosen to remain mostly quiet on the issue and seem to be chalking this up to the ravings of an extremist but they are all staring at Russia to get a sense of their reaction and position on this action.


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.



Each and every time I go to speak to some business or industry group I hear the same story with only minor variations. There is some set of regulations that must have struck some bureaucrat as a great idea but in practice the plan creates a major barrier for business growth and expansion. All too often there is an incident or development that made some level of regulation appear necessary but it often becomes a matter of too much and with too little common sense. I think of the “dress code by committee” example. The discussion started with Bob showing up to work in a speedo. All agreed that this was not appropriate but in order not to single out Bob the issue is put before a committee and pretty soon the dress code is 35 pages long and bans almost everything in a person’s wardrobe. Whatever happened to having a conversation with Bob and determining what is going on with him while leaving everybody else alone?

One such set of inappropriate regulations are those that are applied to agriculture without understanding the nature of that business. Farm trucks that will be required to install electronic monitoring systems to make sure they only operate 10 hours at a time. That will be a little tricky at harvest time. How about rules that keep farm vehicles from operating at night? Or rules about farm kids driving vehicles on their parent’s land? The list goes on and on and each rule is more inappropriate than the last.


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 Chinese Reminder – In many ways China has changed and evolved and has played a major role in the global economy but it remains an autocracy and one that exerts tight control over its population. The most famous of Chinese dissidents died of liver cancer and China is busy scrubbing all mention of Liu Xiaobo from social media and the press in general. The winner of the 2010 Nobel Prize has spent the better part of his adult life in prison for his engagement in the Tiananmen protests and others. To the Chinese government he is a subversive and to the rest of the world he has been a democracy activist and human rights advocate. China is doing its best to erase every trace of him but that has proven very difficult.


It should not come as any shock that China remains a repressive regime. It is a country full of contradiction and paradox as it has elements of modernization side by side with backwards behavior rooted in decades old beliefs. It is open to much of the western world but remains a communist country under the tight control of the Party. Dissidence is dealt with harshly and intervention from outside the country is rejected.


This has to be remembered when trying to shape and impact China. It is not a state that will yield to much and those that seek to intimidate and force behavior will be sorely disappointed. The current US approach has been confrontational and it has yielded very little. Not that appeasement has been a great success either. The happy medium is very hard to find.




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Business Intelligence Brief: July 18, 2017

Short Items of Interest – US Economy


  • Money Isn’t Everything – An interesting study has been conducted by the National Bureau of Economic Research and somehow I am not surprised by the outcome. The study was to determine if incentives would convince people to work out more diligently. The idea was that gyms would offer people as much as $60 off their membership if they showed up to work out more often. It turns out that it didn’t matter much as people who wanted to work out did and those who didn’t were not motivated by the extra money. Given my usual enthusiasm for working out I am not the least shocked to learn that $60 was not enough to get people to do more of it. Perhaps $100 would have done the trick. I suspect that real motivation is more complex and likely involves a good long look in the mirror.


  • Ambitious Tax Plan Proposed by GOP in the House – There is a plan emerging from the House that would revamp the tax code, change federal employee retirement programs, repeal parts of the Dodd-Frank law, and revamp medical malpractice laws. To suggest that this is going to be very hard to pull off is quite the understatement – especially in light of the issues that sank the attempt to repeal and replace the ACA. The political analysts are asserting that this effort will ultimately fail but it will permit many in the House to go back to supporters and their political base and assert that they tried. This is the kind of legislative activity to expect as members of the House prepare for the elections of next year. Their first order of business is protecting themselves from a primary challenge and they will do a lot of tilting at windmills.


  • Focus to be on Trade Deficits – As the Trump White House starts to outline intentions towards Nafta it has been stated that the goal is to reduce trade deficits with both Canada and Mexico. This sounds simple enough but the execution will be tricky. To begin with there are two ways to reduce a trade deficit – either export more or import less. It would be better for all concerned to focus on US exports but Mexico is still a poor nation and Canada has a small population. The US is both rich and populated and will import more than either of the other two. The next issue is what gets exported to the US – both Canada and Mexico send a lot of commodities and raw materials to the US and these will still be needed for the US economy to grow.


Short Items of Interest – Global Economy


  • German Election Focus is on Infrastructure – The development and maintenance of national infrastructure is important to every country – and for all the most obvious of reasons. This kind of work provides jobs and these projects are important to economic development as a whole. In Germany, the issue is even more vital as this has long been a point of pride for the country. It has long sported some of the best roads and facilities and now this reputation is under attack as the country has not been able to keep pace. The challenger to Angela Merkel has asserted that he will pour trillions into a massive effort to rebuild and expand but Martin Schulz has struggled to identify where the money for this would come and Merkel has been taking him to task on that question.


  • Drug Wars Threaten to Shatter Mexico’s Tourist Industry – The bulk of the drug violence in Mexico is still in the more remote regions where the gangs can hold sway and along the US border where they seek to supply that market. Now the drug gangs are spreading more aggressively to tourist centers like Acapulco and Cozumel and that is a very significant concern for the government. Tourists in the US and Europe have expressed more concern than in the past and there are markedly fewer tourists.


  • Ireland’s New Numbers are Not Welcome – The new system employed by Ireland to assess their economy means that it is a third smaller than previously assumed and the debt level is 25% higher than had been thought. It seems that when it came out of recession there was some creative accounting at work.




Health Care Debate is Really Tax Debate

The defections from within the Republican Party reached the point of no return and the latest attempt at repealing and replacing the ACA has failed. As this contest within the Senate developed it became obvious that much of the controversy was about taxation as opposed to the issue of health care itself. Granted, much of the conversation revolved around what to do with Medicaid and how insurance would be handled going forward but for those who refused to support the current bill the issue was less about the heath care implications and more about the taxes that would be needed to pay for it. This dispute will have implications as the issue of actual tax reform comes forward in the months to come. To put this in the simplest of terms it is a contest over whether and how to tax the wealthiest people and companies.


Analysis: As the Senate leadership tried to bring people back to supporting the bill there were concessions made as far as the taxes designed to pay for the bill. The 3.8% tax on investment income was to be retained and so would the 0.9% payroll tax on those making over $200,000 and married couples making over $250,000. Without these concessions several of the moderate GOP senators refused to support it but retaining these taxes caused several conservative members to reject the plan. This is going to be the issue that divides the GOP in the tax debate later this year.

The rationale for taxing wealth is obvious enough. These are the people and institutions that can afford the taxes. It is also the most lucrative option as there is a lot of money to be collected from a relatively small part of the population. The argument against such a tax system is a bit more complex. The most basic problem is that taxing income and wealth in this way becomes a disincentive for further earning and growth. If additional income earning results in higher taxes there will be those who simply choose to work less and therefore reduce their tax exposure. Then there is the general argument against taxes – money taken by the government is money that can’t be used for other purposes – consumption and investment.

The basic purpose of any taxation is the financing of government and this presents a challenge based on what people want from that government. Essentially there are two rationales as far as budgeting is concerned. The first is to produce a list of all the services and duties that anybody wants from government and then decide what level of revenue will be needed to pay for all this. As one can imagine the more that government is asked to do the more taxes will have to be hiked. The other approach is to determine what level of taxation is tolerable and then decide what the government can do with that budget. A low tax system would mean a government that did not provide a significant level of service.

A choice to follow one or the other of these strategies has not been made – there are advocates for both in Congress. The anti-tax forces are just as easily described as small government advocates – they do not want the range of current activity to continue and believe that much of what is in the budget now should be cut. The pro-tax advocates are not really favoring taxation per se – they just want a heavily engaged government and they need the revenue to finance this engagement. The real issue as far as government spending is that three programs dominate the budget and nothing significant can be done with the budget without considering the money spent on all three. Social Security is around 35% of the current budget and going up. Medicare and Medicaid accounts for another 30%. That is roughly 65% of the total budget. Add in the military at 16% and interest on the debt at 6% and you have accounted for almost 87% of the budget. Everything else the government does is paid for with around 13% of the budget. It is patently obvious that cuts would have to be directed at these four programs if there is to be any progress on reducing the size of the budget. Making that kind of adjustment to these programs can be politically impossible and thus we remain at an impasse.


Dollar Falls on News of Impasse

The value of the dollar has fallen to a ten-month low as a reaction to the latest defeat for the GOP. The sense among investors seems to be that there is no realistic chance for the reform agenda that was set out at the start of the year. The health care reform was to be the linchpin for tax reform and by extension most everything else. There is not much optimism as regards infrastructure spend without these tax changes and little hope for the tax changes without reform of health care. The conclusion many have reached is that there is really no GOP unity and that it really doesn’t much matter that Republicans control the White House, Senate and House. The question has become which Republican Party controls what part of the process.


Analysis: Both Democrats and Republicans have always been divided along key issues as there are moderates and conservatives in the GOP just as there are moderates and liberals in the Democratic Party. The President is ostensibly the leader of the GOP but in reality, he is an outsider with limited influence over Republicans. He has been unable to move the legislators to his line of thinking and the White House has been focused on all manner of political scandal from the very start. This has further limited his ability to move on key issues. The reaction of the investment community is thus far a commentary on the future – a belief that little of that initial agenda will come to pass. The fact that most forecasters have been downgrading their estimates of economic growth have played a role as well. It is not that the US is facing imminent recession or even a serious downturn, it is that many believe that growth will remain anemic and unsatisfying for an extended period of time. The markets have remained robust, job growth has been impressive and many economic indicators are still solid – it is simply that some of the cracks are getting larger and that can be worrisome.


Iran Nuclear Deal Stands

The deal that was struck with Iran in 2015 has been extended for a second time despite the intense opposition to such a move by some within the administration and in Congress. During the campaign Trump called this deal “the worst ever” and hinted broadly that he would refuse to extend it. In the months since his term began there has been a very serious battle within the administration over what should be done. The State Department under Rex Tillerson has been promoting the extension and he has won some support from the Secretary of Defense while the opposition has come from within the White House inner circle.


Analysis: The facts are these. The Joint Comprehensive Plan of Action (JCPOA) was agreed to by the US, Iran, Britain, France, Germany, Russia and China in 2015. It is a very narrowly drawn agreement that focuses entirely on the Iranian nuclear program. It calls for inspections of Iran’s nuclear facilities and anything that might contribute to their development of nuclear weapons. It does not deal at all with any of the other provocative Iranian activity such as testing missiles, supporting groups like Hezbollah and Hamas or other activities that could be connected to terrorism. In return for their compliance as far as the nuclear program is concerned, the Iranians are not subject to many of the sanctions that had been imposed as a means to control their activity.

There are many in the White House who want to include these other activities in the agreement and want to impose these sanctions if there is no compliance. Others assert that adding these issues will undermine the JCPOA and will result in a collapse of the whole effort. Iran will return to developing nuclear capability and several of the signatories to the agreement will withdraw (China and Russia and possibly France). The supporters assert that this agreement is not perfect but it preserves the most vital part of the deal – that Iran will not be allowed to develop nuclear weapons. The inspection regime is thorough and thus far Iran has abided by all aspects.

One of the key issues swirling around this deal is the bigger question of who leads Iran. The victory of Hassan Rouhani in the latest Presidential campaign was welcomed as he has been the reform element in that system and had staked much of his reputation on this deal. If it is broken now he will be compromised and the hard-liners in Iran will gain. Thus far he has been able to hold off the ultra-conservatives with the argument that the economy of Iran will grow with this deal in place. If the US pushes harder to include more concessions he will be weakened and that is not a good thing for the US or Europe. On the other hand, the Iranian support for groups like Hezbollah and Hamas threaten US allies in the region and Iran continues to pursue military options that could threaten Saudi Arabia and others. The enmity between Sunni and Shiite has only intensified and Iran is smack in the middle of this confrontation.

Thus far the only western state that has benefited economically from this deal is France as there has been some oil field investment. There are plans underway for investment from the US and UK. Both China and Russia have been engaged thus far. Iran has not yet returned to pre-sanction levels of oil production but there have been major gains in output with most of that oil still heading to China and parts of Europe.


Will Russia Sanctions Hurt the US?

A month ago the Senate voted overwhelmingly to introduce further sanctions against Russia and these are focused on the oil and gas industry. The wording is very broad and the oil companies in the US point out that there will be significant damage done to US companies and projects if they go through as currently planned. The sanctions prohibit US companies and individuals from providing services or products to projects involving off-shore development, Arctic development or oil shale if a Russian company is in any way involved. This would mean that even a very minor Russia participation in a project anywhere in the world would force the US to cut ties. This would affect deals all over the world and put US companies at a severe disadvantage.


Analysis: The plan still needs to pass the House and there is more reluctance to approve but analysts hold that there are likely enough votes to get it through. The sanctions enthusiasm seems related to a desire not to appear soft on Russia these days. If the motivation is partly to put distance between Congress and the Russians it would seem their efforts to involve themselves in the US election will have backfired. The oil companies in the US are concerned because the US has just started to become dominant in the oil sector and this would likely compromise that development and do very little damage to the Russians in the process. The claim by the oil companies is that expanding these sanctions will cost jobs in the US.


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.


Cats Add Challenges to Life

There are those among us who enjoy making life ever more challenging. They are the people who not only go running but decide to add weights or push strollers. They are the ones who introduce routines to expand their Fitbit steps. I recommend that if they really want to add complexity to an exercise routine all they need to do is acquire a cat or two or five.

This morning I was trying to get through my Pilates routine as a means by which to address my hip bursitis. Throughout the 40-minute routine I was “helped” by Scoot. She chose to lay right where I needed to be and proceeded to bump and rub and lick my arm throughout. She found the strings on my shorts and engaged with them intensely. She rolled and stretched and otherwise attempted to occupy any space I was in. I am quite sure my postures were woefully incorrect as I twisted and turned to accommodate her activity.

The help doesn’t end there however. She is always making her presence known when I write and I have to keep moving paws from the keyboard. If it has been five minutes since I interacted with her I get plaintive little sounds until I react. She is the least interested in other cats of the five – they are all buddies and play and sleep with one another regularly. Not her – she is a pure people cat and I doubt she realizes that she isn’t human. The others all had periods in their lives when they had cat companions – at least litter mates. She didn’t as she was found near death in a park surrounded by the ones that didn’t make it. She went straight to human companionship and given that I got her at a very young age – she has imprinted on me completely. Anywhere I am she is and each time I sit down I have her on my lap. Over time I have adapted to these demands. It leads to some awkward positions but it is worth it in the long run.


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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ENI Gets Federal Approval for Off-Shore Drilling.  ENI is going to be able to start off-shore drilling activities in Federal waters off the coast of Alaska.  The Trump Administration has approved its application for drilling authority.


The company will still have to go through a series of state and federal permit applications – but those are typically approved after the Federal Government gives initial authorization.


We don’t focus on the political side of this activity – just the business. This will open a series of new business ventures for the Alaskan waters. Companies that handle everything from the equipment used in off-shore drilling to the transportation and distribution of off-shore petroleum products will see a boost to business when operations start. The final process of getting a rig into place and start the drilling process will take quite some time. It’s not a 2017 event.


This approval comes the same week that Premier Oil announced it had just made one of the 10 largest global oil discoveries in the past 5 years. Oil brought to the surface in tests show it to be light crude – which makes it interesting for many refiners of high-quality products. The initial testing suggests a well would be capable of up to 1 billion barrels out of the deposit. The location was listed as the Zama-1 exploration well in offshore Mexico.



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Business Intelligence Brief: july 17, 2017

Short Items of Interest – US Economy


  • Resistance to New Housing – Throughout the country there have been an increasing number of neighborhoods that have been aggressively resisting the arrival of new housing units even as these neighborhoods have become more popular. Many of these are in older areas with a very diverse population. There are long-time residents that moved in decades ago when prices were far lower. They are now side by side with those who are moving in and gentrifying the neighborhood. The resistance to new housing has meant sky-rocketing prices that divide the newcomers from the traditional residents even further. Those who have been there for a long time do not want the neighborhood to change but the new arrivals will be changing it anyway.


  • Consumer Sentiment Starts to Fall – One of the great mysteries of the last year has been the disconnect between the consumer and the “real” economy. The data has not been all that strong (although there has been good job news overall) and that should have limited the enthusiasm of the average consumer. It hasn’t – at least up to now. The latest consumer confidence data is showing a decided slump as far as optimism is concerned and the majority of that decline is attributed to worries about the future. The lack of confidence is related to the decline in support of those in politics. Trumps popularity has hit a new low and Congress is not much better received.


  • Where is Retail Headed? – The numbers last week were disappointing and somewhat unexpected. The decline of 0.4% was the second monthly retreat in a row and it came as many were expecting better news. It felt like the second quarter was going to be better and now there is some doubt as to whether that is true. The majority of analysts are suggesting that this last month was something of an anomaly and they think that sales will recover in the course of the summer. This optimism is based on the fact that vacation season was more active than in past years and this should boost restaurant receipts as well as gas purchases and lodging.


Short Items of Interest – Global Economy


  • Resistance to Modi’s Tax Reform – The establishment of a national goods and services tax was designed to streamline the system in India and reduce the confusing welter of taxes that have been imposed differently throughout the country. The problem is that many companies liked that confused system as they had learned to manipulate it. Now they are facing a system that will be far harder to play and they will be paying more taxes than before. The textile sector has been at the forefront of that opposition as most of these companies are small and exist on very narrow margins.


  • South Korean President Wants Renewed Military Talks with North Korea – Three years ago these periodic talks ended as the South Korean leadership no longer wanted to be engaged. The new President wants them to start up again. In the past, these talks accomplished little but it was seen as a way to defuse tension from time to time. The US is opposed to the idea and it seems the pressure on the trade pact between the US and South Korea is one way to dissuade the new government of Moon Jae-in.


  • Maduro Loses Referendum – It was an unofficial vote on the proposed changes to the Venezuelan government and it is certainly not binding. The opposition in the country called for the vote and asserts that over 7 million people participated and that they overwhelmingly objected to the changes that would have weakened the legislature and concentrated more power in the hands of Nicolas Maduro. He can certainly continue to ram this change through but it would certainly trigger widespread opposition and could be enough to fuel a coup.




A Tale of Two Economies

The most common query received by an economist is “how is the economy doing”? This generally sends me off into a flurry of qualifiers and a certain amount of dissembling. There really is no adequate answer to such a question as there will always be parts of the country that are booming and others that are wallowing in recession. There are industries that are thriving and those that are in a decline that may not have much to do with the economic conditions of the moment. Lately there has been an even bigger divergence as far as the economy is concerned and it is not all that easy to explain. The optimists are deluding themselves and seeing things that may not exist and the pessimists are overreacting and expecting disaster when there is little evidence of it.


Analysis: As is often the case reality may lie somewhere between the two. For the last nine years the US economy has been more or less in recovery mode and there has been steady and unfortunately anemic growth. Normal conditions these days seems to be a growth rate of between 1.5% and 2.5%, it has been rare to be either under or over that rate. The puzzling part of the economic assessment is that there is evidence that would seem to point to a much more robust economy as well as evidence that points to one that is starting to slow down considerably.

The markets have been on a tear for well over a year – hitting new records every week. The investment analysts keep staring at this like one looks at a balloon that is getting way too much helium. They just know this is going to burst but it has been on the edge of that correction for months and just keeps on rising. Nobody wants to get off this ride too soon as leaving money on the table is as bad as losing it by staying in too long. There are many reasons suggested for this enthusiasm. There is the record level of foreign investment as the markets in Europe and Asia have been so weak that these investors have been seeking better opportunities in the US. There is the usual frenzy that accompanies a growing market and thus far the collapse is only an existential threat. Then there is the fact that many of the decisions being taken by the Fed and others are feeding the enthusiasm – namely that the Fed sees no reason to truly clamp down on the access to easy money provided by low interest rates. If one simply looks at the markets the assumption would be that breakout growth is just around the corner.

The overall economic data of late is not telling such an optimistic story. We see that retail sales have been down for the last two months and it is evident that consumers are returning to their cautious ways. This is partially motivated by the fact that wage growth has not taken place despite the lower levels of unemployment. There are also growing concerns as far as economic policy change is concerned as consumers are no longer expecting any of the reforms suggested at the start of the year to take place. The gridlock in Congress is worse than ever and confidence levels have remained low – 44% express no confidence in the legislature. This is as confident as people have been in five years – in 2016 it was at 52%. Confidence in the Presidency has fallen to levels not seen since 2008 as 42% of those polled indicate very little confidence as opposed to readings in the 30s through most of the last decade. When half the consumers are less than confident that is not good news as far as renewed vigor in the economy.

The job numbers have been decent but without the corresponding boost in wages. The indices as far as manufacturing is concerned have been strong but not quite as strong as they had been earlier in the year. Exports are doing better as the dollar has weakened somewhat and the economies of Europe and China have been improving. Inflation has been very tame and that has been a little puzzling given the low rate of joblessness. The lack of overall wage hikes has been a factor and so has the low price of commodities such as oil and industrial metals. All of this adds up to a disconnect with growth twinned with decline. The question now is whether the stock market can pull the rest of the economy or if the economy as a whole starts to weigh on the investors.


The Death of Retail?

The investment community is seemingly convinced that the days of the brick and mortar retailer are numbered and this has become evident by the emergence of short selling on a significant scale. This is being touted as the best opportunity to short sell since the housing crisis – there have already been 17 major bankruptcies this year and major waves of store closings. The sector that has been hit the hardest has been the department store but there has been a great deal of stress on many of the chains that specialized in clothing and other items. The on-line merchant is devastating the traditional retailer and there is unlikely to be a serious reversal of that trend.


Analysis: The impact of this trend will be felt far beyond the stores that are closing and shrinking. The shopping mall will be a major casualty as it starts to lose those anchor stores and even many of the specialty shops. The selling point for the shopping center and the department store was the same – lots of variety and convenience for the shopper. Everything one needed was in the same place but today that shopping center is trying to compete with an on-line offering that maximizes selection as well as convenience. The shopping center is either going to have to change radically or face extinction.

The other casualty will be communities that depend on the taxes they collect from these retailers. The majority of communities rely on that sales tax revenue and the business taxes collected. With the closure of these stores the tax base shrinks dramatically and that leaves the communities with two bad choices. They either have to sharply reduce the services they can offer or they have to turn to some other revenue source and that becomes a major fight. The bulk of what people value in terms of government services comes from the local community and that sets up a ferocious fight.


Recovery in China?

The latest GDP numbers from China are better than expected – by either the government or the outside analytical community. For the second quarter in a row China has beat expectations and delivered 6.9% growth. This is still a far cry from the pace set a few years ago but a significant improvement over what had been the norm over the last few years. The motivator for this growth has been a property market that is still surging and that is both good news and bad. The good news is that this pace of growth (if it continues for the year) will mean that China will have improved over the previous year for the first time since 2010. The bad news is that China still faces a bubble when it comes to property prices. Earlier in the year the government tried to restrain the markets by putting pressure on the banks but that slowed the economy too much and most of these restrictions have been lifted – resulting in a nice little surge and growth numbers that have been better than anticipated.


Analysis: Despite this little run of good news the country still faces the same issues that have been dogging it for the last few years. The debt to GDP ratio remains seriously out of kilter – average around 240% of GDP. Granted this is debt that government entities owe other government entities but it still weighs on the banking sector and the national budget. Much of this debt is tied to the big development projects that have been promulgated over the years and these have been very hard to control as the regional authorities support them as a way to provide jobs and the overall peace and tranquility that comes with it.

This is not the only challenge facing the country as there are huge overcapacity concerns in a wide variety of manufacturing sectors. This is a country that was geared to providing goods to the world as a whole and it has been harder to pursue that strategy these days. In year past the rest of the world welcomed the Chinese import as this was a boon to the domestic consumer. The problem is that these imports just became more and more dominant. First China basically eliminated all of its developing world competition and then started to go after its competition in the developed world. As Chinese exports impinged on the domestic economies of the developed world the political opposition grew and now China is sitting on far too much surplus. In a true market economy, this would mean closures and shutdowns as has been the case in the US and Europe. China has a quasi-market system at best and there are other factors that play an important role. China has a massive population that it must keep employed if there is to be domestic stability. These operations are kept afloat regardless of demand and at some point, the Chinese try to dump that output on the rest of the world. This makes its trading partners that much more distressed.

It is a delicate time. If China is able to get is growth numbers back to near where they were a few years ago it will again be in a position to consume its own industrial output and that takes a little pressure off the export sector. In order for that growth to kick in the Chinese will have to step up the exporting that so annoys other states.


Financial Shift Underway in Europe

As soon as the British decided they would leave Europe it was apparent that some sectors of the UK economy would be more affected than others and at the top of the list was the financial community. Within hours of the vote it was apparent that the French and Germans would be actively seeking to replace London as the financial center for Europe. The British have been objecting to the aggressive stance that both of these states have taken on Brexit but the reality is that Britain was warned what would transpire.


Analysis: Among the changes coming will be the loss London based banks to serve customers in European countries unless they establish an actual branch in that country. An effort will be made to do that in the larger states but most of the smaller countries will no longer be served by the London banks. It is also assumed that the EU will regain control of the euro-clearing market and that will force the London based banks to either relocate or agree to be policed by the Europeans. The sense is that thousands of financial sector jobs will migrate to Europe and the betting is that France and Germany will land the majority of these.  During the Brexit campaign, the financial sector was dead against the split and tried to make it clear what London would lose but the opinions of London bankers held very little sway in the parts of the UK that voted to leave the EU. The price that will be paid for the withdrawal gets higher every day and there is considerable buyer’s remorse in Britain today. Not that anybody can do anything about it now as Europe has no interest in having the UK back in the fold.


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 Pitfalls of the Good Old Days

I try to maintain a level of skepticism when people start to rhapsodize nostalgically. The “good old days” were not as good as we tend to remember them although it has to be noted that many of the behaviors from the past would be welcome today. It is hard to recollect the past accurately as we all have built-in filters that match our current attitudes. I think that kids were very different back then as I remember doing a lot more playing outside in the pre-gamer era. I think we were in better shape and had better social skills but I also remember being a doofus on many occasions. The “good old days” were not so good for racial minorities and women – we have come a long way from these stereotypes (but still have a long way to go).

I supposed the ideal would be to keep the behaviors and beliefs that worked at the same time we accept the improvements that have come along since. If there has been a consistent lack that permeates the old and new it seems to be tolerance. People were judgmental and intolerant then and many still are today. I have long held that much would be improved in the world if we all lived our lives by the mantra of MYOB. If what you do doesn’t hurt me or interfere with my pursuits I really don’t care what you choose to do and I would hope that you wouldn’t care what I do. I understand that there are times that personal preferences affect me and others. I would rather not live in a lawless society where anything goes but I also don’t see the need to regulate every aspect of my life to conform to somebody’s social norms. It is a tricky balance but it seems to start with tolerance.

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Inventory to Sales Ratio Inches Up in May.  The inventory to sales ratio simply shows us how efficiently companies are managing their inventories. We saw the inventory to sales ratio hit peaks in the fall of 2014 and spring of 2015 – and it sent the transportation sector into its own mini, sector-specific recession.


The current ratio came in at 1.38 in May, up from 1.37 in April. That’s not a big jump on a percentage basis and it’s far from the 1.42 peak we hit in the first quarter of 2016. But, it’s still elevated.


We mentioned in a previous briefing about a year ago that there is a correlation between the dollar and the inventory to sales ratio.  When the dollar is strong, companies are able to use the discount rate to bulk up on foreign goods – they are cheaper to acquire while the dollar remains elevated.


However, with sophisticated supply chain management techniques in place, it’s surprising that companies have not “leaned” their inventory management practices more. If interest rates go higher, the cost of carrying this inventory will start to eat into corporate profits and companies will go through a house-cleaning to get their exposure down. We saw a tight range between 1.25 and 1.30 from 2003 through 2014 (excluding the spike we got during the Great Recession). We have not returned to that tight range.


Although retailers remain elevated against the post-recession period, we believe this may be a new normal for the sector. E-commerce trends have forced retailers to pre-position more inventory in more areas around the country – to meet rapid fulfillment demands by consumers. We don’t believe that this higher inventory level will impact retail reorders.




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Business Intelligence Brief: July 14, 2017

Short Items of Interest – US Economy


  • Retail Numbers Fall Again – This has been baffling the economists and analysts since the start of the year. When asked in various confidence surveys, the consumer has been asserting that they have great confidence in the economy – now and in the future. Unfortunately, that purported confidence is not carrying through into any kind of retail surge. The latest numbers show another drop in retail sales – 0.2% and that comes on top of a decline the month before of 0.1%. This is not the trend one would expect from a supposedly confident consumer. It seems that the responses to the survey are wishful thinking and that the reality is that people are still cautious about spending their money.


  • Inflation Likely to Head Back Up? – This has been the assertion of the Fed Chairman in comments before Congress. Yellen asserts that at some point the tight labor market will prompt higher wages and therefore wage inflation. She also notes that imports have become more expensive as the dollar was weakened a bit and this will also contribute to more inflation and sooner than later. This commentary supports her position that rates will continue to rise this year and very likely into next. The low levels of inflation that have been noted thus far this year have given the Fed a reason to pause and may mitigate against a hike in September as had been expected but the belief is that rates will rise by December at the latest.


  • Industrial Output Bolstered by Gas and Oil – Tracking the changes in industrial output can be a challenge as the three components of the data are different and respond to radically different motivations. It consists of manufacturing, utilities and mining. The latter category includes gas and oil development and this is the sector that drove the gains in industrial production this time. In past months, the driver had been manufacturing but that slowed down and the utilities have still not seen the summer heat needed to really drive their activity (although it is coming and started to make a big difference in July). The gas and oil concerns took advantage of the OPEC reduction and US companies quickly moved to fill the void.


Short Items of Interest – Global Economy


  • A Chinese Reminder – In many ways China has changed and evolved and has played a major role in the global economy but it remains an autocracy and one that exerts tight control over its population. The most famous of Chinese dissidents died of liver cancer and China is busy scrubbing all mention of Liu Xiaobo from social media and the press in general. The winner of the 2010 Nobel Prize has spent the better part of his adult life in prison for his engagement in the Tiananmen protests and others. To the Chinese government he is a subversive and to the rest of the world he has been a democracy activist and human rights advocate. China is doing its best to erase every trace of him but that has proven very difficult.


  • Temer Dodges One Bullet – The President of Brazil is fighting a whole host of corruption charges but the first attempt to bring him down has failed as the constitution and justice commission in the lower house of the legislature has voted against bringing the charges forward. It has been asserted all along that Temer would be able to fend off much of this attack as nobody has more of an idea where the bodies are buried than does he. Those who attack him are likely to be exposed and attacked in turn. He may well be able to hold off his critics indefinitely.


  • Britain Faces Brexit Reality – When the UK elected to depart from the EU the assertion of the Europeans was that they would have to pay to leave as was demanded in the charter. The British leaders asserted that they would do no such thing but now it has been acknowledged for the first time that they will indeed be required to pay and the bill will not be a small one. It is enough to bust the current budget and will have an impact all over the country.




What Worries the Forecasters?

The economist is supposed to be a soothsayer to some degree. Not that people are uninterested in knowing what has happened in the past and why but the real question they want answered is what is going to happen and sometimes the requests can be pretty unrealistic as far as timing – what will the economy look like in five or ten years. That would be akin to asking our brethren, the meteorologist, what the weather forecast will be five to ten years hence. The best that can be done will be vague generalities (hot in the summer and cold in the winter). The forecast challenge is made more complicated when there are lots of dependent variables as there have been this year.


Analysis: The forecasts for this year were very optimistic at the start but they were also loaded with caveats. The starting point for these estimates was the 2016 economic performance and it had been trending in a pretty positive direction. There had been steady job growth all year with the unemployment rate moving down from 5.1% at the start of the year. The growth of the overall GDP was trending up slightly and Q3 of 2016 was the strongest growth notched in over three years. The forecasters observed an increase in business and consumer confidence throughout the year and it was hardly dented by the campaign. The inflation pace was slow and most of the other indicators had been trending in a very positive direction with both the Purchasing Managers’ Index and the Credit Managers’ Index – well above 50 and in solid expansion territory. The forecasts for 2017 were good simply because there was confidence that these were real trends and at the very least they would continue.

As the Trump administration got underway there was another jolt of confidence based on the assumption there would be major changes taking place. This was connected to the campaign promises but that was only part of the story. The real motivation for this enthusiasm was the fact the GOP had won control of government with their success in the Senate and House. It was assumed that this would provide unity and an opportunity for the GOP to follow through on its platform. It has not worked out this way as the Republicans are not all that unified. The assumption at the start of the year was that there would be a repeal of the ACA, major tax reform and tax cuts, extensive deregulation, new trade policies and massive commitments to infrastructure spending. None of this has come to pass and the supposed unity of the GOP has been exposed as a myth (and Democrats are no more organized). The first one hundred days of the administration were essentially wasted as the Trump White House quickly became bogged down in controversy and fell on the defensive. The energy that might have been applied to these economic promises was spent on issues related to the campaign (such as Russia) and explaining various missteps and bizarre interactions.

Now that the 100 days are over and the year is at the midpoint, the assessments are being revised with the assumption these changes will not take place. The new health care plan has proven very hard to develop and without it there is little room for the tax cuts that have been suggested. There has been very slow progress on deregulation and trade policy has been haphazard and ineffective. The sense is that there is almost no strategy and no coherent plan to unite the disparate elements of the Republican party. There is also no hope at all of bipartisan activity and that imposes very strict limits as to effectiveness.

There is another factor that will start to play a bigger and bigger role. The elections of 2018 are right around the corner – at least as far as politics is concerned. Those who are up for election in a year have started their campaigns already and are now far more sensitive to the mood of their constituents. This is a two phase process as these politicians will have to first satisfy their core supporters in order to get through the primaries and that tends to make them unwilling to compromise on much of anything. Then they will have to focus on winning support from the general population in the final election. If Trump’s popularity numbers keep slumping the Democrats will run against his administration and will turn the mid-terms into a kind of referendum. Traditionally the President and his party lose ground in the mid-term election and this may be a more serious decline than usual. In this atmosphere, it gets even harder to pass complex legislation.

The good news is that the economy doesn’t react just to the politics of the day. The forces that started the recovery in 2016 are still in place and will continue to make an impact in 2017 and beyond. Consumers are slowly coming out of their funk, exports have been improving, jobless numbers are still low and there is still little in the way of inflation. The fact is we all go about our business regardless of what is going on in government and that propels the economy.


Why Yellen Will be Replaced and Why She Will Not

The future of Janet Yellen as Chair of the Federal Reserve is under discussion but there is nearly a year between now and when she would be facing a second term or retirement. Trump has not been remotely clear about what he thinks of Yellen and the Fed as he has both praised and condemned the policies of the last few years. Right now, economists give her a one in five chance of being retained.


Analysis: The reason she would be replaced would be for Trump to put his own choice in that position but nobody really knows what he wants the Fed to do and there is no clear favorite to replace Yellen. The reason she would be given a second term is that the markets crave stability and predictability and she has been good at delivering that. The next big issue is inflation and few want to be trying to figure out a new Fed chair at the same time they are worrying about inflation for the first time in over ten years.


The Steel Issue

In many respects, the issue of steel has become a symbol of the overall challenge of setting and altering trade policy. The campaign promise was relatively simple and straightforward and initially gathered a lot of support. The assertion was that the US steel industry was in bad shape (demonstrably true) and that something needed to be done about this. The role of steel in a national economy has long been outsized. Steel production is seen as vital to the growth of the economy and important to the notions of national security. Remember that the original name of the European Union was the European Coal and Steel Community as the notion was that nations could not wage war with another if their steel industry was monitored and controlled. The US steel sector started to suffer decades ago as competition built in other nations and the US steel maker struggled with issues ranging from labor relations to the scarcity of scrap. The US imports a great deal of steel now and some of it come from nations that either subsidize their steel production or find ways to sell their steel at a discount.


Analysis: The “solution” has been to impose tariffs on imported steel and to do so under the rubric of national security. The nation that draws the majority of the US ire is China despite the fact that Chinese steel is only around 6% (on average) of the total imported. The Chinese scare the US as they are aggressive in their subsidies and seem prepared to dump a lot of that cheap steel on the US. They used to consume the vast majority of the steel they produced but with the slowdown in their economy they need to find some place to send it. The fact is that most of the imported steel coming into the US comes from Canada, Brazil, South Korea, Turkey, Mexico and Japan (in that order). The first three nations alone account for 45% of the imports per year on average and all three of these states are allies of the US. It has become obvious that whatever tariffs are imposed there will be exemptions (Canada has already received one).

The bigger issue is what protecting the steel industry will mean to the rest of the economy. The users of steel fear that strict tariffs and quotas will drive prices very high. The steel sector has been weak for a long time and needs an opportunity to catch up. They will likely take full advantage of the import limits to boost their revenues and profits. The steel users will have a limited number of options. They can accept the higher prices and try to pass that cost on to the consumer but they then run the risk of losing business to overseas competition as these companies will not be paying the higher prices for steel. This is the prime concern of companies that use steel to produce vehicles, construction equipment, farm equipment and the like. Much of the steel consumed in the US is slated for construction use and the bulk of that is public sector. The infrastructure plan that has been bandied around calls for an investment of a trillion dollars and if the price of steel shoots up the projects will cost twice as much. That either means getting only half the projects now planned or trying to double the investment to two trillion.

The steel sector needed to be saved twenty years ago. What was needed was better access to scrap steel as that is the resource the US depends on now. The supply has been shrinking for years as there is less steel scrap coming from cars and trucks and from construction tear-downs. The most lucrative scrap source is ships but very few are scrapped in the US due to environmental concerns and that leads to the US selling its decommissioned warships to China to scrap. There is a good reason to try to bolster the success of the US steel sector but doing so at the expense of the steel user is not a very good economic strategy.


Diplomatic Test for Russia and US

At the end of the Obama administration the US ordered two Russian compounds to close and access was denied to several other sites. The assertion was that these facilities were being used to spy on the US and the decision meant that 35 Russian diplomats were expelled and returned to Russia. There was distress in Moscow at the time and vague threats of retaliation but by then Trump had won the election and Russia elected to wait and see what would happen. That patience has apparently worn thin as Russia is now threatening to close US operations in parts of Russia as a response to the December actions by the US.


Analysis: If one steps away from all the internal angst over Trump’s interaction with Russia and looks at what Putin wanted to accomplish it is clear that Russia hoped for a new attitude from the US. They wanted sanctions lifted, they wanted their diplomats back in the US, support for their position on Syria, support in their contests with Europe and so on. Perhaps Trump promised a new relationship would emerge and perhaps he didn’t. The reality is that there is little room to cooperate with Russia now and they are not likely to get what they had hoped for. The chill in diplomatic relations is alive and well.


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.


It’s the Local Economy, Stupid

I had an opportunity to speak to a luncheon sponsored by the Independence EDC. The economic development people in a given community are really the unsung heroes of the local business community and the keys to whether there will be economic progress. I often try to point out that national numbers on growth or employment or anything else are of limited value as they are the average of 50 states and an economy of almost $18 trillion. I have pointed out that every state in the US has a GDP that corresponds to that of a country – California is the size of France and Texas the size of Canada. The meaningful numbers are local.

The economic development teams across the country have similar mandates but they differ in terms of how they go about developing the economy of their community. The Independence group focuses on the existing business community as opposed to spending all its time trying to recruit companies to relocate (although they do that too). The focus has been on helping the small and medium sized business reach their goals and that is crucial. The company could be a tiny little shop with only a few employees or it can be a bigger operation with hundreds and revenues in the tens of millions. The need is nearly identical – people willing to work and consumers willing to spend. To get the US economy as a whole to grow by 3% or 4% means growing these local economies.


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Our Take on the Lidl Story – We were watching our normal barrage of news reports today, and noticed that CNBC was doing a bit piece on Lidl. For those of you that don’t know about Lidl, it’s a German grocery chain that prides itself on providing the cheapest prices on groceries, with the highest quality private-label products available.  They don’t have a wide selection of products, but they probably have what you need and it will be of fairly high quality – in private label products.


They accurately point out that the American consumer will have to get used to private label products being a “quality product”.  We typically view those products in the US as being sub-par. Lidl wants to change that perspective.


What I want to focus on for a minute is the whole concept. Lidl is using a minimalist and efficient operating strategy to help drive costs as low as possible. The stores are no-frills in some facets – but interesting and innovative in areas where it counts. Advanced automation and use of Big Data is rampant throughout the company, from warehouse management systems to merchandising, POS systems, and sales/marketing digitalization.


But, by squeezing every penny out of their operating model, they can compete on a low-cost basis against the behemoths in the grocery world – and win at a point-of-sale level. Product prices are at parity, or cheaper than major retailers. They don’t carry as many SKU’s as a full-line grocery store, but they have built their strategy on having everything that the average consumer needs on a weekly basis. They’ll let the large format and specialty grocery stores win on items that are occasional or infrequent purchases. There’s a lot more to the Lidl story, but that’s not the point.


My point in bringing up Lidl is that it is a disruptor. It’s a disruptor hedging on some old school strategies to be a low-cost leader – coupled with the best new technology to enable it to compete profitably on a low-cost basis.





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Business Intelilgence Brief: July 3, 2017

Short Items of Interest – US Economy


  • Forecasts Show Drop in Enthusiasm – The sense is that all those earlier expectations are now fading fast. Some of this is to be expected as it is rare that a new leader is able to sustain momentum for all that long. This is the origin of the first hundred days assertion. It is thought that the honeymoon for a new President is about 100 days and if there is not a lot of activity by that time the inertia of politics takes over. The forecast community has lowered expectations for the US economy due to the fact that little was accomplished in that 100 days and now the divisions in Congress have made it clear that nothing is going to be easy. The chances are now dimming as far as meaningful tax reform, infrastructure spend and deregulation.


  • Tiny Rise in Producer Prices – A gain of 0.1% as far as producer prices is concerned is certainly no signal of impending inflation but the rise – nominal as it was – was not expected. Most analysts held that the PPI would be flat this month as most of the commodity prices have been lower and there has been little evidence of increased intermediate part prices. For the year the PPI has risen by 1.9% and that is anemic, far less than the Fed would prefer. Their other measures have also seen some modest hikes but not enough to provoke any concerns at the Fed level. The inflation threat remains very subdued and is still not a factor.


  • Yellen’s Last Trip Before Congress? – Janet Yellen is before Congress again today as part of her annual duties. The law requires that she brief the good men and women of Congress and she dutifully does so. Is this her last trip? Her term expires in January of next year and there have been rumblings that Trump wants to replace her. She has not spoken about her future directly but has suggested that she would be open to another term. It should come down to what the overall financial community favors as has been the case in the past and they seem happy with her tenure. Removing her would be a purely political move and thus far there have only been the vague hints as far as who might become the next Fed head.


Short Items of Interest – Global Economy


  • Macron and the Trump Visit – The statements from Emmanuel Macron thus far have made it abundantly clear that he and Trump disagree on most things. They differ on issues such as climate change, refugees, trade and the importance of Nato. They do agree on Syria at least. A few months ago, Trump commented that “Paris was no longer Paris” due to the threat of militant Islamists. The French took exception to the remark and Macron has stated that he wants to show that “Paris is Paris” and plans an almost purely tourist agenda. The other focus of Macron’s interaction is to build some bridges with the populists in France. He cannot very well cozy up to Le Pen as she remains a virulent opponent – making nice with Trump could win him some points.


  • Five Elections in Africa – In the next few months there will be five important elections held in Africa and collectively they illustrate the challenges of democracy on this continent. Joseph Kabila in the DRC is refusing to even hold the one scheduled and shows no intent to leave. The elections in Kenya and Liberia will be hard fought and relatively honest – the winner will actually have to get the most votes and the polling should be mostly honest. The elections in Rwanda and Angola will be shams – show pieces for the current leaders who will claim support from 90% of the voters.


  • South Korea Worries About Trade Pact – Trump has been describing the current trade pact with South Korea as a job killer and wants it changed. That seems more and more likely given the enmity that has developed between Trump and the new Korean president – Moon Jae-in. Trump has been angry with his position on North Korea and is in no mood to offer concessions. It is thought this pact has no more than a 45% chance to survive.




Report from the Trenches

The latest edition of the Beige Book has been released. This periodic study from the Federal Reserve is derived from reports from the twelve Fed districts and is designed to provide something of a snapshot for the overall economy. These are generally put together with input from the Board each district has – local bankers and business people who can comment on what they are seeing. It is not necessarily a well-developed statistical analysis but the work of the staff at each bank works its way into the report. As one would expect there are specific issues and developments in each district but there are always common themes that provide some insight into what is happening throughout the country and this edition is no exception.


Analysis: The question that most want an answer to is whether the economy is growing and this report suggests that the answer is basically yes. It is not the kind of rapid and robust growth that had been hoped for and predicted at the start of the year but it is growth and it seems steady enough. The pace is about as it has been for the last several years – regional rates between 1.5% and 2.3%. There are pockets of the country that are seeing faster growth but by the same token there are parts that are not growing much at all. The factors that have been leading to faster growth include a predictable surge in tourism and travel in various parts of the country and an improvement in export numbers. The dollar has lost a bit of its strength and that has allowed better overseas sales – especially to those parts of the world that have been experiencing growth of their own. The nascent European economy has been giving the US a boost and that will continue to provide opportunities for regions of the US that have traditionally relied on that market.

A second theme that emerges in the report is that most of the country is trying to contend with labor shortages and in a wide variety of sectors. We have harped on the issue as far as the manufacturing sector is concerned and we have likewise detailed the labor issue in construction and transportation. The data from the Beige Book makes it clear that there are labor shortages in a host of other sectors such as health care, IT and some of the professions such as finance, law and accounting. It would seem that there is a major gap between those who have education and training and those who don’t. The unemployment rate for those with college education is less than 2% and for those without a high school diploma the rate is 7.4%. Those who remain unemployed now are those who lack skills and training and education and this is one of the reasons that the very low rate of unemployment has not yet pushed wages up faster. The people who would normally be demanding higher wages are not out there. Business usually uses higher wages to recruit the people they need but when the people they need are simply not out there is no reason to offer higher wages. No business is going to overpay for somebody who lacks the skills needed to do the job.

A third theme that emerges in the examination of the Beige Book is an overall lack of inflation. There is very little price pressure showing up anywhere. The usual motivation for inflation is commodity pricing and wage hikes and thus far there has been little evidence of either. Oil prices may be staying in the $40 to $50 range for months and perhaps years. This used to be the factor that drive inflation fast. The farm commodity prices are down and so are metal prices. The bottom line is that commodity prices are low and likely to stay that way. The wage hikes aren’t happening either as discussed above. Without inflation pressure there is little or no reason for the Fed to be in a hurry as far as hiking rates. The latest testimony before Congress by Janet Yellen said as much. Unless and until the rate of inflation rises there is no pressure on the Fed to hike and the rate increases will be moderate.


Gamers Stay Out of the Workforce

This is one study that will doubtless be challenged in the months to come. It is either going to confirm the suspicions of those who are fed up with millennials or it will provoke a spirited set of denials. The basic assertion of the study from academics from Princeton, Univ. of Rochester and the University of Chicago is that video games are drawing off a substantial portion of the male population and keeping them out of the workforce. The study purports to show that these young men are indeed living in their parent’s basements and spending nearly all their lives immersed in some kind of video universe. They are not getting jobs and they are not getting additional training or education.


Analysis: There is some disturbing data in all this. It seems that 15% of young men who are not classified as students are not holding a job and in 2000 the percentage was just 8%. Of men between the ages of 21 and 30 the number of hours worked fell by 12% between the years of 2000 and 2015 as compared to a reduction of 8% for men between ages of 31 and 55. The researchers have concluded that video games and on-line activity has accounted for between 26% and 46% of that decline. This is indeed a bit of a leap as there may well be other factors related to the slow growth of the economy but there is certainly reason to be curious.

The basic scenario is that young men (far more than young women) are drawn more deeply into these virtual worlds and end up sacrificing everything else to the experience. The social psychologists have been commenting for years that these on-line experiences are replacing real world interactions and creating a generation of people with minimal social skills and communication skills. They have been isolated from the world for so long they have not learned how to interact with anyone else. The study opens up a lot of possibilities and poses questions that will take a long time to puzzle through. It has always been a concern and now there is some evidence that this is having a significant impact on the economy as a whole.


Has China Ended its Deleveraging?

The powers that be in China were deeply worried about the state of the financial system at the start of the year and in April the banks tightened their credit considerably – trying to dry up that liquidity, At the same time the government installed a new and far more aggressive regulator who went after the banks hard with a flood of new rules and interpretations. The effort was a major success – almost too much so. The Chinese have elected to reverse course and move towards boosting the financial sector and by extension the economy. The central bank has injected some $53 billion into the system in the last few days and the regulators have indicated that they will relax somewhat. The lenders in China have been in a real quandary for months as they have been short of cash and have no idea what they were supposed to be doing. There is still a great deal of confusion within the banking sector as nobody knows when the leadership might want to reverse course again. The goal is some kind of happy medium but that has proven to be very hard to achieve as the tendency is to overshoot in one direction or another.


Analysis: Analysts who had been trying to determine what the Chinese were after assert that the deleveraging effort was not well enough understood and that Chinese authorities were shocked at what the policies triggered. It was assumed that the deleveraging effort would play out slowly and deliberately but that is not what happened. The effort to back away from the debt crisis was so dramatic that it nearly triggered the outcome the policies had been trying to avert. The regulatory part of this was far more influential than had been anticipated as banks really did not understand what they could and could not do. They essentially froze and that just about shut down the whole economy. This is what has prompted the retreat and the sudden flow of stimulus but now there are worries that this might be too much and that it will cause problems akin to the ones that existed a few months ago. Fine tuning an economy the size of China’s is anything but simple.

In the immediate aftermath of the efforts to deleverage, the banks started dumping short term bonds at an accelerated rate – causing the government’s short term bond yield curve to invert. The impact was more dramatic and severe than had been expected. Most analysts think the current strategy will be short lived as they assert that China remains most concerned about financial stability and deleveraging. Some of those measures to control the debt crisis will likely reappear but in a far more controlled manner. For now, the idea is to get the banks to some semblance of normal but with an eye towards keeping them from getting carried away. The crux of the ongoing crisis is that regional banks have a very hard time turning down the requests from local and regional governments and these entities are focused on projects that create jobs and they are far less worried about whether these projects are profitable or financially secure.


What Did Russia Expect to Get From a Trump Win?

The “Russia thing” has preoccupied the press and political Washington for months and for all kinds of reasons. There are certainly real issues of national security involved but the motivations of many of the actors are considerably less exalted. The Democrats see a weakness they can exploit and the media sees a story line that attracts viewers. One of the questions that has not been explored in any detail is what the Russians sought to gain. If they favored a Trump win – why? What did they hope to gain? Is it working out as they had hoped?


Analysis: The focus for Russia has been the sanctions imposed by the US and Europe after Russia intervened in Ukraine and essentially backed the division of the country. The war in Ukraine may have dropped out of the media headlines but it is still raging in many parts of Ukraine. Russia’s economy is not in good shape – it has been in recession for the last three years and there are few that see a recovery any time soon. This is a commodity based economy trying to cope with a collapse of prices in all the sectors they rely on. These sanctions have hurt the economy and Putin wants them to go away.

During the campaign last year, it was obvious that Clinton was going to emphasize her experience as Secretary of State until she became endlessly reactive to everything that Trump threw at her. Russia knew full well that she would be an aggressive adversary and that she backed these sanctions fully. Her advisors were all essentially former Cold Warriors and hostile to Putin. Of the options Russia favored almost anyone over Clinton and as they have done since the 1920s they did what they could to push people away from the candidate that was least helpful to them. It has been standard strategy for Russia and the USSR before it.



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 was doing a presentation last night to a group of business people and in conversation with an old friend I learned a bit about the way he named his latest venture. It is called Mustard Seed and it is in the business of helping companies grow and develop new markets. He put an immense amount of thought into this name and it ties back to his religious faith and the notion of growth and so on. Very impressive – especially when compared to what transpired with the creation of Armada.

The idea was essentially hatched in a bar after a few beers. We (Keith and I) really had our doubts as to how successful this would be and we were a little cavalier about what we would start with. We had visions of a suite of companies under one umbrella and we were going to name these sub-units after clipper ships (Sea Cloud, Endeavour, the Hoogly). This was prompted by the fact there was a big picture of a ship over the bar. Armada seemed appropriate for a fleet. The logo still looks like something out of Harry Potter with the owl representing my wisdom and the falcon testifying to Keith’s aggressive approach (or something like that). We had our doubts as to how long we would last and if we had known we would be around 17 years later we might have given this more thought!

This is the point I suppose – we never really know what a decision will lead to. Most of the time it is far different than we intended – we just have to learn to roll with it.


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What Might China Want? – The crisis that has been created in North Korea is much more complex than has been assumed. The bottom line is that North Korea moved a step closer to being a real threat to the US but is not there yet. The missile tested can hit the US but they lack the ability to put a nuclear warhead on it. The reality is that there is time to react and that means engaging China. They can stop Kim in an instant if they want to. The question is what will make them want to. The Trump approach thus far is to threaten and that doesn’t seem to be working. What would China want to engage in stopping Kim?


It is possible to overestimate the influence of China. Realistically they are not in a position to simply wade in and remove Kim from his position. He has loyalists and has built a solid base of people that follow him blindly and would not support such a Chinese invasion. The Chinese would have to squeeze him and be somewhat subtle about it. It will take time but the fact is the North Korean economy is wholly dependent on China and even Kim knows that.


There are likely four things the Chinese would want from the US and the other engaged states if they were to get involved with forcing real change in Pyongyang. The first and most obvious is reduction in economic pressure from the US. They do not want to hear any more about currency manipulation and unfair trade practices. They want an end to the US effort against China being named a market economy by the WTO and they want an end to threats to impose tariffs such as the one being discussed over steel. China wants the US to back off of these and other economic issues.


The second demand would be an end to US engagement in what China considers to be sovereign territorial issues. This is mostly in reference to the South China Sea but would also include the dispute with Japan over the Senkaku/Diayou islands. The Chinese are bent no claiming control over the South China Sea and the US has opposed this


The third demand is a little less urgent but can be a bargaining chip nonetheless. China is engaged with nations all over the world and many of these are not popular with the US. They would like less pressure on states such as the Sudan and Venezuela and other places where China has invested to get hold of raw materials and oil.


Finally, China wants to do more direct investment in the US but is sometimes thwarted when the acquisition is considered sensitive. China wants these restrictions eased if not eliminated. It is not that China expects to get all of this but they see little reason to risk anything in North Korea without getting something in return. What is certain is that China will not respond to bellicose threats and intimidation as they know full well that they have all the leverage.


Giving in on the first two would be very high profile and it is unlikely the US would be willing to stage such a climbdown but the latter two adjustments could be made with very little fanfare and would allow both nations to save face as they moved closer to containing the North Koreans.


Business Intelligence Brief: July 12, 2017

Short Items of Interest – US Economy


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


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


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


Short Items of Interest – Global Economy


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


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


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




G-20 Post Mortem

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

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


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

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

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


More Signs that Cartel is Losing Steam

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


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


China and Africa

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


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

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

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

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


IMF Pushes for Change in the DRC

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


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


The Black Owl Report – An Executive Intelligence Brief

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


It was a Weird Meeting

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

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

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


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


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


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


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


Other than this system, the Atlantic is clear.


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


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


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Business Intelligence Brief: July 11, 2017

Short Items of Interest – US Economy


  • Quarles Set to Join Fed – In 2010 Congress made a change to the way that the Fed would operate by creating a post within the Board of Governors that would be primarily concerned with regulatory issues. That position was never exactly filled but existing Board member Daniel Tarullo assumed these duties. His background was in regulation and he was an attorney. He has since retired and that post has been unfilled. Randall Quarles will now hold that post should he be approved by the Senate. He is an investment banker and a former official in the Treasury Department. Most assume that he will be more industry oriented than Tarullo but the big change may come from his stance on a couple of key issues. He has been against the low interest rate policies of the last few years and has supported the notion of using mathematical formulas to determine interest rate policy.


  • Improvement for Black and Hispanic Workers – The latest jobless data shows that there has been considerable progress for these two groups and it has been a long time in coming. The unemployment rate for Hispanics is now quite close to the overall national rate at 4.8%. The rate for the black community has also improved to levels not seen since the 1970s but it remains quite a bit higher than the national norm at 7.1%. The rate of unemployment for whites is still far lower at 3.8%. Women of all races have lower rates of joblessness than men but this is especially acute with blacks and Hispanics.


  • US Prepares Unilateral Moves Against North Korea – For all the talk of military response it seems the US is going to focus on tighter sanctions as a response. The reality is that Pyongyang can’t be much more isolated than it already is but the Chinese connection has been relatively untouched. The new sanctions would be aimed at Chinese banks and companies that do business with the North Koreans – essentially presenting them with a choice of working with the US or the Koreans. China is not happy about this but they seem prepared to let this play out if it avoids an all-out war.


Short Items of Interest – Global Economy


  • What Does Mosul Defeat Mean? – The third largest city in Iraq has vanished – all that is left is mile after mile of debris and a population that has been shattered. The number of people left is a fraction of the original population and they are starving. The ISIS takeover took place three years ago and now they are gone. What was accomplished? The Iraqi army successfully completed the siege and few thought they would stick it out. The battle was tragic beyond belief but ISIS has been denied even a semblance of authority and the dreams of a Caliphate are gone. Unfortunately, this means that ISIS will simply return to its insurgent tactics and will remain a threat. If there is any kind of silver lining it is that ISIS will have a tougher time recruiting when there is no chance of a new state led by it – recruits will simply face the fact they will eventually be killed.


  • Australian Prime Minister Challenges his Right – Malcolm Turnbull has declared that his government will rule from the “sensible center” and he has moved to isolate the right wing that has pushed policies that are often at odds with what the public supports. He has taken a moderate stance on everything from immigration to economic development and societal support for the less well off in the country.


  • What Does Russia Want? – The issue of whether the Trump campaign was engaged with Russia in any meaningful way will rage as long as the politicians want it to. One of the key questions is why Russia would want to intervene in the first place and this all comes down to sanctions. These were imposed when Russia invaded Ukraine and threatened intervention in the Baltics and they have damaged the Russian economy. The Putin regime has tried to pretend they didn’t but the Russian economy has been in recession since they were imposed and he wants them gone.




Report from the Manufacturing Front

As we note every month, we do analysis for two industrial organizations – the Chemical Coaters Association International and the Industrial Heating Equipment Association. Both are heavily involved in auto manufacturing as well as any sector that engages in either heat treating metal or chemically coating it and that means almost any business that works with metal. They are at the heart of the manufacturing sector in the US. These are parts of the executive summary distributed to the members. These are all areas that matter to the manufacturer and to the overall business community and they make a fairly handy month to month scorecard as far economic performance is concerned.

This may turn out to be the transition month. It is certainly the month when much of the economic data started to turn and settle into what could be a pattern for the remainder of the year. Through the course of the first six months there was a sense that growth was being propelled by expectation and anticipation. The rhetoric at the start of the year was all about change and nearly every business heard what they wanted to hear. There would be big changes in areas like tax reform, infrastructure investment, regulations, trade and health care. It was the policy set that many in manufacturing and business had been pushing for years. Now it has been six months and the changes have been anything but quick with most of the big policy shift stuck in neutral. The business community is now adjusting to this new reality. This month there were seven indicators trending down and only four trending up. This sounds bad but it also has to be noted that many of those that are down this month have generally been positive until now.

One of the more important adjustments has been in the automotive sector. This has been pushing the economy along for months and now that pace has slowed dramatically. There are just too many barriers and the consumer has been sluggish. The same problem has appeared as far as housing is concerned. The price of homes has been rising and there is still not a lot of interest in buying a home among the millennial population. These are both drivers of the economy and have been performing very well until now.

Steel consumption was a bright spot as far as trends are concerned but there is an important caveat – much of the consumption seems related to the expectation of higher steel prices once the tariff on imports is imposed. There will likely be a big drop in consumption once that occurs. Metal prices are generally rebounding this month but that comes after they had all experienced a pretty significant slide. The recovery is nice but has to be taken in context.

The news isn’t necessarily bad or good but the data as far as industrial capacity and capital spending is off this month. There had been a nice little climb under way as far as capacity usage was concerned and it was hoped that this month would see numbers above the 80% level. It fell short again and has slumped a little. Capital investment has been all over the place of late and this was a down month. The data is not awful but it is not what had been hoped for by this time. This is a sign of the overall trepidation that has been manifesting in the industrial economy. There is still some reluctance to commit to big spending programs as business owners are not convinced that the second half of the year will be an improvement over the first.

The three measures of activity in the industrial sector are pointing in various directions. There has been a retreat as far as new orders as measured by the Purchasing Managers’ Index but the overall PMI has been performing well. Even the new orders data is not bad – just not growing as had been hoped. The durable goods numbers are always affected by the activity in the aerospace sector and that is volatile. The performance once airplane manufacturing has been stripped out is mediocre at best. The factory orders numbers have been weaker as well – consumers are no yet in break out mode and they might not gather much momentum in what remains of the summer.

The Credit Managers’ Index has been very odd of late – up one month and down the next. All of this volatility seems to be connected to two factors – dollar collections and slow pays. They are related as dollar collections data reflects whether or not the creditors are paying their bills. The slow pay is not yet a crisis but is heading that way. For the last four months, the index has been positive one month and negative the next – this is one of those positive swings. Transportation has been slumping and much of that is due to reduced activity in freight rail and the continued erosion of the air cargo business. The transportation sector tends to be predictive and if it is sliding the whole economy will follow suit.

New Automobile and Light Truck Sales – There are some serious concerns developing as far as the automotive sector is concerned. For the better part of the last decade the auto sector has been pulling the entire manufacturing community along with it. It was only a few years ago that sales of the bigger cars, SUVS and light trucks drove the market and provided much of the expansion for manufacturing overall. Since 2015 there has been a significant reduction in this activity and especially in terms of jobs. Of the 100 largest urban areas 48 of them have lost auto manufacturing jobs as companies have reduced output and replaced people with technology and robotics. The impact on manufacturing overall has been significant and few expect much of a renaissance any time soon.

The appetite for a new car has been reduced as most of those who wanted one have already made that purchase. The millennial generation is significantly less interested in acquiring their own car and the prime car buyers (Boomers) are fading away and buying their last car. The banks are not as eager to loan for cars as they once were and the model changes are not driving demand either. Cars last far longer than they once did and that means that people keep them for ten years and more. The bottom line is that car sales will not driving the manufacturing community this year or next and not for a long time.


CCAI/IHEA Continued

New Homes Starts – The housing sector is another one that has started to reverse course and that is not good news for the economy as a whole. Just as with the auto manufacturing sector the housing starts data was providing encouragement given the number of sectors this activity can touch. There is the building itself but then one adds in all the appliances that come with a new home and the landscaping and the electronics and so on. The challenges of home ownership have been mounting and they have started to take a real toll. The headwinds have been developing since last year and have only become more intense.

The first issue is that home prices have been rising at the same time that banks have been forced to be more cautious. The old system that allowed people to get into whatever home they wanted with a low down payment is long gone and now the prospective buyers have to pony up a lot of cash. At the same time, there is a shortage of homes in many of the hotter markets and that drives the prices up as well. Mortgage rates have risen a little but have generally stayed about where they have been. Existing homes have also been affected but not quite as dramatically as new homes. The issue that hangs over the whole sector is the willingness of the millennial to buy and that still remains at a slower pace than would have been expected.

Steel Consumption – There is a great deal of tumult in the steel sector at the moment and it has been affecting consumption numbers. The threats of a large steel tariff imposed on steel coming from outside the country has captured the attention of both producers and users. At this point the details of the tariff have not been released and it seems that the different exporting states will be playing by different rules. The largest exporter to the US is Canada and the majority of the top ten exporters are countries that have been long time allies. Given that this tariff is supposed to be for the protection of national security it makes little sense to equate steel imports from China with those from Canada and there may yet be exemptions to the 40% tariff.

Beyond this uneasiness as to what is planned there is the desire on the part of the steel users to protect themselves from impending higher prices and that has meant more stockpiling. The actual consumption of steel has not grown all that much but the accumulating is showing up in these higher consumption figures.

Industrial Capacity Utilization – It was looking so promising! For the last several months the rate of capacity utilization had been heading up towards the level that would signal respectable growth. As we have pointed out endlessly the ideal range for capacity utilization is between 80% and 85% as that signals that the economy is not experiencing slack but it is not overheating either. The trend had been steadily up and now this month it has dipped again and fallen short of that minimum level. Not that around 76.5 is necessarily bad but this still signals a dip and leaves the index showing slack. When the levels are this low the manufacturing community is not interested in buying more machinery or in doing any additional hiring. It had been hoped that this indicator would have continued its march toward normal but that seems more distant than was the case earlier in the year.

PMI New Orders – The Purchasing Managers’ Index has been improving over the last few months but there has been more variability with the new orders index. These are the more forecast oriented readings as these are the orders that point to future activity. The growth of a few months ago have ebbed and there is more caution appearing in the manufacturing sector as well as with some of the services. The blush of wild enthusiasm has faded and there are concerns that many of the good news developments are not going to come to pass this year. It looks unlikely that the health care issue will be settled until next year and neither will the tax cuts. This is problematic as this would have been the ideal year for these to change. The new administration should have had a honeymoon period but it was squandered on meaningless fights and scandals. Now the big changes will be offered during an election year and the reluctance to take a stand will be even greater with those who are trying to protect their seats. All in all, these numbers are not bad – they are just not as robust as they were expected to be at the start of the year. The momentum has slowed and it will be harder to get it back.

Capital Expenditure – The level of capital expenditure often follows the same pattern as capacity utilization as there is less demand for new machinery when the level of utilization is low. The slowdown in capacity usage seems to be playing a role with capital expenditures this month as they are down from what they had been. It has not hit the low set in February but for the past year these are low numbers indeed. The decline in February is partly explained by the fact there is a lot of build up at the start of the year and then purchasing tends to fall off a little. There has been quite a bit of movement from month to month and that has complicated the task of trying to identify trends, as soon as a pattern starts to emerge there is a reversal. It seem that enthusiasm for the future keeps clashing with reality and the continued sluggishness of the economy.



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.


On Being a Fuddy Duddy

I try not to romanticize the past but I am sure that I am guilty of selective memory – most of us are. As children, we were all exemplary – hard working and respectful, dedicated to pleasing our parents and committed to education and our future goals. As Onslow from “Keeping Up Appearances” would say – “Right!”. I am certain that adults looked at me in my tender youth and questioned whether I would survive – much less make anything of myself. I try to remember this when I gaze at the younger generation now as most days I am either vexed or filled with a feeling of doom.

Do kids today really have so much less work ethic than those in my day did? I couldn’t wait to start working and pursued jobs well before I was legally supposed to. I liked working and I liked making an impression on my bosses. Not all of them were great and I didn’t like all the jobs I held but most were interesting and I tried to do my best. I don’t seem to come across that attitude much anymore. Usually I am left with the impression the person I am dealing with hates their job and by extension hates me. The most common approach is surly indifference and I have to be honest – this infuriates me. I have taken to writing letters to establishments commenting on these experiences and usually get no response at all or maybe a generic “thank you for your comment”. I also try to point out the good service when I see it.

I don’t know how we change this. I have tried pointing out these behaviors and all that does is escalate the tension and confrontation. I have been yelled at and been flipped off by some kid whose job is ostensibly to provide service. They learned nothing and that place of business lost me forever. I spoke to managers in each case and received nothing but a blank stare. I am pretty sure I would not have gotten away with this when I was working – I was once fired because I was caught talking on the phone when a customer came in the store. Those were the good old days!!!


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The Truth About the Yellowstone Super Volcano.  There is a lot of news about the number of earthquakes happening near the Yellowstone Super Volcano. News agencies around the world are jumping on the “awakening of the sleeping giant” story – suggesting that this could be the end to the United States if it does indeed erupt. Here’s a bit of truth seeking on our part (we don’t have all of the answers).


There have been a swarm of more than 1,000 earthquakes near Yellowstone – including a 5.8 earthquake that took place in Montana just yesterday. First, this was the largest swarm of earthquakes in a single week…in the past five years. It isn’t unprecedented – in fact, it isn’t really all that uncommon over the past number of decades. The USGS has their volcano alert system still set to Green, they aren’t concerned.  But, if you are an odds kind of person, here’s where they put the odds of a super volcano eruption over the next 12 months:


730,000 to 1


The USGS is telling the public that they look at multiple factors to help predict a volcanic eruption. The earthquake swarms are just one of those factors. Today, only one factor is being triggered, the others are quiet. So, there isn’t a super volcanic eruption in our near future…yet.  An article in a science magazine last week suggested that Yellowstone isn’t the one to worry about anyway.  Because of the type of volcano – it isn’t explosive. Most of the activity that would come out of an eruption would be lava flows – not huge eruptions that blanket the earth in ash for years.


It might ruin a few family vacations – but it probably isn’t the global killer everyone makes it out to be. – KP




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Business Intelligencec Brief: July 10, 2017

Short Items of Interest – US Economy

• Yellen Resists Congressional Calls for Reform – It seems like such a good idea until it doesn’t. There have been those in Congress who believe that the Fed needs the wise guidance of our elected officials. The same people who have run up both a record debt and deficit and are preparing to shut down government in September as they can’t work out a budget. Specifically, the call is for the Fed to set arbitrary mathematical goals and limits and be required to explain to Congress when and if they plan to deviate. The problem is that mathematical formulas can be concocted for a wide variety of economic and financial situations and they always fail at some juncture when the assumptions they are based on change. It is not that the Fed has not made mistakes but no other system will be foolproof and those that are being suggested are far less flexible when a correction needs to be made.

• Jobs in a Slow Growth Economy – The jobs data was better than expected but this is not to say that all is well. This kind of low unemployment rate should have triggered sharp wage hikes and inflation by this time but it hasn’t and analysts point to two prime factors. The first is that employers can’t find the people they need with the skills required and so they are not hiring at all. Even if they are willing to pay more there is nobody they want to pay. The second and related issue is that business is not seeing the kind of growth that allows speculative hiring. Most companies have the staff they need now and would only start hiring if they anticipated more activity in the near term.

• Governors Lead Fight to Preserve Medicaid – At the heart of the debate over what to do with reforming health care is Medicaid. To advocates this is the lifeline for the poor and they wanted to see the expansion under the ACA preserved. To those who do not like Medicaid it is emblematic of all that is wrong with welfare in the US. It is a system that discourages people from working and preserves dependency. The battle is both economic and ideological. The real opposition to the GOP plan now seems to be coming from the GOP governors who are facing the real brunt of the issue. Thus far 16 Republican governors decided to expand Medicaid under the ACA and they are fighting the repeal and changes.

Short Items of Interest – Global Economy

• French Tax Cuts for the Wealthy – The Macron administration advertised itself as pro-business and most of the plans for French growth rely on greater expansion of investment and entrepreneurial activity. To that end the government is discussing tax cuts as soon as 2018 but the challenge is getting that money into something that bolsters the economy. The wealthy tend to be passive about their cash and they do little additional spending and they do not necessarily invest in growing their business. To get that money to work will require some tricks to direct behavior and these are hard to predict.

• Shinzo Abe Drops in Popularity Polls – The future of the Japanese Prime Minister is now in doubt. His ratings have plummeted to levels not seen since 2012 with only 36% approving of his rule and 58% against it. His government has been hit by scandals and his economic gains have been elusive. The electorate seems ready to make a change and there are those in his own party who have their own ambitions. The most likely challenger would be Yuriko Koike. She is the governor of the Tokyo region and has been essentially the opposition leader. She is a populist in many ways and has a no-nonsense reputation.

• Germans Attacked Again for Fiscal Rectitude – The world wants the Germans to spend wildly and run their debt up to record levels. This would be good stimulus for the struggling economies of Europe. This is a bit like looking at one’s frugal neighbor and demanding that they run themselves into crippling debt to buy you a new pool. The Germans would rather not cripple their economy so that spendthrift states can spend more money and this becomes the bone of contention for the IMF and many in the EU.

Did We Learn Much from the Latest Jobs Report?

This is really a pretty silly question as we always learn something. Even if there is no real change to the data we learn that the economy is stable as compared the previous month and if there are gains or losses we get a sense of what is trending in the overall economy. A better question is whether the data is a surprise or not. This month there were expectations of a mediocre number of new jobs – somewhere near the numbers that we have been seeing since the start of the year. Instead the gains were more robust – the best month of the year so far. What does this mean? With unemployment as low as 4.3% where did all these additional jobs come from?

Analysis: There are three important takeaways from this month’s data. The first is that 222,000 jobs were added when the expected rise was nearer 140,000. The second major change is that the unemployment rate moved up slightly to 4.4% from last month’s 4.3% and the third important piece of data is that wages have not been going up as much as would be anticipated with jobless numbers like these.
The first two observations are somewhat linked. When one sees the number of jobs increasing at the same time the rate of unemployment is going down there is a shift taking place within the ranks of the unemployed. Those who had been categorized as “discouraged workers” are starting to find job opportunities. This is more than a little important as these are people who have been unsuccessful looking for work sometime in the last twelve months. Many have been without work for over a year. When this group starts to find employment, it is a signal that companies are starting to get more desperate. The people who have been unable to find work are “employment flawed” in some way. They may lack relevant skills, they may have a less than desirable work history, they may be older than would be preferred by the business community and so on. The list of reasons to be essentially frozen out of the system can be long. Right now, the business community seems more amenable to hiring people who will need training and people who may not turn out to be the most reliable people they could hire. This has meant that the U-3 unemployment rate has been climbing a little and the U-6 rate has been falling – people are shifting out of that discouraged worker category.
This pattern may also be a factor as far as wage growth is concerned. Those who are being hired out of the discouraged worker category are not likely to command top wages and salaries. Their entry into the workforce is offsetting the pay hikes that have been offered to those who have the needed skills. The lack of wage growth has been a growing concern for many. To be blunt the economist really doesn’t care all that much about how many people are employed if these are jobs that don’t pay all that well. The interest is in how people function as consumers. This is what drives the economy after all. The consumer sector accounts for some 70% of the national GDP and provides the majority of jobs. If the consumer is denied a significant level of disposable income the whole economy starts to get sluggish. Low paying jobs produce limited consumers.
There are several trends emerging that could make this issue even worse. As companies struggle to find the workers they need they begin to find alternatives. The manufacturers look towards robotics to handle the work that people did in the past. Fast food restaurants turn to self-service options for the patrons in order to reduce the size of the staff. Then there are those promises of self-driving cars. We have been pumping our own gas for years and the on-line shopping option is reducing the need to hire clerks at the retail outlets. This steadily eliminates jobs and that tends to lower the pay available for those who lack the skills needed.
One other factor as far as hiring is the number of people that are opting for retirement. Given that almost 4 million Baby Boomers leave the workforce every year there is a need to replace them but the new hires are not going to be making the money these workers once did and they may never get to that level given the way the work world has changed.

How Isolated is the US?

The G-20 meetings were every bit as fractious and tense as expected as the majority of those in attendance were doing their best to shift Trump’s position on trade. The tactics ranged from cajoling and pleading to threatening. It all came down to the position these countries have tried to maintain with the US. It should also be noted there was more than a little hypocrisy given the position many of these states have adopted in the past as regards access to their own markets. China is busy promoting itself as a free trade model despite many years of protectionism, dumping, subsidizing and manipulating. There has long been criticism of Japan when it comes to regulatory barriers and Europe has consistently blocked US farm exports with the Common Agriculture Policy. The truth is that every country has engaged in some level of protectionism at one time or the other.

Analysis: The real worry is that the US may be abdicating its role as the world leader on trade issues. This has been something that has been taken for granted for years and not always for the most altruistic of reasons. The US has been an open market to the world for years and that has been good for the nations that seek opportunities in the US. It has come at the expense of domestic industry in many cases but the policy has also been very good for the consumer in the US as it has allowed access to cheaper goods.
The US has also used trade and access to the US market for a wide variety of other purposes other than economic growth. In many cases trade deals were developed in order to cement strategic alliances or to bolster allies in certain parts of the world. Access to the US market was not granted out of the goodness of anyone’s heart – the US got something in return.

Who Leads if the US Chooses Not To?

The issue was not what the US has done or intends to do. This has long been the focus for meeting like that of the G-20 or G-7 or Nato or any of the other high-level sessions involving the US. The issue now is what the US will not do. The sense of the meeting is that the US under Trump is pulling back into an isolationist and protectionist posture but even that assessment is flawed to some degree. The US has adopted an anti-globalization posture and that has affected trade relations but at the same time there is far more bellicose rhetoric coming from the White House as regards North Korea and the issue of terrorism. There are more troops moving into places like Afghanistan, Iraq and Syria and new locations for US engagement keep popping up. It is simply not clear what the US intends and that became a topic of intense debate among the other attendees at the G-20 meeting.

Analysis: Analysts are deeply divided as far as which nation assumes the mantle of leadership should the US continue down its current path. None of the other contenders have anything close to what the US has in terms of resources but they may try to act collectively. Germany has been emerging as the champion of the traditional policies towards trade and economics as well as the defender of the global approach to issues such as climate change. They have been joined by the major economies in Europe (France, Italy and others) and have garnered support from other major trading states like Japan and China. What this really means is anybody’s guess as Germany is unlikely to throw open its doors to imports in the way the US did. Those that would replace the US in terms of leadership are all export centered states and simply don’t have the capacity to absorb the influx as the US has over the years. Remember a few years back when the emerging market states were asserting that they could trade with one another and would no longer need the US market? That lasted less than a year before it became obvious that Brazil, Russia, India and China (the original BRIC states) couldn’t generate nearly enough demand as compared to what the US could offer.
The US has abdicated its role in issues such as climate change and a number of other global concerns. In truth, the US has long been somewhat reluctant to get out in front of these issues as it has always had more to lose and has always been concerned about the fact India and China were not being asked to make the adjustments the US and Europe had. Still, the US stayed engaged and now is pulling back. China appears ready to take a leading role but they have massive internal issues to overcome first. Europe has been on the forefront as far as laws and technology and could play a bigger role as well. It is also important to note that the US may have pulled away at a national level but remains very active at the local and state levels. Corporate contributions are as robust as ever given that many think this remains good for their business.
That leaves the issue of global security and the US has not indicated a withdrawal at this stage. If anything, the US is more engaged than ever with threats aimed at the North Koreans and promises to get more active against the terrorist groups. The problem at the moment remains a lack of an overall strategy and the reluctance to work with allies that share a common purpose.

Steep Slide in Manufacturing Jobs

The boost that came with the expansion of the auto industry has come to a screeching halt and that is affecting the entire manufacturing sector. According to a new study from the Brookings Institution 39 of the 100 largest urban areas in the US lost manufacturing jobs since 2015. It further points out that 45 of these cities specifically lost auto manufacturing jobs. The pattern is not unusual and the culprits are the same as they have been.

Analysis: The first issue is demand and it is off in the automotive sector. All that rapid growth of the last two or three years has slowed although it has not really reversed. The issue is that carmakers are scaling back from the expansion they underwent when demand was peaking and that means reducing third shifts and other moves. The more consistent problem is that robotics keep advancing and replacing the workers that used to do these jobs. There has been little capacity change as far as auto production in the US – even as Mexico has gained more jobs. The capacity has been draining from Canada more than it has from the US but in the US the plants are shifting to the southern states and the modern ones use far more technology and new systems than in past year and so do all the companies that have been supplying the auto sector. The decline in these jobs tends to hide the fact that manufacturers need more skilled workers and now struggle to find 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.

Heat Wave

We are finally getting a taste of what much of the rest of the country has been coping with. Thus far this year my region has been somewhat wetter and cooler than usual. Not that it has been San Diego weather but it had not really hit the mid to upper 90s yet and by the fourth of July one used to be able to count on that heat. This week we will flirt with the century mark.
I am not a big fan of heat – tried to tackle a monster of a weed patch over the weekend and soon felt like a wet dish rag. This was once supposed to be a patch of boysenberry plants and became an overgrown mess. I am not yet done but at least I can see the berry plants again. As I limped back to the A/C I realized my tolerance is not what it used to be. As I ran an errand to the hardware store I passed a baseball game in full swing and golfers on the course opposite the field and just marveled. I no longer call being out in the heat an enjoyable experience. The cold doesn’t bother me that much although I like the idea of curling up in front of the fire.
I wonder when I lost this tolerance. In my younger days, I painted houses for a living, it is how I got through graduate school. I spent a lot of time in the heat of summer and never seemed the worse for it. I have become soft I suppose but I can’t say I am eager to regain that ability.

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Thoughts on Dairy Trends – From a Pro. I had two fortunate conversations over the past four weeks, and I wanted to share one of them with you. We were doing a project for a construction company that wanted to look at target industries in the Midwest. One of the areas that we were exploring was the dairy sector, and I made some comments about trends in the Nebraska region. One of my friends, Dave Kurzawski, and I traded notes. He gave me permission to share some of his insights on trends in the dairy sector with you, which is a treat – he’s one of the leaders in dairy sector analysis and trends.

I had made a comment that Nebraska has lost nearly 70% of its small dairy farms over the past 15 years and yet, it still had too much milk. And despite this trend, I wanted to know why milk prices were still surging significantly. Here’s what Dave offered to enlighten me (which it certainly did!). “The Midwest, to your point, has a lot of excess milk. The West not so much- around 30% of our Butter and Skim Milk Powder is made in California (which is also about 20% of our US fresh milk supply). The Midwest is cheese country. And when you can buy discounted milk every day, you don’t run pepper jack or provolone – you run base commodity cheddar and put it away. And that’s what is happening here. We have what looks to me to be discovering new inefficiencies in the dairy market in which (1) the Midwest has become the darling of US milk production and (2) we could use another 10 million lb. per day processing plant here.The other thing to remember here is nonfat dry milk or skim milk production in the US.

Over the past decade, any meaningful bull market in dairy started with milk powders. Processors skim the fat off and dry it down and sell it domestically (and to Mexico mostly). But China loves milk powder and they love to import it (see melamine issues in China circa 2007/2008). If you have money in China, you’re buying imported food. So the dairy industry moved not so quickly towards powder production. It took nearly a decade, but now we have some 7 or 8 new powder manufacturers coming online in the US. Back of envelope, these plants can take in about 13-16 million lbs of milk per day. That may not mean much to you, but it’s a lot of new powder capacity. Particularly at a time when it’s fat – not protein – that is HOT. Now you may ask, “if they skim off the fat, the fat has to go somewhere, right?” Yes, but it doesn’t have to go into butter that is traded at the Chicago Mercantile Exchange (which itself is a narrow spec). Higher fat deserts and other food items, ingredient use are big pulls on the skimmed off cream. Also some of the fat is staying in the fluid milk. People are drinking more Whole Milk nowadays. I can get the number for you, but Whole Fluid Milk for drinking demand is up around 4% every month consistently since 2015. People want the whole product.

Cheese also absorbs more than twice as much fat as butter. It’s not something you usually think about until you run the numbers, but if cheese is absorbing 50%+ of our milk, then it’s also absorbing about 50%+ of the fat too. The final kicker is that the butter market rally is really driven in large part by a material uptick in global demand for butter and fat. The prices in EU are the ones that preceded this rally in US butter. The price of butter in France right now is nearly $3.00/lb. New consumer trends, this love of fat is part of it. Milk supplies were also a little more snug in 4 of the 5 major dairy exporters over the past year (EU, NZ, AU, AR, and US). Of the 5, the US was the only country to show positive milk production year-over-year. So the way I see it is that the US dairy farmer is benefitting from the problems in production abroad.”


Business Intelligence Brief: July 7, 2017

Short Items of Interest – US Economy


  • Nothing in Jobs Report to Shift Fed Thinking – Later in this issue we highlight some of the issues that should be under consideration when examining the jobs data and at the top of the list as far as influence is concerned is the Fed. One of the factors that the Fed will look at closely before making any further determinations as far as rate hikes are concerned will be the data on the jobs market. If the number of jobs had been as low as they had been earlier in the year the Fed might have been more inclined to leave the rates down as there would be concern the economy was slowing and still needed the stimulus that comes from those low rates. With a bigger jobs gain than expected the Fed has no reason not to stick to the plan to hike rates and to start reducing the size of the balance sheet. These numbers are not yet pushing a more aggressive Fed as wages have not been climbing and thus inflation remains subdued.


  • Exports Up and Trade Deficit Goes Down – The export sector has been performing quite well thus far this year and that has been made evident by the improvements noted in the GDP performance for the first quarter. Each time the data was ratcheted up from the original estimate of 0.7% the main factor was better export data. The trade deficit numbers are also bearing this out. The US has been doing better than it has in the past as far as selling overseas and the reasons are very simple. This is not some reaction to the protectionist policies put forward of late – the gains are due to the fact the dollar has been a little weaker than it was and the economies the US sells to have been doing a little better.


  • Housing Finance Reform – There has been a persistent call for reforming the housing finance system in the US ever since the boom that turned to bust in the last decade. The focus on banks has been to develop systems that prohibit the “too big to fail” issue as nobody wants to see another episode of taxpayer bailout. The changes to Fannie Mae and Freddie Mac were criticized at the time as it did not seem to go far enough. They are still in federal receivership and therefore connected to the taxpayer. Jerome Powell from the Fed has added his voice to calls for bigger reforms and he will likely carry some weight as some see him as the next Fed Chair. Right now, he is the defacto regulatory overseer since Daniel Tarullo retired.


Short Items of Interest – Global Economy


  • Targeted EU Retaliation – If the US goes ahead with its plans to impose high steel tariffs on European producers the EU intends to respond in kind and has identified the products that will face equally punitive tariffs when they come to Europe. The products chosen are designed to apply maximum pressure. Kentucky bourbon is on that list so as to get the attention of Mitch McConnell – Senate Majority Leader from that state. Orange juice is also likely to be on that list and that will annoy Florida as well as Texas. It is also likely that dairy products will be heavily taxed and that hits hard at the overall farming community.


  • What to Expect from Putin? – The Russian President has long been a master of manipulation in small things as a means by which to make his counterparts uneasy. He once brought his dog to a meeting with Angela Merkel who has a well-known fear of dogs. He physically threatened and pushed the smaller Nicolas Sarkozy into a table and forced him to fall over. When he likes someone, he finds a personal issue to focus on. The first meeting with Trump was short and uneventful but there will be other opportunities. It has been noted that Putin brought an unusual retinue to this meeting – several very young and very attractive aides whose expertise is unclear at this time.


  • Quick Canadian Observations – The job numbers in Canada were better than expected and the currency has responded on the assumption that this data will further convince the Bank of Canada to boost interest rates. The investment community is now 91% certain rates will increase at the next meeting.




What is the Jobs Report Saying This Month?

By the time you read this the monthly jobs numbers will have been released. This assessment is coming before the data has been presented and is essentially a best guess for the moment. As with previous months the devil will be in the detail. The last few months have seen a steady softening of the labor market but that reversed again this month with the addition of 222,000 jobs. Last year there were some 189,000 jobs created every month and for this year the average had been 138,000. This is to be expected given the fact the unemployment rate is low and companies have been asserting they can’t find the people they want to hire. It is really a good thing when the rate of hiring falls because the majority of people who are employable have found jobs. There remains a persistent issue of people who are essentially unemployable as they either lack the relevant skills, are in the wrong place at the wrong time or are facing some other impediment as far as employment is concerned.


Analysis: Perhaps the most critical question will be why people remain out of the workforce. The unemployment rate fell to 4.3% (at the U-3 level) and 8.4% (at the U-6 level). This is as low as the rates have been in several years and this is generally a good sign. The caveat is that there are two reasons that unemployment rates decline. People either get jobs or they drop out of the search for that new job. The fact that U-6 has been dropping suggests that there are fewer people dropping out as U-6 counts the discouraged workers as well as those who are involuntarily part time. There are debates over whether this should be considered full employment but all agree that this is pretty close.

The issue of workforce participation remains a major concern although most of the change is explained by the advancing age of the Baby Boomer. Whether one is part of the workforce or not depends on many factors but the most important is retirement. The number of eligible people who are not in the workforce is over 90 million but more than half that total is composed of those who have left in retirement. These are not the concern. The worry is over those who would like to be in the workforce but can’t seem to break in. The current rate of workforce participation is 62.7% and that is as low as it was in the 1970s when most women had yet to engage with the job market. Even today the largest percentage of people out of the workforce beyond those who have retired are those (mostly women) who have chosen to stay home to take care of family.

The most important data this month will be wage related. This has been vexing to many analysts as there has been a break in the usual pattern. Low unemployment rates generally stimulate wage hikes. As people to fill jobs become scarce, the natural assumption is that business will pay more for the people they need and they will also pay their existing workers more in order to keep them from being poached. There has been some of this but not enough to create a real surge in wages. The increase over the last year or so has been around 2.5% – not awful but not great either. The companies that are hiring may decide to invest in technology rather than hire people and many have been seeking to keep their labor costs as low as possible.


Trade Deal or Shot Across the Bow?

The Europeans and the Japanese have signed a trade deal that is both significant and insignificant. This deal has been in the works for years but was utterly stalled a few months ago as neither party was willing to concede on some key issues. Suddenly the talks heated up and the pact has been signed – even as some of those sticky issues have yet to be resolved. Analysts have been divided as to what this agreement really means. It appears to be as much politically motivated as it is economic.


Analysis: In the wake of Brexit, the aggressive protectionism of Trump and the rise of populism in many parts of Europe it had been assumed that the old order was in decline and that notions of free trade and globalization were in full retreat. The assessment of many was that free trade was going to be replaced by isolationism and bunker mentality that rejected engagement with the rest of world. This pact is as much a repudiation of that assertion as it is a real trade pact. Japan and Europe have essentially driven a stake in the ground in defense of open trade with an assertion that it remains a priority for their economies even as they have some issues. Some have interpreted this as a declaration of their independence from the US. The perception in Japan and Europe is that the US has reversed course completely and will no longer be a reliable trade partner. That means these export dependent regions will need to find alternatives and that means working with one another.

The fundamental challenge is that these are both export dependent nations with relatively weak import sectors. It is not that there are no consumers in Europe or Japan as the sector is large. It is simply that it is not as large as the consumer sector in the US. The Japanese and Europeans have aimed their output at the US for years for a good reason. The pact between Europe and Japan will open the European car market to Japan to a greater extent and the Japanese will be open to importing agricultural output from Europe. The big changes that had been under discussion over the last few years have been tabled for now in the interests of getting this deal done quickly. The timing is not accidental as it will be a talking point during the G-20 meetings.

The hard cold fact is the rest of the world can’t afford a disengaged US for very long. To be honest the US can’t long afford that isolation either. The push now is to get the US to back away from protectionism and every tactic is being trotted out. The IMF scolds the US (along with many other groups), trading partners are trying to offer good deals (UK is at the forefront of this) and there are efforts to entice the US with the notion that its intransigence is costing it money (Japan/EU deal).


Chances of a Lasting Oil Rally

There are still oil hawks out there. The last few years have changed many perceptions as far as the oil market is concerned but not everyone is convinced that the old order is gone forever. They continue to assert that prices will start to rise again while the glut will ease and they point out that this situation has existed before. The counter argument has been that some of the changes have been significant and that it will take a lot to change the current pattern. OPEC is a shell of what it once was and can’t even maintain discipline within the core of the cartel. The big player now is the US and it has enough power to bend the markets – more or less at will. A good example of that influence was on display this week when an oil price rally was snuffed out by the announcement that production was up in the US. The price of gasoline this summer has been as low as it has been in well over a decade despite the fact this is prime driving season and the time that most prices traditionally rise.


Analysis: There are several factors that have affected the oil markets over the last few years and the challenge now is to determine which of these are temporary and which are semi-permanent. The most important shift has been the emergence of the US as the world’s dominant producer. The role that was once occupied by the Saudi Arabians has fallen to the US in some respects. The oil rally that started earlier this week fizzled as the US stepped up production. The oil shale development has been significant for a few reasons but one of them is the fact it can be turned off and on rather quickly. If the per barrel price rises even a little the US producers can hit the market fast and take advantage of that hike. The other major producers need price stability for longer periods of time.

The other factors that have contributed to the stability of that low oil price are considered more temporary and some even assert they are anomalies more than anything else. For example, the expectation had been that countries such as Libya, Iran, Iraq and others would be experiencing drastic reductions in oil output due to the instability and chaos in these countries. The fact is that production has been steadier than expected as both the governments and the rebels have had an incentive to keep the oil flowing and the sector has had some protection. The Iranians have been producing more as there has been more wiggle room to sell to the global market. The expected disruption in other oil states never took place and that has allowed them to stay current. The oil hawks point out that any and all of this could change in an instant and the world would be suddenly confronted with shortages.

The biggest mystery concerns demand. Much has been made of the end of peak supply concerns and the emergence of peak demand. Is there really enough of a change to dismiss the chances of a shortage? Will demand recover at some point? The fact is that vehicles have become far more efficient and there will not be a reversal of that process. The millennial generation in the US and Europe will not be gas guzzlers and that suggests that oil demand has indeed peaked and at the same time that supplies are as bountiful as they have been in decades.


A Nasty Meeting of the G-20

This will not go down as the most pleasant of G-20 meetings. In some of the past years the meeting struggled to gain even a little press attention as there was not all that much real controversy. This year the global press has shown up in droves – the most to ever cover these meetings. They expected and are getting real fireworks and confrontations – both inside the meetings and outside. The protest groups stepped up their engagement as they expected more press attention and the violence exploded and expanded within hours. The attacks on police have been more vicious than in past years and security is now extremely tight. The confrontations within the meeting are not going to be as physical but tempers are flaring.


Analysis: The majority of the delegates are on the side of Angela Merkel and dead set against the policies of Trump. They are taking the US to task over trade barriers, the withdrawal from the climate accords and a host of other issues. Thus far Trump has responded with his own brand of disdain and is clearly playing to a US audience. This will not be the meeting that sees a rapprochement with Europe and the world as far as the Trump White House is concerned. The hope is that there are some small gains on issues that are not part of the overall controversy but they will not register the same way that the disagreements will. The staunchest of traditional US allies are all taking a cautious approach and that leaves the more overt enemies with lots of room to criticize. China is now a stalwart ally of the Germans and that rarely happens. Russia is under suspicion by Europe but Putin has leverage as far as the US is concerned.


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.


On that Political Discourse Theme

I received a lot of comment on the story from yesterday that discussed the lack of civil discourse these days. It really seemed to hit a nerve as most of us have grown very, very tired of the screams and rants and the desire to demonize anyone who has the audacity to question us. Several comments included some steps to take to try to return the conversation to what once passed as normal.

The first is to avoid connecting a disagreement over an issue to actual dislike for the person we disagree with. The tendency today is to personalize everything and take every criticism as a direct attack. The way to avoid that trap is to humanize the person. No matter how virulently one disagrees with someone they undoubtedly have much more in common with us than it would seem. They love their families too, they like movies and sports teams we like, they may even share hobbies. Imagine meeting them under different circumstances. A person who took me to task on almost every story I wrote shared my enthusiasm for Doctor Who and we would shift gears to talk of Cybermen, Daleks and Weeping Angels when we sense that our debate was getting a little too intense.

Practice debate as opposed to argument. Screaming obscenities at somebody will not likely change any minds but maybe appealing to facts might. You have a reason you believe the way you do and so do the people you disagree with. They need to know what motivates your belief and you need to know what motivates them. Granted it takes two to tango on this one but somebody needs to start and make the effort to ask.


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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When Do We Put the Geopolitical Premium Back In? – Given all the activity seemingly taking place around the world, does it surprise any of us that there isn’t more of a reaction in the stock market or in areas of influence that affect our daily professional lives? It wasn’t long ago that sending three US carrier battle groups into a region would have sent shockwaves through the stock market. Today, it barely seems to capture 30 seconds of our attention. Maybe that’s a good thing. Conditions and tensions are not insignificant.


We don’t have to go any further than the war being waged in cyberspace to understand just how impactful current global events could be.  The UN has gone so far as to say that a recent cyberattack (likely sponsored by a state) constitutes an act of war!  New evidence suggests that much of the hacking taking place may be shifting to process-control systems; attacks that can shut down infrastructure and create dangerous conditions for citizens all over the world. This has been a risk for years, just ask Iran how much risk there is with computer control systems that go haywire from a cyberattack. There’s evidence emerging today (no surprise) that many of our nuclear facilities have already been attacked many times – luckily with no negative consequences. Maybe it’s the volume of instant news and information that we get today.  Maybe until something hits us between the eyes will we be concerned about it. We certainly seem to be more de-sensitized to the important things – and more sensitized to the events and activities that have no bearing on your business.


For instance, the geopolitical premium that we used to see on crude oil (for instance) just hasn’t emerged. It could be the changing market for crude oil and the explosion of production all over the world that is helping keep the risk premium off prices.  But, about nine years ago, we would have seen anything from a $20-$30 risk premium on top of crude oil prices if a Middle Eastern country blew its nose. Maybe that’s a bad example, because we have had significant events take place in major producer nations – and it hasn’t slowed down the accumulation of crude oil supplies. So, perhaps we now have proof that we don’t need to react or worry about such things any longer. We still believe in the ripple effect (or butterfly effect).  An event in a remote part of the world can ripple through and create problems in our domestic market. We may not label the root cause of a factor accurately and link it back to its origin, and that might be the problem.


There’s two things worth noting as they pertain to you conducting business today and into the future.


  1. There are global systemic problems to watch (automation, population trends, etc.)
  2. And there are secular systemic risk areas to watch (North Korea, Syria, Qatar, etc.)


We try to watch for the pebbles hitting the pond, and then monitor the ripples as they approach the boat we are in. Deciphering between the waves that matter and those that barely rock the boat is the challenge. And that’s the game we all play – right?  Have a great weekend.  KP


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Business Intelligence Brief: June 6, 2017

Short Items of Interest – US Economy


  • Debt Ceiling Issue Clouds Forecasts – Once again the US is in danger of inflicting a wound on itself and that has made forecasting and prediction tougher than usual. We have detailed the odd way the US handles its budget before – that no other country waits until the money has been committed before deciding whether it should be spent. The Treasury Department has stated that the country will run out of money to pay its bills by early September and Secretary Mnuchin has urged Congress to raise the debt limit as soon as possible. The problem is that everybody knows that Congress will do as it has always done and make this a last-minute decision that leaves the US credibility dangling. There is even a good chance there will be a government shutdown that could really damage the reputation of the US. All of this makes estimating what happens in the second half of the year tough.


  • What Might China Want? – The crisis that has been created in North Korea is much more complex than has been assumed (for more on this check out the Black Owl Report this week). The bottom line is that North Korea moved a step closer to being a real threat to the US but is not there yet. The missile tested can hit the US but they lack the ability to put a nuclear warhead on it. The reality is that there is time to react and that means engaging China. They can stop Kim in an instant if they want to. The question is what will make them want to. The Trump approach thus far is to threaten and that doesn’t seem to be working. Why would China want to engage in stopping Kim? That is what we discuss in the BOR this week.


  • Russia “Could Well Have Intervened in the US Election” – These are the words spoken by President Trump in Poland. The words that legions of critics have been trying to get him to say in the US. In the company of Polish officials that have no trust in Russia whatsoever he has essentially agreed with those who assert that Russia meddles. The fact is that Russia and the USSR before it always meddled. That is part of the world of espionage and always has been. It is equally obvious there has been meddling by China and Israel and other allies over the years. It is also apparent that Russian meddling did not throw the election as the margins were not that close.


Short Items of Interest – Global Economy


  • IMF Targets the US, Germany and China – As the G-20 meetings get underway the IMF has issued its usual admonitions and suggestions and has singled out the US, Germany and China as countries that are impeding global growth. The US is being attacked for the emergence of a protectionist set of policies and an anti-trade position, Germany is being scolded for maintaining a massive surplus that has distorted the growth prospects for Europe and China has been assailed for allowing its public debt to climb to wholly unacceptable levels – as high as 240% of its GDP. These are not new criticisms and few expect these three states to change their course any time soon.


  • EU Trade Deal with Japan – After some years of debate and some real acrimony the Europeans and Japanese have reached a deal that will both delight and dismay business in both countries. There are lots of provisions and sections but the most important elements include the fact that Japan will get greater access to the European market for its cars and in return European farmers will gain access to the Japanese agricultural market. Both of these are politically sensitive areas and the leaders have taken some risk by changing the rules at this stage.


  • Transformation of Luisa Ortega – It is not clear what changed as far as the Attorney General of Venezuela. She had been a determined government loyalist for well over a decade and has ruled many times to imprison critics of the regime. She was a true believer when Hugo Chavez was alive and interpreted every attack as a plot by the capitalists and business leaders. Now she has become the leading critic of Maduro and the current leadership and is essentially the leader of the opposition.




Lack of Inflation and the Central Bank Dilemma

The pattern for central banks has been nearly set in stone for years. The overall purpose of the modern central bank is the preservation of monetary stability and what that generally means is controlling inflation. The idea was simply that legislatures had the ability and the desire to stimulate an economy that was wallowing in recession through additional spending. After all, what politician would ever be able to resist bringing home the bacon to constituents in the form of jobs and projects? The hard part was to slow an economy down that was suffering from inflationary pressures. That would require the bank to hike interest rates, change reserve ratios and otherwise restrict access to money and credit. What does a bank do when there is no inflation dragon to fight and little need to boost stimulus? This is the internal battle that is raging in the ranks of the Federal Reserve and within the other central banks as they are all looking at economic activity that is not following the usual script.


Analysis: There are two broad positions within the Fed’s governors and regional leaders. The “traditionalists” are of the opinion that inflation remains an imminent threat and that it could manifest at any moment. The look at the current lack of inflation as an anomaly and they believe that the conditions that have allowed it to stay so low will change soon and that inflation will surge far faster than anyone is really predicting right now. Given that central bank decisions take months to react to, they advocate an extremely cautious approach that errs on the side of keeping rates higher than they have been. This group includes the usual inflation hawks but there are others who have held more moderate positions in the past but worry about the future.

The other group is not quite as united in their reasoning regarding inflation but they agree on the fact rates should not be pushed that much higher – at least in the short term. They are generally of the opinion that something fundamental is different about the current economy. They are supporters of one kind or another of Larry Summers and those economists who talk about an extended period of “secular stagnation” creating a low inflation trap that will be hard to emerge from. The notion is that the usual triggers for inflation are not functioning as they have in the past and they are not likely to. There is some divergence as to which of these factors matter the most but all agree that consistently low oil prices have been one of the most important. In the past, it was oil that spurred inflation hard as nearly everything reacts to these prices. The costs of transportation fluctuate with the price of fuel and this quickly pervades the whole economy. It has also been assumed that low rates of unemployment push inflation as the shortage of workers makes wage growth inevitable. Not this time. The business community struggles to find the people they need and soon face a choice – either pay far more than desired to get the workers they need or invest in technology and robotics instead. A one-time investment in a machine makes a good deal more sense for many than a long-term agreement to pay somebody more than the company can manage (at least for an extended period of time).

All of this means that the Fed and the other central banks are struggling with policy decisions beyond the next few months. There is generally consensus on raising rates another quarter point this year for the Fed and it is likely that the European Central Bank and the Bank of England will agree to some incremental rate hikes within the year but past that there is considerable confusion. There are those who assert that rates will go up two or three times in 2018 and leave the Fed with at least a 2.5% Federal Funds rate but there are just as many who assert that rates will not go past 1.5%. The factor that will shift the opinions of those on both sides of this debate will be the rate of inflation.


Best “Bang for the Buck” in Development Terms

The conversation on aid always comes down to whether the money spent is achieving the desired outcome. It would seem that providing aid and assistance to those in need would not be controversial but it always is. There is always the debate over who is “deserving” and who is not and there are legitimate concerns regarding building dependency into a given culture. The most persistent conversation is over effectiveness. Is there a better way to use the aid to get desired results?


Analysis: The assumption has been that foreign aid should be funneled to the larger urban areas where there is a concentration of people needing help but the latest study from Unicef holds that this is not actually the case. The aid that is provided to the more remote rural areas has a much bigger impact in terms of infant mortality and the general health of the population. The difference is not slight – the impact is much more dramatic.

The working supposition is that people in the rural communities have very little in the way of support from anybody. The governments are weak in these regions and there are not enough friends and family members to form any sort of real support group. The urban dwellers generally have more options and opportunities. They have access to more programs and support and thus manage to avoid some of the crisis situations that plague the people in more isolated areas. There are some important lessons here as far as assisting people in a more developed nation like the US. Much of the effort has been focused on providing services where there is the largest concentration of people and this may not be addressing the real needs. The urban dweller has more options and opportunities in the developed world as well and it is often those in the rural areas that have very limited chances to get help and assistance. The most poverty stricken areas of the US are no longer the cities – it is the rural community cut off from any system that can provide assistance – whether that be the government or the family.


Economic Recovery in the Eurozone

The latest data from Markit shows a substantial recovery in the Eurozone and one that may be picking up speed in the second quarter. The numbers in May were at 56.8 and in June they stayed very close at 56.3. The expectation had been for a decline to 55.5 but the growth in France has been impressive and rapid. There is still a good bit of fragility as far as the global economy is concerned and there are still many who suggest the Eurozone recovery is anything but assured but this surge has already had a positive impact on economies outside Europe. The data in the latest PMI suggests there are three motivations for this recovery.


Analysis: The first and arguably the most stable is the surge in the German economy. The slowdown of about six to nine months ago has been replaced with more robust growth and the estimates are that Germany will be able to grow at between 1.5% and 2.0% over the next several quarters. The consumer in Germany is more engaged than they were just a few months ago and there has been a boost in export demand. The trade related growth has been due to better numbers in Europe as a whole but also to the better economic news in the US and Asia. German exports are not oriented towards consumer products and thus Germany needs other nations to be experiencing enough growth to boost their industrial expansion. That has been taking place in much of the world of late. It also helps that German politics seems to have calmed down a little with Angela Merkel back in the lead as far as the upcoming election is concerned. Economic growth is good for Merkel and it seems that Merkel is also good for economic growth.

The second motivator is perhaps the most dramatic as it was not expected at the start of the year. As important as Germany is to the EU economy, France is a very close second and this country has been missing in action for years. The Hollande government seemed incapable of sticking to a policy direction for more than an hour and the growth rate plummeted as joblessness spiked. It was an economy that was dead in the water and that was largely what provoked the rise of populism. The French were convinced that Marine Le Pen and the National Front would come to power in the elections and the business community was in a panic. Nearly everything seemed to stop as the country tried to figure out what that world would look like. In the end, the French handed Le Pen a stunning defeat and Emmanuel Macron became President and shortly after he won control of the National Assembly. Not that any of the underlying issues affecting the French economy have gone away but the opportunity is there and the business community has responded with relief and optimism. Time will tell as far as how much this enthusiasm is justified.

The third motivator is connected to the way that countries are now connected. If there is anything the last few years have taught is that no country can really pull itself out of decline and recession without help. The US economic recovery over the last few months has been rooted in an expanded export role. The US economy is dependent on exports for at least 14% of its GDP but Germany relies on exports for almost 55% and France needs exports for over 45% of its economic growth. Much of the export activity in Europe is between Europeans but it has taken expanded sales to the US and to China for Europe to start pulling itself out of the doldrums.


Finding Common Cause in Poland

The enmity between Donald Trump and the majority of the European leadership is pretty obvious by this time. The relationship with Germany’s Angela Merkel could not really be any worse and relations between Trump and Macron have gotten off to a rocky start. There are however states that have a much different opinion of the US President right now and Poland is at the top of that list. The ruling group in Poland is the Law and Justice Party under the leadership of Jaroslaw Kaczynski. He is a populist in the same tradition as Marine Le Pen and those leading the AfD in Germany. He has been at odds with the Europeans throughout his political career and is as antagonistic towards Germany and Merkel as Trump has been. The meeting between Trump and Kaczynski will be a warm one as they both point the finger at “old Europe” as the problem.


Analysis: Poland is however an outlier as far as most of Europe is concerned and the enmity that has been directed at Germany has compromised the investment that once flowed into Poland from the Germans and others. The Poles are rather hoping that the US can pick up that slack but that means getting more US investment in Poland. That, in turn, means jobs going to Poland as opposed to staying in the US. Poland is a manufacturing state and growth here will likely have to come at the expense of the US to some degree. The US has sold a Patriot missile system to Poland on the eve of this visit however and there will likely be more of these deals in the future.


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The Perilous State of Political Discourse

This screed is clearly an example of preaching to the choir. I am very, very fortunate to have readers like you – the person who has taken the time to read these words. I get quite a few e-mails and comments from readers on an average week and almost none of them could be described as angry or vituperative. There are many who challenge my assumptions and question my conclusions but these are overwhelmingly thoughtful and respectful and I value these interchanges greatly. Nobody learns anything by cutting oneself off from those who disagree. I am lucky that people reading the BIB are curious and engaged and interested in real exchange. I know many other writers who do not have this luxury and face vitriol and hate on a daily basis.

I have read some of these other comments and wonder what goes on in the minds of these “commentators”. Vile language, overt threats to kill and maim and hurt people’s families. Accusations and threats that would make one want to retreat to a bunker. I can only conclude that zealots and crazies fall asleep reading my stuff and can’t muster the energy to attack. Either that or they assume that nobody listens to me anyway so there is no point in making an example of me. Whatever the reason I am grateful. I am rarely subjected to that kind of abuse and instead have the opportunity to communicate with a wide range of people – some who disagree from the left and some from the right. On occasion, there is even someone who agrees with me! This is what discourse is supposed to be.  I have changed my mind on issues after these exchanges and some others have changed theirs. Most importantly we interacted with respect and consideration – even as we continue to disagree.


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How Healthy is the Chinese Economy? – China’s economy is one of the key indicators of global growth.  Since it produces a tremendous amount of the world’s products, we can use it as a proxy for the global economy and demand. One of China’s PMI readings was released last night, and it came in better than expected. The official PMI (mostly on surveys from large, multi-national companies) came in at 51.7 in June, up from 51.2 in May. This was the 11th straight month of expansion in the Chinese manufacturing sector.


Highlights in the report from Caixin showed that exports (52.0), new orders (53.1), and production (54.4) were all higher and helped push the index up month-over-month. Economists with Caixin reminded readers that China benefitted in June from one extra work-day because of how the Dragon Boat Festival was celebrated this year – which could be helping to boost some of the positive results seen in June. The big number that we all want to focus on is the new export order figure. It moved from 50.7 to 52.0 in June, and signaled that global demand improved in the month. This was a six-month high for the index. Prices in China are confusing. The Producer Price Index fell year-over-year in May to 5.5% (it was 6.4% at the end of April).  But, analysts say that downward price pressure on raw materials producers were easing at the same time.




Caixin also reported on China’s services sector.  It moved up to 54.9 in June, up just slightly from 54.5 in May.

Construction activity was strong with a PMI reading of 61.4 in June, up from 60.4 in May.  Here’s what is most interesting to us:  there was a statement in one of the reports that we read from a subsidiary group of economists that provided some interesting insights about the real health of the Chinese economy looking forward. Here’s what the CEBM Group said about the economy:


“CEBM Group, a subsidiary of Caixin Insight Group, said in a report on Friday that the PMI figures show China’s economy in June has continued the positive trend since the fourth quarter of 2016. It expects the country’s GDP to grow by 6.8% in the second quarter, following 6.8% growth in the fourth quarter of 2016 and 6.9% in the first quarter of 2017.However, the CEBM report warned that China’s economic growth may slow gradually, as it still is highly dependent on the driving forces from infrastructure and housing development. “The dwindling stimulus effect from infrastructure construction and property development, as well as the tightening of fiscal and financial policies, mean that it is just a matter of time before economic growth will fall back from the heights seen at the beginning of the year,” the report said, adding that if the tightening continues, the slide may accelerate.”  Caixin/CEBM Group


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