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Business Intelligence Brief: August 21, 2017

Short Items of Interest – US Economy


  • Consumer Confidence is Up Again – The level of consumer confidence is up to levels not seen since January according to the University of Michigan – the latest reading is 97.6 and that is up from the 93.4 that as registered in July. The rationale for the increase was the same as it has been through most of the year as the consumer has been happy about the low rates of unemployment and the relative lack of inflation – especially as concerns the price of gasoline. The summer has been benign as far as prices are concerned and the low cost of fuel has allowed more vacation activity. The consumer remains fickle but right now these confidence levels are coinciding with the surge in retail activity. The caveat, as always, is that confidence levels can change quickly if there is something that spooks the consumer.


  • Why Gains in Employment? – The conundrum is that there has not been all that much economic growth in the last year or so but there have been steady gains in terms of employment. How is that possible? The estimate has been that three factors are playing a key role. The first is that retiring Boomers are opening up employment in many sectors – 10,000 people a day are leaving and many of those jobs are being replaced. The second factor is that businesses are in a better mood as they have seen some of what they wanted – most notably a reduction of regulation in some key areas. Finally, there is the fact that export oriented business has seen good growth in the last few months as the dollar has weakened.


  • Autonomous Vehicles – Is this the “next big thing” or just an updated version of the hype that surrounded the Segway. Remember that? It wasn’t supposed to be the favored tool of the mall cop – it was supposed to revolutionize the way we traveled. The autonomous vehicle is supposed to replace all the cars and trucks that have drivers now but there are major questions regarding liability and acceptance. Who is at fault when one of these crashes? Will people who watch their laptop crash five times a day really want to trust the machine enough to hurtle along at 65 mph?


Short Items of Interest – Global Economy


  • Spain’s Terror Puzzle – There are a great deal of assumptions made regarding terrorism and every time there is another incident they prove less accurate than thought. The standard assertion is that those who are radicalized to become jihadists are from shattered regions where people have become desperate or they are from western nations that discriminate against Islamic believers. The small town of Ripoll in Catalan country is not hostile to Islam and the men that became murderous bombers seemed well integrated and even friendly. There was no hint they had become so disaffected and that poses an immense problem as it seems to say that almost anyone can become a threat and we really don’t know why.


  • New Malaria Drug Starts Trials in Africa – There has not been a new drug for malaria in twenty years and the medical field has been very concerned as the current drug is nowhere near as effective as it has been. The focus has been on eradicating the mosquito that carries it but this is a monumental task and malaria is back as a major threat to development in Africa. This is a joint effort between the Gates Foundation and the Wellcome Trust (affiliated with the pharma sector). The initial impression is that this drug will be a “game changer” and would bring the world closer to total elimination of the disease.


  • Does Bannon’s Exit Mean Trade is Safe? – He may have been the leading voice of economic nationalism in the Trump White House but he was not the only one and it is clear that Trump remains firmly in the camp of those who prefer isolation and protectionism. Thus far the efforts to attack trade have failed due to opposition from Congress and the overall business community but the battles will still be fought and first on the agenda will be Nafta.




Nafta Talks – As Acrimonious as Anticipated

About the only thing accomplished in the first round of talks over Nafta is that everybody now seems to know how tough this is going to be. One would be hard pressed to find common ground among the participants and now the focus is on determining whether any of these positions are real or just early stage posturing to appeal to specific constituents. What makes these discussions even more unpredictable is that two of the three leaders have significant political issues to deal with at home. The elections in Mexico are not that far away and the candidates are making their positions known. The threat to the PRI (currently the party in charge with Enrique Pena Nieto as President) is AMLO -Andres Manuel Lopez Portillo. He is the former mayor of Mexico City and a fiery leftist who has made much of the Trump hostility towards Mexico. Anything that appears to be giving in to Trump’s demands will be a boost for AMLO and his hardline position. Trump also has to worry about his base. The events in the White House that led to Steve Bannon’s firing threaten to alienate many of those who have been ardent supporters and giving in on Nafta will only further distress this voting block.


Analysis: As expected, the focus of the talks has been manufacturing. The US has been watching a great deal of manufacturing capacity shift to Mexico over the years – especially as far as the auto sector is concerned. The US automakers have been trying to bring their costs down as far as parts and assembly and they have chosen to rely on Mexico more. The migration of the auto sector has been going on for many years as operations have left the industrial mid-west for the southern tier of states and from there to Mexico. At least this is the standard assertion but the data doesn’t really bear this out. US auto production has remained quite stable for over a decade. It is true that Mexican production has increased but the country that seems to have lost the most productive capacity is Canada. It should also be noted that much of the expanded capacity for auto related manufacturing in Mexico is from car makers and parts makers from around the world that have set up in Mexico to have better access to the US market. These parts were not likely to be made in the US regardless and many had been from production facilities in Asia before moving to Mexico. In the long run, it is better for the US economy for Mexico to making these parts as Mexico buys far more from the US than do states like China or Vietnam or Indonesia.

The US has opened these talks with demands that both Canada and Mexico have rejected out of hand. The content rules put forward by the US have been rejected by the automakers themselves and they assert that the suggested rules would make them uncompetitive – even against imported cars. The US business community as a whole has taken a dim view of the US position as it would severely limit trade. There are far more jobs dependent on imports from Mexico than would be preserved or added by these new rules and regulations – that is the position thus far from most of the business organizations that have weighed in.

As is so often the case, the effort to hold on to US manufacturing in 2017 is a case of too little and too late. The majority of those manufacturers that were seeking lower production costs have already left the US and they will not be bringing jobs back to the US even if they elect to return capacity. The cost of labor is too high to compete globally and then there is the overall shortage of qualified workers to deal with. The manufacturers that are returning to the US are able to do so because of technology and robotics. This is great for the US manufacturing GDP but it does little to add jobs. The fear is that political motivations will overtake economic ones and Nafta will be severely crippled. This would mean that other nations in the world would gain a competitive edge over those in North America and that would be bad for the US as well as Mexico and Canada. The more realistic search should be geared towards finding new job opportunities for those who have been displaced by either advancing technology or foreign competition.

The talks will continue from here and there are round scheduled for Mexico and Canada with a conclusion hoped for early next year. That puts the discussions smack in the middle of the 2018 elections in the US and that will be a major factor alongside the impending vote in Mexico.


Industrial Production Up Slightly

For the last few months the manufacturing sector has been the weak link as far as industrial production is concerned. There have been some reasonable gains as far as the utilities and the energy sector were concerned but the dip in the production of automobiles has taken its toll on the numbers. This has been a good summer for the utilities as there has been widespread heat that has encouraged more output. The energy sector is not exactly booming as compared to where it has been in the past but it has managed to get off the bottom and that left manufacturing. It was only a year ago that the situation was reversed with the manufacturers pulling the other two sectors along. The projections hold that utilities will be down again if the winter weather is benign as it has been for the last few years. The energy sector is likely to be down somewhat as well and that will put even more pressure on manufacturing.


Analysis: The fact is the manufacturers in other sectors are doing reasonably well with improved performance in aerospace and in sector as diverse as medical and food service. The problem is that three of the major sectors for manufacturing are all in down periods – automotive, energy and agriculture. The slump in these sectors affect a broad band of manufacturing and there is little expectation of a rapid turnaround. The US has been a diverse manufacturing state for a long time and that has allowed progress more months than not but the ability of aerospace and medical to carry the entire load is questionable. The best news is coming from a much expanded export sector as US trading partners see growth.


Who is the “Working Class” and Where are they Politically

Among the most difficult of economic assessments is determining who is “working class” and what they really mean to the people who identify themselves as in that category. It was once easier as working class was essentially synonymous with blue collar occupations in construction and manufacturing and transportation. This is not so easy now as many of the most skilled workers in these sectors are making far more than a working class income. From an income perspective, the range is considerable – from $35,000 to $100,000 for a family of three. Often the working class definition is reserved for those that earn wages hourly as opposed to a salary. When people are asked how they define themselves the work they do is more important than what they earn. The white-collar worker is not as likely to call themselves working class even if their income places them there and the person working in manufacturing will identify as working class even if they are highly skilled and earning a six-figure income. This self-identification matters in the political world and over the last few years there have been stark changes in terms of how people relate to the various political parties around the world.


Analysis: Traditionally those political parties to the left have captured the majority of the working class vote. The Democrats were the blue collar choice in the US while in France it was the Socialists and in Germany it was the Social Democrats. In country after country that connection has frayed and many of those who would call themselves working class have shifted to support the more conservative parties. Some of this may have to do with social issues more than economic ones. The more liberal parties are often out-of-sync with the traditional working-class voter on issues like abortion, gay marriage, gun control and a host of others. The parties that once were seen as champions of working class issues are now seen as reflecting the priorities of the elite and the conservative parties have become less oriented to the needs of the business community – at least as far as the rhetoric is concerned.

This has created a challenge for the parties that once counted on the support of that population and it also creates a challenge for the traditional center-right. The left leaning parties are becoming marginalized as their focus narrows to segments of the population that are generally seen as minorities. The right was once seen as reliably pro-business but that connection is frayed as the working class supporters are generally anti-trade, anti-wealth and resentful of the “Wall Street influence”. Neither traditional political orientation has the power it once did and that explains the rise of third parties and movements as well as people abandoning politics altogether as they reject the choices offered them. It is more challenging than ever to chart economic policy choices.

Economic Impact of Eclipse Mania

The roads along the path of the solar eclipse are jammed this morning and they will stay that way all day. The transportation companies that need to use those highways have been finding alternative routes or have delayed shipments. The airlines have been jammed for the last few days as people try to get to the right spot. Hotels have been booked for months and people have been renting rooms in their homes for hundreds of dollars. Then there are the millions of eclipse glasses sold and the eclipse parties and all the paraphernalia that can be devised (in my city they are selling black milk). The impact of the event on cities in the path of the event is significant as populations are swelling to four or five times normal. It is hard to estimate the dollar impact at this point but various communities along the path have asserted that it is bringing in millions of dollars from tourism and all the support needed to handle the crowds. This support also costs money so it is hoped that more is made than spent.


Analysis: This will certainly be the most observed eclipse in history and it will transform some communities in the path. It is not likely to alter the economic dynamics of these regions long term but it is definitely making for a nice end to the summer. On the more negative side, the productivity levels for the country will suffer somewhat as many businesses will shut down for the day and others will see a lot of absenteeism. Perhaps the best part of this event is that it has the country talking about something other than politics and vitriol for a day or two. It is all about a lot of people peering skyward to see the sun vanish for about three minutes.

On the other hand, the eclipse has historically been an omen and maybe we should be trying to interpret the signs. Will this herald the beginning of world peace? Maybe the end of the disco revival? Most likely it will be a great opportunity to party with fellow sky watchers before heading into the nearest town for a beer or two. Personally, I am ready with my eclipse glasses and a telescope (solar filter attached) and will be hanging out on my deck.


The Black Owl Report – An Executive Intelligence Brief

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


Bravery and Duty

This weekend seemed to have a theme for me. One night was spent watching “Hacksaw Ridge” and the other was spent watching “Dunkirk”. The first was the true story of the only conscientious objector to win the Medal of Honor. He served as a combat medic at the Pacific front during World War II and was credited with saving the lives of 75 men who he lowered down the cliff while under fire. He was a Seventh Day Adventist and would not carry a gun – a stance that nearly forced him out of the military. His personal heroism is beyond belief. The evacuation at Dunkirk involved hundreds of small craft answering the call to carry the British army off the beaches under constant attack from the German Air Force, Army and Navy. The crews were fisherman, pleasure boaters and anybody else who could sail a boat. Stories from Dunkirk are nothing short of unbelievable. A racing skull of eight teenage oarsmen showed up and hitched a rope to a raft and towed 25 soldiers back to England.

We simply do not know what we are capable of until that moment arrives. It is the best of who we are – the man who pulls an injured person from a blazing wreck, the person who dives into the ocean to rescue a floundering swimmer. We hear these stories every day and it can choke us up. We also need to recognize the heroics that don’t make the news. The person who takes care of a sick loved one for years, sacrificing their own lives to preserve the life of another. The person who sees that somebody needs help and who offers it – whether it is fixing their house or just running errands. Whether the bravery is dramatic or mundane it stems from the same basic belief in duty – it was just the right thing to do. Desmond Doss never called himself a hero – no matter how many others did. To him it was his duty and when those civilian sailors put their lives at great risk to save the soldiers they all asserted that it was their duty. It is really our duty to take care of those who need us – friends, family and strangers alike – this is real bravery.


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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Home Depot, Tesla, and GE: The Acceleration of a Trend?   Sometimes, it takes competitive pressure to push an entire industry to change its operating paradigms.  That may have just happened to some degree with a major partnership between three complimentary companies.


Placing solar panels on top of large-footprint facilities is not a new concept – for goodness sakes it’s not. But, up and until this point, many companies have held off because of the extra costs to install and use solar panels – for various reasons. But, with Home Depot agreeing to outfit at least 50 of its stores with solar collectors, it will be on its way to hitting its goal of producing 135 MW of renewable energy by 2020.


This is just the first step for HD, outfitting 50 stores with these systems.  They have more than 2,282 stores in their US footprint – so there’s still a lot more opportunity out there.


If HD is able to reduce its operating costs through these systems, we would anticipate that the competitive pressure that mounts for other competitors will also build. It could be this push that gets far more implementations of solar panel technologies across the country, in other retailers and industries.


Tesla’s battery storage systems will help ensure an ample supply of energy regardless of weather conditions.


There’s some questions about the full impact of the application (just some debate about the data and estimates on its output). But, Home Depot believes that it can cut its demand for electricity by about 33% in each store, which is enough to power about 2,300 homes for a year.


Again, it isn’t necessarily this set of technologies or the concept of rooftop solar power that’s interesting. It’s the competitive pressure and the push that will be created in the retail sector for others to follow – if they can find the money to do it!


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Business Intelligence Brief: August 18, 2017

Short Items of Interest – US Economy


  • Further Decline in Claims – The number of new claims for unemployment fell again last week and that is yet another signal that the job market remains stable. The fact is that it takes a lot of data to get a real read on the job market. The unemployment rate is useful but there are six different cuts of the data to ponder. The quit rate is a way to gauge confidence and so on. The initial claims data shows whether the business community is laying people off and that has not been an issue for the better part of a year. It seems that once companies get the people they need they want to hang on to them. The real issue now is that there are still far too many jobs going unfilled.


  • Record Number of Job Openings – There are 6.2 million available jobs now and that is a record number. There are many factors involved here. The business community wants people who are skilled and ready to contribute as they have all adopted some version of a lean hiring system and do not have the luxury of hiring and developing. The other issue is that job vacancies are being created by retiring Baby Boomers and they are very hard to replace with millennials. The disconnect between those looking for jobs and those offering them will widen in the years to come.


  • Infrastructure Group Aborted – One of the promises made during the campaign was that infrastructure would be a high priority and this commitment was welcomed for a wide variety of reasons. The first and most obvious is that the US infrastructure is in bad shape and needs the attention. It was also thought this would be the best way to develop some bipartisan activity as both Democrats and Republicans have been supportive. The plan was to create a new advisory board with participants from all persuasions to figure out how to get that trillion-dollar investment needed. The controversy over the events in Virginia have caused this plan to be abandoned and it now looks less likely that the infrastructure money will be found after all.


Short Items of Interest – Global Economy


  • Global Markets Rattled – The US stock market toppled to its lowest point in a month and there is a lot of unease manifesting. The same nervousness is showing up in the rest of the world. It is not just one issue that has the investors spooked – they are reacting to everything from the ongoing North Korean tension to the crisis over the incidents in Virginia. The sense is that Trump is floundering and that makes many nervous. To add to the tension there are the attacks in Barcelona. It is not a rout by any means but the steady rises may have come to an end.


  • Growth in Columbia – A few years ago Colombia was starting to emerge as one of the most dynamic economies of Latin America but that boom was fueled primarily by oil and other commodities. The end of that boom hurt the country but now there are signs that other sectors are starting to pick up the slack and the economy grew more than expected in the last quarter. There has been a rebound in construction – both commercial and housing. The consumer has also started to come alive and demand has been up. The government has thrown some money around and it has been paying off – at least for now.


  • South Africa Tries to Keep Grace Mugabe from Fleeing – The wife of the President of Zimbabwe is being denied an opportunity to flee South Africa until charges of assault can be investigated. She is accused of attacking a 20-year-old model with an electrical cord. Her 93-year-old husband is the dictator in Zimbabwe and is in ill-health, she is seen as the successor. Her reputation is not very flattering and there are those in South Africa (and elsewhere in Africa) who are deeply opposed to this elevation. Many want to use this incident to take her out of contention.




Moment of Truth for Trump and the Business Community?

The contest between the different sets of Trump advisors has rarely been so stark and those who obsess over these things assert that there will have to be a resolution in the next few weeks in which one or the other of these factions will lose and likely will either quit the Trump administration or will be asked to leave. The men who symbolize the two sides are Steve Bannon and Gary Cohn. Bannon is the right-wing populist who has been championing a big chunk of the Trump base and is now defending the white supremacists and their sympathizers. He has been with Trump far longer than Cohn and is very popular with the hard-core Trump supporters. Cohn is the head of the National Economic Council and a Wall Street guy that was recruited from his role as president of Goldman Sachs. He is the front man for the business community and has been instrumental in rallying the business community to Trump. In the coming weeks one or the other of these two will survive and the other will either be removed, quit or remain as a marginalized figure. Given the personalities of the two it is unlikely they will remain unless they retain their power and influence.


Analysis: The connections between Bannon and Trump go way back but Cohn and the business community as a whole are much more recent converts and their engagement is pragmatic rather than ideological. In the simplest of terms, they hoped to see a pro-business White House. The assessment of the Obama years was that they were implacably hostile and that Obama saw the business community as the enemy. There was ongoing irritation at the regulations that poured from every agency- many of them punitive. The response to the banking crisis that preceded the recession was the Bank Reform Act and its 3,000+ pages of regulation that compromised banks of all sizes. They chafed at the rules that came from the alphabet soup of federal agencies and hoped that these would be rolled back under a Republican President. For the most part, they have been correct in that assumption as this may be the primary area where the Trump White House has delivered.

The business interest in the Presidency and Congress for that matter is limited. The success and failure of business is dependent on their competitive decisions and the decisions of their consumers. The role of government is generally to set the rules of commerce and on occasion to find ways to boost development. There are sectors that are more connected to the decisions of government than others but generally the day to day of their operations are only tangentially connected to either the executive or legislative branch. The economy is on pace to grow at 3.0% or faster in the third quarter and there are many who would like to take credit for this. The fact is that two factors have played the dominant role and neither have been all that closely tied to the political decisions being made. The economic recovery of the major trading partners for the US coupled with a weaker dollar has meant a surge in exports and that is important for a country where exports make up 15% of the GDP. In combination with this has been the recovery of the consumer. Retail sales are finally ticking up and meshing with the higher levels of consumer confidence that have been expressed all year and that seems to be mostly related to good job numbers and the continued low rate of inflation.

The point of all this is that business in general is apolitical. There has been support for Democrats and Republicans over the years and there will continue to be. The support is always situational and based on “what have you done for me lately”. The Trump administration was expected to be against further regulation and in favor of tax reform and infrastructure build. This has been the case and that has been supported by business. The rift now is over social policy. The comments from Trump and his supporters have been anathema to the corporate community. The business community is not interested in being stained by association with the KKK and the Nazis. Their customers will not stand for it and neither will their investors or their staff. They have therefore issued an ultimatum of sorts. Either the President repudiate these people or the business community abandons its support. No such repudiation has been forthcoming and the corporate community is keeping its distance. It now comes back to Cohn and Bannon. If Bannon and his allies win this fight one can expect to see Cohn and his allies depart sooner than later and that leaves a very isolated Presidency.


Strong Positions at the Start of Nafta Talks

The US has staked out a very aggressive position at the start of the Nafta negotiations – asserting the pact needs a major overhaul as it has been bad for millions of Americans. The focus has been on the jobs that have shifted to Mexico and the factories that have moved. The deficit between the US and the other members has been a target. The response from Mexico and Canada has been likewise sharp and their representatives have rebuked the US. At this point the sense is that all three states are posturing and playing to constituencies back home. This is especially the case with the US as there is considerable opposition to a radical Nafta reform from within the US business community. The largest trade partners for the US are Canada and Mexico and there are many in the US that depend on these relationships.


Analysis: There are now two schools of thought on how these talks will proceed. One holds that the US is just posturing so that when the changes are relatively minor the perception will be that the US was tough. This assumes the Trump team is not interested in picking yet another fight with the business community. The other assertion is that the Trump administration is now angry with the business community and will push for radical changes as a means to get some revenge on those that Trump asserts have “betrayed” him. It remains more likely that a compromise gets worked out but there is far more uncertainty about this deal than existed just a few weeks ago.


China, North Korea and the Stakes in Asia

There is a great deal of back channel negotiation taking place in Asia these days and the situation remains very fluid. In the last week, the commentary from Pyongyang has been ratcheted down a notch and there are no longer daily threats of missiles flying towards Guam. The Chinese have obviously stepped up their sanction activity but this has been controversial within China itself. The imports from North Korea have been halted at the border and that has left the Chinese that buy these products at a loss. They have been loudly protesting the move. The North Korean government has been trying to play down the impact but China is their only reliable trade partner and they can’t survive very much long without their support.


Analysis: Every actor in the area has taken steps to bolster their position and there has been both carrot and stick on offer. The Japanese have emphasized their missile defense and have moved more batteries to the region. The South Koreans have put their own military on alert but have also offered to restart the talks that had led to what the South refers to as the sunshine policy. The US continues to emphasize the importance of negotiations it has also made it clear that military response is on the table. It seems highly unlikely that a preemptive strike would be considered but the US would retaliate if provoked.

This is all gripping geopolitics but what is the business implication now and in the future. The worst-case scenario is obvious – a full on exchange would be devastating to South Korea and would likely drag the US and China into open conflict. Frankly very few expect the worst and more attention is being paid to the current stand-off scenario. It has been described as akin to what happens when a typhoon strikes the area. The supply chain has been affected and that could be more of an issue in the weeks to come. Shipping in the region is under intense scrutiny and inspection regimes have been stepped up. There is concern that North Korea will seek to thwart the sanctions in place and there is also fear that military hardware could be making its way to the North. The shipping community has noted a major slowdown in South Korea already and it is asserted that Japan is feeling it as well. The conflict has been affecting both inbound and outbound activity. The impact has been relatively minor thus far but there is a concern that more tensions will make this issue far more untenable.

The other issue worth watching is the commitment China will make to these sanctions. These are not popular in China and there are many local business people and politicians who will seek to undermine the new rules and it is not clear the Chinese will do all that much to stop the activity. The North Koreans are well aware that some in China need the market provided by Pyongyang and will count on those who seek to cheat.


Spain and Terrorism

The Spanish have been no strangers to terrorism and in many respects the country has faced far more than others. For years it was the domestic terror provided by the Basque separatists that killed some 800 people before the group (ETA) was either killed or jailed. The jihadi terrorists struck hard at Spain with the Madrid train station attack that left almost 200 people dead. Now there has been another attack after almost a decade of relative peace and the jihadists are behind this one as well. The car attack has started to become the weapon choice and this time it has claimed the life of 13 people.


Analysis: There is no special reason that Spain or Barcelona has been targeted this time. There is a very long tradition of Islam in Spain and it has a large native population of the Muslim faith. The people who carried out this attack have connections back to North Africa but the population of Barcelona has a significant number of potential recruits. It is the center of Jihadist recruitment in Spain and part of the ferment is due to the Catalans and their uncomfortable relationship with the rest of Spain. They have been agitating for their own state and that has led to some alienation among those who are not considered Catalan. The Islamic community is marginalized and that is always a recipe for radicalism.

The fact that the attack was carried out by a van and that the attackers were wearing fake suicide vests suggest that this was not all that well planned or supported by outside groups. The assault would have been far deadlier had there been bombs and this has led authorities to conclude that this was home grown.


The Black Owl Report – An Executive Intelligence Brief

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


More Means by Which to Control Stress

It is a very small world after all. My lovely wife has been buried neck deep in ancestry search of late and in the course of her investigations she spoke with the sister of her ex-husband to get some background on the lineage of her two sons. In the midst of that conversation Janice (my wife’s former sister-in-law) commented “your husband sure loves you”. So, first a shout out and a thank you to Janice Sears and now an acknowledgement that this is a very accurate statement.

It is often asserted that people need those who will stand up for them. The fact is that it is very easy to stand by people who have done nothing stupid or wrong – far harder when the person you are standing by has been an idiot. My wife has never wavered one iota in her support for me despite countless stupid moves on my part. Any other relationship would have been strained by these incidents but her love for me carried the day. It is not accurate to say that I love my wife – I adore her and for too many reasons to count. I honestly do not know what would have become of me without her.

The impact she has on me is astonishing. She can destress a situation in a heartbeat and finds ways to get me to see reason despite my rather emotional personality. I hope she knows what she means to me – I do try to tell her and show her but there are never too many opportunities to express my appreciation and love.


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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Is the Consumer Finally in the Game? – Since the start of the year the consumer has been mumbling about how confident they are in the economy but this never seemed to translate into spending. The retail numbers have been consistently weak but the latest data suggests that the consumer is finally coming out of their funk. The rise of 0.6% is the best that has been recorded this year. What makes this data that much more encouraging is that there doesn’t seem to be some unusual event playing a role. Sometimes the rise in the price of gas will create a surge in retail activity but that is hardly a welcome and voluntary hike as far as retail is concerned. It seems that consumers have been spending a bit more on meals, travel and even things.


Perhaps the most frustrating thing about the consumer is that in general this is a fickle creature and can be shoved in a positive or negative direction very quickly. Consumer surveys have long been affected by the price of gas. If the survey is taken right as the price at the pump hikes the consumer invariably reports being far more depressed than they were prior and if the prices fall they are suddenly ready to buy a boat. Everything affects their mood – geopolitical struggles, job reports, natural disasters and so on. Earlier this year the confidence levels were up in reaction to a new President but as Trump’s popularity fades so do the levels of stated confidence. The retail numbers, on the other hand, don’t lie. It is what it is and for most of the year these numbers have been down. The rise this month comes at the same time that stated confidence is down and that tells one all one needs to know about the reliability of the consumer.


The enthusiasm for shopping has been attributed to some traditional motivators – most notably a reaction to the back-to-school sales and tax holidays. The really good news for the retailer is that a good back-to-school period promises a better holiday season all around. With any luck, the consumer spend will extend into Halloween and then Christmas.




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Business Intelligence Brief: August 17, 2017

Short Items of Interest – US Economy


  • Youth Unemployment Continues to Vex – This was a poor year as the job market for the young was concerned. The rate of employment was as low as has been seen since 1969. At first blush, this would seem to suggest there are not enough jobs to go around but the real issue is that there are plenty of jobs – just not enough young people who want to take them. This summer featured the lowest number of applicants in twenty years. There are a variety of reasons for this. A significant percentage were in school and another group was otherwise engaged in activities such as sports and various camps. The disturbing part is that a very significant number just didn’t want to work and were managing to obtain enough money from parents and others to avoid it. This does not bode well for getting people job ready in the future.


  • Technology and Jobs – The latest job sector expected to suffer from the advance of technology may well be transportation. The estimates are that some 4 million people are at risk for losing their jobs as they currently drive for a living. It is assumed that the driverless car and truck will soon be commonplace and that those who drive trucks and cabs and other vehicles will be put out of business. This all depends on the willingness of consumers and business to accept the concept and the jury remains out. For every early adopter thrilled with the prospect of the robocar there are those who would never put their lives at risk. The fact is these vehicles are coming and soon and there will be a significant impact.


  • Who Wins in Trade Talks? – The prospects for Nafta have waxed and waned all year. In the beginning the pact appeared to be doomed as Trump declared that he wanted to quit the whole agreement. Cooler heads prevailed and the US remained in but with the goal of addressing some key issues. It looked like the business community had exerted pressure. Now the talks have actually started and the rhetoric is back. The additional issue now is that the corporate and business community has started to separate themselves from Trump over the events in Virginia. The fear now is that Trump will seek revenge on the corporate community by reiterating his desire to abandon Nafta altogether – never mind the serious impact this would have on the economy of the US (not to mention Mexico and Canada).


Short Items of Interest – Global Economy


  • Opposition to Deregulation – As the world’s central bankers get closer to their meeting in Jackson Hole, there are a number of issues likely to be on the agenda. One is the strategy these banks will employ to reduce the size of their bloated balance sheets. They hold a fifth of all the debt that has been issued by their governments. The other issue is regulation and there have been some salvos fired already. Stan Fischer is the Vice Chair of the Fed and an experienced central banker as he was once the head of the Bank of Israel. He is deeply opposed to loosening the regulations on the biggest banks for fear that conditions will revert to what they were prior to the recession.


  • Japan Seeks Constant Reassurance – Japan’s Prime Minister will accept the 28th declaration of support from the US in case of conflict when the new Ministers of Defense and Foreign Affairs meet their US counterparts. This repeat performance suggests that Japan is very uneasy about US plans in the region. It has been good that North Korea has calmed down a bit but Japan is still very well aware that it stands to lose far more than the US if there is an actual conflict.


  • Investors Heave Sigh of Relief as Fernandez Stumbles in Argentina – The primaries in Argentina went for current leader Mauricio Macri and the former President watched her poll numbers sink. So much for the comeback for Cristina Fernandez. The voters are getting impatient with Macri and want swift change but they seem to remember that it was Fernandez and her late husband Nestor Kirchner who ran the country’s economy off a cliff.



Shifts and Changes in the Housing Sector

Not that the housing market has ever been easy to understand – there are just so many variables to consider and we all know that nothing is as local and specific as the real estate market. Within the borders of a single city there can be dozens of market forces at work that drive prices, demand and development. When one adds the national issues involved with large scale investing and the pressure of demographics the situation gets every more complex.

There are two major issues driving the housing sector these days and both have been around for a while. The first has to do with the financial realities of housing – increasingly higher prices in the hot real estate markets, the impending hike in mortgage rates and the lack of supply as there are too few existing home owners willing to sell while builders have been hampered by everything from a shortage of skilled labor to the dearth of construction loans. The market for the starter home is challenged as there are plenty of people seeking that home but lack the financial resources to make the decision.

This ties into the second major issue – the behavior of the millennial. This has been a highly perplexing generation and a great deal of energy has been devoted to trying to figure this group out. It is still not clear how much of their behavior is deliberate and how much is reactive. This is the cohort that came into their own in the middle of the worst recession since the one in the 1980s. They have been struggling to catch up ever since and many have the added burden of very expensive student loan debt. Some of their attitude towards housing is based on their lack of financial security but some of that position may be related to real attitude shifts as compared to those in the Baby Boom generation and even the Gen-X population.


Analysis: The question is where does the real estate market go from here? The dominant thought for the past few years has been that millennials will continue to be attracted to the multi-family unit. They are not yet starting families at the rate their predecessors did. They do not yet have that permanent job that offers an opportunity to settle in one place. They are not as attracted to the house as investment as they watched the struggles of their parents when they had to sell their homes and took big losses in the process. Is that preference starting to change? Will the millennial start to shift towards the single-family home? There are those in the investment community who think this is the case and they are starting to put their money on that bet.

One approach has been to get more engaged in the single-family home rental market and there have been some dramatic moves of late. The latest was the combined effort of Invitation Homes and Starwood Waypoint Homes. The combined company (to be called Invitation Homes but led by Starwood CEO, Fred Tuomi) will have 82,000 homes in 17 markets with a combined worth of $11 billion. This is large but still just a drop in the bucket as far as the total market is concerned. The company and others that are going down the same road are betting that renting will continue to appeal to the millennial and they expect that some of the retiring Boomers will choose this option as well – a way to reduce the work of owning a home while maintaining the advantages of a single-family dwelling.

Rents remain strong as far as single-family units. Actually, the rental market in general is good as there are still many who prefer the rental option or who can’t afford to get into buying their own home as long as demand exceeds supply. The question is always – how long does this last. Real estate is notoriously flexible as there are not that many barriers to entry as compared to other industries. The demand for rental property has stimulated rapid growth in the multi-family sector but there are some concerns that overbuilding is starting to become a problem in some cities. There is also the fact that many of these multi-family projects are being built in suburbs and exurbs far away from the preferred living options for the millennial. They have demonstrated a desire for more urban living where they have better access to mass transportation and the amenities of an urban environment. This is where the opportunity for the single-family rental property comes in. There is an incentive for the owner to renovate and rent as there is demand sufficient to drive rents up. This is essentially the process of gentrification and it has been occurring in almost every major (and many minor) city. The majority of this development is relatively small scale but there is enough taking place to interest institutional investors who are employing a variety of strategies – everything from creating new companies to using REITS.

Despite the development of the Invitation Homes model the majority of the investment groups that are engaged in this market are mid-size and regional. The fact that real estate is always locally driven makes it all the more important for investors to know the region they are engaged in. The mid-level institutional investors are paying close attention to regions and areas they know well. This does not preclude the national players from trying to roll up several of these regional projects once they have been established.

As is always the case, there will be an end to this ideal situation. What happens as demand starts to fade for the single-family rental. Will the investors of today stick around for the next up cycle? Will they quickly exit and move on? What brings this growth to an end? The general sense is that at some point supply will exceed demand and the rents will fall. This could come as more of the Baby Boomers turn loose of their homes. Right now, there is not much interest in selling but mortality will play a bigger role in years to come and these homes will be on the market. If this coincides with a desire on the part of the millennial to own a home as opposed to renting the whole picture begins to change but this remains a development some years in the future.

This piece was originally prepared for The National Real Estate Journal and I decided to include this in the BIB this week as there are few sectors that have as profound an impact on the national economy. The millennial has been driving the rental market for years but the latest data on housing starts shows that there is somewhat less enthusiasm for the multi-family project. Does this interest by Wall Street change anything?


Good News in Eastern Europe

There has been good news in Europe as a whole of late. Not that all the problems have been solved – not by a long shot – but the most recent data is showing solid growth in some of the most important states (Germany and France) as well as progress in the countries that have had the most serious issues (Italy and Spain). What has been overlooked is the growth that has been taking place in the Eastern regions. The progress that was being made by the likes of Poland, the Czech Republic and Hungary had faded and most have been more preoccupied with the political issues and the rise of populist nationalism. The more interesting story is the rise of the export sector in most of these countries.


Analysis: These are some pretty impressive growth rates for any country and especially for nations that have been trying to shed the last vestiges of their former economic system. The fastest growing state in Europe this year has been Romania at 5.7% in Q2. Right behind them come the Czech Republic at 4.5%, Poland at 4.4%, Hungary at 3.6% and Slovakia at 3.1%. To put this in some context the growth rate for the whole of the EU has been 2.3%. The fast growth in the eastern states has not been able to offset the very slow growth in the southern reaches of Europe.

There are three drivers as far as this economic growth is concerned. The first is that the years of western expansion and development in this region has been paying off for countries like Germany as well as for these states. The Germans and many other northern states sunk a lot of money into expanded capacity in the eastern region – taking advantage of the low wages as well as the financial incentives that were being provided for this kind of investment. Now that these countries are well connected to the Germans and the Scandinavian states they benefit from growth in these countries. The German recovery has fueled the eastern recovery and to some degree the eastern recovery has been good to the western economies. The trade between the two regions has accelerated.

This has led to the other development. The expansion of trade has meant that there are more job opportunities in these countries and the rate of unemployment has been tumbling. The addition of these good jobs has meant that consumers have more money than they once did and that has allowed the development of the local economies. One factor that doesn’t gain as much attention has been the role of the expatriate. The exodus of young workers seeking opportunities in the western states has been a concern for years and from a variety of positions. The eastern states are worried that they are experiencing brain drain and the western states have been concerned that too many have been arriving seeking work and that this has undercut wages. The positive that many have managed to miss is that these workers have been sending a great deal of money back to their home countries and that has boosted consumer spending as well.

The one motivation for the expansion that worries analysts is that all of these countries have been pouring money into their own economies with various stimulus plans. On the one hand, this is what one expects the government to do as a means by which to boost growth but if the effort pushes debt and deficit levels too high there is the possibility that more damage will be done than good. To make this strategy work these states have to maintain that fast growth and reap the revenue rewards that come with it.


Corporate Backlash

The controversy simply intensifies day by day and the fallout continues. The corporate community had been a stalwart defender of the Trump administration and for the most pragmatic of reasons. They cared little about the Russia controversy and the other distractions and welcomed the efforts to reduce regulatory burdens, reform tax systems, build infrastructure and the like. The fact is that growth has been taking place, most of it has had little to do with Trump policies as these have been largely thwarted but at least the policies were not worse than before. This tolerant attitude is evaporating quickly and is due to a stunning lack of tolerance on the part of Donald Trump.


Analysis: The bottom line is that these corporations are pragmatic. They have a clear mission and that is to make sales and earn money for their shareholders. The attitude of the consumer is paramount. They all spend billions to create an image that supports these sales and they simply can’t be associated with the kind of rhetoric coming from Trump. The defections from the various advisory boards started almost as soon as the attack in Charlottesville and they were coming so rapidly that Trump elected to dissolve the boards rather than deal with mass resignations. He now runs a very serious risk of isolation from those who had been his most important supporters and more to the point – the supporters of the Republican Party.


The Black Owl Report – An Executive Intelligence Brief

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


How Do They Know?

There are times that I really need a distraction from the ills of the world. One can only engage in so much outrage before there is a risk of stroke. I have read many accounts detailing the importance of a pet in restoring calm and certainly the feline five provide more than their share of distraction. It seems that sometimes they know that more is needed.

Yesterday and today I must be sending all manner of distress signals as Scoot has swung into action. All day yesterday she was plopped on my desk and constantly turning to me with a little meow reminding me that I had not paid attention to her in the last five minutes. She always does this in the morning but then she is off on her other missions (sleeping in HER chair in living room mostly). Not yesterday – she never left the desk unless it was to go fetch a toy that I was expected to throw. She does this from time to time but gets bored after a few minutes. Not this time – the game lasted all day. She barely napped at all. Today she is exhausted from all that soothing but has still spent more time than usual on the desk and with toys.

The others have not been undone. I was required to do the laser light thing with Spike all day and Smoky contributed by parading all over the house with a blue ball in his mouth while singing. It is quite a performance. Sven also felt compelled to check in often and carry on some rather one-sided conversations. Even Snip reentered the earth’s atmosphere from wherever she usually is. It is somewhat uncanny that these cats seem to know when they are needed most. I am considerably less stressed than I originally was.


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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Russia Worries About Sanctions – The Russian economy has been teetering on the edge of a serious recession for years and has only recently started to see some signs of improvement. This is a commodity dependent economy that has not been happy to see oil prices fall. The sanctions that have been put in place by the US are worrying the country as these will hit the oil sector as well as other industrial areas. The consumer sector is still very weak and incapable of pulling the economy along. The export business in Russia is commodity based and it is the sector the sanctions will affect the most. The Russians had hoped that Trump would provide new opportunities but that plan now seems to have badly backfired and Russia may have to seek other tactics and strategies.


Putin has tried to assert that the sanctions that have been imposed on the country have not damaged the economy but the evidence is saying something different. The recent round of sanctions imposed by the US Congress were not what worried the Russians last year when all this meddling started to take place. The US has been typically myopic about this issue and has focused almost exclusively on what Putin may have tried to do to influence the US but the fact is that Russian attempts to interfere with elections in France, the UK, Italy and Germany have been well documented. No political leader in these countries made much of an attempt to work with Russia openly but the influence was there. The Russians wanted the sanctions imposed on them for their Ukrainian intervention lifted and these are the sanctions that have stung. They have limited investment in the Russian energy sector, they have affected the banking system and have made trade with Russia more difficult. The position taken by Hilary Clinton was to continue the sanctions and Trump was open to reducing or eliminating them. This strategy has been a bust all around.


Russia is facing stiffer sanctions than ever and the Trump administration has been bogged down in this issue from the very start of the term and by all accounts it is only going to get worse. The Russian economy is now on life support unless and until the price of oil returns to levels that will allow the country to make money from it again. The manufacturing sector is a joke, consumers do not have enough to bring the economy along and there is only a little progress as far as the service sector is concerned. The sale of commodities is the focus of the economy and prices are way down and likely to stay there.


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Business Intelligence Brief: August 16, 2017

Short Items of Interest – US Economy


  • Dispute Resolution in Nafta – The current system involves the use of expert panels to settle disputes between the three nations when it comes to tariffs. This system has been in place for 23 years and the majority of the rulings have been in the favor of the US. There have been some high-profile rejections as well. The real concern on the part of the US is that Trump wants to impose a great many tariffs in the future and it is quite certain the panels will reject most of these. The US wants the disputes to be settled in US courts and for obvious reasons the Mexicans and Canadians reject the idea as biased against them from the start.


  • Housing Starts Down in July – There is a little bit of good news along with the bad on this front. The bad news is that there was a decline in the number of housing starts in July but the good news (sort of) is that the majority of this decline was in the multi-family sector. The number of single family homes actually increased and this may signal that some of those millennials who have been driving the building of apartments and lofts may be switching to the single family option as they get older and start to form families. Starts fell by 4.8% and that was more than had been expected. There was also an unexpected decline in permits – a decline of 4.1%. The expectation has been that starts would be up slightly – by around 0.4% and permits would be essentially flat. The sense is that some of the headwinds that many thought would be an issue earlier in the year are manifesting now.


  • Defections – There have been some high-profile withdrawals from the advisory boards created by the Trump White House. The first to withdraw was the head of Merck and he was greeted by a nasty set of tweets accusing Merck of gouging on drug prices. Subsequently there have been others such as Richard Trumka from the AFL-CIO and Steve Paul from the Alliance for American Manufacturing (created by the steel industry to fight for its survival). These had been people who supported his campaign early on. Others that have chosen to stay engaged have issued strong statements of condemnation of the white supremacist protestors but have asserted that they need to stay engaged in the debate over jobs.


Short Items of Interest – Global Economy


  • Border Tensions Between China and India – Much of the world has been focused on various high-profile conflicts in Asia such as North Korea and the Chinese activity in the South China Sea. The dispute between the Chinese and Indian governments has been a back-burner issue for a long time but now it appears to be heating up somewhat. The border skirmish between troops from both nations was brief but there were casualties and injuries. The two states claim territory in the Himalayas and have been prepared to fight over these claims despite the utter worthlessness of the land.


  • Kenyatta Wins Disputed Election – As expected the current President of Kenya held on to power in an election that has been widely criticized as irregular and fraudulent. Uhuru Kenyatta won over Raila Odinga but few in the country believe the election was fair and many outside observers assert the same thing. In the days after his victory Kenyatta has been closing down any NGO that opposed his campaign and that has provoked other groups from western states to threaten withdrawal. The country needs this aid but Kenyatta seems willing to risk the fallout as he seeks to purge any and all opposition.


  • Italy Sees Fewer Migrants Arriving from Africa – Since establishing new protocols for dealing with refugees and putting a larger naval presence in the region there has been a 73% reduction in the number of arrivals. The Italian navy is no longer operating close to Italy – they have moved closer to Libya and other parts of North Africa and as they intercept the refugee craft they are promptly returning them to African soil. The fear in Europe is that refugees will seek other routes and that these will be far riskier than those used to get to Italy.




What’s Up With the Consumer?

Is there anything quite as mysterious and fickle as the consumer? Perhaps we get distracted by the term. It is not as if there is just one consumer or that the consumer is united in any respect at all. There are 330 million consumers in the US and they are of all ages, genders, races, and they live in every geographic area one can imagine. Most importantly from an economist’s point of view they are all in different financial situations. Assessing a group this large and diverse will inevitably mean making gross generalizations. This task would be considered too daunting but for the fact that consumption drives the US economy in almost every respect – accounting for roughly 80% of the national GDP and a similar percentage of jobs.


Analysis: Having said all that, what do we know about the consumer right now? One of the more perplexing issues this year has been the disconnect between levels of consumer confidence and their willingness to spend. From the start of the year the surveys from the Conference Board and the University of Michigan (among others) have been asserting that consumers are as confident as they have been since before the recession. They have been encouraged by the low rate of unemployment, the relative lack of inflation, the recovery in the value of their home and the fact that various trigger events have been subdued (consumers react strongly to the price of gasoline and it has generally been down). This kind of enthusiasm generally translates into a desire to spend more money and the level of retail sales can be expected to rise. The problem is that these retail numbers didn’t rise as expected – at least not until now.

The rate of retail activity suddenly jumped in the last month – a rise of 0.6%. This is as rapid a rise as has been seen in several years and it begs the question – why now? The spending has been diverse and there is no sign that it has been triggered by something unusual. In past years there may have been a surge in spending because of a sharp hike in the price of gas – causing people to spend more at filling stations. That was not a factor this time. People seemed to spend a lot at home improvement stores and lots of people spent heavily online. Amazon had one of the better months in its history. There was even a little improvement in the sales of cars. This is unmitigated good news – right?

It is not completely welcome news as there are some issues that are lurking behind these better numbers. The consumer may be encouraged by the reduced levels of joblessness but they have not been impressed by the wage hikes that have taken place. The rise in wages has been anemic and that has meant that consumers are having to turn to their credit cards if they want to increase spending and that is a longer-term worry. Over the last few years there has been a reduction in the levels of credit but that has been reversing this year. The crisis in 2009 was due in part to the fact that so many people were too highly leveraged. The situation now is not as serious as it was then but the trends are concerning – especially as the holiday season arrives.

If the pace of spending continues at this pace the chances improve for a robust third quarter growth number. The pace at the start of the year was miserable at 1.4% but the trend was up in the second quarter with a rate of 2.6%. This is the pattern that has been showing up almost every year since the downturn. The year starts off very slowly and begins to pick up speed. The third quarter has often been the most robust of the four over the past few years. In 2016 the growth in the third quarter was 3.5% and this year the prediction is for growth between 3.5% and perhaps 3.7%. If this year is like past years the rate will fall again in the fourth quarter and the whole pattern will be repeated in 2018. The Q3 numbers reflect the consumer orientation towards the coming holidays and once those purchases are made the process slows down.


Fed Minutes and Clues to the Next Step

The minutes of the last meeting of the Fed will be released today and they will be parsed carefully. This is the best opportunity for analysts to get inside the heads of the decision makers as they will get some sense of the conversation that took place over what the Fed should do. We already know the Fed elected to keep rates where they were and that came as no shock at all. The estimate all year was that a rate hike might take place in September but the statements coming from Janet Yellen made it abundantly clear that a September rise was off the table. There has not been enough inflation to justify a radical move and the Fed assumes it can continue to be very patient with this process. The most interesting part of the last meeting was the conversation over how and when the Fed plans to reduce its balance sheet.


Analysis: The Federal Reserve started the recession period with a balance sheet of some $800 billion but it has since grown to at least $4.5 trillion. This was accomplished as the Fed worked to stimulate the economy with three rounds of quantitative easing. The first round was buying up many of the mortgage backed securities so that banks would have the freedom to lend. The banks that had invested heavily in the MBS market had too much non-performing debt on their book. The second and third rounds of QE involved buying lots of treasuries to push more money into the banks and subsequently into the rest of the economy. It is debatable how well this worked but the end result is the Fed has lots of this debt on their books and would like to see it reduced sooner than later. The plan has yet to be detailed but it would involve just letting some of these bonds expire and it may involve actively selling this debt off to other investors. The Fed wants to do this without crushing the market for private corporate debt or municipal bonds etc. The bond buyer seeks security above all and nothing is as secure as US treasuries. When they hit the market, they tend to crowd out all the other options.


Nafta Negotiations – Bombast vs. Pragmatism

After months of statements and posturing the actual process of negotiation has started over the future of the North American Free Trade Agreement. This has been one of the more controversial pacts the US has been involved in from its inception as it had very ambitious goals. The motivation for Nafta in the beginning was simple enough. The US was watching the trade pact in Europe get stronger and stronger and noted that the European Union was giving the Germans and the other nations of the north an advantage as it allowed them to develop manufacturing alternatives in the lower production cost states like Italy, Spain and many of the former east European countries. The US wanted to ensure that it had a similar advantage in North America as it would combine the resource rich Canadians with the lower cost production of Mexico. Business would not feel compelled to decamp to Asia with this arrangement in place. It was also seen as a pact that could cement the oil business of Mexico and Canada to the US. There had been noises in Mexico that suggested they were considering an invitation to join OPEC.

Much has changed since the pact was developed and everyone now agrees that it needs updating and reform in certain areas but very few in the business community have any desire at all to see it scrapped. The opposition to Nafta has been political as opposed to economic. There are certainly businesses in the US that have been adversely affected by the pact as there have been manufacturers that have moved operations to Mexico from the US. The point that is often missed is that these operations would be leaving the US in any case. The competitive reality is that companies have to compete with those that have lower costs of production and if these companies can’t lower costs enough in the US they are forced to look elsewhere. It then becomes a matter of where. Leaving the US to set up in Mexico is much more useful to the US economy than moving to China.


Analysis: The business community exerted a lot of pressure at the start of the year and forced the Trump position on Nafta to change. The rhetoric regarding withdrawal ended and the talk shifted to finding ways to address the trade deficit with both Mexico and Canada in different ways. Now that the talks are starting in earnest, that Trump rhetoric is back as he has threatened once again to walk away from the agreement if there is not significant progress. In many respects, this can be seen as a negotiating tactic as it allows the White House to determine what “significant progress” is. The sides are presenting their most aggressive positions as one would expect and the likely development from this point is a series of gives and takes while both sides trumpet their toughness on the issue. The most interesting development of late has been the push by US manufacturers to capitalize on the Mexican contacts in the rest of Latin America. The US can affect the trade deficit by selling more to the Mexican business community and that means getting more engaged with the trade that Mexico does outside Nafta.


Fed is Not Alone

As discussed in an earlier piece the Federal Reserve is trying to determine what it is going to do with its balance sheet. This task is the same one facing all of the world’s central banks. The last ten years of stimulus dragged the central banks into some pretty unfamiliar territory. In the absence of significant stimulating by the legislatures of the world the banks were tasked with doing more than lowering rates and reducing reserve ratios. Today the central banks hold a fifth of the debt issued by their governments and that is an unprecedented situation.


Analysis: What is often overlooked when discussing the role of the central bank in stimulating is that they have to work through the banking system. The actions of the legislature can be direct – providing financing for projects that will employ people, cutting taxes and generally funneling money into one effort or another. The central bank can only encourage the lending community to engage with lower interest rates and lately by buying treasuries and other government debt through these banks. The challenge now is that the ECB, Bank of England, Bank of Japan, Bank of Canada, Reserve Bank of India, Reserve Bank of Australia, Bank of China and the Fed (among many others) are sitting on billions of dollars of that purchased debt and they all want to reduce the size of their portfolios. There is no capacity in the global economy for this much debt and that means these banks are constrained by the actions of the others. Some attempt to coordinate all this may be discussed at the upcoming meeting of the central bankers in Jackson Hole. The meeting is about a week away and at this point all of the leaders of the major banks are indicating they will attend.


The Black Owl Report – An Executive Intelligence Brief

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


Damage Control

There are some cruel realities in business. No matter how hard one works or how hard one tries there will be failures and mistakes. The illusion of control is just that and the only thing that anybody can really control is how one reacts to the crisis. Over the last year or so we have seen companies that deserve praise for their reaction and we have seen companies that have completely missed their opportunity to limit that damage. There are few industries more challenged by the unexpected than the airlines as they are always subject to the vagaries of weather. Add in their dependence on highly complex machines and their need to emphasize safety and you have an industry that will be required to react to something every day.

I have made no secret of my preference of air carriers and to be honest I don’t really know that much about the other airlines as I rarely fly them. I know what shows up in the press and United seems to have a negative story every day. Lately Southwest has had some issue with their new computer system and it has been frustrating. The system has been down too often and the reservation system has been dumping A-listers into the B and C categories. I have not been happy with this hassle but the response from Southwest has been typically proactive with frequent communications about what is going on as well as with gestures like assigning me extra points for my trouble. In the great scheme of things, it would be nice if everything worked as it is supposed to but that is simply never going to happen so the next best thing is reacting appropriately when there is a breakdown.




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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Japanese Growth Surge – Don’t look now but Japan is finally posting the kind of growth numbers it has long needed. The rate of growth now is 4.0% on an annualized basis and what is even more impressive is that this growth has been driven by the much-maligned consumer. The pattern in the past has been for the consumer to remain cautious in the face of all manner of government stimulus and now that pattern seems to be eroding. Japan has been almost completely dependent on the strength of its exports and lately these have suffered from the strength of the yen. The good news now is the consumer is taking advantage of that strong currency to buy more and the economy has been responding.


There is more to this growth than meets the eye. For many years the Japanese have been struggling to get out of a very persistent deflationary spiral and it seemed that nothing worked. The government has tried wave after wave of stimulus plans and the Bank of Japan has kept interest rates as low as any in the world and for a longer period of time. Tax cuts have been tried and there have even been attempts to make shopping a sign of patriotism. Nothing succeeded. The country remained at the mercy of the global economy with a heavily dependent export economy. If there was not sufficient demand for goods made in Japan there was no room for real expansion and the Japanese remained dependent on the US, Europe and China. There seemed no way to bolster the contribution of the domestic consumer.


The transformation of the consumer from a saver to a spender is hardly complete and the action of the modern consumer may be short lived but for the last few months the consumer has been driving the economy with their purchases of everything from housing to cars to clothes and even travel. The government has tried to make this consumption easier and it appears there is a response. The business community has also been making its contribution as there has been more capital spending and investment.


There has also been some recovery in the export levels as the US, Europe and China have all seen better growth numbers and that permits an expansion of the Japanese export sector at a very critical moment.





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Business Intelligence Brief: August 15, 2017

Short Items of Interest – US Economy


  • Is the Consumer Finally in the Game? – Since the start of the year the consumer has been mumbling about how confident they are in the economy but this never seemed to translate into spending. The retail numbers have been consistently weak but the latest data suggests that the consumer is finally coming out of their funk. The rise of 0.6% is the best that has been recorded this year. What makes this data that much more encouraging is that there doesn’t seem to be some unusual event playing a role. Sometimes the rise in the price of gas will create a surge in retail activity but that is hardly a welcome and voluntary hike as far as retail is concerned. It seems that consumers have been spending a bit more on meals, travel and even things.


  • Nafta Talks Start – There have been many changes since the Nafta conversation began during last year’s campaign. The rhetoric seemed to suggest the US was going to scrap the whole thing and impose immense trade and tariff barriers against goods from both Canada and Mexico. Very little of this is on the table now and the challenge for the White House negotiators will be getting enough of a concession from the Mexicans and Canadians to appease some of the anti-trade backers of Trump. The business community is far less worried than they once were but understand that significant issues remain and they will have to stay alert.


  • Health Care and Economics – The newest nominee to the Council of Economic Advisors is a specialist on health care matter from the University of Chicago. Tomas Philipson has been advising everything from the FDA to commissions on Medicaid and Medicare and runs a consulting group that focuses on health care. He is a very strong free market advocate who has argued for years that the problem with health care is that it has never been allowed to function in a competitive and free market environment – that regulation has as much to do with the problems as any other single factor.


Short Items of Interest – Global Economy


  • Populist Fragmentation in Europe – At the start of the year the prevailing wisdom was that the entire continent was on the edge of a populist takeover as it was assumed that politicians like Geert Wilders and Marine Le Pen would sweep to power. That did not happen and now the word is that populists are on the wane and no longer a factor. This is just as likely to be wrong as the movements have not vanished in the Netherlands or France or elsewhere. If anything, the divisions are more pronounced than ever with strong left leaning populists contesting with right leaning populists. What they have in common is anger and a sense of disillusionment with the traditional leaders.


  • Macron’s Challenge – The sweeping victory over Marine Le Pen should have provided Emmanuel Macron an extended honeymoon but that has not been the case. It seems that most of those who voted him in were really just trying to keep Le Pen out. They are still suspicious and angry and are waiting for something to change for the better. They are not patient and have already started to turn their backs on the new President. The resentment and anger is deep and will not be easily addressed – most are even hard pressed to see a strategy to guide the effort.


  • Increased Attacks in North Africa – In the last week there have been assaults in Mali, Burkina Faso and elsewhere in the region. The groups that have claimed responsibility appear to be loosely connected to the radical Islamist factions that have been active in this region. The target has been UN personnel and security guards as well as police and military. The aim is essentially harassment and it has not been clear that these attacks have been planned outside the region. It has put these already weak governments under increased pressure and there are few other resources they can avail themselves of.




Currency Values and Growth

This shouldn’t come as a shock but it always seems to. The US is an export oriented nation and has always been. The exports from the US account for close to 15% of the national GDP every year and that is some $200 billion. It is estimated that 90% of the Fortune 500 companies depend on foreign trade for at least 15% of their business and there are many that are even more engaged. All the recent bombast regarding the evils of globalization obscures the fact the US relies on that global business at least as much or more than any other country. Japan’s exports account for about 14.7% of their GDP. There are many practical implications as far as the overall economy is concerned. The most salient is that growth in the US is dependent on growth in the export sector. When this part of the economy is doing well the whole economy benefits and when it isn’t growing the US slows. The primary question then is what makes the export sector healthy?


Analysis: The US is certainly not the only country that wants to sell its products and services in foreign markets – there is competition. The fact is that every country has certain advantages and disadvantages as far as marketing their wares around the world. The US will never be able to compete with very low production cost nations when it comes to cheaper consumer goods. This is why the US sells very few of these on the international market and does a lot of importing. The US workers are paid far better than their counterparts in other parts of the world and the cost of doing business in the US is far higher due to everything from taxes and regulation to the costs of materials and other inputs. The US has a higher standard of living and this eliminates some categories of export. On the other hand, the US has the technology and expertise to produce very high value output – both in terms of products and services. There is competition here as well – from the other industrialized states such as those in Europe and Asia.

There are two important factors over which companies have no control. These factors will either make selling overseas harder or easier and will have a profound impact on the level of overall export activity. The first is whether the country that is intending to sell to has the ability to buy. The US export sector has been in some distress for the last few years simply because the major trading partners for the US have been in some economic distress. The European Union has long been at least 25% of total export trade and for the bulk of the last ten years these nations have seen very anemic growth and that has affected their level of demand for US output. Of late there has been better economic news coming from these countries – Japan is growing at 4.0%, the EU is growing at nearly 2.0% and China is back to almost 7.0% growth. All of this leads to more demand for US goods.

The other factor is the value of the dollar and this impact is pretty simple to understand. When the dollar is strong the potential buyers are going to have to pay more for a US product as their currency will not buy as much of what is priced in dollars. This is a major consideration when buying an expensive capital good – for example a slight hike in the value of the dollar adds tens of millions to the cost of a Boeing aircraft as compared to one from Airbus. Over the last ten months the US dollar has been sliding against the rest of the world’s currencies and that has boosted the levels of exports. The US doesn’t necessarily want the dollar to collapse as the US needs to buy lots from overseas – everything from oil and natural resources to intermediate goods for US manufacturers and the consumer goods that Americans covet. There is a happy medium somewhere but it all depends on one’s perspective. The point is that much of the US growth that has been trumpeted over the course of the year has been due to exports regaining their former place.


What a Shock – North Korea Backs Off

The Chinese just yanked the chain and Kim Jong-un has elected to back away from that pledge to attack Guam. What now follows is a whole series of face saving statements and gestures as everybody tries to spin the whole episode. The Kim regime is engaged in a self-congratulatory orgy praising their “dear leader” for his restraint and patience while the Trump administration is swaggering and asserting that those threats forced the Pyongyang regime to knuckle under. The one nation that has been somewhat subdued about all this is the one that had the most to do with defusing current tension.


Analysis: China stepped up its pressure on North Korea with additional economic moves that line up with the sanctions approved by the UN. China has massed troops on the North Korean border for an “exercise” but it has not escaped notice that there has been deployment of anti-missile batteries as well. There have been reports for the last few weeks that high ranking North Korean military leaders and diplomats have been summoned to Beijing. The exact nature of the conversations is not known but it can be surmised that China was making its preferences known.

There has never been a question of whether China had influence – the only issue was determining what it would take to get them to use that leverage. What has China received in return for this engagement? The sense is that China has been able to extract some concessions from the US on trade matters. Suddenly the US has shifted its negotiating stance away from imposing blanket tariffs and has focused on intellectual property. This is something the Chinese themselves have an interest in and seems to signal that the US has decided to back down on some trade issues.

In truth, nobody will ever know the details as none of the nations involved have any desire to reveal much about these trade-offs and deals. The important thing is that the imminent conflict with North Korea has faded and the world can stop contemplating the impact of such an exchange.


The German “Miracle”

Germany today is the clear engine of growth in the European Union and Angela Merkel is expected to easily win a fourth term as Chancellor on the strength of the economy since she took office in 2005. It is almost hard to remember that prior to 2005 Germany was referred to as the “sick man of Europe” with high unemployment, low growth, high deficits and a burgeoning debt. It was not hard to understand why Germany was in this state. The process of reunifying with the former East Germany was exceedingly complex and expensive as it involved accommodating 16 million people who had no experience with a market economy. The infrastructure in the East German region was woefully antiquated and non-competitive and the Germans of the west had to carry their eastern cousins for over a decade. Merkel was from the former East Germany and was an official in the old regime – she knew its weaknesses and its strengths.


Analysis: Today the Germans are the clear European engine and the rest of Europe is well aware. The turnaround has some implications for other countries that wish to see this kind of rapid growth. There have been some decisions that made more of a difference than others. German business was losing the competitive fight to most other countries – from fellow industrial states to developing nations with lower production costs. The key to getting back in the game was labor reform – specifically an agreement with the labor unions that held wage growth down for a period. Eventually these wages went up but the German business community had an opportunity to catch up and regain some competitiveness. There was also money available for the kind of investing that manufacturing required to modernize. The point is that labor flexibility is often key to expansion.

The second major factor is that Germans found a way to bring the whole country forward with investment in the former Eastern regions. Roughly 1800 German companies have sponsored over 3500 projects in the former GDR and in the process created 650,000 jobs since 2003. The growth of Germany has been dependent on the changes in that part of the country. The Germans also targeted nations that had been ignored to some degree by other nations. This is a country that relies on exports for over 50% of its GDP and in the past the vast majority of their market was the other nations in Europe. The EU states are still important but the Germans have been very aggressive as far as opening up new opportunities in Eastern Europe, India and the Middle East as well as in Latin America. The trade patterns for Germany are among the most diverse in the world. They have also expanded their presence in the US through trade as well as direct investment and that has allowed fast growth.


Britain and Brexit

The negotiations over the British exit from the EU are progressing and it has been more and more obvious that the UK wants to stay in contact – at least from a business point of view. The latest proposal issue by the May government suggests that there be some sort of customs union in place after the formal withdrawal is completed. In the simplest of terms, the British want to recreate the organization that existed when this thing was referred to as the Common Market. The truth is that Britain started to become uneasy over the direction of the EU when it moved away from it economic origins to be more engaged in the “unification” of Europe. The UK chose not to become part of the Eurozone as there was no desire to lose control of monetary policy.


Analysis: The real question is whether the Europeans want the same thing and the opinions vary. There are several states in the EU that want this economic relationship to be maintained as they do a lot of business with the UK. Others are not as connected and continue to feel betrayed by Brexit. The key states will be the largest ones – Germany, France, Italy and Spain. If these four agree on a plan the rest of Europe can be cajoled and persuaded to go along.

The British chafed mostly at the provision that allowed open and free migration from one EU state to another. This was considered a cultural and economic challenge to some. The EU members are adamant that this provision is key to EU membership and they are not inclined to give the UK a pass. The fear is that other EU members would begin to demand some restrictions as well. Immigration is not an issue in the UK alone. Beyond this there are those in the UK who reject the regulations that are promulgated in Brussels as they are seen to be inappropriate for the British. The desire for some kind of trade pact will inevitably mean agreeing to many of these rules and regulations as they influence the way that business is conducted throughout Europe. The British firms doing work in Europe already agree to these rules.

The Black Owl Report – An Executive Intelligence Brief

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


Protecting US from Our Worst Selves

I have hesitated to wade into this highly emotional controversy. This publication strives to focus on business and economics and I am, after all, an economist. I am not versed in the dynamics of social turmoil but as a citizen I have a stake in all this. Those who would prefer I keep my comments confined to economic issues (and cats of course) should stop reading about now.

The unalterable fact is that we all have our base instincts and our flaws. We rant and rage at those injustices done us and that is our right to some degree. To protect ourselves from ourselves we have the government and authority in general. Should I take exception to some driver on the highway I do not take matters in my own hands and seek to wreak personal revenge as I know this will get me in a lot of trouble. I have to trust that justice will be done at some point. We have laws to protect us from others and from ourselves.

We are not strangers to fanatics; our history is replete with radicals and extremists using every tactic they can think of to incite change that suits them. The thugs marching behind their Nazi flags and their KKK banners were not the first and they will not be the last. We have a system that protects their right to be bigoted fools but we also have a system that is supposed to protect us from our worst sides. The leaders of this country absolutely must condemn that which rips us apart and makes coexistence impossible. The leaders have to demand our better selves manifest and must make it clear that we may have the right to express bigoted and vile opinion but that this opinion and belief is wrong.


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


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


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


The latest M2 Velocity of Money ratio showed that it came in at 1.425 in Q2, slower than the 1.428 posted in the last update.  This remained the absolute lowest velocity recorded since the series was started in 1959.  Some analysts want to point to an economic environment where we are growing at 2-2.5% and call it good. It’s not bad, but as long as the velocity of money is still stagnant, we don’t know how fast the economy should be growing. Let’s see money start to change hands faster…and then see what GDP looks like. Maybe it won’t change.  We believe it will.




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Business Intelligence Brief: August 14, 2017

Short Items of Interest – US Economy


  • Weak Dollar Promotes Growth Expectations – Over the last few years the strength of the dollar has been partly responsible for the sluggish pace of growth in the US. As large as the domestic economy is the US is still a state that depends on the export side of the equation – it accounts for some 15% of the national GDP. The high value of the dollar made it harder to sell overseas and that drug the rate of growth down. Now that the greenback has been losing some of that strength the export sector is coming alive and this may be the single most important driver of recent US growth. The fastest way to reduce trade deficits is to export more than one imports and the value of the dollar is the key ingredient.


  • Inflation Still Subdued – The latest edition of the Consumer Price Index shows that there has been very little movement – a slight hike of 0.1%. This has been baffling to many analysts and to the Federal Reserve. It had been expected that all the additional growth over the last year would have started to put pressure on prices by now but this has not been happening. Wage rates are still down and commodities have not seen a boost either. The unemployment rate is indeed low and that should provoke higher wages as business tries to recruit from a smaller pool. The problem is the people who are being hired are not all that well qualified and that reduces their leverage as far as wages are concerned.


  • Market Still Reacting to Global Unease – Thus far there are few who assert that a major correction in the market is imminent but there has been more uneasiness than has been manifested recently. The fear gauge has been rising as people remain nervous about what might happen in North Korea and now there are additional fears rising from comments regarding Venezuela. The racial incident over the weekend has had an impact as well as there are fears that tensions could escalate to the point of riots and disturbances in other cities. This is a doldrums period for the market anyway and every issue takes on a greater level of significance.


Short Items of Interest – Global Economy


  • Japanese Growth Surge – Don’t look now but Japan is finally posting the kind of growth numbers it has long needed. The rate of growth now is 4.0% on an annualized basis and what is even more impressive is that this growth has been driven by the much-maligned consumer. The pattern in the past has been for the consumer to remain cautious in the face of all manner of government stimulus and now that pattern seems to be eroding. Japan has been almost completely dependent on the strength of its exports and lately these have suffered from the strength of the yen. The good news now is the consumer is taking advantage of that strong currency to buy more and the economy has been responding.


  • Growth in China Likely to Slow Again – Earlier in the year the Chinese government was taking steps to reduce access to credit as a way to slow the economy down a little. That decision was reversed in mid-year and growth took off again. The chances are good that China will try to control that credit again by the end of the year and growth will slow once more. The goal has been to fine tune the economy and that is always challenging – especially an economy based on investment and foreign trade.


  • Russia Worries About Sanctions – The Russian economy has been teetering on the edge of a serious recession for years and has only recently started to see some signs of improvement. This is a commodity dependent economy that has not been happy to see oil prices fall. The sanctions that have been put in place by the US are worrying the country as these will hit the oil sector as well as other industrial areas. The consumer sector is still very weak and incapable of pulling the economy along. The export business in Russia is commodity based and it is the sector the sanctions will affect the most. The Russians had hoped that Trump would provide new opportunities but that plan now seems to have badly backfired and Russia may have to seek other tactics and strategies.




Economic Implications of the Opioid Epidemic

This has rapidly become a major crisis for the US and for the world in general. The impact has been felt in cities, rural areas, suburbs and in every economic category. The death toll is mind numbing – 60,000 people died of overdoses last year alone and that is more American deaths than in the Vietnam War over a ten-year period. This alone makes it an economic as well as a cultural issue as it has become the leading cause of death for people under 50. The addiction is pervasive and has affected nearly every community in the country. It has now been proclaimed a national emergency by the White House and that will presumably release more funds to tackle the issue. The problem is there is very little agreement on what tactics to employ to address the issue.


Analysis: The language thus far is typical of that which has been employed before. There is going to be a “war” on the opioid epidemic, whatever that means. Presumably this means an emphasis on drug interdiction and an attack on those that distribute the drug. This will always be a part of any campaign and this makes sense to a degree. The issue is that it is far from enough and far from effective. There is not enough law enforcement to stop the spread of the epidemic as long as there is demand and money to be made from the sale.

The alternative to “war” is to treat the epidemic as a public health issue as outlined in a study put together for Chris Christie of New Jersey. His state has a massive problem with opioids and it has devoted a great deal of money and effort to the law enforcement fight. Christie’s report states that emphasis needs to be placed on treatment and on breaking the addiction. This means using medical substitutes for addicts. This course of action has been disallowed through most of the country as these addicts are required to adhere to a strict regime of abstinence. The majority can’t follow that protocol and are soon back to their old habits. It I also recommended that drug centers be funded through Medicaid – something not allowed at the moment.

There are many elements of this issue that make it different from the drug problems the US has faced before. These are drugs that affect users across all classes. The opioids are as common among middle class users as with poor users. These are domestically produced drugs for the most part – not smuggled in from other parts of the world. There are supplies coming from elsewhere but there is no hope at all of interdiction at the border. The drugs are almost invariably addictive and additives have made them especially dangerous. The fact that millions of people use these opioids for legitimate reasons makes the problem even harder to address. An outright ban is not possible.

The most immediate economic impact is the costs incurred by treatment and the other ways the addiction is addressed – incarceration and the law enforcement time and money spent. There is the issue of lost work hours from those affected by the addiction as well as the damage caused by those who have the problem. Finally, there is the diversion of consumer dollars from legitimate purchases to illicit ones. The list goes on and on and estimates vary considerably according to what a given analyst is considering. The most common sum thrown around has been $80 billion and that is certainly money that could be put to far better use. At the heart of the solution is figuring out why people are drawn to this addiction. Most start out using the pain killers as they were intended for but it becomes a slippery slope to addiction as the amount needed to dull the pain increases.


China, North Korea and Leverage

The divisions within the White House on China and North Korea are becoming more and more obvious. The focus of these disagreements is what can realistically be done to stop the increase in tensions over the North Koreans and their threats towards the US. The key player, as it has always been, is China. They can and will stop Kim Jong-un from making good on his threats but not until they get want they want from the US as well as Japan and South Korea (among others).


Analysis: On the one hand, you have elements of the Trump team (as well as Trump himself) committed to putting as much pressure on China as possible – over everything from trade issues to their incursions into disputed territory (South China Sea, Senkaku/Diayou and with the Indian border). On the other hand, you have advisors such as National Security Advisor McMaster and UN ambassador Haley urging a much softer approach to China in order to ensure they use their influence on North Korea.

The fact is China holds all the cards when it comes to North Korea and it is no accident that things get tense with Pyongyang when China wants something from the US or the rest of the world. China has both short term and long-term options as far as bringing Kim to heel. The Chinese control the economy of the North Koreans and can shut down the country at will. In the short term the Chinese have anti-missile batteries on the northern border of North Korea and could shoot down any missiles launched should Kim be in the mood to challenge his benefactors. The Chinese are doing what they have always done – exact the best deal they can get from the US before they bring their power to bear on North Korea. At this point the anti-Chinese rhetoric from Trump is making this harder than it should be but China figures that time is on their side. It is not China that North Korea is threatening and the US has the most to lose. Sooner or later a deal will be struck with China and steps will be underway to defuse the situation with face saving gestures all around.

This is assuming the pragmatists in the military and the intelligence community hold sway. The one wild card is Kim and his willingness to try the patience of the Chinese. He may try to provoke a reaction before China gets what it wants from the US but such a betrayal of the Chinese would certainly cost him power and even potentially his life.


Why Threaten Venezuela?

One of the more perplexing statements to come from Trump was an almost off-handed comment regarding the crisis in Venezuela. The statement in its entirety was “We have many options for Venezuela, including possibly a military option if necessary.” There was no context for the threat and there has been no threat issued from the Maduro government towards the US. It is certainly true the US condemned the recent creation of a puppet legislature that is destroying what is left of the democracy in the country and it is also true Maduro has been an implacable enemy of the US as was the man he replaced (Hugo Chavez). It is certainly likely the US is willing to aid anyone who would seek to remove Maduro from power but an overt attack from the US would almost certainly accomplish little other then cementing Maduro in power and pushing many other Latin Americans states against the US. There have already been strong condemnations from governments as diverse as Peru, Chile, Colombia and Mexico. Left wing regimes in Ecuador and Bolivia have been nearly apoplectic.


Analysis:  The statement has been assailed as an “early Christmas Present” for Maduro as it has instantly given credence to his assertion that all of his country’s problems can be blamed on the US. Not that they can be trusted but polls in the country suggest that Maduro’s popularity has surged. The opposition in the country has been stunned by the remarks and has been forced to reiterate over and over again that they are not colluding with the US to forcefully overthrow Maduro. The Latin states that were calling for him to resign and allow the old legislature to return to power have been issuing statements of solidarity and pledging to defend him in the event the US acted against him.

Given that this was an utter diplomatic disaster and likely set back any attempt to unseat Maduro, one has to ask what the intended consequence might have been. There are two rationales under discussion. The first, as Machiavellian as it appears, is that the statement was meant to have just the impact it has. This theory holds that a real coup was imminent and this has been asserted by more than a few analysts who have been noting the dwindling support Maduro has been able to muster. The thinking is that the people ready to stage such a coup would be just as hostile to the US and would likely enjoy more support from the population and that would further delay the development of a Venezuela interested in re-connecting to the US. It would therefore be better to keep Maduro in place until the opposition is able to unseat him.

The second rationale is not so convoluted and mysterious and rests on the assumption that Trump was reacting without a lot of consideration of the consequences. Maduro was desperately unpopular with his neighbors and the world in general and it may have been assumed that a threat from the US would be a welcome sign this administration shares that opposition. The problem is that Latin America has a long history of US intervention and the majority of these states deeply resent these past incursions and tend to rally behind one another if such a threat reappears.


Rising Value of Euro Creates Dilemma for ECB

The value of a given currency changes rapidly and for a wide variety of reasons. There is no ideal position for a currency either – some in the country will always push for a weaker position and others will always push for a higher value. The exporters in a country want to see the currency value low as that makes what they sell cheaper on the global market. Those that import have the opposite desire as they want to see a high value currency that allows them to buy things cheap. The traveler wants their own currency to be strong so they can buy overseas but the domestic tourism business wants to see a weak currency to attract visitors looking for a bargain.


Analysis: Earlier in the year the euro was weaker against the US dollar and that was a benefit to the export community in the Eurozone. Many of these countries rely heavily on exports – Germany depends on exports for over 50% of its GDP and that is the same story for most of the members. The fact the euro has gained 6% in the last year has brought the euro to a two and a half year high against the greenback and that poses a problem for the European Central Bank. It has signaled that it is reducing its stimulus effort and is pulling back on its quantitative easing effort. A rate hike is expected later this year but all of that could be placed in jeopardy by the rising value of the euro and its negative impact on exports. The ECB is well aware that hiking rates will only make the euro that much stronger and that mitigates against any dramatic moves. The recovery in Europe is delicate and the ECB worries that acting too soon will stall that rebound.


The Black Owl Report – An Executive Intelligence Brief

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


What Determines a City’s Culture?

The slogans associated with a given city say a lot about a place and is self-perception. I have been in Austin for the las couple of days to speak to a trade association (PPAI). They are the promotional products people and it is somehow fitting they are meeting in a city that has done a dandy job of promotion. The slogan is “Keep Austin Weird” and this is a reputation the city embraces for the most part. It is a very fast growing city – fastest in the country for the last few years. It is the 11th largest city and the 31st largest metropolitan area. It hosts both the state capitol of Texas and the mammoth University of Texas. How did this place get this kind of reputation?

When talking to long-time residents it doesn’t appear to have been exactly deliberate. The city was open to those who generally control the cultural heart of a given community – the musicians and artists and other creative types. Today there are literally hundreds of music venues and an equal number of art galleries and performance spaces. The reality is that only a fraction of the population frequents them but there is pride in their existence. Austin prides itself on being the “other Texas” – markedly different than the rest of the state but the reality is that Texas has a lot of this variety. What makes Dallas tick is not what drives Houston and the culture of San Antonio is far different than that of Amarillo. One of the most interesting cultural developments of the last few years has been the transformation of Waco – a renaissance that is down to the influence of one family and one TV show. Today Waco is at the top of Texas tourist destinations and this shows how rapidly a culture can develop and change.


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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Financial Risk and Probability of Recession Remain Low – There are many anecdotal ways to speculate on recession risk.  We like to primarily go to the data. We look at the relationship between GDP and the St. Louis Fed’s Financial Stress Index.


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


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


We pulled the data showing the index through August 4th, and the index continues to fall further, hitting -1.582 in this briefing (it was -1.496 in the last update).  Again, the further from “zero” that it gets, the further from recession risk we go.


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


We have another measure that we also watch (Gross Domestic Private Investment) and there’s an update on it later in today’s National Economic Security Estimate (NESE).





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Business Intelligence Brief: August 11, 2017

Short Items of Interest – US Economy


  • December is Now Favored Month – At the start of this year it appeared that the Fed had a pretty firm plan in place. There would be rate hikes at the start of the year, another one in mid-summer, a third in September and likely another one in December. That no longer seems to be the case. The September hike looks less and less opportune and the majority of analysts now assert the next rate hike (of perhaps a quarter point) will take place in December. The fact is that there is no push from inflation on the horizon and that basically eliminates any sense of urgency. The economy is not exactly in need of further stimulus but there are parts of the country that have not recovered from the recession and could probably use more of that easy money.


  • Market Reaction to North Korean Crisis – As expected the markets reacted to the bellicose statements from both Trump and Kim. The decline was the steepest seen in several months but the real shock is that it wasn’t more dramatic. This reaction is an expected response to uncertainty but there has yet to be real panic as the majority of the analysts still see this as posturing by both the US and North Korea. The market decline was the largest in three months as the S&P index fell by 1.5%. The fear index is at the highest level since the election of Trump and the global markets are in the same condition. This is not a full-on crisis and it may not reach that point unless the words turn to actions. The latest move to defuse the situation has come from South Korea as the leadership there has suggested a peace conference.


  • Declaration of an Opioid Crisis – The Trump White House has finally declared the opioid crisis as a national emergency and that is supposed to free up funding from the national level. The money will certainly be welcomed but the grim fact is that few really know what to do about the burgeoning problem. There are those who want more aggressive law enforcement and others who want expanded treatment programs – most want some combination of the two. The big question is why this has exploded now and what underlies the epidemic. This is a very complex question to address but the business community is going to have to engage as the crisis is said to have cost the economy over $85 billion since the recession. This is due to lost productivity and mounting health care costs.


Short Items of Interest – Global Economy


  • Decline of Latin Populism – It is always risky to declare any political movement dead but the recent trends in Latin American politics suggests that the age of populism is giving way to the age of pragmatism. This has already been seen in Argentina as Mauricio Macri took power from the Fernandez/Kirchner group and the Peronists. That same pragmatism is showing up in Peru and Colombia. The populists in Venezuela have utterly destroyed the nation and there has been little progress in Bolivia or Ecuador. The challenge is that voters are impatient and even Macri has been noting a slump in his popularity,


  • Mexican Central Bank Leaves Rates Alone – The aggressive hiking of rates in Mexico seems to have come to an end despite the fact that inflation threats still manifest. The thinking is that consumer prices have peaked and that allows the bank to keep rates at 7.0% – at least for the time being. The country needs more access to capital and stimulus but there was no desire to feed inflation in a country that has battled this for years.


  • Service Sector Drags UK Growth Down – The sluggish pace of growth in the UK is being attributed to problems in the service sector and much of that seems to be related to the Brexit decision. The financial sector has not determined its future and many of the companies that did work in Europe were those in the service sector. Growth has slowed from 0.3% to 0.2% and that is about as close as one can get to real recession.



Budget Brinkmanship

This appears to be the word of the day. The major issues facing the world today would seek to call for some calm and rational approaches designed to minimize damage but this is not the strategic direction that Congress or the Presidency seems ready to pursue. We are all too familiar with the global game of chicken being played out with North Korea but soon there will be something much closer to home that will have consequences of its own. In just under two month the US faces two important deadlines as far as the budget is concerned and at the moment it would appear that progress will be difficult to achieve until some kind of last minute agreements gets cobbled together. There is general agreement that the actual crisis will be averted but a quarter of the analysts and economists polled assert there will be damage and fallout comparable to what took place a few years ago when the government was unable to pay its bills.


Analysis: The crucial dates will be September 29 and 30. The first is the deadline for extending the debt ceiling that enables the government to sell more t-bills to finance the budget decisions that have already been made. The 30th is the date the fiscal year ends and a budget has to be in place if there is to be money for the new fiscal year starting in October. As has been pointed out repeatedly, the US is unique in how it handles its spending. Most other nations do this kind of fighting at the time of the budget itself and some may continue the fight into the appropriation stage. There are no major nations that go through the budget and appropriations process and then decide if these agreements will be honored. It has been compared to a consumer walking out of a store after having used their credit card and then canceling the card. The people and businesses that are expecting a check from the government are left with nothing. Prior events such as this actually put some businesses into bankruptcy and resulted in many people falling into financial ruin. Those who depend on Social Security are not generally able to go without that monthly income nor are those depending on other aid.

The most damaging aspect of this impasse as far as the economy is concerned is the impact this has on the investment community. The crisis has caused the ratings agencies to reduce the value of US bonds and other obligations and that has forced some investors to divest themselves of these bonds as they are prohibited from holding anything other than AAA rated paper. The most distressing aspect of this controversy is that it is an entirely self-inflicted wound. The US has no trouble selling its bonds and borrowing costs are as low as they have been in years. There is plenty of room available to raise the debt ceiling – at least from a technical perspective.

The reason that this issue develops nearly every year is rooted in the very different attitudes towards the size of the federal budget and the issues of debt and deficit. If one looks at the political conversation of late one might assume the US has no debt or deficit issues anymore.  These topics were on everybody’s agenda for years but now there is increased support for spending and tax cuts from both parties – despite the impact this would have on debt and deficit.  The US debt is rising and is now at $20 trillion – about 110% of our national GDP. As recently as 1980 this debt level was just over 30% of the GDP and most analysts assert that carrying a debt that is about 60% of one’s GDP is about as far as one should go and the US is now at twice that level. At the start of the Obama Presidency the debt was around 65% of GDP and surged from there in response to the recession. The debt levels have continued to rise under Trump.

Those who see this rise as a profound threat make an attempt to cut spending during the budget process but there is often too much pressure to stimulate the economy with various government efforts and politicians always enjoy spending money on their constituents far more than taking money away from them. If the budget hawks fail to reduce the size of the budget they use the debt ceiling as their next line of defense. It is clearly a tactic of desperation as the ceiling will always be raised at some point as nobody wants a total and permanent government shutdown. The real issue for those in Congress is who gets blamed for the crisis. The last time the issue went this far the Republicans were assigned responsibility and all the damage done was laid at their feet. It hurt them in the campaign that year and this time would be similar as the GOP holds sway in both the House and Senate. Will those who suffer from the shutdown blame the GOP or will the champions of budget frugality reward them for trying to control the size of the debt. Polls are mixed as far as voter reaction and it all seems to come down to whether people depend on the government or not.


Speaking of Deficits

The latest deficit numbers are not going to make this any easier. The deficit in July was $42.94 billion and that means the US is still on pace to see a deficit numbers worse than last year. In the first ten months of this year the deficit was 11% higher than it was at this time last year. Spending rose by 4% and revenue rose by just 2%. The Congressional Budget Office predicts that the deficit will be 3.6% of the GDP and that is up from the 3.2% registered last year.


Analysis: The deficit limit that was set in Europe several years ago was 3.0% of GDP and if countries exceed that boundary they are subject to a whole range of fines and restrictions. The majority of analysts caution that deficits as high as those in the US seriously undermine the economy. The US seems immune to these argument as the only conversation these days has been about cutting taxes. If the tax cuts that are proposed in the current plan are implemented and there are no corresponding budget cuts, the deficit will balloon to levels that are exceedingly damaging. It is a “have the cake and eat it too” attitude in Congress and the White House. The only way to seriously address spending in the US is to look at the major entitlement programs such as Medicare, Social Security and Medicaid but these remain off limits.


Fickle Voters in Europe

It is inevitable that voter popularity will wax and wane. The political leader that is popular today may well see a dramatic slide in that popularity. The fact is that voters are none too sophisticated when it comes to the way that government actually works. They seek instant solutions to problems that may have developed over decades. They don’t generally tune in to politics until there is an election and even then they have only vague notion as to what a given politician really intends. The whole process of democracy is messy with lots of compromises but the average person fails to understand that and resents those who do not give them what they want.


Analysis: Many of the more important leaders in Europe are facing a decline in their overall popularity. In some cases, this is not all that important as these leaders will not be facing the voters any time soon. That is the situation that Emmanuel Macron faces as he just won his race and will be President of France for years. Angela Merkel is facing an election in a couple of months and needs to pay more attention to her poll numbers. As she returns from a break she is facing a ten point drop in her popularity. The decline doesn’t really help her opponent as Martin Schulz also saw a decline of 4 points. The voters that have turned on Merkel have been drifting to the smaller parties as something of a protest.

Merkel seems to be fighting a perception that she has been too relaxed about this campaign and is not taking the whole thing all that seriously. She has also been attacked for the response to the violence that surrounded the G-20 meeting. Many thought she was not tough enough with the protestors. The continued attacks from terrorists have alarmed people as well but this has not translated into support for the right-wing parties as it has in the past. The overall sense is that some voters are just restless and wonder why there has not been a credible challenge to Merkel at this point. Schulz made a run at her at the start of the year but it faded as the Social Democrats are just not that different from the Christian Democrats on many key policies.

The analysts are not sure where all this is heading but there has been agreement that voters are uneasy. This is the attitude that has led to flirtation with extremist such as the Alternative for Germany (AfD) and the National Front in France. These groups surge for a while and then that popularity starts to fade. The left leaning parties have likewise seen their fortunes improve and then they also lose momentum. There is a sense that nobody is really addressing the issues that are of most concern but the fact is that few of these issues are easily addressed. What can the leaders really do about the state of the global economy or warfare in the Middle East or the inexorable advance of social problems? There is not even consensus on which of these should be tackled first.


North Korean Options

Perhaps the most interesting and perplexing aspect of the current crisis over North Korea is the relative lack of preparation by either the US or North Korea. The threat from Pyongyang is that they will send missiles towards Guam but thus far there has been no indication the North Koreans are getting ready to launch anything. The US has not ramped up its preparedness significantly either. Troops are not being moved from South Korea and there has been little reaction in Guam. The statement from US Secretary of Defense Mattis and Secretary of State Tillerson have been completely opposite to the comments from Trump as both assert that diplomatic efforts are underway, that sanctions are working and that a military response will be a last resort. There is no counter spokesman in Kim’s regime but China has issued statements calling for the situation to calm.


Analysis: There are some salient facts that seem to be consistently overlooked in this overwrought situation. The North Koreans do not have the capability needed to strike the US – even hitting Guam would be a stretch. There is no imminent threat to the US although there are certainly US lives at risk in South Korea and Japan. It is true that North Korea seems to be making progress towards its goal to develop nuclear weapons that can be delivered by missile but they do not have them now and that leaves time to develop plans other than an attack on the country.

The sanctions that have been recently imposed are the strictest yet and they have been developed with the cooperation of both China and Russia. They have already had an impact in North Korea and this will only accelerate. The notion is that Kim is akin to a cornered rat and is either planning a drastic move as he contemplates the end of his rule or he is trying to make a threat strong enough to give him leverage. He could agree to reducing his threats in return for looser restrictions. This seems to be the course of action preferred by China.


The Black Owl Report – An Executive Intelligence Brief

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


Ignorance Really Can be Bliss

At least as far as one’s friends and acquaintances are concerned it can be. Facebook, Linked-In, Twitter and all the other social media exposures I am still ignorant of have provided me a great deal of information about people I know and I am not sure that I want to know all that. Much of what is shared is pretty mundane and I am not really concerned when people take pictures of their food or share those vacation snapshots. I remember the days when people organized slide shows of their vacations and Facebook is far better than sitting through one of those evenings.

What I am not sure I want to know is everyone’s opinion on everything. I like to assume that people I know are smart and kind and generous and then my image is shattered by some mean-spirited rant and I can never quite look at them the same way again. Not that they don’t have a right to that opinion but for the sake of social peace it might be better to share these a little less generously. Of course, I should talk given what I do every day. The hapless readers of this screed get my opinions whether they want them or not. The dog people are especially fed up with my cat-centric outlook.

I must also admit that all this sharing leads to some positive outcomes as well. It is nice to find people who share interests and outlooks in these forums as I am not sure I would ever know these things any other way. Like everything social media is a tool and should be used with foresight and care. I may not want to know that you partied yourself into oblivion in Bermuda but at least I know what your preferred libation is now.


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Signs of Life with the Peak Season – Container Import Volumes Surge.  We get bits and pieces of port data throughout the month.  The latest was a blistering pace being set by the Port of Virginia. Import container volumes are up 7.5% year-over-year in July. That matches much of what we see on a national basis as well, across most major ports. We are getting about a 7% year-over-year increase in import activity. That comes even as the US dollar has started to slow a bit. We know that intermodal volumes are not seeing quite that level of year-over-year performance, but have also been trending a bit higher over the past month. According to the Association of American Railroads, intermodal volumes are up by about 3.2% year-over-year through week 31.


One reason could be the availability of capacity and how supply chain managers are moving merchandise. Through July, truck-moved container volumes were up 9.3%, rail-moved container volumes were up just 5.6%. We see in spot pricing for trucking that there are deals to be had in some markets where capacity is a bit looser – perhaps easier to book truckload volumes than some spot rail volumes at this time. But, not to sell our rail partners short, the rail sector is seeing volumes “off the charts” in many sectors. When you look at the AAR report on weekly carloads, top line total carloads are up 5.3% YTD.  Even when we add-in intermodal and get to a total traffic figure, it’s up 4.2% year-over-year. In fact, just about every commodity class except four areas are up year-over-year.  In the case of commodities like coal, grains, and nonmetallic minerals, they are up significantly.  We saw those commodities rise 15.3%, 6%, and 8.8% respectively.


One of the trends that we speak with our transportation clients about is the shifting of asset demand for the rail sector and how that impacts trucking. Demand for rail services has dramatically changed over the past 18 months. We went from a sector where coal and grain demand was weaker…to a period where those two commodities are “killing it”. Not only does this create demand for a different type of rail asset, but it also creates demand in different areas of the country. We see distribution patterns are very different for commodities like coal and grains than they are for commodities that are driven more by manufacturing. One comes out of largely remote, lightly populated areas. The other comes out of densely populated heavy areas. What this does to the broader transportation sector is that it causes “modal migration”.  Companies will search for capacity across different modes of transportation, and make adjustments to their transit times, order sizes, etc. to better fit with changes in mode use.


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Business Intelligence Brief: August 10, 2017

Short Items of Interest – US Economy


  • Wholesale Trade Inventories Rise More than Expected – The inventory levels rose by 0.7% and that was slightly more than the 0.6% that had been expected. The investment community watches these numbers closely as they are a major contributor to GDP. The levels of inventory had a negative impact on GDP growth in the first quarter but it now appears that they are neutral to growth as far as the second quarter is concerned.


  • Haves and Have Nots – There are plenty of divisions as far as the overall economy is concerned and there has been much made of the widening gap between those with very high incomes and those whose incomes are very low. The hollowing out of the middle has been a major concern and the issue is not limited to individuals. There is a significant split between cities that are growing and those that aren’t. The good news in the tech centers like Seattle or Salt Lake City or Silicon Valley is offset to a degree by the bad news in the older industrial communities in the “Rust Belt”. The declining communities soon get trapped in a cycle of high unemployment, deteriorating infrastructure and public budgets that are strained beyond capacity. This eventually becomes a national problem and in many cases already has.


  • More Concern Regarding Productivity – The economy of the US is essentially dragging an anchor behind it due to the consistently low levels of productivity. The dreams of rapid growth always seem to be dashed by the reality of reduced output and it has been difficult to determine just what the problem is. The adoption of new technology slowed with the recession but there has generally been little significant innovation as far as the service sector is concerned. There are fears that workers are simply not geared towards productive work as they may have been in the past and there are also concerns that regulation undermines productivity by forcing so much focus on work that has little to do with the business itself. It is estimated that business owners spend half their time on satisfying regulatory demands as opposed to just 20% in the 1970s.


Short Items of Interest – Global Economy


  • Global Recovery has been Slow – Looking back at the recession and its aftermath it has been obvious that some nations pulled out of the decline faster than others but most still had to wait until at least 2011 or 2012 to see real progress. The US started to turn the corner in 2011 and is up by 14.6% while France and Japan didn’t see progress until 2012 and they are up 6.7% and 4.7% respectively. The states that have seen no real progress include Portugal, Italy and Greece (still down by over 24%). China never really slowed down at all and is up by over 119%.


  • British Trade Deficit Widens – It was not supposed to be this way. The assumption was that there would be at least one positive development due to the Brexit decision. The reduction of the value of the pound was supposed to stimulate growth in the export sector and slow down the imports. Neither of these developments have taken place and the latest trade deficit is worse than it has been in over a year. Exports are down and imports are up despite the weak pound. Britain is struggling to reset its relationships with Europe and the rest of the world.


  • Mexico Draws Clear Boundaries on Nafta – The talks on what the future of Nafta will look like have started and the position of the Mexican government has emerged. In the beginning, it appeared that Mexico would be in a defensive position but times have changed and the advantage seems to lie with Mexico to some degree. The government of Enrique Pena Nieto has refused to bend on some of the high-profile issues pushed by Trump and those US interests that have benefited from Nafta have become more focused and organized. The modifications are likely to be far less drastic than was originally assumed.



Latest Edition of the Industrial Indices Show Growth

Each month we put together a series of indicators that are of particular relevance for the manufacturing community. These are prepared for the Industrial Heating Equipment Association and the Chemical Coaters Association International. These provide a kind of snapshot of the economy at a given moment. What follows is the executive summary and some select portions of the report. If you have an interest in the entire collection complete with all the keen charts and graphs just send me a note at and I will forward you this month’s edition.

This month the majority of the indicators have been trending up – eight of them are in positive territory or are at least flat as compared to last month and only four are trending down. Even some of those that are pointing in a negative direction are not all that distressing when looked at historically. The readings this month tend to agree with many of the overall economic assessments for the year. There are some important trends that point to a better end to the year. The single most interesting development is that exports are surging again. The overall trade deficit in the US improved in the most recent data and this has boosted the overall growth of the economy – a combination of a weaker dollar and growth of the economies the US sells to the most.

Not everything is trending as would be preferred. The biggest decline has been in the automotive sector and that appears to be something the economy will have to deal with all year. This takes some of the wind out of the sails of the economic rebound but the good news is that other sectors have been gearing up and that has allowed progress in the economy as a whole. The other negative readings are not as big a shock and don’t have the same implications. There was a dip in the new orders index from the Purchasing Managers’ Index but even with the decline the readings remained above 60 and that is very comfortable territory. There was also a decline in steel production that is likely related to the issues in automotive and to some degree the construction sector.  The only other decline was in the Credit Managers’ Index but this has been a pattern for the last several months – up one month and down the next. The motivation for the latest dip is a little different than it has been the last few months – not as tied to dollar collections and slow pays. The good news is that the favorable factors are still all close to 60. The bad news is that many of the unfavorable factors are hugging the low end of the 50s or have actually fallen into the 40s.

Enough with all the bad reports, the good news this month was plentiful. The expected collapse of the housing sector has not taken place as yet and signs are that it may not. The prices have gone up and that has discouraged some but mortgage rates have been steady and have even eased off in some markets. The capacity utilization number has improved although it has yet to make it all the way to the promised land between 80% and 85%. This gain has been enough to boost interest in capital expenditure however and these numbers are as good as they have been in a year. The gains here also signal that banks are turning loose to some degree and that is more than welcome.

The durable goods numbers are essentially flat but this has occurred at a fairly high level and there has been a nice surge as far as factory orders are concerned. This is likely due to the desire to get inventories prepared for the coming holiday season. The expectation is that this will be another inventory light year as retailers are not seeing the enthusiasm that one would expect from consumers that are claiming to be so confident. The appliance numbers still look flat but the reality is that sales have started to recover as the housing market continues to grow. The price of metals started to come off the floor a month or so ago and the gains have continued – especially for copper and nickel. The growth has been more tepid for aluminum but then again, these prices didn’t collapse to the same degree as the others. The transportation numbers improved a little and most of that was trucking and ocean cargo while rail was a little less active. The overall sense is that transportation is getting ready for the holiday surge with all eyes on the burgeoning parcel business.

The conclusion that can be reached this month is that economic growth is improving and the trends are encouraging for the rest of the year. The political arguments have slowed some of the domestic momentum that had developed at the start of the year but the good news is that export growth has been enough to counter these disappointments. The hope is that trade continues to carry the day but that will depend on the US interest in maintaining those relationships.

New Automobile and Light Truck Sales – The decline in the sales of new vehicles has become a major concern. The sector has been carrying the industrial sector for the past few years and it was only a couple of years ago that records were set for vehicles sold. Even then there were warnings that this pattern would not be maintained a lot longer. The three factors that were driving the bulk of car sales were seen as somewhat temporary and frankly most analysts were shocked the demand levels held up as long as they did. The consumer was motivated by the desire to get a new car – especially those who had purchased a smaller car when the price of gas was expected to keep rising. They had been delaying their purchase until they felt a bit better about their economic future and as unemployment numbers fell they were better positioned to buy. The consumer is still in a good position but those who wanted a new vehicle now have one and the overall demand has fallen.

The second major motivator was easy bank loans and overall financing as lenders flocked to this space. It seemed a safe option but now the banks are rethinking that decision as the borrowers today are higher risk than the ones previously. The third motivation was often a solid demand for their old car and that has fallen off as well – there has been a drop in demand for used cars right along with the drop in demand for the new cars. The bottom line is that sales are sinking fast and nobody is expecting any sort of recovery in the near future.


More from the CCAI/IHEA

New Home Starts – The automotive sector may be hitting the doldrums but the good news is that there appears to be life in the housing sector yet. The sharp hike in new home starts combine with equally good news as far as permits issued and there has also been more activity as far as existing home sales. It is not that all the headwinds have vanished but for now the home buyers are still out there and still driving demand in select areas. It is always important to reference the caveats as far as home building is concerned – location, location, location. The market remains very hot in some places and far cooler in others.

The worry has been that higher priced homes would drive the new buyer away but thus far mortgage rates have remained reasonably low and the new home demand has not flagged as much as feared. It has been noted that the majority of that new home demand has been for the higher priced home and not the starter. The millennial remains the mystery as far as home buying is concerned. The older members of this cohort are starting to form families and that has increased their interest in a home but for the most part this group is turning to the existing home market.

Steel Consumption – The latest trends as far as steel consumption is concerned are not all that favorable and there will be considerable disruption politically as the details of the steel tariff are developed. The two largest components of steel consumption have always been construction (mostly commercial and public sector) as well as the automotive sector. The news is not all that inspiring on either front. The commercial side of construction has been holding its own especially as far as medical projects are concerned but office space has been dwindling as there has not been the demand there used to be. The number of people telecommuting has affected the need for big offices. The public sector is still in the doldrums as there is simply no money for the kinds of projects that once drove steel demand. The auto sector had been booming but that has also shown signs of reversal. The demand for new cars is off from the peaks of a few years ago and the only thing that has saved steel demand is that the vehicles that people are buying are larger (trucks and SUVs).

On top of this there is the issue of steel tariffs. It is obvious at this point that a blanket 40% tariff will not be imposed as many of the countries that supply steel to the US are close allies (Canada, South Korea, Japan etc.). The end of June deadline came and went and so did the end of July and now the thinking is that a decision may not come until late this year. The fact is that steel users are deeply concerned about price hikes and there are far more of them than there are domestic steel producers. The end result is unclear as China is the target but they only account for about 6% of the steel imported into the US (Canada alone accounts for about 17%).

Industrial Capacity Utilization – It moved back up. Not a great deal to be sure but it is headed back in the right direction. This is a measure that says a lot about what a company is likely to do in the future. If the level of capacity utilization is under 80% this is a signal of slack usage and slack demand. There is little likelihood that additional capital spending will take place and there is unlikely to be additional hiring as long as there is slack. The level now is a bit closer to the low end of normal but isn’t there yet and thus would suggest that slack remains a problem. When the rate moves past 85% there will be other issues that stem from backlogs and shortages and that triggers inflation. The Fed looks at capacity along with other data to determine what to expect as far as inflation and right now they see the threat as fairly distant given that these capacity numbers have been down for quite a while. There will be more excitement when they finally break through into that 80% to 85% zone.

Capital Expenditure – The rate of capital expenditure has risen sharply in the last month and the levels are as high as they were a year ago (with the exception of that spike in December). The rise at the end of a calendar year is often due to expiring tax credits or other motivators but to see a nice rebound in the middle of the year means that there is some additional enthusiasm in the business community propelling these decisions. The fact that there was an increase in the capacity utilization readings at the same time suggests that at least some sectors are starting to anticipate some better times ahead and are trying to ramp up to some degree. The additional investment is not taking place in the automotive sector or in farm equipment at this stage but there has been a rebound in energy development and the oil fields. These gains are still spotty as oil prices have remained stuck in the 50s and 60s.

PMI New Orders – The PMI overall has weakened just a little but remains strong as far as the numbers are concerned. Remember that anything over 50 indicates growth and that numbers under 50 suggest contraction. Even as the PMI has drooped a bit the numbers are still very solid and that goes for the new orders data. It may be off the totals seen a few months ago but staying above 60 is no small thing. Even the overall PMI is close to 60 although it fell back a bit to the mid-range this month. The point is that the PMI is showing strength and the PMI data for other countries has been showing the same pattern. The Eurozone PMI improved a bit and that is good news for the US as that likely means more demand for US exports given that Europe is 25% of the US export and import trade.



The Black Owl Report – An Executive Intelligence Brief

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



I tend to use this part of the BIB to focus on lighter fare or at least more personal stuff but I have to confess that I find the current situation with North Korea very distressing. Maybe this is because I am in the middle of a book on the First World War called “Sleepwalkers”. That book (along with many others) makes the point that none of the major powers (or the minor ones for that matter) wanted World War I and certainly had no idea that such a conflict would be one of the bloodiest and most destructive in history. They just lurched from crisis to crisis and it developed. I look at the escalating threats and counterthreats over North Korea and it looks similar.

It has often been noted that one never tries to exchange threats with someone who has nothing to lose. The tyrant that is Kim Jong-un is well aware that he stays in power because of his ability to instill fear. His people are starving and would likely overthrow him if they weren’t convinced that trying would cost their lives. Part of that mystique is rooted in his bombast towards the US – it looks that the US fears him as well. For him to back down would cost him dearly so he has no choice but to play this out. He doesn’t believe the US threats and that leaves the US in a no-win situation.

Trump thunders about raining fire and points at the nuclear arsenal. There are now only two outcomes and both are bad for the US. The first is that we invite a nuclear war by actually attacking North Korea – even as we know this invites destruction of South Korea, attacks on Japan and the engagement of China and even Russia. If we fail to follow through, our threats will be revealed as empty and North Korea gets away with even more. This is why previous leaders in the US have been so cautious with this tin pot dictator.


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 Pattern in the Atlantic.  There is an interesting pattern setting up in the Atlantic Ocean regarding the movement of storms.  Tropical Storm Franklin had NOAA Hurricane Hunter planes flying through it at 5,000 and 10,000 feet tonight getting readings.


As of tonight, Franklin is expected to make a hard-left turn and head right into Mexico. In fact, it will bring enough heavy rain and winds that areas in heavy manufacturing and production zones need to pay attention to this storm.


At this time, most forecasts show the storm making hurricane strength right before making landfall sometime on Wednesday night.


If you have supply chain interests in the area, you need to pay attention to the storm for flooding and mild wind damage along the coastline and moderately inland.


The second storm cruising through the Atlantic is expected to strengthen a bit closer to the weekend. This storm looks like it could have an impact on the East Coast of the US, although the final path of the storm and the strength it will hit is still undetermined. There is just a 40% chance that this will become a tropical storm over the next 5 days, but those chances will get better as conditions get more favorable over the next three days.



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Business Intelligence Brief: August 9, 2017

Short Items of Interest – US Economy


  • Some Productivity Gain but Not Enough – The latest data on productivity is encouraging but there is still a long way to go. The 0.9% improvement has come as good news but with caveats. These figures are notoriously volatile as they measure the output of workers in sectors that can be very seasonal. The data is also collected over a pretty long period of time and that adds to the shifts that are noted every quarter. The big concerns remain. The pace of growth has been tepid at best and it would have been expected that it would be more aggressive due to the fact the recession reduced the size of the workforce. The low rate of unemployment suggests that many companies are back to full staff. There has been a slowdown in the adoption of new technology and that has had an impact as well.


  • What is Happening with the Gig Economy – A few years ago this was to be the next big thing. The lack of traditional job openings would mean that people would have to find some other means of employment and the Uber model would take over. People would no longer seek the traditional full-time position and would stay in free agent mode. Now that jobs are on offer will the gig economy falter? It seems not – at least so far. The appeal of a less structured job remains strong and there are many who want to continue their lives as free agents despite the fact that this is far less secure than the old model. The gig option remains far more appealing to the younger worker than to the older worker with mortgages and other responsibilities.


  • Immigrant Hires Down in Tech World – The tech community has long looked outside the US for the talents and skills needed – especially to India. Concerns about the immigration stance taken by the Trump administration has led to a 37% decline in interviews for tech positions. The worry is that there will not be enough opportunities to get the visa needed to hire that person. The tech companies are trying to look at domestic options but the demand far outstrips supply and many are not qualified for the position on offer. The ones that do fit the needs are far more expensive than the immigrant applicant as well.


Short Items of Interest – Global Economy


  • Current Threat More Dangerous than Cuban Missile Crisis – There have been many references to the Cuba Missile Crisis and the fact that war between the US and the USSR seemed imminent at the time. The stand-off with North Korea has been judged to be far more threatening as neither Kim nor Trump are predictable at this point. The potential for a stumble into chaos is great as both leaders think the other one is bluffing. The US threats may be just an intimidation tactic but Kim is anything but rationale and may elect to call that bluff. The Cuban crisis was tense but Kennedy, Castro and Khrushchev were far more predictable.


  • Kenya Polls Lean Towards Incumbent – The polls show that Uhuru Kenyatta is heading towards reelection but the opposition has asserted that the results are bogus due to a computer hack. Raila Odinga is obviously not going down quietly and many fear that a civil war is going to erupt as the two fight each other to the bitter end. Observers assert there have been irregularities but nothing that would sway the election one way or the other. The Kenyatta win seems legitimate enough.


  • Zuma Survives – In the end the members of the ANC refused to oust their controversial leader and Jacob Zuma survived the no-confidence vote. It was an unlikely outcome from the start as it would have required almost 60 members of the ANC casting votes against him and even with a secret ballot there were too few who wanted to put the party at risk. The scandals are not going away and Zuma is far weaker than he was but he still holds the PM position.



Does North Korean Tension have Business Implications?

Geostrategic battles do indeed have implications for the business community but these are very hard to predict and assess. It really comes down to whether the threat is real and whether it is imminent. The bellicose exchange between Kim Jong-un and Donald Trump has put many on edge and there have already been reactions from the investment community as this group reacts to everything that takes place in the world. The currency havens have been busy as the investors jump out of the equity markets in favor of the swiss franc and gold. Markets in Japan and South Korea fell by more than one percent and the European markets likewise fell by a similar amount. The US markets are expected to open lower as well. How much damage is done will depend on whether anything is done to defuse this situation. Long term impact on business will depend on what happens in the weeks and months ahead as longer term solutions start to emerge. All eyes are on China now as they are the only ones with leverage over the North Koreans. It is not actually clear what China can or is willing to do at this point.


Analysis: The latest development is basically a war of words and threats. Trump has promised “fire and fury like the world has never seen” and the North Koreans have started to threaten a strike on Guam, an American territory with both naval and air bases. Such an attack would undoubtedly kill US troops and citizens and this would demand a retaliatory strike. This is the kind of exchange that rapidly gets out of control. The strategy that has been developing in the US is murky as there have been radically different approaches in evidence with Secretary of State Rex Tillerson calling for negotiations as he tries to reassure the Kim regime that the US does not consider them enemies at the same time that Trump has been essentially calling for a nuclear assault. This may be a high stakes game of “good cop – bad cop” but the biggest worry is that neither of these leaders are predictable and are quite capable of capricious actions that leads to very bad outcomes.

The most likely scenario as far as an attack on Guam is concerned is that the US would shoot down any missile from the North Koreans that constituted a threat. The arsenal available to Kim is limited and the US has moved quickly to put anti-missile capability in place. The attempt would still be considered an act of war and would demand a response. The likely reaction from the US would be to surgically destroy some part of the North Korean military and at that point the potential for continued escalation is high.

This brings us back to China. They have leverage in North Korea but it doesn’t mean they can force Kim to do anything specific at short notice. The pressure that China can exert is mostly economic as the North Korean economy is utterly dependent on China. The fact is that China has the ability to depose Kim but such a move would be extremely risky. The last thing China wants is a collapse in North Korea that results in millions of refugees streaming into China. They do not want to provoke a destabilizing coup and they do not want to replace Kim unless there are no other options. The pressure from China has been intense but it depends on the relative sanity of Kim Jong-un and thus far the world has not seen much of this. He doesn’t care much about his population and has demonstrated that he is a true psychopath willing to do anything to bolster his power. He firmly believes that the US, Japan, South Korea, China and the others are all bluffing and that they will do nothing to stop him. He demands that he be allowed to develop his nuclear weapons for “defensive purposes” and thinks he can back the world down. So far, he has been correct as nobody really wants to smack this hornet’s nest.

Back to the potential business impact. Outside of the reactive markets there has not been that much reaction although there has been some caution expressed. At this point the belief is that this will remain in the realm of bombast and theatrics. Trump has a reputation of making strong statements that are not backed up with action and Kim has been exercising his lungs for years with empty assertions and threats. It is expected by most that this is as far as it will go this time but there is more doubt than has been the case in past years as the US leadership didn’t get engaged in this kind of threat trading. Japan and South Korea have been the most concerned as they would likely be engaged in any sort of real confrontation. There is unease but not enough to cause real economic reaction.


Potential for Oil Price Hikes

The price per barrel has started to drift up a little – Brent crude was at $52.39 and West Texas Intermediate was at $49.46. The move up has been due to the slow decline of the US stockpile of oil. Over the last few weeks the US producers have allowed the levels of stored oil to decline in order to better match the levels of consumption now that the summer driving season is coming to an end. The impact of this reduction is not likely to be all that significant and oil analysts are not anticipating prices going up all that much – perhaps the mid to upper 50s at best.


Analysis: The effort by OPEC states to reduce the amount of world oil has been largely a failure as many of the OPEC states simply can’t go without the cash flow from oil and have been routinely ignoring their quotas. The US has been keeping the world well supplied but the US output is not the only factor. The oil business has been asserting that this is the new normal and that oil prices will remain in the $50 to $60 range for the foreseeable future. There has been some reaction in the oil markets to the North Korean situation but it has been limited as this country is not an oil producer nor is it a major consumer. This is a conflict that seems pretty distant from the oil fields and there is an understanding that the US can almost instantly ramp up production again if the demand increases and prices rise even a little bit.


Lots of Jobs but Few Hires

The latest job numbers have been good – 4.3% unemployment has not been seen in close to a decade. Even the more inclusive U-6 readings are better than they have been in a long time. The number of jobs added was a bit of a surprise and the pace is obviously pretty good. This positive news tends to obscure a longer term concern and one that is likely to be that much more vexing in the future. The business community has a lot of job openings – more than has been the case in recent years. The total is now over 6.5 million and that would seem to suggest that employers would be trying to fill these positions and that there would be very few people in the US that could not find a job if they wanted one. Despite these openings the rate of hiring has been tepid and that leaves some 9 million people without work. This is an unusual situation and has created a concern about the trends in the future.


Analysis: The most basic issue is that the people who are still looking for work are not possessed of the skills that are needed by the employers. The hiring has been slow as companies are not finding the people they can hire – they don’t have the appropriate education or background and in many cases they lack good work habits. In days past the company might have been able to hire somebody with potential and take the time to train them. Now this is far harder. It is estimated that an untrained worker will need between 18 and 24 months to reach the needed skill level. The company often can’t wait that long and even if they try to train they may face the loss of that person once they reach the needed level of proficiency. They will face aggressive poaching from rival companies and the worker may elect to bolt for a few dollars more an hour.

There are other reasons that people have been unable to take the jobs on offer. They are sometimes in the wrong place at the wrong time and can’t move to where the jobs are due to family obligations or some other factor. The employer can’t find the people they need and the workers without a job can’t crack the system without experience or training. This is a situation that has existed for a long while but little has been done to address it.

Among the suggestions offered are putting more emphasis on developing trade schools and training centers. This is a tough sell in an era of limited budgets. There is the option of having business do more of its own training and finding a way to subsidize that effort. The problem remains that trained people will likely leave if better opportunities present themselves. How does a company develop a “sticky” relationship with its workers? Offering more money is not always the answer – especially for the smaller company that lacks the resources to compete that way.

The solutions are complex and will require time but there are other options that would address the problem more quickly – at least from the perspective of the employer. If there are too few people in the US with the requisite skills the company may have to turn to the rest of the world and employ more immigrants. This has been an intensely unpopular and controversial approach and has certainly not been encouraged politically but the reality is the US lacks the skills needed and through most of the US history that lack has been addressed by the arrival of immigrants with the needed talents.


German Youth Support Merkel

In the last few years the youth vote has become increasingly unpredictable in many countries. They are the least anchored to a particular party and most are not even all that tethered to an ideology. They supported Obama in the US and then shifted to Sanders. Some even joined the Trump bandwagon. They supported Le Pen in France and Wilders in the Netherlands. They were big supporters of Brexit in the UK. The one place where the young voter has not followed that pattern has been in Germany where polls show an overwhelming preference for Angela Merkel. She is often referred to as “grandmother Merkel” and seems to provide stability for a generation that has been concerned about the future and their place in it.


Analysis: Merkel continues to rely on her traditional base of middle class voters and those with more conservative attitudes towards the economy and social issues but her support among younger voters has helped her build a comfortable lead in the coming election. One issue that has been popular with the young voter has been the refugee policy and this has helped blunt the criticism from within her own party. The attitude among the younger voters is that Germany did the right thing as regards the refugees even as many express concerns about what this means to their jobs.


The Black Owl Report – An Executive Intelligence Brief

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


On the Loss of a Pet

Don’t panic – the feline five remain healthy and active despite the fact that two of them are over 16 now. The loss is being felt by my step-son. He has been trying to find a way to get his beloved Sneak back to health but the fight was lost this week. The tumor was not something that could be operated on and the prospects were dim for a course of chemo. He was forced to do the most difficult thing a person can be asked to do as he ended the suffering on Monday.

It is astonishing how hard it is to say good-bye to a pet. In many ways, harder than with a person. The death of a loved one is rarely unexpected and there is usually time to come to grips with the situation. There is often some sense of closure. Those that have passed away in my life were essentially ready and were prepared. The animal remains a trusting innocent to the very end. They exist solely to be with their “person”. Sneak was Sean’s buddy – the dog that went everywhere with him. This has been wrenching.

I remember when I had to part with Squeak – he was my first “daddy’s cat” and was a constant companion. He was desperately sick and in pain and we knew what we had to do. As we cried over that decision he roused himself from his pain and tried to comfort us – he knew his people were in pain and that made the tears flow even harder. I know the hurt that Sean feels right now and I understand the loss that others feel when they lose these companions. A real hole is left behind and it never quite heals – I still miss my buddies and think of Smudge, Squeak and Scamp often.


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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Trimmed Mean PCE and Why It Is Stumping the Fed.  You’ve heard me talk a lot about the Trimmed Mean PCE and why I like it as a better gauge of real inflation. Well, we keep seeing the latest figures throwing curve balls at the Federal Reserve.


Remember that the Fed is looking at A) economic growth as GDP; B) unemployment levels as both U3 and U6 figures, and C) inflation. Two of the three components have basically hit Federal Reserve targets. But, the inflation level target of 2% continues to be an elusive target.


For those of you that don’t remember what the Trimmed Mean PCE is, it’s a measure of inflation that essentially takes out the highs and lows and averages the remaining elements of inflation. It’s a personal consumption expenditure – adjusted for excessive measures across the components that comprise inflation.


The Dallas Fed likens it to figure skating judges where 10 scores are captured, they throw out the highs and lows and average the remaining scores to get a “composite”.  A lot of economists prefer it to other more volatile inflation measures.


To give you an idea of how complex the calculation is, there were 177 different inflation readings that comprised the Trimmed Mean PCE (the standard PCE typically will include these as well).  But, the standard PCE is showing an annualized growth rate of just 1.4%, well off of the Fed’s 2% target rate.


The latest trimmed mean PCE reading came in at 1.7% (annualized). I didn’t include it, but the one-month PCE rate in June was just 1.3%, with the six-month hitting at just 1.5%. These are trending in the wrong direction for a Federal Reserve that’s looking for a 2% target rate.


The big question we all are looking for is: where’s the inflation. We don’t see it in wages, it isn’t coming across in raw material costs, energy is down, and big-ticket items like automobiles are seeing more stringent competition and discounting to try and move units. From that perspective, the lower inflation rate seems to make some sense.


Anyway, it was time for another update.  We’ll anxiously await the Dallas Fed’s July figures. – Keith


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Business Intelligence Brief: August 8, 2017

Short Items of Interest – US Economy


  • Conference Board Indicators Improve – One of the more challenging economic trends to study involve employment as this is a moving target at best. The changes in the employment picture take place daily and it is hard to do more than estimate at any given time. Much attention gets focused on the unemployment rate but that is far from definitive. This is what makes the Conference Board’s index so useful as it combines a number of measures including job openings from the BLS, jobless claims from the Labor Department, industrial figures from the Fed and so on. This month the good news is that all eight of these indicators are up. The index number rose to 133.77 and in the previous month it was at 132.42


  • Who Pays Corporate Taxes? – At the heart of the current tax debate is the fundamental question of who actually pays for the taxes that are assessed on a corporation. Is the burden going to fall on the investor or the employees of the corporation or on the consumer? Most analysis agrees that there will be tax implications for all three. If the corporate tax is reduced the immediate benefit will go to the investors and owners but there will be opportunities for the workers as it is assumed the corporation will take that money and invest in expansion and growth. It is also assumed that prices will be reduced to the consumer as the company is not paying as much in tax. This is the issue – the only guarantee is that investors will be taxed less as the company may choose not to expand or reduce prices and in that case the benefits of the tax cut are very narrow.


  • Steady Growth Anticipated – It was just a few month ago that many of the global analysts predicted the US economy would stutter this year and slow down. Now the majority of these groups assert that growth at around 2.5% will be sustained through this year and likely into next. This is not all that close to the 3.5% or 4.0% that had been asserted at the start of the year but it is consistent with where the economy has been for the last decade. The factor that seems to have had the most impact is the recovery of the export business in the US as the dollar has weakened a little and other world economies are starting to rebound.


Short Items of Interest – Global Economy


  • Improved Data in Italy – The numbers are not exactly pointing to a major growth surge but the slide seems to have been interrupted as Italy has started to see some better numbers. Growth last quarter was a meager 0.4% but this was much better than the recession that marked last year. The second quarter also grew by 0.2% and while that is still very slow it means the country didn’t slide backwards. The most important shift has been in exports as the Eurozone recovery has meant more demand for the Italian output. It is now expected that overall growth for the year will be around 1.3% and that will be a better performance than anything seen in the last several years.


  • Drug Crime Escalates in Mexico City – This is shaping up as the major issue for the country in the coming elections. Drug violence has always been an issue but in the past, it seemed to be concentrated in the areas where the gangs are strongest and in tourist areas where the demand is most obvious. Mexico City was somewhat immune but now the attacks are becoming more frequent and deadly. This has a negative impact on the current President but it also affects his left-wing challenger. It was as mayor of Mexico City that Andres Manuel Lopez Obrador bragged that he had the drug gangs under control and now that is not the case.


  • Rouhani Places Emphasis on Foreign Relations – Now that Hassan Rouhani has won a second term as the President of Iran he has the challenge of bringing his promises to fruition and that can’t realistically happen until there is economic growth and that takes better relations with the rest of the world. It will be his mission to remove the country from the list of pariah states that can’t fully participate in the global economy.



This Week’s Focus on Trade and China

The US market is immense and it is sometimes easy to forget that this is the case and what that means to the rest of the world as well as to the business community and the consumer in the country. The vast majority of businesses can ignore the rest of the world and survive quite nicely on selling to the domestic market alone. Most workers in the US are only dimly aware that their jobs are tied to what happens in other countries. The truth is the US is and has always been a highly export centered nation. Currently the US relies on exports for over 15% of the total GDP and that is no small number when one is looking at a GDP of $18.4 trillion. The US market is the most coveted in the world as the US consumer is the most dedicated buyer in the world and that means that imports are always significant as well. The difference between what is sold overseas and what is purchased from overseas is always of concern but mot fail to grasp the implications for both business and the consumer. It is good that the US exports and it is also good that the US imports. These imports are generally less expensive than they would otherwise be and that allows the US consumer to pursue a lifestyle they would not otherwise be able to afford.


Analysis: This month’s data on trade shows the deficit shrinking a little as the US exports rose by 1.2% from the previous month while imports sank by 0.2%. This was a better performance than had been expected on the export side and reflects the fact the dollar has fallen in value over the last few months. It has also helped that many of the countries the US counts as significant trade partners have started to see some real growth. This has been especially important in Europe as the Eurozone states account for almost a quarter of US exports and a like percentage of imports.

Given the importance of trade and the political controversy that has surrounded the issue, all eyes are now on the trade data that will be coming from China this week. The economy there has been shaking off some of the early year doldrums and has been growing at close to 7.0%. Granted a lot of this growth has been due to the stimulus packages the government has been providing but much of the expansion has been genuine and that is indirectly interesting to the US. Though the Chinese are not a big export market for the US the countries that do sell to China buy a great deal from the US.

The export and import numbers for China will be have been released and they show continued strength in both categories but not as much as had been expected. The analysts had predicted that exports would go up by 10.9% and the actual gain was just 7.2%. Imports were not as expected either as it was thought it would be up by 16.6% and the actual number was 11.0%. These are not bad numbers by any stretch but they are clearly slowing from the pace that had been set earlier in the year. The question is whether this is the start of another trend or is it an anomaly. The expectation is that inflation has been holding steady in China at both the consumer and industrial level and that would seem to allow the government to engage in more stimulus should this be deemed necessary.

China is doing relatively well – certainly no signs of an imminent downturn. The problem is that vulnerability is showing up and that could force decisions the country would rather not make. It could also affect Chinese sensitivity to US pressure. If the US chooses to push its trade agenda and threaten China with tariffs and other restrictions, these will likely hurt more than would have been the case earlier. China may elect to be more cooperative to avoid the pressure but it is far more likely that there will be more aggressive action in reaction to that pressure.



The big question these days is why productivity has been so consistently weak. The number one reason cited for the sluggish pace of wage growth has been the even more sluggish pace of productivity growth in the years since the recession. This has been perplexing as one of the things that one used to be able to count on was the impact of a recession on productivity – the fact that fewer people would be doing the jobs once done by more meant that labor productivity would automatically improve. That has not happened this time.


Analysis: The prevailing theory is that there has been insufficient investment in the technology that would improve productivity in the overall economy. The manufacturing sector would likely have done more capital investment without the downturn and the addition of more robotics and technology would have meant gains. The service sector has lagged even further behind as technology investment slowed. The other issue is that there has not been the big tech breakthrough that boosts overall output – nothing approaching the impact of computers and cell phones when they first arrived on the scene. In fact, most of those breakthrough technologies have deteriorated into frivolous time wasters.

Generally, the productivity gains are connected to consumption of some kind. The producer gets better at making something or providing something that the consumer wants or needs. The consumer has been cautious and has yet to fully return to the spending habits of yesteryear. Even as the producer gets better at providing the goods and services the consumer has been resistant and has not encountered the “must have” situation that drove expansion in the past. There is some expectation as far energy use is concerned but the collapse in the price of oil has slowed the adoption rate for electric cars. Solar and wind power alternatives are gaining but they have not propelled the greater economy. There has been intense discussion over whether problem solving might be the thing to boost productivity – such as taking on climate change or urban congestion or any of a dozen other pressing infrastructure issues.


Macron’s Strategic Goals

Nobody expected the situation facing Emmanuel Macron to be easy. His rise to power was as much about the weakness of his opponents as it was about his own policies and strengths. To be honest there was not a lot for analysts to react to as his goals and plans were fairly vague as the campaign progressed. He was not taken all that seriously at first and his move to the top was as much about stumbles from the others as it was about his policy ideas. Francois Fillon sunk his chances with a series of scandals and poor responses while the Socialists divided themselves between Hamon and Melanchon. Marine Le Pen was unable to escape her right-wing populist past and couldn’t capture the center-right votes she needed. Now that Macron is in charge the voter is casting a more critical eye than before and he has dropped precipitously in the polls. He has lost some of the center-left support as he has advocated reform of the strict labor laws but the center-right doesn’t trust him either as he has seemed weak on immigration issues. One of the new goals seems to be geared towards wresting control of Eurozone economic policy from the Germans. Whether this resonates in the French electorate remains to be seen.


Analysis: For the past decade the German approach has dominated the Eurozone and there are several nations that have been supportive of this doctrine of fiscal rectitude. This has opened the Germans up to criticism from many in Europe as well as the US. The assertion has been that the Germans have maintained a surplus that is excessive and their refusal to adopt the stimulus efforts of the other economies has slowed recovery in Europe. The southern tier states such as Italy, Spain, Greece and France to a degree have argued that fiscal rectitude as practiced by the Germans has condemned them to slow growth and slow recovery. The Eurozone decisionmakers have been of the German position but they are starting to retire and it appears that Macron will be making a serious push to get more expansion oriented people in their place – such as his Finance Minister Bruno Le Maire.

It is not clear that any of this will help his standing domestically. His poll numbers are not in crisis yet but the decline has been sharp and illustrates the challenges faced by leaders these days. The electorate provides support that is a mile wide and an inch deep. They react to very parochial interests and rarely look at any sort of big picture. It has been asserted that many countries have become all but ungovernable as it has been near impossible to develop consensus on much of anything. Macron has the added liability of being “neither fish nor fowl” as he has not emerged from either the right or left and thus both of these groups oppose him.


Will Zuma Survive?

To describe South African President Jacob Zuma as controversial would be an understatement of epic proportions. Throughout his tenure he has been accused of scandal after scandal and his decisions have been impetuous and unpredictable. The economy has been in ruins through most of his term and there have been many who would like to see him gone but the opposition has been unable to unite around an alternative and he maintains his position at the head of the African National Congress – the party that holds a commanding position in parliament. Up to this point the vote of confidence that was required to oust him was public and those who voted against Zuma knew they would be punished if he survived. The vote this week will be secret and that may allow members of the ANC to cast negative votes with little fear of reprisal.


Analysis: Removing Zuma will still be very hard to pull off as it would require 58 members of the ANC to vote against him but the chances are better than they have been. Part of the problem is that nobody in the ANC has been willing to put themselves forward as an alternative to Zuma and that means that a no-confidence vote would open up the possibility of an opposition victory. Given the fact they currently lack a majority position the most likely scenario would be a battle within the ANC and that would be very bitter and disruptive as there are many who owe their positions to Zuma and know they would lose that job under anybody else. The system is corrupt and rife with patronage and cronyism but that is exactly what keeps it from being reformed. The people in place know full well they are not there due to their merits and they have every reason to back the status quo. The government has consistently failed to deliver on its promises of economic progress and that is wholly unacceptable given the resources and advantages this state has. Zuma is the major issue and he has to be removed but at this stage nobody knows how this will be accomplished and nobody knows who would replace him if some means were found to dump him.


The Black Owl Report – An Executive Intelligence Brief

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


Living in a “Screamocracy”

I was just trying to eat my crummy airport sandwich in peace but the TV was blaring away with what sounded like the most emotionally fraught and angry conversation I had ever heard. I assumed it must be some kind of intense debate between pro and anti Trump commentators or at least an intense debate over health care or the economy. No – it was about why Colin Kaepernick was not competing for a job in the NFL somewhere. The three commentators were nearly apoplectic as they shrilly asserted that this was related to everything from slavery to the Bill of Rights. The intensity and anger seemed inappropriate when the topic is what a mediocre quarterback is going to do next.

The fact is that every conversation these days is a screaming rant. It seems impossible to hear people exchange views with any respect for one another – at least in the media. The aim is to attack and devalue the person one disagrees with as opposed to making a case for what one believes. This constant anger is corrosive and affects us all. When did we become intolerant of anyone who disagrees with us on anything? I take some pride in the fact that I can offend those on the right and the left as I am neither one. I also take pride in the fact I have friends on both the left and right. We disagree intensely on some issues but we never forget what we have in common. I listen to what they have to say and they listen to me and we can get heated and emotional but at the end of the day we respect one another and can come together on some other topic. It serves no purpose to simply hate and revile someone – there is no path to compromise and without that compromise we can’t live in a civil society.


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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Dollar Still Falling –  There’s a lot of chatter today about the falling dollar and the impact that it might have on everything from raw material costs to the cost of doing business abroad.


The chart at right from the Federal Reserve shows the trade weighted dollar index against most major currencies. We can see that it has been dipping since early May of this year and it continues to fall. Shortly, if it continues to fall below 87.64 (currently at 88.05), it would break through a technical level and hitting levels that we haven’t seen since January of 2015.


We put the trade weighted dollar index against West Texas Intermediate (US crude oil) to give you an idea of how they move together. For a while, we weren’t getting the response from WTI prices (when the dollar dips – they rise) – but we are seeing that relationship redevelop now.  Generally, if the dollar continues to fall, we can expect many of the raw commodities and imported products face increasing price appreciation.



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