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Business Intelligence Brief: June 21, 2017

Short Items of Interest – US Economy

 

  • Uber Ousts the CEO – We do not usually do much writing about the trials and tribulations of specific companies but this story has been too tempting given all the implications. I also have a more than passing interest in the future of the ride share idea. I use Uber at least six or seven times a week as I have lost all faith in the taxi business. By all accounts Travis Kalanick was an example of the tech guy who has no clue how to do anything else and managed to build a poisonous culture. He is no more the CEO and the company is struggling to figure out who replaces him. The point is that my personal experiences with Uber have been universally good -not one bad ride as compared to the dozens of miserable taxi experiences that had me fearing for my life. The moral of this story is that one has to be good at everything when you are running a company and Kalanick was really bad at most of these duties.

 

  • Republican Control of NLRB – The five person NLRB is the federal agency that rules on most of the labor decisions in the country and in the past it has either been an ally to the unions or an enemy. This is the board that determines what makes a union and which workers can form one. At the moment, there are two vacancies and Trump has just nominated Marvin Kaplan to one of the seats. He is an attorney with extensive experience in labor negotiations and is expected to win confirmation. That would mean there would be two Democrats and two Republicans on the board and the fifth member will be nominated by Trump by the end of the year. The GOP has not held the majority on the NLRB since 2007.

 

  • The Dove Speaks – Charles Evans is the head of the Chicago Federal Reserve and has established a firm reputation as the most dovish of all the regional Fed leaders. He also has tenure in his position and has been a leading advocate for keeping rates low. He has indicated that his preference would be to leave rates where they are until December. That doesn’t mean that the others will follow his lead but he is going to fight a September hike – that much is clear.

 

Short Items of Interest – Global Economy

 

  • Germans Face Reality with Refugees – The statements have been terse as the German government has asserted the majority of the refugees that sought protection and a new life will be unemployed for a very long time and will have to rely on the state. The problem is that there were three distinct waves of migrant. The first were the better educated and wealthier Syrians fleeing the war and most of them have been able to resume their lives in Germany. The second wave was Syrian but poor and they have not been assimilated as quickly. The third wave was the largest and came from all over North Africa, the Middle East and South Asia and the estimate is that 90% are without work or the skills to get work.

 

  • Comeback for Berlusconi? – Many in Italy would shudder at the prospect as he left office beset by scandal and most of his policies were judged to be epic failures. The center left is still ahead in the polls but there are many who are not favorably inclined towards their policy choices. It was assumed that the Five Star Movement would be the challenger but they appear woefully unprepared to govern and now some are looking at the right again and concluding that Berlusconi might not be so bad this time.

 

  • State Department Urges End to Feud – Trump has moved on to other issues and has seemingly lost interest in the situation with Qatar and that has put the State Department back in control. The demand is for the Gulf States to delineate their issues with Qatar and to move towards a solution. The US is not willing to lose that key air force base and there is frustration over the lack of specifics from the Gulf States as they cut off ties to Qatar. The US wants a brokered agreement that allows all parties some room to back off but they can’t do that without knowing what the grievances really are.

 

 

 

Oil Market Defies the Old Logic

It is a brave new world out there for the oil producers and suddenly nobody really knows the rules. It is not that many years ago that the oil markets were predictably volatile. You never knew what the price per barrel would be but you could count on that price going up and rarely down for any length of time. The demand was always close to constant and production was limited and could be constrained at will. The power of OPEC may have peaked in the 1980s as there were more nations producing than before and many were not members but even those that were not formally part of the cartel would follow its lead when it came to production in order to get prices where they wanted them to be. This system seemed to be a constant and most assumed that oil prices would continue to ratchet up over time. Go back and look at the predictions that came from the likes of Goldman Sachs in the 1990s – their analysts were not alone in asserting that the per barrel price would climb to over $200 by the end of the century and just before the recession the prices were between $100 and $125. Suddenly the prices started to fall and at first everyone assumed this was just a reaction to the recession and the expectation was for the higher prices to return as soon as there was more economic activity. It didn’t happen and oil prices have struggled to get past $50 or $60 a barrel despite the overall growth of the global economy. While it is true that growth has not been exactly robust there has been enough to have stimulated more oil consumption and still the market is in bear territory.

 

Analysis: There are many factors explaining why this has become the new normal but five stand out as the most relevant at the moment. The first is that the OPEC deal to cut production was not aggressive enough. In past years the problem with many OPEC deals to limit output has been that members cheated the quota. Many of these countries rely almost exclusively on the oil money they make and simply can’t reduce as much as the Saudi Arabians would like. This time the deal was struck with an eye towards getting maximum compliance and this means that the proposed cuts were pretty anemic. The members are in general compliance and that is a good thing but the cuts have not been deep enough to have much impact on the glut. They are limiting their output to 1.8 million barrels a day but analysts assert that the production number should be half that large. Getting production numbers that low will risk seeing many members cheating as they have in the past.

A second factor has been unexpected levels of output from countries that had been essentially written off as major players at this time. Libya and Nigeria had both been exempted from the reduction due to their political circumstances. There is barely a government in place in Libya and yet oil production has been climbing and all of that oil has been hitting the market. Nigeria has been fighting insurgents that attack the oil infrastructure and in the past that has severely limited the levels produced. Now they are getting better at defending the system and output has risen.

The third factor that has been playing a role is the persistence of the glut in storage. The intent behind the OPEC reduction was to provide an opportunity for the storage surplus to recede. It was assumed that demand would pick up and that the global stockpile would be consumed rather quickly. It has barely fallen at all because the demand expected has not materialized and the cuts were not deep enough (as outlined above). The talk in the oil world is of “peak demand” and not “peak supply”. The global economic recovery is not robust – the US is growing at perhaps 2.3% and Germany is ecstatic over the prospect of hitting 1.8% this year. China is limping along at 6.5% and India is the top dog with growth that is hitting 7.0%. Both of these states were boasting growth numbers in the double digits just a few years ago. This is not growth that bolsters oil demand. Even with growth the majority of the business community has adopted policies that limit energy use and that further dampens demand expectations.

The fourth factor is perhaps the most consistent and likely to be the major one for many years to come. The US was not even in the production game a few years ago but is now the largest producer in the world. The oil shale revolution is very real and the US has barely tapped the potential in the country. Then there is the 85 billion barrels of known reserves offshore. The Obama approach might have limited the oil output a bit but under Trump the oil sector has boomed and would be growing faster were it not for the low global prices. The US can now easily replace any production cuts from the OPEC states if it wants to.

Finally, there is the behavior of the oil market itself. When OPEC made its decision to cut production and got the Russians to follow along the investors immediately assumed that the old rules were still in place and the speculators bet heavily on higher prices. Those did not materialize and they have been trying to dump their positions ever since. All of this adds up to the return of a bear market and one that looks persistent.

 

A Couple of Other Factors to Consider in Oil

The five factors explored above are the drivers right now but consider some others that could play a role. The unity of OPEC is as strained as it has ever been and the recent fight between Qatar and the various Gulf Oil states is an ongoing issue. The Saudi Arabians and Iran are still both in OPEC despite the enmity between them. It is not out of the realm of possibility that the OPEC organization starts to come apart at the seams and that would mean an end to even modest efforts to control the oil states.

 

Analysis: It has been asserted that a break up of OPEC would cause oil prices to plunge to $30 and even $20 a barrel and that sets up a dangerous spiral as many nations would be unable to produce at that price and would drop out – setting up a shortage down the road.

 

Significant Changes at the Top in Saudi Arabia

Under no stretch of the imagination is Saudi Arabia a democracy – this is a Kingdom where the power clearly resides within the royal family but that doesn’t mean the King has all the power he might want. Making big changes in the country’s leadership requires a consensus position and the engagement of many of the royal players. The current King has been trying to get his son positioned to be the successor in the event of his death or his desire to step down. King Salman has been trying to walk a delicate line between factions within the country that want to return to conservative positions and those that are pushing reform. The selection of Mohammad bin-Salman to be the Crown Prince means that Mohammad bin-Nayef has been replaced as far as the succession is concerned. He was also removed from his position as Interior Minister and is no longer the man with the anti-terror portfolio. The US has long relied on a close relationship with bin-Nayef but bin-Salman has been pro-US as well and has tried to court relationships with Trump as well as some of the European leaders.

 

Analysis:  Mohammad bin-Salman is very young (31) and his elevation would be almost shocking in a country which has been led by older men for decades. It was once asserted that somebody in their 60s would be a radical move. The concerns that have been expressed have come from outside the Kingdom as few would dare to bring these up inside the Kingdom. There is worry that he is too inexperienced and that he favors moves that challenge the country too much. He leads the effort to break away from being an oil dependent state but the alternatives force the country to be more open to outsiders and that means cultural change. He has favored the engagement of women in politics and business but thus far only at a local level. He has pushed a more aggressive foreign policy and has been behind the activity in Yemen as well as the confrontations with Qatar and Iran.

King Salman is not suggesting he plans to step down anytime soon and by all accounts he remains in good health. The expectation is that Mohammad bin-Salman will be Crown Prince for several more years and even then his succession will be a topic of debate as there are certainly other contenders.

 

Scandals in French Politics

The new Macron government has had to face a crisis already although it is one that should be weathered with minimal damage. The decision was made to combine forces with a smaller centrist party at the end of the National Assembly elections. Modem has been around for a while and would bring 42 seats to the coalition. The Marcon party has enough seats to form a government without them but the total would have been more impressive. Unfortunately, the Modem politicians are now under investigation for misuse of funds and nepotism. In the old days they would likely have fought to stay in their positions but the mood of the French voter is different now. It was financial scandal that derailed the campaigns of Francois Fillon and even Marine Le Pen and Macron has acted swiftly by demanding the resignations of people he just appointed to the government.

 

Analysis: One of the concerns about this brand new party is that not much is known about many of those who ran for the National Assembly and there was not a lot of time to get the candidates vetted. The fear is that there are potential land mines out there and that some of these new members will have skeletons in the closet that could appear. Right now, Macron is acting quickly to remove anyone tainted by scandal but at some point those in his government will wonder if he ever has their back. If there are people removed simply due to allegations there will be an incentive for the opposition to accuse people of things even when they know the accusation is groundless. This has long been a tactic of the National Front and most expect they will further employ smear campaigns to keep Macron off balance. He will have to take a stand at some point and defend the people he has put in place.

The good news for Macron is that many of those who ran on his ticket are not politicians and have no track record. That doesn’t mean that they are without personal challenges but these will affect the French voter less than what happens when a politician is perceived as corrupt. Those who have been brought in thus far do not know Macron well and that allows him to be somewhat picky about the inner circle and right now it appears that this circle is very small and tight. The one key advisor is the same as it has been throughout his life. His wife – Brigitte Macron – has been the most important advisor in his career and she wields a tremendous power in terms of who gets access to him. She sizes people up very quickly and her assessments are almost always dead accurate.

 

The Black Owl Report – An Executive Intelligence Brief

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

 

Louisville and Me

One of the most common questions I am asked is which city I like. People know I travel a lot and they make the assumption that I learn a lot about the cities and communities I visit. In fact, I am judging most of these places by their airport and their hotels. But there are places that I go to often enough that I start to get a bit of a feel for the community. I always tell people that having been born in Kansas City and having spent my entire life there I have no desire to go anywhere else – KC is my home and my favorite place. BUT – if I was to somehow offend the entire city to the point that I was tarred and feathered and run out of town on a rail where would I choose to go.

Louisville is a town I could live in. It has the same feel that KC has – a little more southern but KC is a cross between southern and western. The people are charming and the pace is about right – not frenetic but not slow either. It is a physically beautiful city and there appears to be lots going on. On my last trip, I was in a Holiday Inn that was being renovated and when I got to the room I noticed there were no lamps. I struggled with this for a moment and then concluded that people in Louisville emit their own light and don’t need lamps. Beyond all the other factors there is one that stands out as far as Louisville is concerned – the food. I really have had some of the best meals ever in that city and frankly that is more than enough for me.

 

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

 

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The “Blue Line” in the Sand.  Russia has drawn a line in the sand, and it’s the Euphrates River.  In the 24 hours immediately after a US F-18 shot down a Syrian SU-22 fighter, Russia has said that it will paint and shoot down anything airborne operating West of the Euphrates River. According to wide reports in the media, it’s not too uncommon for US assets to get “painted” by targeting radar in and around Raqqah and areas on the Euphrates.

 

US military authorities and officials are working to smooth over relations between the US and Russia after the incident – to prevent further issues from happening. The US and Russia have operational communications in place to prevent accidental engagements between the two countries in an area that has no less than 6-10 different military interests operating and carrying out operations. Russia threatened to cut off communication with the US in retaliation for the attack – but doing so will put Russia at risk of embarrassment – which it will likely avoid. It will use a stick wherever it can, instead of soft diplomacy, because it believes the door is now open to do so. With so many different entities operating in the country, the risk of accidental engagements is high. Don’t be surprised if there is at least a mild incident in the next week that allows Russia to show it’s “control” of the situation. It might be an attack on a drone or something unmanned.

 

But, here’s the real reason why I wanted to comment on this story (the mainstream is covering it in length if you want specific details about the event).  This is a new method of engagement and field operations for the US military. Well, it’s new in the sense that we haven’t had this level of field operating authority in about 8 years.  Previous administrations (regardless of political party) typically gave the military full operating authority in areas of high conflict risk. The White House or Congress would set the parameters for an engagement or in a theater where tensions were high, perhaps set objectives, and areas where political risk could not be compromised; then they would allow field commanders to use the tools necessary to ensure that the US had an “overmatch” situation in place.

 

Giving operational authority to the experts in the field is the right way to operate. We are adjusting to this “back to the future” way of operating. As a public (and perhaps even many military authorities) have forgotten what it feels like to wake up in the morning and read that a significant incident has taken place. Frankly, the White House is informed before we are – but it can also get caught by surprise if a theater is fluid and engagements are swift with this method of operating.

 

This new construct has also sent a message to potential adversaries all over the world that a US response to aggression can be swift and decisive. That will keep many foreign leaders off-balance. It will also ratchet up the risk of conflict in many areas of the globe. So, there is a trade-off.

 

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Business Intelligence Brief: June 20, 2017

Short Items of Interest – US Economy

 

  • Why is the US Struggling? – This is a subject that will get far deeper treatment in the Black Owl Report but just as a starting conversation, the US is facing endemic issues that have led to a populism that still baffles the pundits. How is Trump so unpopular with the majority of the elites and still so popular with others? The premise is that the US has at least three deep structural problems that have been building for years and are now coming home to roost. The first is that it has become extremely hard to move up the income ladder in recent years and that challenges the notion of an egalitarian society. The second issue is that there has been a failure in terms of education and its value. Too many are dismissed as “second class” as they lack a degree and yet business can’t find people to hire and the third is that much of society and the business community has become complacent.

 

  • What is the Fed Saying These Days? – Now that the June meeting is over and the decisions have been made, the focus on the Fed shifts to what the various governors and local heads are saying. Bear in mind these people are not all completely on the same page as there are hawks and doves when it comes to Fed policy. Over the next several months they will be making their case for their position with the hawks urging higher rates amid assertions that inflation is still something to worry about and a belief that the economy really doesn’t need all that much stimulation right now. The doves will be arguing that the current recovery is still new and not all that robust and that tightening too much and too fast will create more pressure than the economy can bear.

 

  • Reactions to Student Death – There is no doubt in anyone’s mind that the leaders of North Korea are among the cruelest of people on the planet. The fact that Kim Jong-un sentenced his uncle to death by being attacked and eaten by wild dogs is proof enough. The North Koreans arrested a college student for the crime of taking a propaganda poster as a souvenir. He was mistreated in prison and was released to the US in a coma. He subsequently died. The US is outraged along with the rest of the world but we have been outraged at Kim for a long time. At the end of the day we have to question why anyone would come near this country and we need to make people understand that they are beyond help in this tyranny.

 

Short Items of Interest – Global Economy

 

  • Tensions Rise in Middle East – There are so many reasons this headline would be true but this particular incident involves Iran and Saudi Arabia. The assertion is that members of Iran’s military elite were seized on a boat that had entered Saudi waters and that the boat was carrying a large cache of arms. The implication is that Iran is actively trying to equip elements in Saudi Arabia that might challenge the Kingdom. The Iranians deny that this was the intent but they have not explained where these weapons were heading.

 

  • South African Central Bank Under Attack – The government of Jacob Zuma has been at war with the Reserve Bank for years as he wants to promote an extremely aggressive policy of government largesse and the bank wants to keep an eye on inflation. Zuma has been packing the bank with his supporters and it now appears that inflation is not a concern for them any longer and is threatening to accelerate. This has been enough to cause the Rand to drop in value as it appears the government will be “printing” currency recklessly.

 

  • DRC on Edge of Utter Collapse – The Democratic Republic of the Congo has been a failed state almost from its inception and it is hard to see how it could get any worse but that is the assertion. The government barely controls a several square block in the capital city and at last count there were over twenty militia armies active. It is now thought that famine will tear through the country and reduce the fragile state to utter chaos.

 

 

 

Are Tariffs in the Interest of National Security?

There are many reasons given for the imposition of tariffs, some more understandable than others. Nearly all have a political element in that there are domestic industries and interests at stake and the determination has been made that imports should be discouraged to some degree. There is the “infant industry” argument that is based on a national desire to build up a certain sector and the assertion that this sector needs to be protected from competition until it has time to get established. There are tariffs that are based on the fact that other nations have an unfair trade advantage due to low wages and production costs or because they have weak environmental and consumer protections. Trade barriers are erected to protect specific industrial sectors where domestic jobs are at stake. The imposition of tariffs and regulation is overtly designed to promote the domestic economy but usually comes at the expense of the consumer and certainly hurts the countries that seek to sell to the US. There is another rational used to restrict trade and it has been deemed the “nuclear option” by trade theorists and advocates. Opposing trade and establishing tariffs based on national security opens up a more serious debate and often leads to more aggressive trade policy.

 

Analysis: It is not all that unusual for a country to assert that a trade barrier has been erected as a means by which to ensure national security protection. Japan has imposed very high tariffs and extensive regulation on imported rice as this is considered a national staple and government is sworn to protect the ability of the country to feed itself. Japanese rice farmers are small scale and woefully inefficient compared to those in the US, Brazil, and throughout Asia but they are aggressively protected. The US has injected tariff protections to block foreign control of key resources and lately the attention has shifted to the steel sector. It is not the first time that steel has come under the wing of the government and it is not the first time that steel tariffs and restrictions on imports have been used to ensure the survival of the domestic steel business. Nor is the US the only country that has elected to protect this sector – steel remains a mythically important industry. Remember that the origins of the European Union was the European Coal and Steel Community as it was asserted that nations could not go to war against one another if their steel industries were monitored and controlled.

For a variety of reasons, the protection of the steel sector became a major part of the Trump campaign and it was assumed that there would be significant trade barriers erected to block the import of foreign steel shortly after he came to power. The decision was not as swift as had been expected but it seems that this week will see the full development of the plan and it will be centered on the national security motivator. There is a provision in a 1962 trade agreement referred to as Section 232 and it allows a President to impose tariffs and other measures on the grounds that national security is at stake. It was designed to allow country to impose barriers when the product or service is coming from a nation that would be considered hostile to the US. In the years since the provision was created the US has only pushed its case 26 times and all were abandoned but two – both having to do with oil imports (from Libya and Iran). The vast majority of the imported steel comes from close allies to the US – 60% of the imports are from Canada (17.1%), the EU (14.3%), South Korea (11.5%), Mexico (9.1%). China accounts for just 2.6% of the imports that come into the US. The remaining 45% of imports are spread among many smaller producers that may specialize in a specific kind of steel output.

The health of the US steel industry is not good. The majority of the steel produced in the US is by mini-mill and this relies on scrap as opposed to iron ore. This is a harvested resource and the supply has been dwindling over the years. The majority of scrap comes from vehicles, construction teardowns and the scrapping of other items. The longevity of vehicles and the heavier use of plastic and aluminum has reduced the steel available for harvest and there have been fewer construction related sources. The US can’t even scrap most of its own ships due to environmental regulations and that means that scrapped US warships have been sold to the Chinese for dismantling. The tariff imposition may not be enough to bolster the industry but it is certain to cause steel prices to rise in the US and that is a major issue for all the manufactures and others that consume steel. The consumer ultimately pays that price through more expensive cars and equipment.

Why is the Trump Team Aggressive on Trade?

The rhetoric is fiery to say the least and the critics have lambasted Trump for his consistently hostile approach to trade but there is likely more nuance here than might be expected. The commentary and explanation that has been coming from within the administration is far less theatrical and reflects a position that has been held by Democrats as well as by some in the GOP. The gist of the argument is that many of the trade pacts and agreements the US has entered into were motivated by factors that are far different now than in the past.

 

Analysis: Most of the organizations created to manage the global economy and orchestrate trade stemmed from the end of World War II and the US was committed to helping the rest of the world rebuild. Part of that plan was based on giving access to the US market and many of these strategies are still as they were in the 1950s. The US has also used trade as a political weapon – especially during the Cold War. If you supported the US against the USSR you were granted access to the US market. Today the need to rebuild the world is no longer an issue and the Cold War has ended. It may well be time to reassess the breaks that other states receive from the US and it is time the US demands a few breaks of its own.

German Growth Expected to Accelerate

Suddenly it appears the German economy is firing on all cylinders and the prognosis for the country has been improving with almost every passing week. The latest assessment from the Ifo organization asserts that growth this year will be at around 1.8% and that is up from the 1.5% assertion of just a few months ago. Furthermore, the assumption is that growth will be at 2.0% in 2018 if the current trends are maintained. This growth has all sorts of implications for Germany and the rest of the EU and the fact that growth is accelerating has come as something of a shock to many who had been assuming the worst at the start of the year. The sense was that Brexit was going to do significant damage to the German export community but that no longer seems to be the case. It was assumed that the populist wave was going to deliver politicians such as Geert Wilders in the Netherlands and Marine Le Pen in France and it was feared that this would affect the politics of Germany and strengthen the position of the AfD (Alternative fur Deutschland). Thus far these threats have not played out as many had assumed and right now Merkel is seeing a rise in her poll numbers and seems likely to win another term as Chancellor.

 

Analysis:  The analysts are suggesting there are perhaps four reasons for the rebirth of the German economy in just the last few months. One is the collapse of the populist threat and the fading of right-wing criticism of Merkel. The AfD is still active and still feeds off the general antipathy towards the refugee policy but that pressure has eased somewhat. The second rationale is that Germany has been growing its employment ranks at a record pace. The country has thus far seemed to avoid the demographic trap that has affected many others in Europe and in Asia. The workforce is indeed getting older but there have been enough newcomers to offset the ones that are leaving the workforce and a significant number of these new workers are coming from the ranks of the refugees. The third motivation for the new growth has been a business community that has successfully expanded its ability to export and to new markets. The slump in Europe over the last several years forced German companies to look elsewhere and they have been successful in selling to Asia and Latin America as well as the US. The fourth rationale for growth has been the performance of a more upbeat consumer. The spending levels are not to American standards but the Germans are buying more than they used to. They are buying homes and cars and other larger items as well as more normal consumer purchases. The German vacation is alive and well and more of them are being taken in Germany itself and that boosts the impact of the tourist euro.

A strong German economy is very good news for the rest of Europe and especially France now that it has a business friendly and centrist President. Italy has been likewise enthusiastic about this growth. If the pace is as rapid as is predicted the rest of Europe will start to see increased German development outside its own borders and that will be a welcome change for the countries of eastern Europe.

More Wealthy Chinese than Ever

The numbers of wealthy Chinese have expanded dramatically in the last year or so but the ranks may start to thin in the future as property prices fade. A great many of the 1.5 million who are said to have over Rmb 10 million are paper moguls as the bulk of their wealth is tied up in property holdings. The high prices have made them wealthy for the moment but there are deep concerns about the bubble that now exists in the Chinese property markets – should these burst, the people who are now considered wealthy will slip out of that classification.

 

Analysis: There are at least two issues facing China as far as this wealth is concerned. The first is the same as faces any country and this has to do with the stability of that wealth. A sudden drop in their asset base will rob the country of some investment capital and will accelerate the overall plunge of the economy. The more unique challenge in China is ideological. It still creates tension in China for there to be rich people alongside those with less. The majority of those that are wealthy have gained that distinction through investment and that seems awfully capitalistic. There are many within the ranks of the Communist Party that remain uncomfortable with their status and do not wish to do anything to protect them.

The paper wealth in China has boosted consumer activity but mostly at the higher end. There has been a lot of luxury purchasing but the demand from the middle class remains somewhat anemic. The stores that have been doing well in the big cities are those that cater to this elite – not the stores aimed at the middle class.

The Black Owl Report – An Executive Intelligence Brief

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

 

Contempt

This is the definition of contempt – “the feeling that a person or a thing is beneath consideration, worthless, or deserving scorn.” It is a miserable feeling to be held in contempt by someone or some institution but that is exactly what many of us feel when interacting with government or other institutions. The day becomes a series of insults and dismissals and the poorer one is the more this is the case. I have seen far too many people treated badly and disrespected simply because they seem to be “undeserving”. The cleaner at the airport who is dealing with people throwing trash in their face or the person shopping and trying to figure out whether they have enough money to pay.

The rest of us get this as well – too often. The government official who reacts in an imperious manner when we have an issue that requires their engagement. The fact is that nothing makes us angrier than being disrespected and dismissed. We know full well that we are important to our loved ones and friends and that we matter and it is insulting to be treated shabbily by those who are supposed to be paying attention to us.

      

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

 

To get a FREE TRIAL go to www.armada-intel.com

 

 

 

General Producer Prices Unchanged M/M, Higher Y/Y.   The Producer Price Index showed that it was flat month-over-month, but was 3% higher year-over-year for manufacturers. Commodity prices used in the manufacturing process were up 4.6% year-over-year and were down slightly by .3% month-over-month.

 

Just a few more highlights and areas of interest from the report:

 

  • Cement prices were up 3.3% M/M and 7.1% Y/Y. That’s a substantial price increase for a key construction commodity.
  • Frac Sand (using in oil production) was flat M/M but were up 8.8% Y/Y
  • Plastics and Resins used in manufacturing were up 2.4% M/M and 8.4% Y/Y
  • Grocery Stores -.7% M/M and down -.6% Y/Y
  • Bankruptcy Lawyers up .9% M/M and 6.2% Y/Y
  • Warehousing and Storage flat M/M and up just 1.7% Y/Y
  • Book Publishers down .1% M/M, but up 2.2% Y/Y (is print really dead – or are just the print brick-and-mortar retailers dead?)

 

I know that we have a very diverse reader base. We have worked with clients to use this data in sales presentations, industry benchmark studies, etc. It can even help in strategic assessments of new industries (see if there is price stability), older mature markets, etc.

 

 

 

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Business Intelligence Brief: June 19, 2017

Short Items of Interest – US Economy

 

  • “America First” Bites – Up to this point the majority of the trade plans that were put forward by the Trump campaign have been either stalled or abandoned altogether. It has been too hard to battle those who opposed the new restrictions or the ideas have otherwise lost support. The tariffs that have been based on “national security” issues are the ones that may be able to get enough support to pass although trade advocates point out that these motivations are not generally the best from an economic point of view. The steel tariff is a case in point as the rationale has been to preserve the steel business in the US for the purposes of national security although the tariffs will have a negative impact on the users of that steel. The tariff has opposition but it also has a lot of support these days.

 

  • Farmers Hit by Nafta Uncertainty – This has not been a banner year for the farm sector at this point. The high dollar has affected the ability to export farm goods and the weather has been too nice in too many places. There is an oversupply of food and the markets are saturated in the US. Add to these issues the problems that have arisen as far as shipping to Mexico as well as taking in imports. The fact is that Mexico buys a lot of agricultural production from the US – everything from corn and wheat to cheese (65% of all the cheese produced in Wisconsin goes to Mexico). The Mexicans are angry with the US and have started to impose their own restrictions in reaction to the attacks on Nafta.

 

  • Large Disparity Between Labor Rates – It is always something of a misleading statistic. When we are told that the unemployment rate is 4.3% or 4.4% the statement is almost meaningless from a practical standpoint as there is no state in the union that has the same rate as the national rate. The states are all either higher or lower than this rate. The states that have the lowest rates are the ones that have had many jobs on offer and too few people to fill them. California’s rate is now 4.7% and they were in double digits just a few years ago. North Dakota is still among the lowest at 2.5% and Oregon is at 3.6%. The states that are struggling are largely in the industrial Midwest – states like Illinois, Ohio, Michigan and Indiana. They are all seeing higher rates than the national average.

 

Short Items of Interest – Global Economy

 

  • Unity at Stake in Middle East – It is a little hard to talk about unity when discussing the Middle East – it has been more than obvious that divisions are profound. The fact is that there has been more unity than not when it comes to the Gulf oil states as they have much in common due to their shared commodity dependence and their shared culture. The challenge now is that Qatar finds its policy of mutual appeasement hard to maintain. The Saudi led region objects to the support that Qatar has given to the Iranians and Islamic extremism. The position of Qatar has been to appease everyone and now this policy is under extreme stress.

 

  • Less Unity in Syrian Conflict – The US and Russia are clearly on opposite sides in this war and that just became more obvious. The US just shot down a Syrian plane that had been attacking positions that belong to US backed rebels. The Syrians had been warned repeatedly not to engage and this was one infraction too many and now the Russians have indicated they will attack aircraft that are connected to the rebels and technically that includes US airplanes. That gets very nasty very quickly.

 

  • Nato Allies Object to Steel Tariffs – If the US actually goes through with the tariffs on steel there will be intense opposition to the plan from Nato allies. This is just the latest provocation as far as the allies are concerned and it is likely there will be some kind of negative reaction designed to impact the US. This will soon escalate into a real trade war.

 

 

 

 

Housing Data Looks Pretty Stressed

The housing sector is not in crisis exactly but it has certainly looked healthier than it does now. This is a sector that gets a great deal of attention from economist and forecasters and most of that focus is deserved as the state of the market really does play a major role in the underlying economy – at both the macro and micro levels. To the consumer it matters as this is the primary way that people store wealth in the US and for the economy as a whole it matters as it involves dozens of ancillary industries in the construction phase as well in financing and maintenance and the like. Most economies in the world are also dependent to some extent on the housing sector but no country has the level of home ownership that the US has. The scrutiny that is applied to the housing sector is therefore well deserved.

 

Analysis: Last year the housing sector seemed to be one of the key drivers as far as the health of the economy was concerned – alongside the surge in interest in new car sales. Now it seems that both of these sectors are struggling to keep up that pace although neither has really crashed either. The latest data on housing starts shows that they dropped by 5.5% from May and there has been a corresponding dip in the number of permits issued which indicates that there will be fewer starts in the months to come. The decline in permits was 4.9%. What makes this data even more distressing is that both had been predicted to go up this month – the consensus view was that starts would be up 3.4% and permits would be up by 0.8% at least. This optimistic assessment was based on the fact that demand has been up and rising fast. How is it that demand is accelerating and supply is not keeping up? There are several reasons suggested and they range from the fact that those in the market for a new home can’t afford the current prices or they are not getting the mortgage they can handle. It has also been pointed out that it has been increasingly difficult to find people to build the homes and that creates a major backlog in many markets.

On Wednesday the data on existing home sales will be released and the expectation is that the numbers will have declined but perhaps not as precipitously as they did in April when the fell by 4.3%. The same issues that are affecting the new home buyer have been affecting the existing home buyer. This has been frustrating to those in the housing market as there has been evidence that the millennial has started to come into its home buying period at last. The problem is that the majority of these buyers are struggling to get the down payment they need for the homes that are on the market at the moment. The majority of the millennials are still living in multi-family units and the majority have not yet started families and this is the factor that generally provokes people to start the search for a single-family unit.

 

Consumer Confidence Starts to Fade

There has been an anomaly evident in the consumer data of late. Since the start of the year there has been a strong sense of consumer confidence as expressed by the various surveys from the likes of the Conference Board and the University of Michigan (among others). This has been all well and good but it seemed that all this confidence was not translating to the retail sector as over the last few months these sales have been anemic at best. One of these two would have to change. Either the level of confidence would have to fade or the sales would have to go up.

 

Analysis: The University of Michigan reading is now 94.5 and that is as low as it has been since November of last year and a considerable drop from the 97.1 that had been registered a month before. Although this was a significant decline, the numbers are still higher than they were a year ago (by 1.1%). The problem is that this reduction was unexpected as most analysts had expected a very minor retreat to perhaps 97. It is always hard to tell what is troubling the consumer and these surveys are very often volatile. In past months they have been profoundly affected by the rise and fall of gas prices or some geopolitical development that threatens to alter business. Given the stability of gas pricing lately and the relatively good news as far as hiring and overall economic growth the search is on for something else that might be spooking the consumer.

One factor that plays a role is politics. At the start of the year there was lots of enthusiasm as the new Trump administration promised an end to many of the economic issues that had been vexing the voter. We were going to see a swift end to the ACA as it existed, massive deregulation, infrastructure repair, reworked trade deals, tax reform and a host of other changes. These have all proven far harder to deliver than many had expected and now there seems to be disillusionment and frustration setting in. The Trump White House has been embroiled in scandal and controversy from the very start and the public is losing patience as indicated by the slumping popularity of the President.

Not that this process is unusual. Every President is faced with the reality of US politics and how long it takes to get anything accomplished. Every President comes to power with the campaign fresh in everyone’s minds and that means that promises have been taking center stage – most of which will be difficult to deliver on. Approval ratings always fall as the bulk of the population has unrealistic expectations as far as what a President can accomplish. The additional factor that has consumers worried is that they are not sure that Trump can play the necessary games to get his agenda passed. His style courts antagonism and even alienates would-be allies and that makes progress exceedingly hard. The consumer is a fickle creature and today’s angst could reverse in a month if there is some unexpected good news.

Macron Has All the Tools

The question now is whether he will be able to accomplish what he has indicated he wants to do and whether the French public will allow him the time to do this. The country that was teetering on the brink of handing power to a right wing ideologue who wanted to pull out of the EU, expel immigrants and institute populist nostrums that would have destroyed the French economy is now in the hands of a brand new party and a President that is overtly pro-business and has a very ambitious reform agenda. When Macron became the youngest President since Napoleon and without a speck of experience in elected office, the expectations were somewhat minimal. He had no support in the National Assembly as his party was created just in time to allow him to run for office. The pundits all declared that he would be a weak President as it was unlikely his brand new collection of politicians would be able to pull off a significant win. That assessment turned out to be incorrect as his Republique en Marche now holds 350 seats in the National Assembly and that is more than enough to exercise control. The party that literally fell apart was the Socialists as they only managed to retain a fraction of the seats they once had. Le Pen’s National Front also lost a lot of their seats. The major problem as far as setting out a new agenda is that the voter turnout was at a record low – 57% elected to stay home as they did not really like the options they were faced with and/or they just got tired of the whole thing.

 

Analysis: Now what? The platform as set out by Macron was more detailed than many had expected from a candidate but he is a technocrat running for office and really had no track record of politics to refer to. Le Pen was full of rage and fury but her plans were massively vague and changed with every speech as she tried to broaden her coalition. The other candidates essentially relied on what they had done before and the party platforms that had developed over the years. Macron had a different approach and it was one that many thought would doom him as it gave opponents something to grab on to. Apparently it was something the voter could grab on to as well.

At the top of his agenda is labor reform and most analysts assert this will be his make or break issue. He pledged reforms during the campaign and asserted they would be in place by September. He will have to make maximum use of his “honeymoon” period. The details will be worked out in the next few weeks but the plan in essence is to destroy the sclerotic labor system in France. Business would be given far more flexibility to hire and fire according to business conditions and the economy. They would be able to negotiate over working hours, overtime rules, wages and the like. The system now is heavily oriented towards worker protection and once hired people are very difficult to fire. The problem is that business becomes very reluctant to hire in the first place as they feel they will not be able to reduce staff later. The young worker finds it very hard to get a job and unemployment is a far bigger issue than it should be. The unions will aggressively oppose these reforms as they have in the past and Macron will need lots of skill to keep France from being overwhelmed by strikes. If the reforms pass he will have to hope that business responds and starts to hire aggressively – the whole balance is very delicate.

 

Retaliations

In the aftermath of the terror attacks that have erupted in the UK the police indicated that their biggest ongoing concern would be retaliatory attacks from the extremists seeking to attack the Muslim community and there has been such an incident over the weekend as a van plowed into a group of people leaving a mosque. One has been confirmed dead and many have been badly hurt. This brand of terror is even harder to impact than that of Islamic extremism as these perpetrators can be anyone with a grudge and in the vast majority of cases they have no background that would make them suspect.

 

Analysis: This has not been the only attack – far from it. There have been assaults and at least three suspected murders of someone of the Muslim faith simply due to their affiliation with Islam. The law enforcement community fears these rounds of attacks will continue and will escalate as each set of extremists seek to assault one another. The overall sense is that violence will beget violence in an ever expanding cycle of rage – each side accusing the other of fomenting it. The only response is for those who do not support the violence to speak out in greater numbers.

 

The Black Owl Report – An Executive Intelligence Brief

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

 

I HATE Tech

If I am to be honest I hate the lack of reliability. I face every interaction with the tech world with great trepidation. Will it work this time? What do I do when it doesn’t and I know that will happen more times than not? I find that raging is somewhat cathartic but accomplishes little. Just in the last week I have been treated to the wonderful world of frustrating technology. The internet connection has been extremely spotty – cutting out ten to twenty times a day despite near constant re-booting and all kinds of “helpful” advice from Spectrum. The garage door opener doesn’t work and neither does half the other electronic tools at my disposal. My cell phone periodically decides not to capture a voice mail and invariably these are the ones I need. I understand that my experiences are anything but uncommon and that begs the question – why?

Why is so much attention focused on “new and improved” when the real desire is for reliability? The fact that we collectively tolerate this nonsense is bizarre as we would not be so forgiving with many other things. I have spent half the morning fighting this and I dearly love wasting time trying to make something work.

 

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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Nuclear “Dirty Bomb” Scare in Charleston, SC.  There wasn’t a tremendous amount of detail released by the FBI or US Coast Guard regarding an incident on Thursday morning involving Maersk’s Memphis container ship.

 

The FBI was tipped off to intelligence that led them to believe that a potential “dirty bomb” (radioactive material used as a terrorist weapon), was imbedded in one of four containers on the Maersk Memphis ship.  After portions of the port were evacuated and crewmembers on the ship were moved to safety, the ship was scanned and cleared.

 

We don’t know if the intelligence was Humint (human intelligence) or Sigint (signals intelligence).  We would assume that it was Humint – because they didn’t find anything that would be throwing off a false radioactive signal. And, being human intelligence – it can produce false flags or erroneous threats – which this appears to be.

 

Unfortunately, with tensions growing between North Korea and the US, threats like this one will be growing. The threat of a dirty bomb may be more prevalent than other types of risks to the US, and North Korea has a plethora of material that it could use to produce just such a bomb.

 

It will intensify the need for US Homeland Security to expand its ability to scan inbound cargo for potential radioactive material (which it does well today), but broadened to hit all US borders and territories.

 

Interestingly, this story didn’t generate any real buzz, nobody is really paying attention to it.  When an incident does eventually occur, unfortunately it will likely work like 9/11 – it will likely change our way of doing business.  Incidentally, the FBI did mention that it was “dealing” with the source of the intelligence – obviously trying to get to the bottom of the false threat warning.

 

 

 

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Business Intelligence Brief: June 16, 2017

Short Items of Interest – US Economy

 

  • Expansion of Apprenticeship Programs – For many years now the most consistent complaint from the business community has been lack of labor. The shortages in manufacturing, construction and transportation have been acute. The new Labor Secretary took over only a few weeks ago but has quickly settled on apprenticeship programs as the key to solving this problem. The approach has been tried before and there were grants awarded liberally during the Obama years and under most of the prior administrations. The key difference this time is that programs will be developed by industries and organizations as well as by schools and these programs will be accredited by the government so that the training is transferrable. There are those who assert this will mean less oversight but the business community is eager to get engaged in training that is relevant to their needs.

 

  • Investors Question Fed – There was always going to be a segment of the investment community that would oppose the hiking of interest rates – they are the ones that have been enjoying the good times of low borrowing costs. The rest of the community has been aware that at some point the rates have to go up and get close to what used to be considered normal. The challenge is timing. The Fed has been sounding quite aggressive of late and there are some who think this may be premature given the fact there has been no real inflation to speak of and the overall growth of the economy has been mediocre at best. Not that this trepidation is likely to slow the Fed – most expect rates to be going up again in September.

 

  • Cuban Opening Stalled – The US relationship with Cuba is beyond doubt one of the most complex in the world and that has long been peculiar given the tiny size of the island nation. During the Cold War the fascination was somewhat more understandable given the efforts by the USSR but over the last several decades it is hard to fathom except for the impact of émigré politics and the ideological challenges. The US under Obama started to open up to Cuba in anticipation of new leadership in that nation someday soon. Now these efforts have been halted by Trump and the US is likely to lose whatever influence it might have had with the next generation of Cuban leaders and it appears that both Russia and China plan to exploit this opportunity.

 

Short Items of Interest – Global Economy

 

  • Is al-Baghdadi Really Dead This Time? – This time it is the Russians who claim to have killed the leader of ISIS – Abu Bakr al-Baghdadi. In the past, it has been the Syrians and the Iraqis and even the US that have asserted that he had been eliminated. Thus far there has been no confirmation of his death and it is not at all clear that it would matter all that much to the ongoing conflict. He has been in nearly constant hiding for years and has been moving from location to location. It is apparent that he has little day to day control over tactics but he has been the titular leader and inspiration. His death would be a blow but hardly the death knell for the movement.

 

  • EU Gains Popularity in Europe – The European Union was shocked and angry at the decision by the UK to withdraw but there may have been a silver lining of sorts. Since the split, the popularity of the EU has soared in Europe itself – at least according to the polls. This new found support within the population may have been a big factor in blunting the rise of populist movements in France, Italy, Netherlands and elsewhere and now there are those who are seizing the opportunity to expand the reach of the EU.

 

  • Bank of Japan Stands Firm – There have been some signals that Japan has been starting to pull out of its slump but it isn’t happening all that quickly and the Bank of Japan is not ready to move away from stimulation as they have decided to keep rates at their historic low and continue to look for other ways to boost growth.

 

 

What is Going On With Trade These Days?

Trade between states has always been controversial – at least in some quarters. The basic idea behind trade is that two or more nations are buying and selling goods to one another because there is some kind of economic advantage to be had. The notion behind absolute advantage is pretty simple as one nation sells something to others that they do not have. The countries that have oil sell to those that don’t as an example. The notion behind comparative advantage is more complex and here is where the controversy begins. The goods and services traded are produced by both nations – or at least they could be. A country decides to buy those things that are better produced elsewhere – either because they are cheaper or better. Each country concentrates on producing what it does best and buys the rest from somebody else. Generally speaking the US is going to buy most of the cheaper consumer goods from somewhere else as it is not really efficient for the US to make t-shirts and sandals. The US manufacturers sophisticated goods like airplanes and road building equipment and sells these.

Unfortunately, the real world doesn’t work as well as the theory suggests. The US sells cars and trucks all over the world and US consumers buy cars and trucks from all over the world. The choice of what to import and export is in the hands of the consumer and the overall business community and the choice of where to make these goods will rest with the business itself. Hence the controversy. If a carmaker elects to take advantage of lower cost labor in Mexico the consumer is very happy as the cost of the vehicle is less but the people who once worked in the US to build that car or supply the parts are not nearly as happy.

 

Analysis: In the campaign last year, trade became a major issue as both candidates asserted that the US was being taken advantage of by other nations as they sold us far more than they bought. The trade deficit has been getting wider and wider and people who once made things in the US lost their jobs. At the same time the consumer was winning as these products cost less than they otherwise would. The Trump approach was geared towards making it harder to import and easier to export by imposing high tariffs on those imports. The companies in the US that made these products would benefit to some degree from the protection but the consumer would lose access to these cheaper prices.

The bottom line is that it is not possible to please everybody when engaged in trade. Bringing products from the rest of the world means intense competition for US companies as most of these other nations have lower production costs to work with. The consumer in the US saves somewhere between $5,000 and $8,000 a year as they are able to buy things cheaper. It becomes a battle between what is good for the majority and what is good for the minority.

At the moment, the trade relationship between the US and some of its more traditional partners has become strained. There is a desire to impose a 20% tariff on all goods coming from Mexico, a renegotiation of Nafta, a tariff on commodities and goods coming from Canada, withdrawal from the TPP, withdrawal from talks regarding a new trade pact with Europe and so on. It would seem that the US is bent on pursuing a far more isolationist and protectionist policy than has been the case in prior decades.

The reality is that these trade patterns are not that easy to disrupt and there have already been retreats from the more aggressive positions taken. It seems that not all products from Mexico will be subject to these tariffs as there have already been exemptions granted for things like cement and sugar. The Nafta withdrawal threat has changed to simply a desire to renegotiate parts of the pact. The US is out of TPP but elements of the agreement are already reappearing. The US has also elected to open up new deals with the UK and parts of Latin America. The situation is fluid to say the least.

What should US business assume about trade patterns in the years to come? Will there be countries the US will engage with more aggressively than others? Are there growth opportunities in some of these nations that will attract more US attention? The answer to all of these questions would be a definitive yes but it is not 100% clear which countries will provide that opportunity as politics will play as much of a role as will economics. In my estimation, there will be three countries that stand to gain the most attention from the US and will offer the greatest set of new opportunities.

The first and by far the most important is India. It has been predicted for years that India would emerge as a challenger to China but it always seemed that India would manage to get in its own way with a burdensome regulatory system and a host of infrastructure inefficiencies. These still exist but the impact is less than once was the case and India has modernized in many regions. It has been a leader in tech for years and that will only expand. Now the growth in India is faster than that in China and the Indian diaspora around the world has given them another major advantage. The US has never quite interacted with India as aggressively as they have with China but that is changing and the reforms that have been instituted by Narendra Modi have been intensely controversial but they have been effective in boosting growth.

The second set of opportunities will be in the United Kingdom. These are not as large and lucrative as those in India but the UK is a well developed and sophisticated nation that will be in a position to buy more from the US. While the US is likely to buy far more from India than it sells, the opportunity in the UK is the opposite. The Brexit decision has all but cut off the British from Europe and they will need new markets and new suppliers. The pound has been weakened and this will encourage US investment in the UK and will make buying from the British easier. The US will still find an export market because the British will have lost their outlets in Europe. The only real alternative for the British is the US and to a lesser degree the other Commonwealth nations like Canada, Australia and India.

 

Trade (continued)

The third set of opportunities is more of a region than any specific nation. The Latin American markets still beckon but they are different than the ones that demanded attention a few years ago. It is no longer Brazil as this state is now wallowing in recession and political chaos. Mexico remains a close trading partners but the enmity of the Trump team will be hard to consistently overcome. The nations that will likely see the expansion will be Colombia, Argentina and Chile. Each has advantages and disadvantages. Colombia has come a very long way from the days when the drug trade dominated but it remains a nation that is dependent on commodities like oil and farm output. Argentina has likewise come out of the cold now that Mauricio Macri has made peace with the global investment community. It is also a nation that relies on commodities but has a manufacturing base to work with as well. There are still holdover issues from the days of Kirchner/Fernandez. Chile is doing well but relies on copper and is still a very small nation.

Trade will remain very important to the US – it consistently relies on exports for 14% of the total GDP. The political attacks on trade will continue but the economic realities will dominate in most cases. The challenge is more intense than is usually the case but there has never been an easy set of trade relationships.

 

The “Other” Central Banks

The decision by the Federal Reserve was not at all unexpected and the markets had this hike priced in weeks ago. The real fun has been taking place in the other meeting rooms of the other central banks – especially that of the Bank of England. There have also been moves at the Bank of Japan and the European Central Bank. In general, the central banker are signaling a major shift in attitude and a move back to the core purpose of the central bank. The hawks are starting to become a factor again – after years of dominance by the doves due to the need to stimulate the overall economy.

 

Analysis: At the last meeting of the Bank of England three members bolted from the others and made their opinions clear – they are no longer willing to tolerate the inflation threats that have been building in the UK economy and they want to see rates go up. Not that they are calling for some massive hike that would send their economies reeling into recession but the commentary has changed in tone. Thus far there has not been any real sign of an imminent inflation outbreak and the fact remains that economic growth has been anemic in most of the developed states. The thinking had been that the British would continue to tilt towards stimulation given the uncertainty that surrounds the Brexit issue and the recent election but it seems that at least some of the decision makers are worrying about factors down the road.

The central banks are well aware that their decisions do not have impact automatically and rarely swiftly. There is always the response of the markets to consider and these are quick but shifts in the rates that banks charge one another have a slower gestation. If there is a desire to lend and expand it is going to take a while for higher rates to curb bank influence. The central bankers know that it will take some time to curb that enthusiasm and that means they need to anticipate inflation and act on it sooner than later. Waiting for inflation to become a major problem will mean the banks will be trying to catch up and they struggle to do this.

The Federal Reserve remains the most aggressive as far as rate hikes are concerned. The Bank of England is just starting to talk about this and the European Central Bank seems to be sidling towards a more hawkish stand but not in the immediate future. The fact is that economic conditions are not sending a clear picture at this point. There is no clear sign of an imminent inflation surge as commodity prices have remained under control and wage hikes have been spotty. This would seem to suggest that leaving rates alone would be a good strategy but there are also signs that economic growth has been picking up and that promises more of that inflation threat.

At the start of the year it seemed there were a couple of trends that could be counted upon. The first was that the US was going to grow and expectations were high. Now the US is mired in one political skirmish after another and those expectations are pretty clearly going unmet. At the same time Europe seemed to be teetering on the brink of a populist debacle with the success of people like Geert Wilders, Marine Le Pen and Beppe Grillo. Now in June that threat has all but vanished with their defeats. Europe now seems poised to grow at the same time the US seems to have lost its momentum. Does that mean higher rates in Europe and a stall in the hikes for the US? Not yet but the conversation has started to shift in that direction. The focus of attention has been on the Fed over the last several years but now it may be the turn of the ECB and the BoE.

 

The Black Owl Report – An Executive Intelligence Brief

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

 

Lots of Jobs I REALLY Don’t Want

The truth is that I really enjoy what I get to do for a living. When one is an opinionated kind of guy who dearly loves to inflict his worldview on others there is nothing quite like being able to make speeches and write as a vocation. Then there is the opportunity to observe the kinds of jobs that other people have and I am even more grateful. Just yesterday I encountered several people I would never change places with – not for a second.

As I dropped off a suit for cleaning it was a hot day – temperatures in the mid-90s. My guy at the cleaners pointed out that it was close to 110 degrees in the back of his shop. No way I could handle that heat and I am really glad he can! As I was stopping by the drug store to pick up various nostrums to combat advancing age I encountered two guys from a road crew. They looked spent but were still laughing and suggesting that they had better get their “heat legs” under them as it was only going to get worse from here. Every time I fly I am grateful I don’t have the job of gate agent or customer service. NOBODY comes to the counter in a good mood and prepared to enjoy their experience. In fact, the majority of those who work with the public are seeing us at our worst. I can plop into my seat on the airplane and clamp the headphones on. The flight attendants can’t and they get to work with the nitwits who have apparently never set foot on an airplane in their lives. Not a job I would ever want.

Hats off to those who do these jobs and even seem to like them (at least part of the time). My life would be much the worse without people who clean suits, repair roads and make the airplane arrive more or less when it is supposed to.

 

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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Container Shortages in Focus.  The Journal of Commerce ran an article today that focused on container shortages in parts of the country. A report, publicly available from the US Department of Agriculture shows the geographic regions where container availability is sparse, and areas where it is plentiful.

 

Those of you running supply chains, aluminum and steel producers, and transportation firms need to pay attention to this trend, because it is cyclical. A combination of factors is helping to create these shortages (primarily around Kansas City, Tacoma, Dallas, Denver, and Savannah).

 

First, Chinese manufacturers of containers are being forced to use a different type of paint to cover their units.  While they test and convert over to this new type of paint, production will likely suffer. That could create a temporary, but significant shortage in containers for the next 6-10 months.

 

Second, US grain activity across the country has been robust.  Export demand for those commodities have been strong and that has increased the number of containers being used for agricultural products.

 

Third, we have mentioned many times that distribution patterns in the US are changing as ports in the Gulf and along the East Coast are able to take advantage of an expanded Panama Canal. That change just took place last summer, so we are still seeing fairly new distribution trends – and we don’t know if these shortages are due to seasonal, cyclical, or “new normal” types of activity.

 

One of the areas of focus for the Trump Administration is to open up US exports to new foreign markets.  That’s great for the economy and companies love the opportunity. What we will witness as a result, is that there will be imbalances created in some markets as a result – and the national distribution system will need to adjust to it accordingly. It will just take time.

 

 

To get a FREE TRIAL go to www.armada-intel.com

 

Business Intelligence Brief: June 15, 2017

Short Items of Interest – US Economy

 

  • No Change in Industrial Production – This is not what had been expected and there is some concern that manufacturing has started to slow down after having been in growth mode most of the last six to nine months. There is no evidence of a real slide just yet but the sluggish behavior is a concern. Industrial production numbers in the US include the utilities and mining as well as the manufacturing sector and for most of the last six months the problem has been with the former as manufacturing carried the weight. Utilities are seeing more demand as the weather heats up and there has been slightly more demand coming from the energy sector. The slowdown in manufacturing seems to be centered in automotive and to some degree farm machinery.

 

  • Fed Rejects Trump’s Numbers – They are not alone. Very few analysts have any faith in the assertion the economy will be able to grow at a 3.0% pace this year or next for that matter. The consensus view is that growth will average around 2.0% and the Fed has it at 1.8%. Much of the 3.0% growth projection was predicated on being able to push through tax reform, repeal of the ACA, expansion of infrastructure repair and extensive deregulation. None of this is happening very quickly if at all. The sense that growth will be anemic for a long while is dominant and the 3.0% target will be impossible this year and only slightly more likely in 2018.

 

  • Fed Assessment of the Economy is Slow and Steady – The bad news regarding the US economy from the perspective of the Federal Reserve is that growth will be slow for the coming year and perhaps beyond – maybe even slower than the average over the last ten years. The good news is that this growth will be steady and reliable and the risks of a major recession are receding. The Fed has not exactly embraced the concept of “secular stagnation” but they have adopted most of the precepts and assumption. The US is not heading for disaster but the grindingly slow pace of growth is a problem all its own.

 

Short Items of Interest – Global Economy

 

  • Foreign Takeovers in Europe – There has been ongoing concern over the rash of hostile takeovers in Europe. The low value of the euro has made it all the more tempting for US companies and others to invest in these takeovers and then there is the pattern of buying companies in Europe in order to lower the tax obligations of the US buyer. The French President has now added his voice to those who want the EU to establish some authority over these takeovers so as to prohibit them in key areas. He has been joined by leaders in Germany and Italy and that makes these changes more likely.

 

  • African Drought Intensifies – Right now the UN is trying to feed some 8 million people in Ethiopia who are on the brink of starvation due to the expanding drought and that number is expected to double within the year. The agencies that are trying to react will run out of food and money before the end of the summer. This famine is already the worst in twenty years and if it continues to expand it will affect more people than have been affected since World War II. The rain is simply not coming and crops are ruined for the year.

 

  • Japan Passes New Terrorist Law – The new law is modeled on Britain’s “preparation for terrorism act”. It creates a new law against conspiracy and allows the arrest of someone accused of planning a terrorist act. The opposition sees this as an attack on privacy as these arrests will be based almost solely on surveillance and eavesdropping. The fear is that even the most casual and joking threat to “the powers that be” could be grounds for arrest and the potential for abuse is immense. On the other hand, the advocates point out that waiting for a crime to be committed puts many people at severe risk.

 

 

 

Why Aren’t Wages Going Up?

There are very few aspects of the economy that provoke more debate and angst than wages. The majority of people who are earning them are convinced that they should be getting far more than they are and every time the see their employer make a little more money they are of the opinion that largesse should be shared immediately with the employees. A few years ago, there was a movement in the business community called “open source management” and its goal was to educate the people working at a given company so that they could better understand what a company had to spend on and what the limitations are in business. The workforce is just one of the factors as far as budgeting – there are many other obligations ranging from taxes to the need to add technology to improve productivity.

The issue of wage growth has been top of mind for many as it would seem that these pay packets should be getting larger given the fact that unemployment rates have been hitting lows not seen since the recession started. Why have wages been stagnant and is this something that is likely permanent? The last time that jobless rates were this low the wage rate grew at close to 4% but today the wages are rising at an anemic rate of 2.5% at best and have been even lower.

 

Analysis: Why are wages not keeping up with the reduction in unemployment? Isn’t there a shortage of workers? We have been harping on this for months and it would seem that shortages of labor would trigger higher wages as employers seek to get the people they need. In fact, those sectors where there is a shortage of skilled labor have seen significant wage hikes as companies do have to pay a premium to get the people they need and they also have to pay their existing workforce more so that they are not poached by other companies. The problem is that most people lack these needed skills and can’t compete for these higher paying jobs.

There are at least three factors that have been holding wages back. These are not unique to the US either. In many of the developed states there has been a similar pattern of lower unemployment coupled with slower wage hikes. The first of these factors has been the slow progress as far as productivity is concerned. The output per worker has been stagnant and there has even been evidence of decline and that is perplexing at a time when companies have been keeping their businesses lean and mean from a hiring point of view. It has long been assumed that having fewer people producing the same level of output would boost productivity but the most recent period of layoffs and attrition actually cut into the ability of companies to produce. It turns out that asking fewer people to do the work done previously can only work for a short period before they wear out and productivity slumps. It has also been suggested that companies have not had enough access to credit to get the technology they needed to boost productivity. Whatever the reason the level of productivity has stalled and that has compromised growth and the ability to pay higher wages.

A second factor has been the limited pricing power that companies have had during this long period of very low inflation. The absence of even modest inflation gains over the last ten years has meant that prices have stagnated in most sectors. There have certainly been some price hikes but in general inflation has been very low. That has meant that skimpy wage hikes have been slightly less of a problem as prices remain stable but it also means that producers have been unable to scale up their revenues and profits and that limits the wage hikes on offer. There are certainly many high profile companies that have seen big boosts in both profits and revenues but the vast majority of small and medium sized businesses have not and these are still the dominant employers in the US.

The third factor is that demographics has played a role. The aging workforce has been an issue for a long time and now the transition is affecting wage rates. The older workers are often the better paid workers due to their longevity and skill set. As they retire they are generally replaced by much younger and less experienced workers who do not command the same wages and salaries of those that have left the workforce. The wages paid to these workers are substantially less than the wages of the people they are replacing.

 

Upbeat Fed Lays Out a Plan

The comments made by the Fed yesterday were as clear as they have been in a while and seem to lay out a plan for the remainder of the year. The conjecture at the start of the year was that rates would be hiked three times this year but after the first hike there was a sense that perhaps the rate hikes would accelerate a little. With the second rate hike of the year the Fed has indicated that it plans just one more and that it would likely be in September. The Fed also outlined the plan for reducing the size of its balance sheet – standing right now at around $4.5 trillion. This move would take precedence over another rate hike at the end of the year.

 

Analysis: The assertion is that the economy is growing steadily enough to significantly reduce the stimulating that has been part of the Fed’s mission for the better part of a decade. The reduction of the balance sheet will be accomplished through allowing the bonds to mature and electing to roll them off without reinvesting. This is essentially an attrition strategy designed to have the minimum impact on bond markets. There had been concern the Fed would try to reduce this overhang more aggressively by selling off the holdings as opposed to just letting them mature out. This may yet be a strategy to be pursued in future years but for the moment it doesn’t appear the Fed is in a hurry and the same goes for the interest rate policy. There is no real pressure from inflation at this point and that gives the Fed all the time it needs. The rates now are between 1.0% and 1.25% and that remains historically low. If there is another quarter point hike in September the rates will still be low – between 1.25% and 1.5%.

 

What Does the Brexit Look Like Now?

The whole issue of Britain’s role in Europe has been fraught with confusion and concern for many years and that chaos has intensified in the last year. There has always been a sense of distance between the UK and Europe and there has long been reluctance to fully integrate into what would be described as European culture. The UK was slow to join the Common Market in the beginning and never did become a member of the Eurozone. The “euroskeptic” has been present in both the Labor Party and the Conservative Party along with those that supported the EU. There is a widespread resistance to doing things the “European way” and that has always created tension within the business community as well as the voter. Despite this traditional enmity it was assumed the British would continue to support the EU albeit with reluctance and few really expected the voters to opt out the EU. Of course, this assumption was incorrect. Nobody really expected the Tories to lose a 25-point lead and end up having to form a weak coalition government but here we are. What does this mean for the Brexit talks now? There are those who now expect a hard Brexit and those who retain some optimism that a soft Brexit may still be possible.

 

Analysis:  The hardest version of the withdrawal would be a total divorce without any sort of agreement – Britain just tumbles out of Europe and retains virtually nothing from the relationship. This is considered an unmitigated disaster for the UK as well as Europe and most assert that economic growth would tumble in the whole region – perhaps enough to trigger a real recession in both the UK and Europe. The slightly less drastic version of a hard exit would be one that would involve some protection of citizen rights for both those in the UK and Europe but would have little impact on trade. This might preserve the right to work in other states and perhaps protect the ability to live in Europe if one is British. The next step up would be an agreement on free trade in goods but not in services. Right now, this is the most likely option as there are many in Europe who want access to the British market and certainly many in the UK who want access to the Europeans. The practicality of allowing trade in goods will prevail over some of the political objections but this will not protect the role of London as far as being a financial center.

The other options start to trend towards a softer exit and at the moment these seem less likely given the current political positions taken by the British as well as those in Europe. There could be some sort of customs union that would harken back to the days of the Common Market but this means that the British would lose some control over their tariff system and that would mean it would be harder to block imports from Europe. There were those who supported Brexit simply due to a desire to limit these imports into the UK. At the same time this makes the European market more accessible to the British and some in Europe now oppose this. The next step towards a soft exit would be a whole new trade agreement that would allow almost unfettered trade between the UK and Europe but that would mean Britain following European rules and being subject to the European Court of Justice when there were business disputes. That would be a step too far for the majority of the Brexit supporters and this option seems rather remote. A “true” soft exit would not be an exit at all as the UK would essentially capitulate and agree to all the rules of the EU – including the free movement of people and it was the immigration issue that really galvanized opposition to the EU in the first place.

 

Russian Sanctions

There is plenty of confusion these days over the US relationship with Russia and for that matter over the European relationship. For years the Europeans have been calling for the US to step up activity designed to sanction Russia over its invasion of Ukraine and the US has come under pressure as it has appeared that the Trump approach to Russia and Putin is far more tolerant than before. Now comes the Senate decision to step up these sanctions and the Europeans are upset. It seems that sanctions against Russia that will be detrimental to the Europeans are out.

 

Analysis: The issue at stake is the pipeline that delivers gas to Europe – Nord Stream 2. The plan in the Senate is to sanction work on this project but the Europeans want it left alone as this is what will ship more of Russia’s gas to them. It seems that sanctions are great as long as they hurt other nations and not Europe. The Trump White House has not backed the Senate plan fully either and there remains evidence that Trump has been trying to develop some kind of unique relationship with Russia. These sanctions are not likely to make that plan any easier to pursue. The bottom line is as it has always been. Russia is a complex nation and the US is as well. The two agree on some issues and disagree on others, most of all the two are rivals for influence in Europe and elsewhere.

 

The Black Owl Report – An Executive Intelligence Brief

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

 

Waste

This is an incredibly sensitive area for my wife. She just can’t stand wasting things. It pains her no end to throw away food and she works tirelessly to make sure that stuff that winds up in the fridge ends up on a plate and not in the compost. We recycle as much as we possibly can and she takes great pride in having very few bags on the curb on trash day (usually just one and it is mostly kitty litter as there is a limit to reuse). She takes home anything not eaten at the restaurant and we tend to save every scrap of something just in case we might need it someday.

Every time I fly I see things that would send her into orbit. The kid that takes one bit of a hamburger and throws the rest away. The gargantuan salad that ends up in the bin. I understand that places often serve too much and it is a little awkward to carry a “doggy bag” half way across the country but it still bugs me and especially her. She really does practice the “waste not, want not” mantra.

I suppose what amazes me the most is that after years and years of pleas to be frugal and to avoid waste there is still so much taking place. I turn out lights I am not using and don’t run water recklessly. It is no big deal but it seems that few have that orientation and that can be a little discouraging when one likes to assume that people understand the need to maintain some level of parsimony.

 

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

 

To get a FREE TRIAL go to www.armada-intel.com

 

 

Supreme Court Throws Out ELD Challenge – Be Ready.  Supply chain operators and trucking firms alike will need to get ready for the Electronic Logging Device Mandate, set to be enforced on December 18th.  A challenge to the rule that was brought as high as the Supreme Court was thrown out by the court.  Therefore, the Congressional rule will stay in place and companies will be expected to comply after December 18th. For background, Congress passed a rule that will mandate that every Class 8 truck (and perhaps other classes as well) have an electronic logging device (ELD) that keeps track of operating hours when a truck engine is running. It prevents the “forging” of logs that are kept manually today. There are a vast number of speculative impacts to the national supply chain because of this rule, which appears to now be more likely to be enforced at the end of the year after this Supreme Court decision.

 

We can focus on one of two camps – as it pertains to the impact of ELD’s on supply chain operations and cost moving forward. One camp believes that most trucking firms have already implemented the technology and steps have been taken to meet mandatory operating rules, and this will have very little impact on available capacity, operating costs, or supply chain costs. The rule is designed to enforce the 11-hour rule (which limits how many hours a trucker can operate behind the wheel of a big rig) and those adjustments have already been made.  This camp doesn’t believe that available capacity or transportation costs will change because of the ELD mandate.  However, there is another camp that believes that it could strip out as much as 20% of the nation’s trucking capacity.

 

In any event, even if you don’t operate a supply chain, there are a few business impacts that you need to take from this story.

 

  1. Transportation costs are going to rise faster, start building that in to your financial projections and budgets. Any company with a heavy emphasis on supply chain management will see their operating costs rise when the mandate is fully enforced.
  2. A large percentage of the trucking industry has not purchased the ELD’s (although a majority have). Still, there should be a significant boost to the ELD industry and ongoing maintenance and replacement units will become an ongoing source of growth for those companies. Look for a couple to emerge as dominant in the industry (especially those that can multi-task and perform a variety of functions to help the driver).
  3. Eventually, the ELDs will become like other technologies, and simply will come with a new truck. Look at the history of GPS devices for (likely) a similar model.
  4. There are many others.

 

There will be far more discussions on this as we move closer to the mandate deadline.

 

To get a FREE TRIAL go

Short Items of Interest – US Economy

 

  • No Change in Industrial Production – This is not what had been expected and there is some concern that manufacturing has started to slow down after having been in growth mode most of the last six to nine months. There is no evidence of a real slide just yet but the sluggish behavior is a concern. Industrial production numbers in the US include the utilities and mining as well as the manufacturing sector and for most of the last six months the problem has been with the former as manufacturing carried the weight. Utilities are seeing more demand as the weather heats up and there has been slightly more demand coming from the energy sector. The slowdown in manufacturing seems to be centered in automotive and to some degree farm machinery.

 

  • Fed Rejects Trump’s Numbers – They are not alone. Very few analysts have any faith in the assertion the economy will be able to grow at a 3.0% pace this year or next for that matter. The consensus view is that growth will average around 2.0% and the Fed has it at 1.8%. Much of the 3.0% growth projection was predicated on being able to push through tax reform, repeal of the ACA, expansion of infrastructure repair and extensive deregulation. None of this is happening very quickly if at all. The sense that growth will be anemic for a long while is dominant and the 3.0% target will be impossible this year and only slightly more likely in 2018.

 

  • Fed Assessment of the Economy is Slow and Steady – The bad news regarding the US economy from the perspective of the Federal Reserve is that growth will be slow for the coming year and perhaps beyond – maybe even slower than the average over the last ten years. The good news is that this growth will be steady and reliable and the risks of a major recession are receding. The Fed has not exactly embraced the concept of “secular stagnation” but they have adopted most of the precepts and assumption. The US is not heading for disaster but the grindingly slow pace of growth is a problem all its own.

 

Short Items of Interest – Global Economy

 

  • Foreign Takeovers in Europe – There has been ongoing concern over the rash of hostile takeovers in Europe. The low value of the euro has made it all the more tempting for US companies and others to invest in these takeovers and then there is the pattern of buying companies in Europe in order to lower the tax obligations of the US buyer. The French President has now added his voice to those who want the EU to establish some authority over these takeovers so as to prohibit them in key areas. He has been joined by leaders in Germany and Italy and that makes these changes more likely.

 

  • African Drought Intensifies – Right now the UN is trying to feed some 8 million people in Ethiopia who are on the brink of starvation due to the expanding drought and that number is expected to double within the year. The agencies that are trying to react will run out of food and money before the end of the summer. This famine is already the worst in twenty years and if it continues to expand it will affect more people than have been affected since World War II. The rain is simply not coming and crops are ruined for the year.

 

  • Japan Passes New Terrorist Law – The new law is modeled on Britain’s “preparation for terrorism act”. It creates a new law against conspiracy and allows the arrest of someone accused of planning a terrorist act. The opposition sees this as an attack on privacy as these arrests will be based almost solely on surveillance and eavesdropping. The fear is that even the most casual and joking threat to “the powers that be” could be grounds for arrest and the potential for abuse is immense. On the other hand, the advocates point out that waiting for a crime to be committed puts many people at severe risk.

 

 

 

Why Aren’t Wages Going Up?

There are very few aspects of the economy that provoke more debate and angst than wages. The majority of people who are earning them are convinced that they should be getting far more than they are and every time the see their employer make a little more money they are of the opinion that largesse should be shared immediately with the employees. A few years ago, there was a movement in the business community called “open source management” and its goal was to educate the people working at a given company so that they could better understand what a company had to spend on and what the limitations are in business. The workforce is just one of the factors as far as budgeting – there are many other obligations ranging from taxes to the need to add technology to improve productivity.

The issue of wage growth has been top of mind for many as it would seem that these pay packets should be getting larger given the fact that unemployment rates have been hitting lows not seen since the recession started. Why have wages been stagnant and is this something that is likely permanent? The last time that jobless rates were this low the wage rate grew at close to 4% but today the wages are rising at an anemic rate of 2.5% at best and have been even lower.

 

Analysis: Why are wages not keeping up with the reduction in unemployment? Isn’t there a shortage of workers? We have been harping on this for months and it would seem that shortages of labor would trigger higher wages as employers seek to get the people they need. In fact, those sectors where there is a shortage of skilled labor have seen significant wage hikes as companies do have to pay a premium to get the people they need and they also have to pay their existing workforce more so that they are not poached by other companies. The problem is that most people lack these needed skills and can’t compete for these higher paying jobs.

There are at least three factors that have been holding wages back. These are not unique to the US either. In many of the developed states there has been a similar pattern of lower unemployment coupled with slower wage hikes. The first of these factors has been the slow progress as far as productivity is concerned. The output per worker has been stagnant and there has even been evidence of decline and that is perplexing at a time when companies have been keeping their businesses lean and mean from a hiring point of view. It has long been assumed that having fewer people producing the same level of output would boost productivity but the most recent period of layoffs and attrition actually cut into the ability of companies to produce. It turns out that asking fewer people to do the work done previously can only work for a short period before they wear out and productivity slumps. It has also been suggested that companies have not had enough access to credit to get the technology they needed to boost productivity. Whatever the reason the level of productivity has stalled and that has compromised growth and the ability to pay higher wages.

A second factor has been the limited pricing power that companies have had during this long period of very low inflation. The absence of even modest inflation gains over the last ten years has meant that prices have stagnated in most sectors. There have certainly been some price hikes but in general inflation has been very low. That has meant that skimpy wage hikes have been slightly less of a problem as prices remain stable but it also means that producers have been unable to scale up their revenues and profits and that limits the wage hikes on offer. There are certainly many high profile companies that have seen big boosts in both profits and revenues but the vast majority of small and medium sized businesses have not and these are still the dominant employers in the US.

The third factor is that demographics has played a role. The aging workforce has been an issue for a long time and now the transition is affecting wage rates. The older workers are often the better paid workers due to their longevity and skill set. As they retire they are generally replaced by much younger and less experienced workers who do not command the same wages and salaries of those that have left the workforce. The wages paid to these workers are substantially less than the wages of the people they are replacing.

 

Upbeat Fed Lays Out a Plan

The comments made by the Fed yesterday were as clear as they have been in a while and seem to lay out a plan for the remainder of the year. The conjecture at the start of the year was that rates would be hiked three times this year but after the first hike there was a sense that perhaps the rate hikes would accelerate a little. With the second rate hike of the year the Fed has indicated that it plans just one more and that it would likely be in September. The Fed also outlined the plan for reducing the size of its balance sheet – standing right now at around $4.5 trillion. This move would take precedence over another rate hike at the end of the year.

 

Analysis: The assertion is that the economy is growing steadily enough to significantly reduce the stimulating that has been part of the Fed’s mission for the better part of a decade. The reduction of the balance sheet will be accomplished through allowing the bonds to mature and electing to roll them off without reinvesting. This is essentially an attrition strategy designed to have the minimum impact on bond markets. There had been concern the Fed would try to reduce this overhang more aggressively by selling off the holdings as opposed to just letting them mature out. This may yet be a strategy to be pursued in future years but for the moment it doesn’t appear the Fed is in a hurry and the same goes for the interest rate policy. There is no real pressure from inflation at this point and that gives the Fed all the time it needs. The rates now are between 1.0% and 1.25% and that remains historically low. If there is another quarter point hike in September the rates will still be low – between 1.25% and 1.5%.

 

What Does the Brexit Look Like Now?

The whole issue of Britain’s role in Europe has been fraught with confusion and concern for many years and that chaos has intensified in the last year. There has always been a sense of distance between the UK and Europe and there has long been reluctance to fully integrate into what would be described as European culture. The UK was slow to join the Common Market in the beginning and never did become a member of the Eurozone. The “euroskeptic” has been present in both the Labor Party and the Conservative Party along with those that supported the EU. There is a widespread resistance to doing things the “European way” and that has always created tension within the business community as well as the voter. Despite this traditional enmity it was assumed the British would continue to support the EU albeit with reluctance and few really expected the voters to opt out the EU. Of course, this assumption was incorrect. Nobody really expected the Tories to lose a 25-point lead and end up having to form a weak coalition government but here we are. What does this mean for the Brexit talks now? There are those who now expect a hard Brexit and those who retain some optimism that a soft Brexit may still be possible.

 

Analysis:  The hardest version of the withdrawal would be a total divorce without any sort of agreement – Britain just tumbles out of Europe and retains virtually nothing from the relationship. This is considered an unmitigated disaster for the UK as well as Europe and most assert that economic growth would tumble in the whole region – perhaps enough to trigger a real recession in both the UK and Europe. The slightly less drastic version of a hard exit would be one that would involve some protection of citizen rights for both those in the UK and Europe but would have little impact on trade. This might preserve the right to work in other states and perhaps protect the ability to live in Europe if one is British. The next step up would be an agreement on free trade in goods but not in services. Right now, this is the most likely option as there are many in Europe who want access to the British market and certainly many in the UK who want access to the Europeans. The practicality of allowing trade in goods will prevail over some of the political objections but this will not protect the role of London as far as being a financial center.

The other options start to trend towards a softer exit and at the moment these seem less likely given the current political positions taken by the British as well as those in Europe. There could be some sort of customs union that would harken back to the days of the Common Market but this means that the British would lose some control over their tariff system and that would mean it would be harder to block imports from Europe. There were those who supported Brexit simply due to a desire to limit these imports into the UK. At the same time this makes the European market more accessible to the British and some in Europe now oppose this. The next step towards a soft exit would be a whole new trade agreement that would allow almost unfettered trade between the UK and Europe but that would mean Britain following European rules and being subject to the European Court of Justice when there were business disputes. That would be a step too far for the majority of the Brexit supporters and this option seems rather remote. A “true” soft exit would not be an exit at all as the UK would essentially capitulate and agree to all the rules of the EU – including the free movement of people and it was the immigration issue that really galvanized opposition to the EU in the first place.

 

Russian Sanctions

There is plenty of confusion these days over the US relationship with Russia and for that matter over the European relationship. For years the Europeans have been calling for the US to step up activity designed to sanction Russia over its invasion of Ukraine and the US has come under pressure as it has appeared that the Trump approach to Russia and Putin is far more tolerant than before. Now comes the Senate decision to step up these sanctions and the Europeans are upset. It seems that sanctions against Russia that will be detrimental to the Europeans are out.

 

Analysis: The issue at stake is the pipeline that delivers gas to Europe – Nord Stream 2. The plan in the Senate is to sanction work on this project but the Europeans want it left alone as this is what will ship more of Russia’s gas to them. It seems that sanctions are great as long as they hurt other nations and not Europe. The Trump White House has not backed the Senate plan fully either and there remains evidence that Trump has been trying to develop some kind of unique relationship with Russia. These sanctions are not likely to make that plan any easier to pursue. The bottom line is as it has always been. Russia is a complex nation and the US is as well. The two agree on some issues and disagree on others, most of all the two are rivals for influence in Europe and elsewhere.

 

The Black Owl Report – An Executive Intelligence Brief

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

 

Waste

This is an incredibly sensitive area for my wife. She just can’t stand wasting things. It pains her no end to throw away food and she works tirelessly to make sure that stuff that winds up in the fridge ends up on a plate and not in the compost. We recycle as much as we possibly can and she takes great pride in having very few bags on the curb on trash day (usually just one and it is mostly kitty litter as there is a limit to reuse). She takes home anything not eaten at the restaurant and we tend to save every scrap of something just in case we might need it someday.

Every time I fly I see things that would send her into orbit. The kid that takes one bit of a hamburger and throws the rest away. The gargantuan salad that ends up in the bin. I understand that places often serve too much and it is a little awkward to carry a “doggy bag” half way across the country but it still bugs me and especially her. She really does practice the “waste not, want not” mantra.

I suppose what amazes me the most is that after years and years of pleas to be frugal and to avoid waste there is still so much taking place. I turn out lights I am not using and don’t run water recklessly. It is no big deal but it seems that few have that orientation and that can be a little discouraging when one likes to assume that people understand the need to maintain some level of parsimony.

 

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

 

To get a FREE TRIAL go to www.armada-intel.com

 

 

Supreme Court Throws Out ELD Challenge – Be Ready.  Supply chain operators and trucking firms alike will need to get ready for the Electronic Logging Device Mandate, set to be enforced on December 18th.  A challenge to the rule that was brought as high as the Supreme Court was thrown out by the court.  Therefore, the Congressional rule will stay in place and companies will be expected to comply after December 18th. For background, Congress passed a rule that will mandate that every Class 8 truck (and perhaps other classes as well) have an electronic logging device (ELD) that keeps track of operating hours when a truck engine is running. It prevents the “forging” of logs that are kept manually today. There are a vast number of speculative impacts to the national supply chain because of this rule, which appears to now be more likely to be enforced at the end of the year after this Supreme Court decision.

 

We can focus on one of two camps – as it pertains to the impact of ELD’s on supply chain operations and cost moving forward. One camp believes that most trucking firms have already implemented the technology and steps have been taken to meet mandatory operating rules, and this will have very little impact on available capacity, operating costs, or supply chain costs. The rule is designed to enforce the 11-hour rule (which limits how many hours a trucker can operate behind the wheel of a big rig) and those adjustments have already been made.  This camp doesn’t believe that available capacity or transportation costs will change because of the ELD mandate.  However, there is another camp that believes that it could strip out as much as 20% of the nation’s trucking capacity.

 

In any event, even if you don’t operate a supply chain, there are a few business impacts that you need to take from this story.

 

  1. Transportation costs are going to rise faster, start building that in to your financial projections and budgets. Any company with a heavy emphasis on supply chain management will see their operating costs rise when the mandate is fully enforced.
  2. A large percentage of the trucking industry has not purchased the ELD’s (although a majority have). Still, there should be a significant boost to the ELD industry and ongoing maintenance and replacement units will become an ongoing source of growth for those companies. Look for a couple to emerge as dominant in the industry (especially those that can multi-task and perform a variety of functions to help the driver).
  3. Eventually, the ELDs will become like other technologies, and simply will come with a new truck. Look at the history of GPS devices for (likely) a similar model.
  4. There are many others.

 

There will be far more discussions on this as we move closer to the mandate deadline.

 

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Business Intelligence Brief: June 14, 2017

Short Items of Interest – US Economy

 

  • Fed Will Hike Rates – For once this is not the real issue. The assumption is that the Fed will hike rates by another quarter point but after all the conversation that has been coming from the Board of Governors the markets long ago priced this move in. The real issue now is when the next rate cut will come and even more importantly, when and how will the Fed reduce its balance sheet. The betting is that the Fed will not try to do both at the same time and that will affect the policy choices made at the end of the year. The rates may go up again in September and December if there is any inflation pressure but if the price activity remains subdued the Fed may focus its attention on selling off its bonds instead. The hope is that the Fed finds a way to unwind slowly and without causing much consternation in the markets.

 

  • Wage Growth – The job situation should have been pushing wages up by now. The unemployment rate is as low as it has been in decades and that usually means that there is a shortage of available workers and with that shortage comes higher wages. The problem this time is that there are no available workers with the requisite skills to take the jobs that are being offered – regardless of the pay. Companies that offer good wages are not interested in hiring someone who will not be an asset for as long as 24 months. They want someone ready to contribute immediately. The wage hikes that are taking place are those that are being used to poach a worker from another company.

 

  • Tech Arrogance? – Uber’s CEO has become the latest in a long line of tech founders that have jeopardized their own company through their arrogance and inability to adapt to the demands of success. The same criticism that has been leveled at Travis Kalanick was once leveled at the founders of Google and Facebook and others. The fact is that start-up mentality is not always consistent with long term success and the majority of the successful transitions have been with an “adult” at the helm. Uber is under attack for its culture as opposed to its financial success. The tech world has long been seen as a “boy’s club” with the sophistication of a 10-year-old. The environment has been hostile to women and others and there is a demand environment that is hard for non-founders to engage with. Uber will change or it will vanish.

 

Short Items of Interest – Global Economy

 

  • End of Populism in Europe? – At the start of the year it was feared the populist revolution would sweep across Europe and alter the dynamics of the region forever. It looked very likely that Marine Le Pen would be the President of France, that Geert Wilders would be the PM of the Netherlands and that the Five Star Movement in Italy would be the kingmaker. There were surges in Germany with the AfD and the Austrians came close to putting a right-wing firebrand in the President’s office. Now these are all parties and movements in disarray as they have been rejected in poll after poll. Does this mean the threat has ended? Not by a long shot – the voters are still very angry and frustrated and will not give the leaders they picked all that much time to act.

 

  • Taiwan Loses Another Formal Ally – The Republic of China has lost another ally to the PRC and that leaves only twenty states with formal ties with the ROC. The switch by Panama was not a huge shock given the financial engagement China now has with the Panama Canal but this is still a high-profile loss for the Taiwanese. The economic engagement doesn’t change much though.

 

  • Iceland Sinks Back to Recession – The first quarter numbers for Iceland are as bad as they have been in the last three years and the central bank has reacted with a rate cut to boost the economy. The action is not expected to help all that much as the island is a boom and bust prone country. This is the second cut in as many months and seems to be a reaction to declines in tourism. The country sees a lot of tourists from the UK but that number has been eroding in the wake of the Brexit issue. The price of aluminum has also been a factor.

 

 

 

Credit and Productivity Linked Tightly

One of the most worrisome aspects of the slow growth period the US seems to be trapped in what has been the consistently low levels of productivity as defined by output per worker. The pace of productivity has been very slow and that has sapped the strength of the overall economic recovery. There have been many theories as to why this has been the case – everything from a slowdown in the adoption of technology to the lack of progress as far as the skilled workforce. It has been more than a little baffling as there have been developments that usually result in higher levels of productivity but this time these have not had the usual impact. As companies reduce the size of their workforce there is often an increase in productivity as fewer people are doing the jobs that were once performed by that larger staff. None of the ideas around productivity lags have been quite satisfying as far as explaining the recent stagnation. Now there is a new study that asserts that lack of credit may be a major factor in the decline.

 

Analysis: The recession was marked by the collapse of the credit and banking system – just as with the Great Depression the Great Recession was a financial sector crisis first and this is what triggered the greater crisis. The availability of credit was an issue from the start as banks had become dangerously overleveraged. The LIBOR rate soared and many of the world’s largest banks were in a state of extreme disarray. These banking crises have not ended as can be seen by the turmoil in Italy these days. Not only was there a credit crisis in the banks, the impact was felt in trade credit as well. The Credit Managers’ Index was showing distress as early as the middle of 2008 and steadily weakened through that year and into 2009. Companies of all sizes struggled to get access to normal credit and this inhibited much of the investment that might have boosted productivity.

The study from the International Monetary Fund holds that lack of access to credit resulted in significant reduction in the kind of investment that normally boosts productivity. Companies have not invested in technology to the degree they once did and there has been a dearth of training and education that would otherwise have boosted the output of the workers. Those companies with the weakest financial situation were also the ones that saw the least progress as far as productivity. Those that were more financially stable were also the ones that saw gains in overall productivity.

If there was one area that was starved more than others it was research and development. In most companies, this was the sector that saw the most severe reductions and in many cases the R&D efforts were abandoned altogether. The productivity gains vanished along with those cuts. The inescapable fact is that without attention to development of new products and techniques there is no real chance of progress.

In order to boost productivity now there will have to be more attention paid to credit access and to the need to bolster these neglected R&D programs and that puts more burden on the banks. The fact is that these investments can be risky as there is no guarantee these programs will bear fruit. The credit squeeze is basically over and there have been years of lower rates but this has not meant that lending has been aggressive and the credit markets remain tighter than they have been in the past due to stringent regulations seeking to ensure that there will be no repeat of the “too big to fail” debacle. This is a worthwhile goal but it has also inhibited credit growth and productivity gain.

 

“Good Shutdown”?

The notion that there is such a thing as a “good shutdown” was suggested in one of the Trump tweets and now that idea has been echoed to some degree by the Treasury Secretary. How can shutting down the government ever be a good idea given the millions of people who depend on the government for their livelihood? In fact, there is nothing good that comes from a shutdown and Mnuchin made that clear in his testimony as he pointed out the damage that act does to the status of the nation’s credit – in addition to the damage done to those who rely on government money.

 

Analysis: The issue is the way the debt ceiling talks proceed every year. The fact is that the US is the only major industrial state that handles its budget this way. It is akin to going on a shopping spree and then rushing home to cancel your credit card. If you do this you will end up in jail – not so for the good men and women of Congress. The time to decide what to spend on is during the budget process itself and at the very least at the point of appropriations, not after all the approvals have been made. Mnuchin is frustrated with the games and the posturing and seems to be saying that perhaps these legislators need a reminder of what happens when they take this too far.

A real shutdown would mean the credit rating of the US will fall and that makes all future borrowing that much more expensive. Millions of social security recipients would be denied their money, employees would be furloughed and contractors would not be paid. The impact would be significant and the anger generated would be overwhelming – perhaps enough that it would put some of those in Congress in danger of losing their job (interestingly enough, their pay is not interrupted in a shutdown). Mnuchin is not impressed with all this gamesmanship and has been imploring Congress to raise the limit before they break for the summer but there is very little chance of this. It appears there will be another cliff hanger in September and once again the US will be held hostage to the various demands and requirements of those who ostensibly represent the country.

 

China is Growing a Bit Faster but Concerns Remain

The IMF has released a somewhat more upbeat assessment of the Chinese economy but it has come with a warning that time is running out for the country to engage in the kind of deep reforms that will be needed. The majority of the growth that has been experienced in China has revolved around investment and debt. The result is that China is facing real bubbles as far as property values are concerned and an effort has been underway to restrain some of this. For the last few years the country has been propelling itself with government debt through a series of fiscal boosts and this has been accompanied by the investment surge in property. This has driven the value of housing to record highs and this makes many nervous. The banks lend to build the housing and they depend on that housing to keep ratcheting up in value to protect their balance sheet. A collapse in the housing sector would place these banks in real distress and quickly. This is the part the IMF wants the country to reform.

 

Analysis:  The fact is that China has been embarked on a massive restructuring of its economy since Xi Xiyang took power. His vision has been referred to as the “Chinese Dream” and it centers on the consumer. He wants to take a country that has been dependent on exports and foreign investment to a new system that relies on the consumer and internal demand. He is not happy with the fact that China remains dependent on foreign markets and that exports remain the life blood of the country. The transition to a consumer based society is not simple as it introduces a wide variation of consumer ability. The rich are gaining far more than the rest of the population and that presents ideological issues.

The Chinese government has been propping up the economy with wave after wave of stimulative budgets but this has created a major debt burden.  China is looking at a debt to GDP ratio of over 240%, far greater than the 110% that the US has been running. The situation is not sustainable long term and the Chinese know it. The IMF wants to support the transition from exports to some degree but they suggest that internal markets are stunted and distorted by all the public money.

The IMF has also been highly critical of the data that has been coming from China. It has been revealed that some of the provinces have been deliberately falsifying data and many others just don’t have the ability to collect accurate numbers. Specifically, the growth and employment numbers seem to have been manipulated to make things look better than they are. The outside analysts suggest that growth may be two or three points slower than is claimed and that would take China to perhaps 4% rather than 6.7%. Nobody really knows and even fewer have a sense of what the real employment situation is.

 

Eurozone Reforms?

There have been two reactions to the emergence of the populists in Europe. The first has been to challenge the whole concept of the EU and the Eurozone and this has been the position of those who have followed leaders such as Marine Le Pen and Geert Wilders as well as those in the UK that had been pushing for the Brexit. The other reaction has been to go full tilt towards an even stronger system in the Eurozone nations. The motivation for this latter position is that populists have been handed big defeats of late and that would seem to suggest that people want more rather than less from the European institutions.

 

Analysis: Lately the call has been coming from those states that have been on the periphery of Europe economically. The Spanish Economy Minister has suggested the currency system be greatly strengthened with the creation of a common treasury and that efforts be made to force labor reforms and pension changes on those nations that have been resisting the reforms. Luis de Guindos has been making the case that Spain created many of its own problems because of local politics and would have benefited from the intervention of the Europeans long before the crisis unfolded.

Needless to say, there is wide opposition to an even stronger EU and Eurozone from those of a more nationalist bent but many in the financial community have been supportive given the kind of challenges the region has faced in the last few years. The notion is that many nations have been unable to pursue the reforms they should to handle their financial situations due to local political constraints and therefore they need some outside entity to provide the impetus. The very fact that local politics has made these reforms hard is the reason that few will want to grant the additional power to the EU. Most of those who supported Brexit in the UK were reacting to the immigration issue but most in the business community had taken an opposition position due to the influx of regulations from Brussels that forced changes in the UK that were unwanted.

 

The Black Owl Report – An Executive Intelligence Brief

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

 

Lies and Damned Lies – No Statistics

Poor service is bad enough but when it comes with a side order of deceit the situation becomes intolerable. Yes, this is yet another travel rant. The episode starts with the fact the hotel is under renovation and is not offering even a fraction of what would normally be the case with a Hyatt. The check in process was annoying as they were unable to find my reservation – even as I pointed out that I had confirmed by phone earlier in the day. The system was in shambles and that comes with being open during the chaos. The other part missing from the hotel was room service. No big deal but I was tired and just wanted to eat a meal in the room and relax. There was nothing available other than a buffet downstairs so I called a Pizza Hut for a delivery. That is when the lies started.

I was assured that a pie was going to appear in about 30 minutes. After an hour, I called and was told that the delivery guy had a lot to do and it was on its way. Another hour goes by and no pizza. Then I note that I have a text on my phone stating that he tried to deliver and was unable to. I call the front desk and they confirm that no such attempt was made. Two and a half hours later – no food but lots of obfuscation and lying.

Just yesterday I listened to a very funny guy on the subject of branding and loyalty and service. These speeches are all somewhat the same and have a common theme. Service is everything in the service sector. If your company treats the customer with contempt and fails repeatedly to deliver, the future of that company is bleak. Yet, every day we get the kind of nonsense I got last night. Why would someone not deliver a pizza? Why would a store make no attempt to correct? It is a mystery but Pizza Hut just got slammed in a column that is read by at least twelve people that I know of!!!

 

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

 

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Not Sure What to Make of This.  We have talked from time to time about the Economic Policy Uncertainty Index.  It was built by economists from Stanford, Northwestern, and the University of Chicago and it takes a series of global geopolitical and economic actions and compiles it into an index.  That index has not always been a statistical predictor for recessions or even a period of significant uncertainty, but it took a significant shot upward yesterday and got our attention as a result.

 

In fact, this was the second largest daily increase since the index began prior to 1986.

 

We must relax a bit about what this means. There is less than a 5% correlation between this figure and something like the VIX (stock market volatility index).  They don’t always move hand-in-hand.

 

Further, if you look at the recessions (in gray) over the past 30 years, a spike or surge in the Economic Policy Uncertainty Index doesn’t even correlate to a recession.

 

But, if the index continues to stay higher, something is afoot. Where there’s smoke, there’s fire and with the index now surging to levels we have only seen one other time in the history of the index, we better all at least start sniffing around to see what’s afoot.

 

The St. Louis Federal Reserve Financial Stress Index has been going the other way. But, it’s difficult to see in the chart at right comparing the two, but the Economic Policy Uncertainty index often has led the St. Louis Fed Financial Stress Index in many occasions over the past 30 years. We know that the latter index has been accurate in predicting recession pressure in the past. So, we will watch to see if the St. Louis Fed Financial Stress Index follows the EPUI this year and shoots up with it.

 

Again, it seems odd to be bringing something like this up when there are so many economic metrics trending positive today. But, since our business is to try and give you as much early warning on changes in financial conditions, just know that one of our “listening posts” just went off.

 

At least for now.

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Business Intelligence Brief: June 12, 2017

Short Items of Interest – US Economy

 

  • When Does the Government Run Out of Money? – We know that the Treasury has essentially run out of cash already but has been able to manipulate the system day to day in order to pay the bills. The debt ceiling must be lifted soon or the government really does run short and will be unable to make good on budgetary promises. Whether this is before or after Congress leaves for its summer recess is the question and thus far Treasury Secretary Mnuchin has been less than forthcoming. The fact is that this process is always agonizing as everyone tries to extract as much as they can by using the threat of shutdown as leverage. Mnuchin wants an end to the games and is not giving out any details. This makes the investment community that much more uneasy.

 

  • Puerto Ricans Want to Become a State – For the fifth time the voters of Puerto Rico have expressed their desire to become the 51st state and no longer exist as a commonwealth. The vote was overwhelming with 97% expressing support for statehood. In the past, there have been those who pushed hard to be an independent country but there are few that have any interest in that option now. The financial crisis that has gripped the territory has made it clear what limitations exist under the current system and nothing short of statehood will fix things. The problem is that statehood is not up to the voters in Puerto Rico – this is the purview of Congress and there is no support at all for this move – especially given the extent of the financial burden.

 

  • Benefits Outpace Wages – Much has been made of the slow progress as far as wage gains are concerned. They have been going up but not all that quickly and the assumption is that they would, given the very low rate of unemployment. Part of the reason for these slow gains is that more and more compensation is now showing up in the form of benefits – everything from health care to retirement to vacations. In many cases there has not been more of these benefits – it is just that they cost more than they used to and that is particularly the case with health and retirement benefits.

 

Short Items of Interest – Global Economy

 

  • Fire Sale in India – If ever there was a good time to go shopping for bargains in India this would be it. The millions of shop owners in India are slashing their prices in order to get rid of inventory that will soon be subject to additional taxes. They would rather sell cheap than pay the inventory tax and this is causing a massive rush of spending but one that will come to a sudden end when the inventories are exhausted as there is no sign that anybody is planning to beef these back up in the future. Most buyers seem to know this pattern is emerging and are buying as much as they can possibly afford as they know there will soon be shortages and likely very high prices as these products become scarce. The Reserve Bank is trying to anticipate what this will mean as far as overall inflation.

 

  • Moroccan Stability Threatened – This country has been a star for many years – at least in terms of economic progress and even its cautious move towards democracy. This reputation is now under siege as the government has reacted to the demonstrations with mass arrests. The level of unrest is reminiscent of the “Arab Spring” protests and the country is not really prepared to respond. The motivation is that people think the reform efforts have stalled and many parts of the country are feeling desperate and left out. It is not clear what happens from here as the government has only limited ability to respond.

 

  • Qatar Tries to Reassure – In the wake of the intense criticism that has been leveled at Qatar, the country’s leaders are doing all they can to reassure and mollify. They have committed to the US military operations and have stated they plan to follow the policies of OPEC to the letter. This is a state that survives by playing both ends against the middle and is now in full damage control mode as it reacts to the assertions that it supports Islamic extremism.

 

 

 

Busy Week Ahead as Far as Data is Concerned

By Wednesday of this week we will know a little bit more regarding the state of the global economy – this will be the day for a wide variety of data releases from the US, Europe and Asia. Not that these will be definitive but it will provide some insight into whether some of the recent trends are holding and it will provide some policy direction in the face of some additional political turmoil. This is the week the Federal Reserve meets and is expected to hike rates but this is also the week the Bank of England meets and they will be reacting to some degree to the latest election in the UK, creating a hung parliament just as the Brexit talks begin.

 

Analysis: Retail sales figures will be released Wednesday and the expectation is that there will have been a 0.1% gain. This is not all that impressive given that April’s increase was 0.4%. The sense is that consumers have returned to their cautious ways to some degree but this is also the time of year that spending can ease a little in expectation of more spending once the vacation season really gets underway. The big losers have been traditional stores as they continue to see their consumers defect to the on-line option. The department store is dying and many analysts expect many more closures and bankruptcies in the months to come. The consumer got a break at the gas pump this month and that also contributed to the reduction in activity.

This reduction in retail activity has had some impact on inflation as well. In April, for the second straight month, the consumer price index showed a decline in year over year numbers. The 2.2% gain has the Fed somewhat concerned as it was the increase in inflation that had them confident in their intent to hike interest rates. Now it appears that the inflation threat is even more subdued than had been assumed. The commodity prices that often drive inflation have not yet been a factor and the impact of higher wages in some sectors has not been universally felt.

The big news for the week will be the meeting of the Fed and it is expected the rates will come up by another quarter point. The signals have been about as clear as the Fed can make them and there has been nothing to radically change the perception the Fed has of the economy at this stage – unemployment is down, inflation is slightly up and the growth rate is not impressive but it appears steady. The big question is what happens from this point. The consensus view was that rates would move up slightly in June and then again in September and likely again in December but that assumption was based on faster growth and higher rates of inflation. Neither of these two assumptions appear to be as accurate as they seemed a few months ago. Much will be made of the commentary that will accompany the Fed decision. There is also the Fed’s plan to reduce the size of its balance sheet – in 2008 it was a mere $800 billion but after three rounds of quantitative easing the level is close to $7 trillion and there has been conversation regarding how to get this back down. It is assumed the Fed will not try to both reduce the balance sheet and lower interest rates so comments on that strategy will inform expectations for Fed activity later this year.

In addition to the Fed watch there will be some anxious eyes cast towards the Bank of England. Once again, the British voter has upset the expectation of the pollsters and analysts and this has implications for the work of the BoE. There had been an expectation that monetary policy might start to tighten up a little as the British economy had started to show some signs of life despite the challenges of Brexit. Now all bets are off as the UK will be heading into these talks in a far weaker position than was once the case. The tenure of the Prime Minister is in jeopardy and there are even suggestions that Britain will face another election by the end of the year. This has the Bank of England staying connected to its loose policy and low rates far longer than they intended to. The same rumblings are being heard as far as the European Central Bank as they are likewise unsure what transpires between the UK and Europe now.

 

Future of Border Adjustment Tax in Doubt

One of the key planks for the new Trump plan regarding trade was the imposition of a new border adjustment tax. This is better described as changing the direction of an old tax as opposed to really creating a new one. Currently importers get a tax break due to the way that goods are classified and the plan would take that advantage away and essentially give it to the exporters instead. It was fought from the start by the retail community in the US as it would rack up the price of most consumer goods in the US. Needless to say, the consumers have not been a big fan. The opposition to the idea has been building in Congress and at the moment the sense is that this tax is holding up progress on the whole tax reform effort.

 

Analysis: The more conservative members of Congress (those who identify as part of the Freedom Caucus) do not like the thought of a big additional tax on the consumer as it is certain they will pay the bulk of this hike. The more moderate member of the GOP dislike the plan as it is likely to be ineffective in terms of boosting exports. The very fact that exporters will be getting a substantial tax break will tend to make the dollar that much stronger and a strengthening dollar will reduce whatever advantage the exporters might have had from the tax change in the first place. Right now, the plan remains intact and is being considered integral to the overall tax reform effort as it would be a good revenue source.  However, the opposition within the GOP is building and there is no support from the Democrats that would offset this internal Republican division. Most analysts assert that the plan will likely be sacrificed along the way in order to get some other part of the plan for tax reform in place. It is also an example of the power of the import community and the consumer. The big exporters have been running into the likes of Wal-Mart and Target and the consumer advocates and they have made their positions very clear.

 

Macron Set to Dominate in the National Assembly

It was just a few days ago that Emmanuel Macron was a President without a single supporter in the French legislature. He may have crushed Marine Le Pen in his landslide win but the fact remained that his brand-new party was without a single seat. The key to his ability to move the country forward would lie in his ability to sweep the other traditional parties aside in the elections for the National Assembly and after the first round of voting it seems that he has done exactly that. The polls show that over a third of the votes cast were for Republique en Marche or the other centrist party that had allied with Macron (Modem). If these first round victories are carried through into the second round, this brand new party will hold some 70% of the National Assembly with 400 seats. To govern without a coalition a party only needs to hold 290.

 

Analysis:  The traditional parties were severely trounced in the first round – all of them. The biggest losers will be the Socialist party and Le Pen’s National Front. The Socialists may see the number of seats held drop from 284 to 15. The National Front saw support dwindle to 13% and they may lose seats as well. More importantly the party is now sharply divided over what it should be in the future with one faction advocating a robust return to its anti-immigrant and anti-European roots while the other factions want to shift towards the center and take advantage of the disarray in the other right leaning groups. Several lessons seem to be learned at the moment and there will be major challenges ahead for Macron with this victory.

The most immediate lesson is that French voters are still angry and disillusioned with the political leaders they blame for the problems in France. Many of those leaders have not even been able to defend their seats in the National Assembly and have been kicked to the curb. The voter had a choice in how to express this frustration – they rejected the bitter and angry invective of the far right and have embraced the hope and optimism of Macron but that puts immense pressure on this government as these changes will not be easy. The situation in France is not entirely in French hands. The economic struggles are as much a reflection of the recession that has gripped all of Europe as it is French policy. The global economy is far from healthy and that makes French progress tricky. Social issues will not heal automatically and the terrorist threat will certainly not go away. Expectations will be very high and voter patience will be very limited.

The Republique en Marche is completely untested and barely united. The majority of those who ran under the banner of the new party are new to politics and certainly to each other. They all have their own ideas as to what to do next and they are coming from a wide variety of perspectives. Macron attracted the center left and the center right. He has supporters from the business community attracted by his tenure as an investment banker and he has support from those who supported the Greens in the past. He has rural supporters who want to see their protections remain in place and he has support from the immigrant community. Can all this disparate groups be satisfied and quickly enough to boost his status? He is a planner and a strategist but it remains to be seen whether he is a politician or a diplomat.

 

Meanwhile – Back in Italy

The landslide victory for Emmanuel Macron in France is having some impact in Italy and elsewhere in Europe. It was just about a year ago that analysts were predicting a landslide of populism that would sweep the traditional parties out of power. At that point, it seemed certain that Geert Wilders would hold power in the Netherlands, that Marine Le Pen would end up leading France and in Italy it seemed that the Five Star Movement was ascending fast. Today it is a far different narrative as Wilders finished worse than expected and Le Pen appears a spent political force for the moment. In Italy, the party created by Beppe Grillo may have already peaked if the results of the latest municipal elections are any indication. The voters are rejecting the Five Star Movement all over Italy and even Grillo had a tough time defending his position in his home region.

 

Analysis: The intent was to use success in these local polls to springboard to a national role but now that seems less likely. The polls suggest that positions taken by the party are not as popular as once assumed. The desire to follow the British example and leave the eurozone is not popular at all now that people are seeing what this has done to the UK. There is less support for the anti-Nato position and more support for the policies that have been proposed by the center left. The polls suggest that the Five Star Movement is now in a dead heat with the center left Democratic Party and they were 10 to 15 points ahead just a few months ago.

The Black Owl Report – An Executive Intelligence Brief

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

 

The “Joy” of Traveling

You are expecting a rant on the airlines aren’t you? Maybe some nasty commentary on poor service or a huffy observation about those whom I share planes and airports with? Hah – It is none of these – at least this time. I am now referring to the delights of disease and the threat of insect and animal encounters. This is a commentary provoked by a story of an outbreak of Legionnaires disease in the Rio hotel in Las Vegas – the same hotel I was staying at a few months ago when attending a conference. Delightful. It seems that the disease was spreading at about the time I was there but as far as I know I suffered no ill effects. This is a disease that gets spread from the presence of the bacteria in the air conditioning system and causes pneumonia-like symptoms in victims.

I have been lucky to stay in places that are pretty well maintained and have not been the victim of bed bugs or other lovely creatures. The fact is that travel is not all that good for one’s health. You get stuffed into a giant disease incubator with 124 of your closest friends and get to breathe all the air they just expelled. I am always thrilled to sit next to the next Typhoid Mary. The airports are full of threats and so are the hotels and the meeting rooms and the like. That is just the world we live in. I take the usual precautions of washing hands and being careful where I put my suitcase. I also wear my hazmat suit on the plane and erect a plastic bubble around my bed in the room – or at least I think about doing this at times. Thus far I have managed to stay pretty healthy and the most dramatic roomie was a small snake that had gained entry through the sliding glass door at some point and had been evading notice. It seemed to be more relieved than I was when I captured it and escorted it back to the wilds outside my room.

 

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

 

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Musings from Wedding Week – This was a busy week for geopolitical events. For instance, we had a devastating UK election for the May Administration – making it tough for Theresa May to get a lot done in parliament.  Although this may seem like a challenge and a huge event for the UK, it won’t have a lot of impact on US business conditions in the near term – outside of the exchange rate between the pound and dollar. But even that will settle down in time. There was also the entire focus and attention being paid to the Comey testimony.  Although this is dominating the news, it really doesn’t have a lot of bearing on the business community or the national economy – unless it ultimately ends up doing something to the Trump Administration. At this point in time, that doesn’t look to be the case.  So, business and life…goes on.

 

As I sit here, I’m writing from Corpus Christi, Texas, just hours before my daughter gets married this weekend. I’m struck by how much “life goes on” in communities like this around the country – and I thought coming into this week just how little people pay attention to global events happening around them.  That’s what I find when I move through business communities around the country – many people that I strike up conversations with don’t care about politics, economics, or the latest in global news.  But it was different here. If you talk to the average beachgoer, or person standing around waiting on a fast food meal, they know quite a bit about the top headlines from around the world.

 

I went on a fishing trip this week with 9 people (part of the wedding week festivities), and during the day while in the intercoastal area, I was actually surprised how many times someone would check their phone and ask me if I had heard the latest on a specific bit of news. I would guess that it was just because they know what I do for a living, and they wanted to impress me or show that they were up to the challenge; but they knew a lot more about world events than I had expected.  It dawned on me that this is partly because of the area, and what makes it tick. This entire region has its livelihood tied up mostly in the petroleum sector. You either work directly in the petroleum sector here, or your job is influenced by people that are directly tied to it. Even local tourism is impacted to a degree by the amount of money flowing into the local community.  When petroleum firms invest in people, help pay for infrastructure, fund city services and spending, pay strong wages so that people can afford fishing boats and houses on the bay, etc.; the local community thrives. And, the locals know it. This area and the livelihoods of its citizens are impacted significantly by the ebbs and flows of the petroleum sector. History has taught many people here (and made them wary) about what can happen to them by influences outside of this region and completely out of their control. OPEC can make a move, and workers around here suffer layoffs (at least in the past it had that type of impact).   So, they are more sensitive to it around here. Watching how they consume news, however, made me think about corporate media control and the importance of controlling your message.

 

Business Intelligence Brief: June 9, 2017

Short Items of Interest – US Economy

• Household Net Worth Reaches Record Levels – The net worth of the total of US households has reached $94.8 trillion after a surge of $2.3 trillion in the first quarter of the year. The jump is attributed to two prime factors and both can be volatile. The performance of the stock market has been the most important as the markets have been hitting records over and over again. The other contributor has been the price of homes as they have been rising steadily and in almost every part of the country. This is good news for the consumer today and should provide most people with more financial security but the caveat is that these factors can change very quickly and gains can be replaced with losses as we all saw in the recession period of 2009.

• Shifting Alliances – There has been more reaction to the foreign policy statements that have been coming from the Trump team. South Korea has been quite publicly tilting towards China since the election of Moon Jae-in. To be fair this tilt has less to do with the US and more to do with the positions that Moon has long taken. He has ended the missile defense deal the US has with the previous government in Seoul and he has rejected any suggestion of further sanctions against North Korea and it is expected that he will want the US to reduce its military presence. He has also started new fights with the Japanese. His relationship with Trump is hostile and that doesn’t bode well for future cooperation.

• Roll Back of Dodd Frank Starts – Along mostly party lines the House has passed the Financial Choice Act which is designed to adjust and alter the Bank Reform Act passed in the aftermath of the financial crisis. The bill now goes to the Senate and it is expected that some of the provisions will be altered again. The major changes will affect the newly created Consumer Financial Protection Bureau, ending the use of the Volcker Rule on what banks can do as far as investment and there will be changes to how banks are expected to unwind from obligations. The small bank community remains frustrated that changes they want have not appeared.

Short Items of Interest – Global Economy

• Faster Growth in the Eurozone – The latest revisions of the Eurozone GDP numbers show that the region grew quite a bit faster than had originally been reported. The growth over the last quarter of 2016 was 0.6% as opposed to 0.5% and the year over year gain from the first quarter of 2016 was 1.9% as opposed to 1.7%. This is the fastest pace of growth since 2015 and this has many analysts optimistic about how the year progresses from this point. Even better news is that much of the new growth seems to have come from France and even Spain.

• Labor Party Exults in Showdown with Tories – It would have been nearly out of the realm of possibility for the Labor Party to win outright in the election but a hung parliament is nearly as good. Not that the Labor Party really gains any power – they remain in the minority but the Tory decision to unite with the hard right in Northern Ireland makes the next election an even more challenging one for the Conservatives. Labor is stronger but still has to be content with being the critic.

• ECB Rejects a Rate Cut but QE will Continue – The European Central Bank has elected to split the difference as far as policy is concerned. There were those who asserted that the ECB should cut rates but the leaders feel that growth has been strong enough of late to avoid that. On the other hand, the decision was made to continue with quantitative easing as the southern tier states still need all the help they can get.

Congress and the Economy

The business community is not unaccustomed to uncertainty – that is the nature of competition. One never knows what the consumer is thinking and there is never certainty as far as the reaction of competitors. Natural disasters can upset supply chains and there are numerous upstream and downstream developments that can upset the most carefully planned strategies. Then there is the uncertainty that is delivered by the good men and women who are ostensibly governing. The decisions and the lack of decisions from Congress can radically alter the development of the overall economy and this is vexing at several levels. The first is that most of these issues should be easily resolved if the intent is to bolster the growth of the economy and secondly the fights are far less predictable than other business influencers as there is political logic at work as opposed to economic or business logic.

Analysis: The US is headed for another of these political fights that will influence the progress of the economy and it is over an issue that has been hashed and rehashed over and over again. The US is once again facing a debt limit. Years ago it was determined by Congress that setting a limit to the amount of debt the US would be allowed to take on would be a good way to impose budget discipline. The debt ceiling was established but it was permitted to exceed it if there was a vote by those in Congress that set the limit in the first place. Few other nations in the world have anything like this system as it tends to be an after-the-fact solution. Other legislatures attempt to control budgets as well but generally do so at the time the budget is created or at least at the point when appropriations have been made. The US is somewhat unique in that the budget and the appropriations process is allowed to proceed and then the debt ceiling kicks in and the US is not allowed to borrow the money needed to finance these decisions. This is the main reason that business is so uneasy about the situation. The Treasury department is put in an impossible situation as Congress sets the tax policy and requires Treasury to spend money while denying a move by Treasury to make up the difference with borrowing.
Those companies that are doing business with the government (and there are tens of thousands of them) have been told to perform their assigned duties but are not sure they will be paid. The millions of people who receive money through Social Security or as employees are not sure they will get that money on time. In the past Congress has always buckled and allowed the ceiling to be raised but not after extracting as much leverage as possible and taking the process to the last possible moment. In 2011 the government was just two days away from formal default and that caused rating agencies to downgrade the value of US treasuries – an action that cost the US billions of dollars. Employees were furloughed and payments were halted to contractors and the economy suffered for at least two quarters.
The government ran past the current debt ceiling limit in March and has been paying its bills with various cash management schemes but this tactic has about run its course and the country is facing another last minute crisis that has been self-generated. Treasury Secretary Mnuchin has called for the debt ceiling process to end and for the US to work out its budget strategy at the time of the budget process and he is not alone as all the past Treasury Secretaries have asked for the same thing. The economists who assess the future of the US economy have downgraded growth projections because of this latest wrangle and this is the first time they have been leaning in that negative direction since the start of the year.

 

Changes in Labor Department Policies

The new head of the Department of Labor is Alexander Acosta and he has been busy looking at the various labor regulations and policies that had been established in the Obama administration. Acosta was on the NLRB under Bush, has been an Assistant Attorney General for Human Rights and a Federal Prosecutor. He has been a long time Republican but had no ties to Trump prior to his appointment. He has pushed some changes the business community favors and has left other provisions intact. He has also suggested a new set of priorities for the department when it comes to developing the workforce that many in business have been demanding for many years.

Analysis: The expanded overtime rules that had been part of the Obama plan will likely be abandoned in a return to the old system. There will be a revamp of the system that defined how employees would be treated when they have multiple employers. There are likely to be fewer policies that focus on low wage workers except in terms of helping them get out of these low wage jobs. The plan is still in development but the stated goal is to bolster the vocational training opportunities in the US.
There will be attempts to approve and accredit more vocational programs and schools and this is expected to include the programs that many companies have established to train their own workers. Right now, a worker that goes through training at a given employer can’t carry that education to another employer as the skills developed have not been formally recognized or certified. That might change. There will be efforts to expand apprenticeship programs and that would likely involve the unions as they are the entities that handle the majority of these programs now. Most importantly there is a conversation underway as to how to pay people to get this education. The majority of those who need this additional skill development and training are older and have family responsibilities and can’t just quit work to get an education. In many nations, these trainees would get some sort of stipend or the company that hired them would get a tax break for the period the workers are in training. Both of these ideas are on the table at the moment.

 

Hung Parliament in the United Kingdom

The Conservative government of Theresa May is in disarray and that may be a prime example of British understatement. A few weeks ago, the Prime Minister decided the time was right to call for a snap election designed to strengthen her position as the Brexit talks with Europe were to begin. At first this seemed a wise call as the polls showed the Tories had a commanding lead and the majority of analysts thought they would pick up seats in Parliament and give May much more security in her position. That this strategy was flawed became increasingly obvious with every passing day as that lead vanished to the point that most called for a dead heat between the Labor Party and the Conservatives. Today the UK has the worst possible outcome as far as projecting unity is concerned. No party has a majority in Parliament now – the Conservatives lost seats and lost their majority position but Labor didn’t gain enough to become the majority either. There is no majority with Tories holding 318 seats and Labor holding 261. To govern alone a party needs 326 and that forces the Tories into forming a coalition with a smaller party or two. The consensus view at the moment is that the coalition will be between the Tories and the right wing Democratic Unionist Party of Northern Ireland.

Analysis: Suddenly the DUP has immense influence and power – all ten of them. They are the more hardline of the two pro-British parties in the region and they differ from the Conservatives in some significant ways. They lean to the left when it comes to public spending and would likely demand more money for their region. They are far more socially right wing with strong positions on gay marriage and abortion (they are against both). There is an intense dislike of Jeremy Corbyn due to his previous support for Irish nationalism but the majority of the Tory party also dislike the Labor leader for a variety of other reasons.
The electoral map shows just how divided the country is and that makes reacting to Brexit and other challenges that much harder. The Labor votes were in the cities and in the industrial north while the Conservatives held sway in the southern parts of England and in the more rural areas. The Scots voted for their own Scottish National Party and the Welsh voted for Plaid Cymru. The party that received the worst news was likely the Liberal Democrats as they polled badly throughout the country. It was only a few years ago that the LibDems would have been the coalition partner that would be able to put either Labor or the Tories over the top. Now they are an afterthought and only polled well in parts of Scotland.
Many in the Tory party have called for Theresa May to resign in the face of this defeat but many others are well aware that there is no natural replacement for her at the moment as the party remains deeply divided. The sense is that the UK has to salvage some kind of unity when it starts to deal with the European Union. The bigger question is how the new government plans to address the frustration of those that supported Labor. The economic situation motivated a lot of this vote and by all accounts that economic situation is going to get worse now. The pound has fallen sharply and estimates of economic growth are ratcheting down again.

 

Meanwhile in France

The win by Emmanuel Macron was not entirely unexpected as he held a commanding lead in the second round polls but his emergence as the winner of the first round was shocking given that he had no political party to back him. His first order of business as the new President has been to create that party and his new organization has been swiftly pulled together to contest every seat in the National Assembly. The big question has been where his support will come from. Will he pull from those who supported the Socialists as he was once one of them? Would he pull from the center right? Would people who had not supported anyone before be attracted to his outsider status?

Analysis: Thus far his party seems to be pulling people away from the National Front and it appears that Marine Le Pen’s significant loss is costing the NF a great deal of momentum. Some of the longest serving members of the NF are behind in the polls and look to lose to those who are supporting the Republique en Marche! – Macron’s one year old movement/party. One of the interesting tactics embraced by the Macron team has been to recruit fellow outsiders to run and to choose people with celebrity and fame in their own right. The collection running on Macron’s ticket includes actors, football players, models, TV personalities and the first female bullfighter in France. There are also veteran politicians from the left and right who have joined along with intellectuals and business leaders. They have managed to capture the support of those who have grown tired of the usual status quo. At least Marie Sara will be prepared to deal with the usual output of the politician better than most

The Black Owl Report – An Executive Intelligence Brief

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

A Lot Happens in a Week

If left to its own devices the yard would soon swallow up every vestige of my home and make it appear that we were driven from it years ago. We were only gone a week and it has tried to revert. Weeds have formed gangs and have acquired weapons. Animals are taking up residence and have had cable installed already. The plants that we wanted to grow apparently went through some kind of period of mourning and decided that they should expire from neglect. It is astonishing.
It is also interesting when people stay at one’s home. We had Karen’s nieces staying so they could look after the cats and the house in our absence and they did a fine job but the routines differ. All five cats were befuddled and all five were as clingy as could be when we came back. Spike was upset because nobody knew the importance of the cardboard box in my office and Scoot was upset because nobody was writing at my desk and she had nothing to supervise. Snip didn’t get her usual combing and Smokey was puzzled by the lack of TV time. Even the new guy was perplexed but he adapted and did his best to demand food at 4:00 AM.
They did a great job of keeping the place neat but it took a while to figure out where things went and why certain lamps had been unplugged. We felt like the Three Bears trying to figure out who was sleeping in which bed. I am gone a lot but Gay generally holds down the fort and without her, chaos begins to reign. Good thing we are finally home.

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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Armada Transportation Demand Index Mixed in May. Our transportation demand index followed many of the same trends and paths that we have seen in other economic metrics of late. We saw monthly sequential trends that were disappointing, but year-over-year metrics were very positive. The composite index fell by .6% month-over-month in May with the primary index falling from 51.0 in April to 50.7. However, it jumped by 5.4% year-over-year against May of 2016. As in other diffusion indexes, a reading above 50 is considered to be indicative of expansion, below 50 is contraction.

Knowing that transportation equally covers both inputs and outputs into just about every corner of the economy, It’s a bit worrisome that it slipped backward in May, and nearer to contraction. Breaking down the sectors, rail came in higher in May, rising to 50.2 in the index. That was 1.6% higher than the April reading and the only sector that saw month-over-month improvement. Year-over-year, the index was up 7.9%. That’s interesting because the AAR has total carloads up about 6.5% YTD over levels seen in 2016.

Trucking was not as strong. The trucking index was down .4% month-over-month, but remained in expansion territory at 50.8. Year-over-year, trucking demand was up 5.2%. We know that the spot trucking market is up, capacity is steady, and pricing is inching up higher. But, with manufacturing being a bit slower in May, that will have a near term impact on conditions.

Air Cargo is still our strongest metric in the index. At 55.0, it is showing the most expansion strength among all of the sectors. Obviously, parcel activity is going to be driving this demand above all other factors at this time. The index was down just slightly month-over-month in May by .1%, but was up 13.7% year-over-year. That also closely resembles the growth rate we see in e-commerce sales activity – interestingly.

Lastly, maritime activity was down .8% month-over-month, but was higher by 7.7% year-over-year at 53.2 points. Some of the readings we have been getting from China, especially the news that manufacturers are slowing down their building of raw materials in recent months tends to play into the sluggishness trends that we see in the index.

We haven’t flipped the index to see what it would hold for predictability – that’s coming. Our hope is that we can get it to look 2-3 months forward to help us figure out what is coming. Again, transportation can be one of the best forward-looking metrics to follow.

 

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Business Intelligence Brief: June 8, 2017

Short Items of Interest – US Economy

 

  • Training Initiative from White House – The Labor Department has been working on the development of a training initiative for some time and the plan now seems ready for prime time. The lack of workers to take the positions on offer has been a major and developing problem for years but there has been little done to address it. The plan as it is understood at the moment is designed to expand apprenticeship programs, speed up the accreditation of various vocational schools and find ways to help students pay for this kind of education. The challenge is that many of those who most need these opportunities are older and they have significant expenses that require them to make a living – leaving little time to attend traditional programs and schools. At some point, the on-the-job training opportunity has to be expanded.

 

  • Jobless Claims Drop Again – For several months the rate of new claims for jobless benefits have been falling and that has been an encouraging trend as far as employment is concerned. There are two aspects of importance as far employment is concerned. The first of course is that hiring needs to take place but if there are also lots of lay-offs the employment picture doesn’t much improve. The good news is that business is not firing people and instead there seems to be a focused effort to retain the workers that these companies have. The wage rates have risen a bit simply because companies are either offering more money to people to switch jobs or they are paying existing workers more in order to hang on to them.

 

  • Canada Plans Significant Military Expansion – Canada has indicated that it plans a 73% increase in its military spending over the next two decades. If this plan is put in place it will bring spending to about 1.4% of the national GDP and closer to the 2% level that has been suggested by Nato. The Canadians are concerned that the US may withdraw from areas that matter to Canada – most notably the Arctic where Canada and Russia have conflicting claims. The sense is that Canada will have to be more concerned about its own defense and less reliant on the US or on Nato itself.

 

Short Items of Interest – Global Economy

 

  • Is Real War Imminent in the Middle East? – There are real fears that things are starting to spin out of control in one of the most volatile regions of the world. The Saudi Arabians have opened an overt attack on Qatar and they have been joined by many other Sunni nations. Right now, the war us diplomatic but that may not last. The Islamic State attack on Iran has been attributed to the Saudi government by a furious Iran and the tensions between the Sunni and Shiite have rarely been so intense. In the past, the US tried to exert pressure to keep things calm but Trump has sided overtly with Saudi Arabia and that has emboldened the Sunni to be more aggressive towards the Shiite. This could get very nasty and very quickly and we could all say good-bye to low oil prices for a long time.

 

  • Japan Downgrades GDP Growth – The GDP numbers that have been released in Japan indicate that growth was not quite as robust as originally thought. The good news is that Japan is still growing and avoiding the curse of further deflation but the bad news is the consumer is not as engaged as was originally assumed. Exports are doing well but domestic spending is not propelling the economy forward as had been hoped.

 

  • UK Elections in Dead Heat – The British are at the polls today and the Conservatives are expected to eke out a very narrow victory but will doubtless lose seats in Parliament to Labor. The voters are still undecided in many respects and there are pollsters who are hesitant to declare an outcome with the memory of Brexit fresh in their minds. The May tactic is not panning out as expected as she thought the snap election would strengthen her – now it seems she will be weaker and could be dealing with a hung parliament if there are defectors from the party in the days ahead.

 

 

 

Report from the Manufacturing Front

Each month we assess a series of data points that are of interest to the manufacturing community for two organizations that are heavily engaged in the metal sector – the Industrial Heating Equipment Association and the Chemical Coaters Association International. Both sets of companies are engaged in treating metal – with heat or chemically. They are engaged with the wide assortment of operations that use metal and have a broad interest. What follows is the executive summary and some select sections of the report. If this whole report is of interest to you – just send an e-mail to me, chris.kuehl@armadaci.com .

The economy is seemingly caught in a wait and see pattern and this is not all that unexpected. We all remember the wild enthusiasm that greeted the first of the year – the “animal spirits” referenced by the market as there was an anticipation of great things to come. The Trump promises were beckoning and there was an expectation that big changes would soon arrive in areas like health care, regulation, taxes and economic growth through infrastructure investment. Then reality started to set in as the lack of consensus on what to do became obvious. Trump has been spectacularly ineffective as a political driver as he has been unable to unite the GOP much less bring the Democrats he needs along. The whole reform process has stalled once again that has created a sense of caution and disillusion. That said, the manufacturing and general business community has been trying to plunge ahead anyway and the consumer is now starting to come out of their shell a little. The result is a mixed report from the index this month – five of the measures are positive and seven are trending in a negative direction.

The data on New Automobile/Light Truck Sales is slightly down but it has not been a crash. This sector has been driving economic growth for the last several years but it looks like that run is about to come to an end. The banks are not as generous with loans and the consumer is fading as most who wanted to buy already have. This isn’t a total wash but it is not leading the growth pack any longer. The same can be said for the housing market as there have been developing headwinds that have affected the New Home Sales sector. The combination of higher home prices, higher mortgage rates and a shortage of people to actually build these homes has stifled the market for the time being and has offset the fact that millennials are finally starting to buy. These are two of the more negative trends although the rate of automotive sales activity actually improved a little this month.

Steel consumption is off again and that reflects the slowdown in auto production as well as the overall lack of public sector construction. There is still a hope for some expanded activity as far as infrastructure repair and build is concerned but that seems distant at the moment and has done nothing to encourage the steel producers. Metal prices have been generally flat with the exception of nickel prices as these have declined in tandem with reduced demand for steel.

The level of capacity utilization is a real bright spot and encouraging as it is higher than it has been in well over a year. It is still not in the normal range between 80% and 85% but it is knocking on the door with a gain to over 77%. This trend upward has been sharp and that bodes well for the future. The concern at this point is that capital expenditures are not moving in the same direction. The slump is not dramatic but usually capital investment follows the same pattern as utilization and there is currently a disconnect. This may simply be a matter of letting the two catch up with one another.

The level of durable goods activity dipped a little but this is more a reflection of changes in the aerospace sector than anything more serious as it seems that overall demand for business machines is solid. Factory orders decline a bit as consumers have yet to really get in the game – retail numbers were down in the first quarter and are only now starting to come to life. The appliance activity is still flat but this is a reflection on the data available more than a comment on the sector itself.

Three of the more general assessments of the economy are sending mixed messages. The PMI new orders data is not as good as it was a month or two ago but it remains in very respectable territory and is heading back up. There was a decline as far as the Credit Managers’ Index is concerned and that reflects a fairly up and down performance over the last few months. Transportation has seen a little rebound but has not returned to previous highs. Rail is seeing some better numbers as the summer demand for coal increases but trucking has not recovered much momentum.

 

New Automobile and Light Truck Sales – The little bump in the sales of automobiles and light trucks signals that there has not yet been a total collapse in demand for new vehicles but this doesn’t change the more recent narrative all that much. The major surge in vehicle buying has ended and the manufacturers have been reacting as expected with reductions in output. Much of the sales activity that was noted this month has been due to the car dealers unloading the inventory they had been building and there is not much evidence to suggest that they are eager to replace what they have sold. The consumer is somewhat satiated as it has been assumed that those who wanted to buy a car have now done so.

The other important factor is bank caution. There is concern that car sales have gone the same route as mortgages did a few years ago with banks financing people that probably should not have been. The borrower of the last few years has been a bigger risk and the banks are now withdrawing a little. This lack of easy credit has affected some that might have otherwise been in the market. This isn’t yet an industry on the verge of collapse but it isn’t going to be the engine for manufacturing it once was.

 

CCAI/IHEA Continued

New Home Starts – The pace of new home starts has declined for several months in a row now and that may be a longer-term trend given the appearance of some serious headwinds. There is some good news showing up in the market as well but thus far this has not been able to offset the problems that have started to accelerate. The good news is that millennials are finally starting to hit the housing market in significant numbers – at least the older members of that generation as they have started to create families as they turn 30.

The headwinds include three important factors. The first and the most obvious is that home prices have been going up sharply all across the country and that limits the new home buyers as well as some of those who are seeking to downsize. There are many markets that have experienced severe shortages and that drives up costs. Combine this with the fact that higher priced homes demand more down payment and you have crimped demand from the new home buyer. Then there is the increase in the mortgage rate that has taken place in the last year and is only expected to accelerate as the Fed continues to hike rates.

The third headwind is a bit more subtle and has not been a universal issue across the country – at least not yet. There are not enough people working in construction and it has become very hard to find the people needed. The wait for a dry wall team in Dallas was over a year and most markets are reporting severe issues as far as finding the needed employees. That slows building even when there is solid demand.

Steel Consumption – The pace of steel consumption has been off for the last few months and for predictable reasons. The auto sector has been slowing and there has not been a real surge in terms of construction – at least not yet. At the start of the year there was considerable enthusiasm for infrastructure build and the hope had been that all these stalled projects would come back to life and create that new demand for steel. The wait is not over and with the budget conversations that are taking place in Congress it is unlikely that there will be a surge in that project work this year.

Commercial construction has likewise been more tepid than expected although there have been some solid growth areas such as medical construction. The office building is not the driver it once was and there has been a slowdown in building for the manufacturing and warehouse sector as well.

Industrial Capacity Utilization – One of the best indicators of overall economic growth responded very well this month. The rate of capacity utilization is at levels not seen in years and is getting very close to that magic number of 80%. You can all say this with me now – “between 80% and 85% capacity utilization is the sweet spot”. When the levels are below 80% there is too much slack in the system and that limits the amount of expansion as companies are not using what they have effectively. When the level of utilization is under 80% there is less acquisition of new machinery and less hiring. In contrast when the levels are above 85% there is more likelihood of shortage and bottlenecks as there is not enough capacity to meet demand. We have been nowhere near that level for some time and even with these recent gains this is still a pretty distant threat. The good news is that the pace of utilization growth has started to accelerate nicely and that suggests that normal levels may be within reach sooner than later.

PMI New Orders – The level of PMI New Order activity has ratcheted up again and is back towards the 60 level although not as high as it was a few months ago. The same pattern has been seen in the overall PMI where there has been some slippage from the high point reached earlier this year. The good news is that all of these numbers have been solidly in the expansion category – overall readings in the mid-50s and the new order numbers closing in on 60.

The most interesting aspect of the latest PMI data is that it almost universally good around the world. There have been gains in Europe, Asia and Latin America as well as the US. Most of the sub-index numbers have been solid as well – good data on exports and employment. This suggests that there is reasonable growth taking place and expectations of more to come. This will be the test in the months to come – is there going to be the growth that many had expected or will there be a period of disillusionment as it takes longer to get the changes that were anticipated?

Capital Expenditures – The fact that capital expenditures are not matching up that well with the level of capacity utilization is a bit of a concern as generally these are pretty closely aligned. When the level of utilization increases there is often an increase in capital spending as companies seek to meet that demand. This month the level of expenditures have not followed and that means one of two things. Either there is a delay between the rise in utilization and capital investment (which there often is) or there has been a slowdown in investment despite the rise in utilization. The latter explanation would suggest more caution among manufacturers – a lack of willingness to make big investments until there is some proof of staying power.

 

The Black Owl Report – An Executive Intelligence Brief

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

 

Some Observations

They say that travel is broadening and if they are referring to my waist line this is an accurate assessment. I had some of the most delightful food in my brief sojourn to the UK. In Nottingham, there were delightful dinners at a great Indian restaurant where I had the opportunity to try ostrich and a great sushi bar. In London, my uncle and aunt threw a great dinner which featured everything from eel to salmon and artichoke. That was followed by dinners at a French café for their tasting menu and a fusion place that combined Jewish and Japanese cuisine. We also snuck in a nice fish and chips pub meal. Eating is truly one of the most delightful endeavors one can undertake with friends and I don’t care that I now need to spend 36 hours on the elliptical.

The other thing that struck me was the diversity in the London and Nottingham cultures. There are people from absolutely everywhere and it makes for really wonderful experiences. London is a melting pot unequaled in the world and the evidence is everywhere. The tragedy that occurred the weekend we were there only underscored the fact the terrorist thugs are utter failures. They want people to be afraid and to be divided and that is not going to happen there or anywhere else for that matter. The British were on about their business hours later and the outcry of anger was from every person regardless of background. There was a local Iman speaking at Hyde Park as we passed and his message was blunt – these terrorists are not Islamic believers – they are outcasts and have been condemned by Allah and by all those that really are Muslims. The anger in his voice was palpable and the crowd with him was just as frustrated with those that sullied their religion.

 

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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Interesting Perspective on Russia.  There was an interesting perspective on Russia introduced by a geopolitical analyst I was listening to.  This has no other bearing, than to set up the potential for future conflicts or geopolitical events.

 

Here are just two bullets that we should keep in mind as global geopolitics play out.

 

  1. Russia has a population problem. There aren’t enough younger generation citizens being born to help pay for older retirees under the Russia system. Even base tax contributions won’t be enough to help cover basic Governmental expenses – even without the economic sanctions currently hampering growth in the country.  Japan has the same problem, but it probably has a better means of coping across it’s industries: robotics and automation.
  2. Russia also has a military coverage problem. Forget the need for Russia to participate in conflicts around the world and to assert its influence in global theaters of all types. Let’s go back to simple protection of the country. Russia currently has more than 2,000 miles of borders to try and control – and it can’t do it with a two-million man army. During the Soviet Union, when its borders extended out further, geographic “choke points” were created which restrict the amount of land it’s military must cover. With much of the original Baltic Nations back in its control, it would need to close less than 450 miles to create a protected border situation.

 

It might sound crazy to think about foreign invasions, but even controlled immigration is a big threat to a country like Russia. Despite it needing more population in the country, there are many risks that come as a result of uncontrolled migration. The country has many cultural enemies – and terrorist attacks can be wide-spread in a country that can’t get emergency military aid to various locations quick enough – the country is simply too vast.

 

And, as Russia is forced to spend more of its GDP on military readiness and preparedness, it can’t spend its money on economic development.

 

Also remember the opening story regarding the moves by Saudi Arabia against Qatar and how it might push crude oil prices downward. Russia would be impacted heavily if oil prices continue to stay lower.

 

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Business Intelligence Brief: June 7, 2017

Short Items of Interest – US Economy

•           Jobs Data Not All That Bad – The job data from last week was a bit weaker than had been anticipated with the number of jobs added far below the 183,000 that had been expected. The number of new jobs totaled 138,000 and that is lower than it has been in over a year. The unemployment rate fell even lower than it had been previously and that underscored the challenge in interpreting data right now. As we discuss later in this issue, the employers are finding it hard to locate the workers they need and that affects the hiring numbers. There may be 6 million people seeking work in one way or the other and 6 million jobs available but they are not matching up at all.

•           Let the Negotiations Begin – The rubber is about to meet the road when it comes to Nafta as well as many other trade agreements. The initial statements made during the campaign were hyperbole as is usually the case. The blanket statements regarding the desire to block imports have been abandoned and now the issue is which products and services will get exempted. There has been an agreement in principle with Mexico to avoid a trade war over sugar and there will continue to be imports into the US to meet the needs in the US. Even with the seeming war on sugar there is a major demand for the substance and there is no way for the US to supply this need alone. This has not been the first compromise and it will not be the last.

•           Backing Away from Climate Change – The Paris Climate Change agreement was not a treaty as it was never approved by Congress. In fact, it was never much more than a statement of intent as the member states were not really required to do anything at all and if they failed to do what they sort of said they would do there was no enforcement power. This is part of the reason that so many states signed it. The US withdrawal doesn’t actually change much of anything but symbolism counts. It suggests the US is not interested in changing (and that is still not really true). It gives other states yet another excuse to drag their feet and that is already evident in China and India. It was a gesture towards domestic constituents in the US and not a very helpful one for the world as a whole.

Short Items of Interest – Global Economy

•           Military Worries About Energy Investment – A group of military leaders have put together a report that links investment into energy as a national security concern. The fear is that the US has been falling behind in the development of renewables as well as nuclear power. The Chinese are carving out a major position as far as solar and wind and the US is well behind. This makes the US more vulnerable than it needs to be and this is something that could be rectified with more emphasis.

•           US-UK Relationship – The US has long been able to count on its “special relationship” with Britain but this has been under assault of late. The criticism of the British response to the terror attack by Trump has infuriated the population of the UK and has made working with Trump harder. The snap election called by Theresa May still seems to be going her way but the contest has narrowed and the Tories will be weaker and could even lose. A victory for Labor would mean a very deep division between Trump and Jeremy Corbyn.

•           Australian Economy Slows to Recession Levels – The pace of growth in Australia is as slow as it has been since 2009 and there have been many culprits identified. The bad weather has affected crops and commodity exports and the consumer has retreated as far as home buying is concerned. China has recovered a little but they are still not buying as much of the commodities that Australia depends on and there has even been some impact from the slowdown in Britain.

Finding Workers

The economy has now reached that awkward stage. There are still millions of people who are out of work but at the same time the majority of businesses are struggling to find workers. The number of openings in April rose to the highest level seen since these records have been collected. There are over 6 million openings recorded and that is a jump of 250,000. The number of people out of work is at 6.9 million now and it would seem that this would be an easy issue to deal with – simply match the 6 million jobs to the 7 million that need them. If it were only that easy. The challenge for the economy now is that the people currently out of work fall into three categories and none of the three will be easy to contend with.

Analysis: The first group is estimated to be around half of that 6 million. These are the people who really do want to work but lack the skills needed to fill the available positions. The companies that are doing the hiring are not looking for low skilled workers. They are seeking people with the right education or experience or skill. In past years there was more willingness to hire people with the intent to train them but the last few years have seen companies engaged in “lean and mean” and that means little patience for developing talent They need people ready to contribute right away. They also fear that when they hire people who have to be trained they run the risk of losing them to a rival who offers slightly more money once these workers have been trained. This has been a big problem for small and medium sized business as they can’t really defend against larger companies poaching their workers.
The second group of people currently unemployed are those that simply do not want to work. This is estimated to be roughly a third of the total. There are two reasons that people may choose to stay out of the workforce. There are those who are getting enough social welfare assistance to survive although this is a not a large percentage of the total. The US system is not all that generous when it comes down to it and there are not all that many who will be content with what they can obtain from the government. The major reason that people elect to stay technically unemployed is that they are working but not formally. The off-the-books economy is significant and getting larger all the time. These are people who are engaged in both licit and illicit activity and many make substantial sums from this work. Given that this is unregulated and untaxed work it takes a lot of incentive to get people to give this up and take that more formal job and this is especially true when the job is illicit work in the drug trade.
The third rationale for being out of the workforce is that there are other priorities. This may be the young mother that would rather stay at home for a while to raise children or it could be the member of the family that needs to take care of an elderly parent. This also includes people who chose to stay in school or return to get more education and training. These are expected to be temporarily out of the workforce and at some point they would return to the job market.
The biggest issue now is the labor shortage. This is not a new issue by any means as we have been harping on this topic for years. It is simply that it gets worse with every passing year and is rapidly reaching a crisis point. The people that hold many of the key jobs in the economy are retiring at a rate of 10,000 a day (almost 4 million a year) and that is catching up with the economy at a very rapid pace. There are no simple solutions to this problem. The only reasonable course of action is to fill the many gaps with immigrants and right now that has become an incredibly controversial strategy.

Economic Policy Divisions

There has rarely been real consensus when President’s put together economic teams. Sometimes this is deliberate as the desire is to get a variety of inputs from experts in the field. More often the different policy advisors are put in place by those who are seeking to influence the way the President approaches the economy. Right now, the Trump team has a clear division between the “economic nationalists” and the more traditional GOP strategies. The nationalists were very vocal during the campaign but have faded somewhat since the term started. The number of traditional GOP economists have grown and the nationalists have been somewhat in retreat. The newest member of the team is likely to be Kevin Hassett as he will become the chair of the Council of Economic Advisors. It appeared that Trump was not going to appoint anyone to that post at first but he changed his mind and Hassett is definitely from the traditional side as he has been with the American Enterprise Institute for the past several years.

Analysis: There will be many issues that divide these two groups – with trade policy at the top of the list. The one thing they agree on is that major changes will have to be made if the economy is going to have an opportunity to grow at over 3%. These include tax reforms with an emphasis on building capital in the country. Hassett has been vocal in his support for free trade and immigration to alleviate the shortage of key workers. His point has been that the US benefits from global engagement and the issues that come with that engagement can be managed. The economic nationalists want more restrictions and less engagement and have campaigned against trade and immigration consistently. The assertion that Hassett has made is that the us economy is dominant in the world and should be taking advantage of that power to leverage better growth opportunities. He asserts that most of the inhibition to growth has been due to internal disincentives and that means that issues such as taxation and regulation have to take center stage as well as policies that promote trade with allies. The latest conversation has revolved around cementing a better deal with the United Kingdom now that they are seeking a replacement for their European business.

Reactions in London

The attack on London Bridge took place as I was finishing my business in the UK and this afforded an unwelcome opportunity to get the reaction of the British to this latest atrocity. In many respects the response was one would expect. There was plenty of angry reaction mixed with desire to reach out to the victims and their families. It is not as if the British are unfamiliar with these attacks as they have become almost commonplace. The reaction to the attack by Trump was not welcome and came under severe criticism from all sides in the UK. There were three sets of commentary that stood out for me as they were somewhat different than the reactions one hears in the US most of the time.

Analysis:  The first set of comments were directed towards those who were trying to assert that these were the very worst of times and never had the UK been under such stress. It was noted repeatedly that there have always been violent extremists and that the British have been dealing with this for years – as has most of the world. The commentators reminded people of the days when the Irish Republican Army attempted to assassinate Prime Minister Margaret Thatcher and bombed almost on a weekly basis. There were the leftist terror groups like the Red Army Faction (they assassinated the Prime Minister of Italy) as well as the Baader Meinhof gang. There have been episodes stemming from the reaction to do-colonization. The point was that terrorists always try to employ the same tactic and that is why they are called terrorists – they try to make the population afraid and fearful enough to change the way they go about their lives. The tactic rarely works unless the authorities become overzealous in response and that is what informed the second set of commentaries.
The first response to such an attack is to tighten security and make sure “this will never happen again”. That is nearly impossible to accomplish. The attackers used knives and a van. They didn’t bomb and they didn’t shoot. How would this attack have been stopped? The UK reaction to this has been defiant. They do not want to give up their freedom to live in a police state. They do not want to live in terror and within hours life was back to near normal. I was touring around London Bridge and the Tower no more than 12 hours after the attack and there were hundreds of people doing the same. It was partly a defiant gesture and partly just life going on as it has before.
The third strain of commentary focused on motivation. The attacks can’t realistically be stopped if there are people willing to sacrifice themselves to whatever cause they have chosen. The people involved have been disaffected for years and in the course of investigation it became obvious that many around them knew full well what path they were on. This was an opportunity to engage the police but more importantly an opportunity to engage family, friends and various community leaders in an attempt to get through to them. There were many people speaking about how they had been turned away from this violent path by these interventions. One of the leading religious leaders in the Islamic community has made it his mission to find these people and turn them away from this violence.

US Engages with Middle East Over Qatar

The position taken by Qatar over the years has been vexing to many in the region. This is a nation that has tried to play all sides against one another and has generally refused to completely join any one position or faction. It is the host of the largest US air force base in the region and that base is absolutely key to attacking ISIS and allowing the US to project influence. This would seem to make Qatar a ripe target for the Islamic extremists but the leaders of the country have long backed Iran and various groups the western states find unacceptable – Hamas and Muslim Brotherhood. The Saudi Arabians have been critical of Qatar for years and they have been joined by others in the region. The surprise move was Trump asserting his backing of this initiative and his attack on the country the US relies on for its air force support.

Analysis: Trying to find a true ally in this region is extremely difficult. The Trump team seems to be siding aggressively with Saudi Arabia but this is the nation that supports the Wahhabi strain of Islam and this has been an inspiration for many of the extremists that have been active in the region. It was not people from Qatar or Iran or Syria that attacked the US on 9-11, these were Saudi. Osama bin-Laden was a Saudi. The US is not much more than an ally of convenience to these states and generally speaking the US has avoided taken sides as they only thing that really should matter is what works best for the US. Qatar hosts our base and there is no ready replacement. We can get what we want from Saudi Arabia at times as well but should not forget that OPEC has rarely been a friend to the US in the past. This is a diplomatic quagmire and best treated as such.

The Black Owl Report – An Executive Intelligence Brief

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

Apologies to the Loyal Readers

This has been a rough week for the BIB and I now know that there are people who miss these scribblings. I was asked to do some programs in Nottingham last week and took the opportunity to spend some time in London with my uncle. He will not be running any marathons any day soon but his razor wit is fully intact and the visit was delightful. His wife Adele was as charming as ever and was determined to make the trip a joy. The problem is that getting to the UK is a long haul and there is far too much time spent on airplanes and airports. It does tend to wreak havoc on writing schedules.
I apologize for the missed issues and I am pretty confident that my domestic travel over the next few months will not be as challenging. It was nice to be missed though. The return to the normal writing routine was also very important to Scoot – she has not left my desk all morning and asks for attention about every five minutes. She is glad to be back to work and so am I.

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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What Qatar Rift Could Mean for Oil.  The rift between Qatar and 7 Arab nations (led by Saudi Arabia) has created a tremendous amount of global uncertainty in the past 24 hours.  To give you just a bit of background in case you haven’t been paying attention to the news, 7 Middle Eastern countries have cut diplomatic ties to Qatar and have ordered all citizens of Qatar to leave their countries (some within 48 hours (from Monday morning) and some within 14 days).

These countries have been at odds with Qatar for years (if not decades), over ties to Radical Islamic Terrorism. The US has a significant Naval base in Qatar. What isn’t completely understood is what role the Trump Administration may or may not have played in pushing this along – and the strategy behind it. What we mean by this is that Saudi Arabia and others have suddenly felt emboldened by something, and it could have been a strong sense of security (freedom to act) that they were given by the Trump Administration on its recent whirlwind tour through the Middle East. If you recall, the administration announced about $110 billion in arms deals with the Saudi Kingdom. And, this comes just a few years after the Obama Administration announced its “Asian Pivot”, which would reduce the US presence in the Middle East and possibly change alliances.

US crude oil production capabilities has changed our view of stability in the Middle East. With the US now able to export crude oil for the first time since the early 1970’s, there is a completely different view of the Middle East and what happens there. At this time, the US is still not completely oil independent, but we aren’t far from it. Knowing that this could destabilize relations in the Middle East (to a degree – Qatar doesn’t have a military to speak of and it couldn’t stand up to Saudi Arabia, Egypt, etc. without help from large allies like Iran), and more importantly perhaps signal the end of OPEC cooperation, oil prices were dropping on Monday night. The notion that oil traders are looking at is the fact that a break-down in cooperation within OPEC will make it easy for countries to violate their production cut agreements for this fall.

It starts to get tricky.  Think about motivations here. Saudi Arabia has the lowest break-even point in the world right now on crude oil – it could allow the price of oil to drop to a level that would undermine and make it difficult for some of its adversaries to be profitable. It would also hurt allies in the process and hurt its own ability to fully fund its Government activities (especially funding the war in Yemen).  Other countries in OPEC may be in the same position in which they need cash flows so bad that they flood the market with cheap energy.

It also shoots across the bow of US shale oil producers in the process if the world gets flooded with cheap oil and prices plummet.  But, what analysts don’t know is how far this rift goes. Does it spill-over and get Iran involved (especially since Iran and Saudi Arabia are already seemingly fighting a proxy war in Yemen)? How does Egypt and others that sit on the fringe react beyond political wrangling?

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