The latest data from the Thomson Reuters/University of Michigan consumer confidence survey is in and it has come as something of a surprise to the economic analysts that track the vagaries of the consumer mood. After months and months of a poor consumer confidence level there is suddenly a change in mood and the confidence level is back to what it was prior to the arrival of the recession. In April the reading was about what it had been for the bulk of the year – an anemic 76.4. There had been some expectation that it would improve in May but the majority of the analysts expected to see no more than a reading of 78. Instead the consumer shocked everyone with a jump to 83.7. This takes the confidence reading back to the heady days prior to the recession when everyone seemed to be ready to believe that the boom of the last decade could last forever.

First there is the usual caveat when looking at the consumer confidence numbers. Consumers are among the most fickle creatures on the planet and they are fully capable of having a drastic change of heart before the next month’s data comes out. In fact there are some suggestions that people are already having a change of heart and that could lead to a big drop in confidence by the time the next survey is released.

The assessment of the survey suggests that much of the confidence jump came from the ranks of those who are engaged in the stock market. The rise has restored more than a few retirement accounts and has gladdened the hearts of those who have invested in equities. Not that this is a bad thing but as most have learned by now – what comes up most usually comes down and at some juncture there will be a market correction. Will that be enough to cause overall loss of faith in the market? Probably now but it could be enough to cause a dip in consumer confidence.

The other factor that seemed to play a role was the price of gasoline. We have noted more than once that the consumer is especially sensitive to the price at the pump. When the price of gas is down the mood of the consumer is upbeat and when the price of gas is high the consumer is bummed out. In April the cost of gas fell in most parts of the country but in May the price rose in some places and that might have an impact on consumer mood as well. Thus far that price hike has not been universal and that may keep the impact less than dramatic.

Analysis: It is not that consumer data is of no interest or can never be trusted. It has to be taken for what it is. This is a snapshot of sorts, an assessment of the overall mood of people at a set point in time and what is happening at that precise moment matters quite a lot. In some cases there has been some national tragedy that shakes people’s confidence about the future and the Boston bombings did indeed cause some reduced optimism in the eastern parts of the country. On the other hand a booming stock market can make people feel good about the future – even when they are not actually engaged with the equity markets. They just assume that strong stock market performance must be good for the country’s economy as a whole.

The analysts are now in search of some kind of consistent trend – several months of good moods and confidence and there is some hope that May is providing the start. The most encouraging part of this data is that a rise in confidence right now might suggest that there is not really going to be a spring swoon in 2013 – at least not one as injurious to the economy as those of the past few years. The level of business confidence is still not what would be preferred but improved consumer mood could help alter that in the coming weeks. The business community is worried about the lack of direction from the government as well as the consumer.

Is the Future of Innovation Bright?

There are two kinds of people in the analytical community when  the subject matter is innovation – especially when innovation is discussed as the prime tool for getting the US economy moving and growing at a rapid pace again. There are optimists and pessimists as regards the role of innovation and there are several sub-groups within each category. In general the pessimist asserts that the big innovations have already taken place and there is nothing on the horizon that will have the input that previous innovations have had. The other argument is that many of the innovations area actually not that good for the economy in the sense that many of them involve replacing people with machines. The optimists assert that much of the growth in the last several decades as been due to innovation and that there are many areas remaining that cry out for innovation and improvement that would benefit economic growth.

Analysis: We will start with an assessment of the pessimist and finish on a more upbeat note. There are many variations on the theme but there are basically two reasons for the skeptics to take a dim view of the power of innovation. The first is that there is nothing on the horizon that would shape the economy as dramatically as the innovations that have taken place in the past. There is nothing like the revolution in computers or telecommunications or even something as basic as climate control. The problem with this assertion is that innovation is by definition the solving of problems that have been considered insoluble in the past and because it is innovative there is little advance warning. There are dozens of major problems that need solutions. It is not clear that innovation is imminent on any of these fronts but it is absurd to assume that none of these solutions will have the potential to drive major economic development.

Only five or six years ago it was considered nearly impossible to extract oil and gas from the fragmented and inaccessible formations in the US but today the development of the Bakken field is driving the US economy and will change the US relationship to oil and gas forever. Imagine the economic impact of a cure for cancer or diabetes. Consider the impact of the new accretive technology in manufacturing as the process shifts from cutting away what one doesn’t want to simply adding layers of what one does want to create a part or tool. There are major issues in all aspects of transportation that could use solutions and then there are the innovations that could improve efficiency and reduce the impact on the environment. There is nothing that assures that these innovations will take place but it is clear that there is demand for them and that they would change the nature of the economy.

The second argument made by many in the pessimistic camp is that innovation is not the best way to advance overall economic goals and in many cases it even interferes in the process. The assertion is that innovation takes jobs away from people. Machines replace manual labor and over time the only people working are those who know how to design and operate the robots that have replaced the entire workforce. This has been most evident in the manufacturing sector as capital investment in technology and robotics has been the competitive edge the US has employed to regain some of the market share lost in the last few decades. It shows up in other sectors as well – everything from pumping one’s own gasoline to handling one’s check-out at the grocery store. Advances in technology all but eliminated the function of the administrative assistant and other support personnel. This is innovation that may assist the elite but it detracts from the ability of others to get and keep employment.

The argument has some merit but it becomes a matter of short term vs. long term. There would be far more employment if we had no vehicles and people had to rely on horse carts and their own muscles to move things. The general trend is towards more efficiency and that means more technology. This process also opens up better jobs in these sectors. The real challenge for the society as a whole and for those working is to keep pace. The workers of today have to keep concentrating on the skills they will need tomorrow. Unfortunately that is much easier said than done. There are legions of people who have been left behind by innovation and there will be far more in the future.

What is the optimistic view of innovation? In some respects we have addressed that in the critique of the pessimist but it goes beyond this. Innovation has the ability to utterly change the current dynamic and in the process it opens up opportunities that range throughout an economy. The Bakken field development is a classic example. There is certainly money to be made in drilling for oil and gas and there are plenty of people involved directly in that industry. The greater job growth and the greater economic expansion is due to the peripheral and ancillary developments. There is construction all through the region and at a frantic pace – everything from homes to apartments and hotels. There are stores and restaurants and bars. There are communities adding schools and fire stations and sewer systems. The banks are busy and so are the insurance companies and the medical centers and the veterinarians and every other part of a modern economy. In the end these will be the developments that revolutionize the region – all on the back of a key innovation.

By definition we don’t know the impact of the next innovation. It may be minor – like some new way to text. It might be major – an end to some disease that costs millions of lives. It may be innovation that only matters to a specific industry but as that sector becomes more efficient there is always a ripple impact.

Not Much in the Way of Data Releases This Week

The data supply will be truncated this week – mostly some data on housing and a set of speeches from the members of the Fed. The housing sector has been performing well of late despite the small slide last month. The latest news on permits has been positive and it is expected that more good news will be coming from the National Association of Realtors as they release their latest housing numbers. It is expected that home sales will have risen by another 1% and that continues a solid trend that has been pushing this sector to the position of economic engine.

Analysis: There will be some Fed speeches this week and that will provide some opportunity to gauge their opinion on when to start to ratchet back on the loose monetary policies of the last four to five years. This is also the week that the Fed releases its latest set of minutes and that will also contribute to some understanding of the mood. It appears that everyone at the Fed agrees that the economy is improving a little and that there will come a point when the stimulating will come to an end. The division is over when that point will be reached. To the hawks that moment came months ago and speeches from the likes of Esther George, Richard Fisher, Jeff Lacker and Charles Plosser reiterate that position. The ones to watch are the doves like Janet Yellen, Eric Rosengren and Charles Evans. They start to waver in their support of loose monetarism and a shift will be imminent. The speeches will provide some clues but nothing definitive until the next meeting.

Trouble in the Gold Market

The yellow metal commands a great deal of attention and there are few investment sectors that generate more intense emotion. Those who defend purchasing gold at any price assert that it remains the ultimate hedge against inflation and protection from the volatility of the investment world. This position is rigidly adhered to despite prices that have exceeded all expectations and seem to the gold critics to have long since left logic behind. The gold critics are just as determined and emotional – asserting that there is nothing to justify the adherence to gold as the measure of all value. The collapse of gold prices due to the rumor that Cyprus would be forced to sell its paltry collection was an example of how changeable this market has become. Now the price of gold has tumbled again and silver is falling even faster. What prompted this latest decline? Nobody is really certain – other than to say that the markets have been as nervous as they have ever been.

The bigger issue is what is happening in the global investment community as a whole. Gold is not the only thing that seems to have lost contact with the economic fundamentals. Nobody can really explain why the stock market in the US continues to surge when the overall economic news is not all that compelling. The data suggests that the economic recovery is continuing but at a snail’s pace, nothing that would justify the kind of surge that has taken the stock market to record highs every few days.

One of the assertions by analysts is that this recession has forced some systemic changes that nobody is quite sure how to manage. The central banks have been universally committed to asset purchases and stimulation regardless of the long term risk. There are vocal critics inside and outside the banks that assert that this extended policy of loose monetarism is inviting some risky behavior on the part of banks and other institutions and they further assert that it is only a matter of time before the inflation threat manifests. Thus far they are voices in the wilderness and the central banks press on. Part of the reason for their aggressive posture is that the fiscal side of the house is missing in action and has been for an extended period of time. In past years it would have been expected that the legislatures and parliaments of the world would be participating in the drive to bolster the economic recovery with big spending programs and tax cuts but they are all concerned about their growing debts and deficits and that has served to keep them out of the game. This sets up some serious problems.

Analysis: The critics assert that these efforts have set up a set of false expectations. There is less market volatility than would be expected and there is an illusion that there is more financial stability than is justified. The markets are expecting two things and there is considerable doubt as to whether these will continue to manifest. The first expectation is that the central banks will continue to stay committed to the current loose monetary strategy and that they will keep on buying assets as a means to bolster the economy. Given the conversation of late that may not be such a wise conclusion. The second assumption is that the US and Europe will start to get the kind of political leadership necessary to bring the economy out of its slump. This is an awfully confident position given the actions of the last several years. The investors are convinced that the powers that be will look at the economic mess and will get engaged in the kind of stimulation that has been the pattern in the past. They are convinced that the Europeans are right on the edge of abandoning all that austerity nonsense and that these Eurozone states will soon be pumping cash into the system again. None of these assessments quite get around to explaining where that money is going to come from but they seem to believe that it will be conjured up somehow. As for the US they are convinced that all the debt and deficit talk will soon fade as the US has made some progress on that deficit issue and now understands that the economy needs a jolt.

This may the prevailing opinion of the investment community but this is not the opinion of most analysts. There is little to suggest that there has been a real sea change in attitude towards debt and austerity in the places that really matter. The Germans are not prepared to back off and they are the ones that are underwriting the Eurozone rescue. The opposition to expanded debt and deficit in the US remains formidable. The bottom line is that the assumptions that are supporting the stock market and the gold market are shaky enough to give an investor reason to question current values.

Mexican Stumble – Predicted and Probably Not that Serious

The Mexican economy was perking right along at the end of last year – a growth rate of 3.2%. That made them one of the fastest growing economies in Latin America but there were some concerns emerging towards the end of the year as the US economy went into its swoon. The US in the fourth quarter fell below 1% growth and most anticipated a similar drop in the Mexican economy. Sure enough there was a slump to 0.8% growth in the first quarter and that was below even the more pessimistic assumptions of 1.2%. There is no panic in Mexico however. It would appear that a rebound will take place sooner than later as the US economy began to grow again in the first quarter.

Analysis: This is also indicative of an economy that remains dependent on the US but has still managed to diversify. There is more than oil and tourism now and that gives the Mexicans more flexibility. The recovery in the next quarter will likely be led by manufacturing.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

The Origin Story

One of the joys of traveling around and flapping my lips for a living is the opportunity to talk to the people who read this screed every day. I am astonished at how many do so – more than I ever expected. I am even more shocked at how many people read this last story and assert that it is their favorite part. It is time therefore to explain where this all originated.

Many of you are reading the Business Intelligence Brief because it comes from an organization that you are affiliated with. You will notice that underneath this story there is a box that each organization uses differently. Some run announcements of the programs they are offering and others run advertisements from businesses interested in their members. Either way they want people to make it to the back of the BIB so that they at least see what is in that box. This led us to use this space for something a little offbeat and personal. Hence the litany of travel stories, cat reports and random observations. This is always the last thing I write in any given morning and it is literally what is on my mind that very instant before I send this off to Karen so that she can get it off the readers.

Over the years I had shared way too much I am sure. I run into people that have never met me but they know the names of my cats, know that my wife is a singer, gardener, exquisite cook and has excellent taste in everything but men. People know that I really like the TSA (not) and just adore the joys of flying. People who know me are now asking if every conversation we have is potential fodder for this column (the answer is yes). It is somewhat odd to find that people like reading these rants. Somewhat intimidating as well. I strive to make this stuff relevant and interesting and that is not all that easy given the fundamentally mundane life I lead. Perhaps it is time to take up some extreme sport so that I can report on life in a hospital.

The numbers from last month had started to worry those who keep expecting something to derail the housing sector. The number of starts had fallen by 16.4% and that was the steepest decline since November of last year. Granted, even that reduced number was 36% higher than it was in April of last year but there was still a shock wave through the sector on which many are now placing a great deal of emphasis. If the housing surge starts to fade this soon into its recovery there will be a lot of pessimism emerging as far as the rest of the year. The numbers from May are brightening a lot of moods as it would appear that the April slide was more anomaly than trend – something affected by the volatility of the apartment sector and not a signal that the expansion was already coming to an end.

Permits were up in April and that trend seems to be extending into May. The gain in April was 14.3% and that is largest gain since June of 2008 – before the recession hit and before the real damage had been done to the housing sector. The permit data is actually better at prediction than housing starts and that is truer now than before. In the boom years there was a lot of speculative activity and builders would get permits to construct homes that they hoped to sell but for which they had no ready buyer. The lending climate now is not all that conducive to these speculative builds and when a permit is obtained it is a good bet that there is a buyer in place already. That leads to a more direct connection between the permit process and the ultimate construction and sale of a home.

The construction of apartments can skew the start data from month to month as this sector is far more volatile than the single family residence. The most obvious factor is that apartments are planned and built in far larger numbers. The start of a multi-family unit is going to have an impact on the data that is far more dramatic than starting a single family home. By the same token when there is a slowdown in building these apartment complexes the impact on the data is significant. In April there was a 36.2% decline in the construction of the multi-family unit. There is also a transition from time to time depending on the preferences of the consumer at that moment. The single family home is getting popular again and people are reacting to the higher rents in the apartment sector.

Analysis: The housing sector is once again carrying a lot of the weight of expectations. If the sector continues to expand the economy is very likely to expand right along with it. It is hard to overemphasize the role that housing plays in the economy – directly and indirectly. It is obviously a source of jobs for those that build the homes and it makes money for the builders, banks and real estate companies. That is just the start of the impact. The home is the primary source of consumer wealth and its value determines the financial security of millions. There are all the sectors that contribute to the home during construction and after. There is the lumber and cement and carpeting and appliances and furniture – the list is long. In the boom years it was estimated that housing and related sectors accounted for as much as 30% of the GDP. That percentage fell drastically but is now starting to grow again and will be the underpinning of the year’s recovery when all is said and done. Most anticipate a good year for the sector but not one that will resemble the frantic period prior to the recession and that is a good thing. The mortgage rates will stay low through the bulk of the year so all that is needed now is more consumer confidence.

The Threat of Currency Manipulation

There are few global economists who command the respect that has been afforded Fred Bergsten. He has been an assistant secretary of the Treasury but his greatest claim to economic fame has been as head of the Peterson Institute of International Affairs. This has been one of the most powerful think tanks on the issues affecting global trade and finance for years. He has just recently retired and gave a speech as one of his farewell gestures. This was perhaps his most direct and powerful discussion of a threat that he considers very serious and one that is becoming more complex by the day. He has long argued that global trade is the most powerful tool for real economic development and he has asserted that all the barriers and protections only serve to hold back growth – even in the nations that believe that they are protecting their own economy. One of his primary targets has always been the use of currency policy to promote exports and discriminate against imports.

Analysis: The temptation to use one’s currency value to dig out of an economic crisis is powerful. The process is really pretty simple. If a nation takes steps to lower the global value of a currency the export community in that country instantly has an advantage against other competitors. The goods that they are trying to sell on the international market are instantly discounted and that will attract buyers. The downside is that goods that coming to that country become more expensive as they will cost relatively more given that they are being paid for in weakened currency. This would seem to be a pretty substantial disadvantage and it is for the consumer and those who have to buy commodities and other goods from overseas. It is an advantage for the domestic industries that compete against the global competitors as they now have a domestic price advantage. The goods that are arriving in the country are carrying extra costs just as if they were being hit by tariffs.

There is no “right” position as far as having a weak or strong currency – it all depends on which side of the debate one is on. To the exporter and the domestic industry there is nothing at all wrong with having a weak currency to work with. To the consumer and the businesses that need inputs from outside the country the weak currency costs them dearly. For years the US trade deficit has worsened every time the price of oil went up at the same time that the dollar weakened as that oil import just became that much more expensive. The fact is that those who benefit from a weaker currency generally have more political clout than those who benefit from the stronger currency and many countries now push hard to keep their currencies from rising.

If one looks at the policies in place around the world there is no avoiding the conclusion that Bergsten has reached. The world is in a currency war and one that shows no signs of diminishing. The Chinese have been aggressively controlling the value of the yuan/renminbi for decades and has endured criticism from nearly everyone. This is an export driven economy and one that depends on selling cheaper consumer goods. They need every edge they can get their hands on and thus the government has maintained a policy that results in a currency that is clearly undervalued – by as much as 30% or 40%. At one time the Chinese were somewhat on their own as a currency manipulator but those days are gone.

Today almost every nation is doing what it can to influence the value of its currency and some have gone far beyond what the Chinese have done. Japan is aggressively pursuing policies that collapse the value of the yen because this is also an export centered state and they desperately need that sector to come back to life. The Bank of Japan has lowered the interest rate to zero and has pursued a loose monetary policy that makes the policy of the Federal Reserve look almost tight in comparison. The yen has fallen like a stone and the Japanese economy is growing at a 3.5% rate. Brazil has been assailing the US Federal Reserve for its loose monetary strategy and has accused the policymakers in the US of deliberately trying to wreck the economies of states like Brazil. That is probably going too far but the fact is that the low interest rates in the US have an impact on Brazil and others.

Part of the problem is that investors do not care much for weak currency regimes and they tend to direct their money towards countries that have stronger currencies and higher interest rates. If there is a nation like Brazil that favors higher interest rate they become a target for that investment money. This is not as positive as it sounds. The Brazilian economy (and others) have a bigger concern as regards inflation than some others. It has been inflationary surge that has damaged the Brazilian economy many times before and they share this issue with many other developing nations. If the “hot money” from investors floods into these states they are looking at an inflation breakout and that causes them to hike interest rates. That only encourages the investor more but it slows the economy at the same time. It is a vicious circle that is hard to break.

Bergsten also point out that currency manipulation distorts trade patterns and that this costs nations a great deal of money in the short and medium term. It is his assertion that the global economy would be ahead by over $1 trillion if the currency manipulations were removed. This would be like adding almost 1% growth to the global economy and that means millions of jobs in nations throughout the world. The race to the bottom creates strains for the consumer and that restricts growth and thus reduces expansion and jobs. It is not realistic to assume that nations will stop engaging in this practice but steps should be taken to slow down the process before the world sees a 2013 version of the 1930s –“beggar thy neighbor” policy that marked the Great Depression.

More Concern About Loose Policies

The consensus is building throughout the world. The problem is that there is no such consensus yet in the Fed itself. The latest voice to be heard on the subject is the head of the Bank for International Settlements – the central bank to the central banks. The comments from Jaime Caruana are the most direct he has made yet. The basic assertion is that the time has come for a retreat from the loose monetary policies of the past several years as they have outlived their usefulness. The underlying assertion is that the banks have been asked to do far too much and it is now time for the fiscal side of the house to take responsibility. In fact it has been their responsibility for some time.

Analysis: The comments from Caruana are similar to those within the ranks of the Federal Reserve who have been calling for a reversal of the bond buying plan. The fear is that this consistent loose policy is inviting highly risky behavior as banks and others seek to find returns. They are getting into situations that look disturbingly similar to those that preceded the 2008 meltdown. Then there is the threat of inflation at some point. It is obvious that there is relatively little threat of inflation pressure right now but that massive money overhang is not getting any smaller and if there is a rush out of the banks and corporations and consumer pockets the system will be overwhelmed by the money supply and the inflation threat becomes very real.

Bad Signs from the Transport Sector

The analyst have been suggesting for some time that global trade would be slowing in the coming year despite the fact that some of the bigger export economies are working overtime to bolster their chances to compete. The Japanese are certainly seeing far more exports action than has been the case in the last few years but China has been seeing slowdowns in their own trade numbers. The US export community has been seeing less activity and Europe is downright moribund. These are all assessments derived from the export and import data from a few months ago and that is the nature of government information – it is always rear view mirror analysis. To get a sense of the future one needs to look at the transport operation as they will reflect the pace of today as well as the future. The assessments coming from the ocean cargo carriers, the rail companies, trucking companies and the air freight operations are universally cautious and in some cases downright depressing.

Maersk is the largest of the ocean cargo operations and they have just lowered their expectations for the year. They had been predicting growth of around 4% to 5% and now they have adjusted to now more than 2% to 4%. The container traffic they had expected to see has not manifested as yet and there is no expectation that it will catch up. The retailers have not shown an eagerness to load up on inventory yet. There is still time to get product in for the holiday season but peak shipping season is fast approaching and there is nothing to suggest that there is a surge coming.

To further complicate the situation for the ocean carriers there is the problem of over capacity. Maersk has idled almost 50% of its fleet and they are far from alone as all the major carriers are trying to restrict their capacity in order to keep freight rates from collapsing. That capacity pressure will be on the ocean carriers for some time and that will keep prices down – along with profit potential. Right now the carriers are engaged in every tactic they can think of to stabilize prices. They are slow sailing to reduce fuel costs and to control delivery times. They are waiting until a ship is fully loaded before sailing and that can delay the transportation of goods by additional weeks. At the moment there is not the kind of demand that would require faster shipping but at some point there will be a need to speed the process.

Analysis: This is the challenge of transportation and logistics. The shippers need the service that they need and only when it is appropriate. As long as the consumer is not clamoring for the product the shipper is not in a hurry. They can wait for the slow sailing and the need to only move fully loaded vehicles. They are also unwilling to pay for anything but the most basic of services. Then demand begins to spike and the need for fast and efficient transportation increases. Now they are willing to pay and now is the point at which transportation companies can make some money. They will want to keep capacity restricted as long as they can as this is the point where prices rise in reaction to bottlenecks. In time the capacity grows to meet demand and the money flows stop. At some point there is overcapacity and prices start to fall again – it is a cycle that is very familiar to all elements of the transportation sector.

Global Executives Assess the Future

The good news is that 27% of the 1600 executives polled think that the global economy will improve by the end of the year. The bad news is that 21% of them do not expect much improvement and that leaves almost half of those polled with no idea what is going on. This is far from a ringing endorsement of the future and would suggest that all the concerns about uncertainty are still valid. The breakdown in confidence vs. pessimism was predictable and tended to match up with the industries that have been growing out of the recession and its aftermath. There was also a great deal of difference depending on where the executive was located. The Americans are more upbeat than the Europeans and most of the Asian responses were more positive than those from the US or Europe. The sectors that are most confident include those involved with energy production, housing and vehicle production. The retail sector was not generally happy and there is considerable gloom in some of the more basic manufacturing areas.

Analysis: Given the broad approach of the survey is there much that can be taken from this? In some respects the survey is too broad to provide clues but there are issues that get almost universal attention and response and that provides some good clues as to what is of greatest concern and where the strengths might lie. The surprising response is that 64% thought their company would do well despite the fact that only 21% thought the economy as a whole would improve. There are many companies that have simply adopted the attitude that they only have control over their own business and that they should get on with the task at hand regardless of the activity around them.

Another point of near universal contention is that regulation will provide the biggest threat going forward. It is not even that these companies seek a world of no regulation; they are seeking rules and regulations that make sense and do not contradict one another. There are rules that affect hiring and firing that make employment decisions tough. At the same time they are being assailed for investing in technology and not people. The right hand knows not what the left hand is doing.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

Making Life Worth Living

There is a set of pictures making the rounds on the Internet these days. The first photo is of a woman (age 53) who is reputed to be a natural food guru and a devotee of all those odd behaviors like colonics and purges and the like. She looks to be about 106. The next photo is of Nigella Lawson and she is also 53. The gorgeous photo makes note of the fact that she eats chocolate, butter and other delectables while also enjoying a fine wine. The fact is that somebody took the most unflattering photo they could find of McKeith and she doesn’t really look that bad given that she has spent most of her life outdoors. The photo of Lawson is a very carefully presented glamour shot and she has her bad days as well. The real point is that one needs to make a choice as to how to live.

We all have our wants and needs and desires. For some the satisfaction of life lies in music or fine spirits, a day of golf or a day in the garden. Sometimes these avocations are “good” for us and other times perhaps not. The decision is ours. I have watched Nigella for a long time as I count food and wine as among the great pleasures of life. She does indeed consume butter and chocolate and rich offering of all kinds but she also does so in moderation and with an eye to enjoying these things for a good long time. It is not healthy to spend one’s life in deprivation. We all get joy from different activity and we have to make certain that we don’t sacrifice too much pleasure in the pursuit of other goals – whether that be work or the quest for some ideal weight.

The surge in the price of farm land has been one of the most persistent developments in the last few years – certainly a contrast to the value of residential and commercial property in the same period. In the last year the average price for farmland in the middle of the country has risen by 16.3%. There has been considerable variability from state to state and from farm to farm as there are all kinds of relevant factors but these are record numbers for non-irrigated farmland and most assume that the prices will stay relatively high although some of the growth may be starting to tail off a little. In the last quarter the rise in value was only 3.4% over what it was in the first quarter of 2012. The fourth quarter of 2012 was 7.2% higher than fourth quarter of 2011.

Three factors have been driving the price of farmland higher and thus far there is no reason to think that any of the three will fade away completely. First there has been a rise in the value of the commodities that are being produced on that land. Last year was oddly profitable for many farms despite or maybe because of the widespread drought. When almost the entire nation is caught in a disastrous crop year the price of the commodities will soar and that makes the payments issued by crop insurance far higher. The crops that farmers are able to harvest are also that much more profitable. It is a bad year when a specific farmer has bad luck while all around him are having a good year.

The second factor has been the low interest rates available from the banks. Given the uncertainties in the agricultural markets many farmers have been taking advantage of this period to buy the land that they might want later – a matter of buying when the opportunity presents itself. Thus far it appears that most of the farmers are managing their debt well and reports from the Federal Reserve are not suggesting that the sector as a whole is overleveraged.

The third factor is that farmers are competing with some of the big investment groups and equity funds for the land and that has driven prices up. The investors are also reacting to the higher priced commodities and the low interest rate environment but they are also turning to farmland as a safer alternative to the more volatile places they can stash their money. Right now many of the investors are seeking cash generators and that is why they are buying up farms along with houses that they can subsequently rent or sell when the market improves.

Analysis:  There are many who worry about a boom and bust in the Ag sector as these price hikes have been consistent and significant. Whether this surge turns sour will depend on the vagaries of the weather and the other factors affecting the sector. If commodity prices stay high these land investments will continue to pay off but that all depends on harvests and yields. Thus far this year the drought is less of an issue than it was last year and now the problem has been too much rain at the wrong time along with unseasonably cold temperatures. This has not convinced the forecasters to alter their assumptions and the expectation is that this will be a good year in general for most of main crops – corn, soybeans, wheat, cotton, rice etc. If that prediction holds the price of these commodities will likely ease and that would put some pressure on the land values but if there is another bad year that affects harvests and the prices go back up that farmland investment will still look pretty wise – at least as long as the debts remain under control. At the point that interest rates rise the surge in farmland investment will likely ease.

Is Manufacturing Going to be the Spring Buzz Kill?

The data emerging from the consumer side of things looks better than expected. There have been some decent retail numbers and the latest data on wholesale and consumer prices indicate improvement based on some lower prices for key commodities like gasoline. That latter trend may have come to a shuddering halt in the last week as national gas prices have started to spike in anticipation of demand. For the moment there is a sense that the consumer is a little more confident although most of the surveys are not suggesting a big change in attitude. There are some developments that feel a little more positive – housing prices continue to rise and that is leading the recovery in home building and sales. There have been some better job numbers although there is nothing to suggest that the rate will fall from the 7% range anytime soon. It is not that the news from the consumer sector is all that spectacular, it is just better than the news that is coming from the other sectors right now – manufacturing among them.

Analysis: There is always a lot of controversy over identified trends like the “spring swoon”. In past years there have been major events that affected the economy at this point. In the last few years the global economy has been confronted by tsunamis and earthquakes in Japan and political upheaval in the Middle East. The former event caused a major disruption in the global supply chain that took months and months to recover from. The “Arab Spring” took many people by surprise and there was the promise of substantial change and a new order in some key states of the Middle East and North Africa. Today that promise has faded completely and it appears that states like Egypt, Tunisia and Libya are almost worse off than they were before. There have been years in which spring storms set the US economy back but this year has been unusually quiet – at least to this point. Without one of these major events there is some question as to whether one can assert that there is a “swoon” this year. If there is a decline taking place in 2013 however it looks like it is manifesting in the manufacturing sector.

The data shows that there was a 0.4% drop in manufacturing output in April and that is biggest decline in six months. That is consistent with the data on industrial output as there was a decline of 0.5% in that same period. After several months of increase the rate of capacity utilization has also slipped – from 78.3% to 77.8%. This was a bigger drop than had been forecast and a real disappointment for those who thought they would see some more movement towards normal utilization by now. The preferred level of capacity utilization is around 85% – much more than this would start to create some bottlenecks and shortages and that would start to push prices up.

That may be the silver lining in the latest data. The slump in manufacturing is not quite a slide but this decline has served to lower wholesale prices and consumer prices and that translates into far less inflation threat for the time being. The behavior of prices has been watched very closely by the Fed as they seek signals that inflation is poised for a breakout. The warning signs are all there but thus far nothing has developed that would convince the Fed that it is time to reverse course on its loose monetary policy. The only real inflation threat right now is that expanded money supply that has developed as the Fed has tried to stimulate the economy. The threat of wage inflation is low as long as the rate of joblessness is as high as it is. The threat from higher priced commodities remains low despite the recent spike in gasoline and diesel prices. The crude oil numbers are still pretty low and there is not much on the horizon that would indicate that they will jump up – at least not in a consistent way.

The other factor affecting the US manufacturing community is a drop off in export activity and this situation is getting more complex all the time. There is the fact that demand globally is down and there are many reasons for this. The most obvious is that many nations that the US traditionally sells to are struggling and they are just not buying as much as they used to. The European economy is in a recession deeper than the one five years ago and China is as slow as it has been in several years. It is not that the US manufacturer sells all that much to China but they do sell to the nations that sell to China and as that major economy cuts back it impacts the countries like Australia that sell their commodity output to China.

In addition to the slowing economies in the world there is the fact that the US manufacturer is seeing more aggressive competition that was the case a couple of years ago. Japan’s new stimulation plan has collapsed the yen and quite deliberately. Thus far the world is giving Japan a pass on this currency manipulation as it has been deemed in the long term interests of all concerned to see Japan recover its economic stability. In the meantime the Japanese exporters are benefiting from that lower valued yen and they were already pretty formidable competitors.

The manufacturing sector in the US only accounts for about 12% of the nation’s GDP directly but the indirect input is about twice to three times that level. For every person directly engaged in manufacturing there are eight people dependent on that job – those who market the object, service it, finance it, insure it, distribute it, sell it and so on. It matters that the manufacturing sector is growing and expanding – especially if there is a desire to start to grow out of debt and deficit.

What the Heck is Up with Gas Prices These Days?

The hike in the price of gasoline has taken many consumers by surprise. Thus far the rise has not been nationwide and there are some parts of the country that have even seen some reductions. For the most part the hike has been between twenty and thirty cents a gallon and in a short period of time. Every time these hikes take place there are some very unhappy consumers. Is there a single reason for the increase? No, actually there isn’t.

Analysis: It would appear that there are three major motivations for the recent increases. The first is that the nation is heading for the start of “driving season” and this usually means more demand. This year supplies of gasoline are adequate but not excessive and there is an anticipation of better than usual demand. If that bet is incorrect look for a sharp fall in the price of gas after the holiday. The other two factors are more stable. The refineries in the US are old and that means that they require a lot more maintenance every year. The regulations governing oil production have become stricter since the Gulf oil spill and some other incidents and that means that refineries shut down more quickly and that they restrict production more often. This is the time of year that refineries start to introduce the summer additives and that can cause slowdowns as well. The good news – such as it is – remains that there are no big issues that are causing crude oil prices to rise. The per barrel price is more or less stable and that should allow pump prices to fall soon.

Brazil Emerging as Major Focus for the US

In past years the best way to describe the relationship between the US and Brazil would be benign neglect. To a significant degree the two states tended to try to stay out of each other’s way as there was not a great deal of connection between the two and there were plenty of reasons to differ. The counties have been rivals in agricultural trade for years and it has been the disputes over soybeans, ethanol and sugar that have kept the two nations on opposite sides when it comes to the WTO and the proposed trade agreements that started over a decade and a half ago. The US farmer doesn’t want to compete with the Brazilians and there are many industries in Brazil that want the US kept at arm’s length as well. The divisions are not enough to create a real trade war but they have kept the leaders of these nations somewhat suspicious of one another.

The politics of Brazil can be awkward for the US and vice versa. The government of Brazil has been in the hands of the Worker’s Party for over a decade – under either Inazio “Lula” da Silva or his successor – Dilma Rousseff. This means that Brazilian policies have differed widely from the US on Venezuela’s Hugo Chavez and Argentina’s Cristina Fernandez. Brazil is also far closer to the leftists in Ecuador (Rafael Correon) and Bolivia (Evo Morales). There have been more diplomatic issues as far as other nations are concerned as the policies of Brazil have been tolerant of Iran as well. Needless to say these differences will not be going away anytime soon.

All this aside there are all kinds of reasons for the two nations to find ways to work together and of late there seems to be more progress than in the past. It was somewhat symbolic given the way the vote was going but the US scored some points in Brazil when the decision was made to support Roberto Azevado for the position of WTO head. The US had been backing the more pro-trade candidate from Mexico – Herminio Blanco – but when the time came for the final vote the US elected to support the Brazilian. That signaled that the US was taking Brazil that much more seriously as a global partner in trade.

Analysis: There are perhaps three reasons for the two nations to ally more closely with one another. One of them is a mutual distrust of China. The US has been growing concerned over the introduction of Chinese companies and the Chinese government into Latin American affairs. This has been most obvious in places like Venezuela and Ecuador but there are overtures in almost every state in the region. China wants the resources in the southern hemisphere and it wants access to these growing markets. The US is obviously uninterested in a Chinese presence in the area it tends to see as its own sphere of influence but Brazil is generally no happier. The Chinese are a good customer for the commodities produced by Brazil but the Chinese are also rivals in the manufacturing sector and Brazil remains a pretty protectionist state. There is no real desire to see this Asian behemoth playing a major role in their backyard.

Beyond this there is the fact that the two nations really do produce complimentary goods. The growing season in Brazil is the opposite of the US and that allows the farming sectors for both nations to stay out of each other’s way to some extent. The Brazilians are about set to become one of the world’s biggest oil producers at the same time that the US emerges as an oil and gas giant. The two of these nations could end up dominating the sector the way that OPEC has in the past. There are many US companies operating in that nation now and there will be more. The business community would like the two countries to become closer.

Brazil has also decided that it has to be far more aggressive in terms of its own development and to that end they are focusing on education more than ever. The country that Brazil plans to send its students to is the US and there are already thousands of young men and women in the US on grants provided by the Brazilian government. This is the kind of connection that leads to closer and closer business ties especially given the fact that Brazil is concentrating on training students in technical fields related to energy development.

This is not to say that all the divisions between Brazil and the US will vanish or that the leaders will suddenly become boon companions. Obama and Rousseff are not close but they are friendly enough. The relationship is being built on mutual need rather than on any kind of personal connection and that may be best in the long run anyway.

Japan Sees Some Results but Worry Remains

The first quarter growth in Japan is better than any of the other major industrial states – a nice solid reading of 3.5%. The credit is being given the development of “Abenomics” but there are many concerns that remain. The stimulus package has been aggressive and the yen has fallen drastically in response. Exports are way up and so is consumer spending. It looks like this massive shot in the arm is paying off but there is one major fly in the ointment – business investment is still down and this marks the fifth straight month of decline.

Analysis: The reluctance on the part of the business community is related to the assessment that this plan is like a sugar high – it will feel really good until it doesn’t. The plan is dependent on some very solid growth and for an extended period. If this doesn’t happen the Japanese debt situation becomes utterly unsustainable and the whole exercise will be condemned as an act of desperation. The export sector is carrying the load but sooner or later the rivals will try to grab back some of that market share and exports will not be as potent as they are now.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

What Really Motivates?

There are few questions more vital. It is the determination of motivation that lies behind almost every human decision. Managers need to know what their employees are working for, teachers need to understand the motivation of their students and we all know how hard the retail community works to figure out the consumer’s motivation. This question is at the heart of all human behavior. On a long drive through the heartland I heard a particular story a few times yesterday and I was struck by the debate.

The issue is the rampant poaching of rhinoceros for their horns. It seems that many in Asia ascribe great value to the powdered substance. So much so that a few ounces of the stuff will fetch tens of thousands of dollars. That is a recipe for the extinction of the animal because poachers will kill every last one of them to get that payoff. How is this to be stopped? The traditional response is to try to catch the poachers and the distributors. We all know how well that works. There are attempts to convince people not to buy the stuff but if you think it will cure cancer or give you special powers you are not likely to avoid it.

Here comes the economist’s suggestion. Legalize the sale and distribution of the horns and harvest them without killing or hurting the animal. The horn is removable with no damage to the animal – its purpose is to attract attention from other rhinos. The animal would essentially be ranched and the horns would be removed and sold every year. The illegal hunt would be eliminated and ranchers would value the rhino as a resource to be protected. Is this a perfect solution? Of course not – it makes a magnificent wild animal into a commodity. But what is the option? There are maybe 20,000 of these animals left and right now 500 are killed every year for their horns – how long does the population sustain this?

It comes down to what motivates – can we shame people into not buying rhino horn? Not very likely. Can we motivate people to protect them because it is in their financial best interest? Much more likely.

The past few years have been all about achieving the seemingly impossible. Every discussion of the federal budget was essentially a lament that something had to be done but at the same time there was a sense that achieving progress would be impossible without some kind of massive effort and a sudden outbreak of bi-partisan enthusiasm. In the course of that discussion there has been no real identification of how much the deficit should be cut or how much the debt should be reduced. It seemed that getting any progress at all was such a remote possibility that the details really didn’t matter.

There is now a reason to start considering an answer to that question as the latest data from the Congressional Budget Office shows that the federal deficit is falling much faster than anyone had anticipated. Has it fallen far enough that it is no longer that worrisome? Most analysts would not go that far but perhaps it has fallen to the point that some of the more draconian suggestions could be taken off the table for now. This is an especially sensitive question as the sequester process starts to accelerate and more government agencies face some real demands for reduced service.

The deficit last year had reached a truly critical level – $1,087 trillion. That is the kind of number that sets off alarm bells for even the most dedicated spender. That is wholly unsustainable and leads the nation to a debt crisis that can’t help but be crippling. Apparently that level also managed to galvanize the powers that be into some kind of response and by the start of the year the projected deficit (according to the CBO) was down to $845 billion. This is not good to be sure but it is not quite the crisis that a deficit over $1 trillion would be. Now comes the latest assessment and the deficit projection is down to $645 billion. For four straight years the country has stared at deficits over a trillion dollars and it looked like these levels would be sustained indefinitely. Now the situation is brightening considerably and the debate could well start to shift.

Analysis:  What has caused the deficit to shrink by nearly half and is this something that can be sustained. The three most important factors are that tax collection has increased due to the expansion of the tax on wealthier people that came with the fiscal cliff solution as well as the retreat on the payroll tax deductions. The gains on the revenue side have been significant due to the growth in the economy as well. It is not that the GDP has expanded all that much but the growth has been enough to bolster revenue collection.

The second revenue factor is that more money has been returned from the various bailout programs than had been expected. It was assumed that it would take longer to get the money back but the banks have paid back the majority of the funds they received from TARP (the big banks have paid in full). The money that was supplied to Fannie Mae and Freddie Mac was in the hundreds of millions and much of that will be paid back this year.

Then there are the cuts. The sequester is the most dramatic tool but in truth there have been cutbacks and reductions all year and these are adding up. The end result is that the country will not face a borrowing limit until sometime in October and maybe not even then. There is now time to discuss what the budget should really pay for and what level of deficit is acceptable. No realistic plan calls for the deficit to vanish altogether but most agree that $645 billion is still too high. The question is what is the level that can be deemed appropriate. The sense is that most nations would be happy with a deficit that is less than 3% of its GDP and that means that a deficit of around $500 billion would be tolerable in the US.

The Recession in the Eurozone Deepens

The latest data from Europe is just extending the gloom. There was some slight progress in Germany but that was overwhelmed by the deepening recessions in France and Italy. When the Greek economy imploded some years ago the hope was that this was not going to be the beginning of a series of related collapses but that seems to be exactly what has been unfolding and the dominos are continuing to fall. The Spanish are in almost total meltdown and many are predicting that Spain will be locked in a recession for perhaps a decade or longer. Italy is teetering on the brink of an economic crisis that will rival that of Spain and now France appears to be heading in the same direction. The entire Eurozone has been in recession for six straight quarters and by most definitions that is a depression. When the Greek mess was unfolding there was an assumption that rescue could emerge from a combination of French and German efforts and it was assumed that Italy would hold its own. Those assumptions have proven to be less than accurate.

Analysis: The latest decline in the GDP numbers was 0.2% from the last quarter of 2012. This recession has now lasted longer than the one in 2008-2009 but thus far it has not been as deep so that is somewhat encouraging. The last time there was any growth in the Eurozone was in the third quarter of 2011 and that now seems a world away. In that quarter the German economy was growing at a 3% pace and the only nations in the Eurozone that were facing real recession were Greece, Portugal and Ireland. What a difference a year and a half makes. Now the nations that are in full recession include three of the largest states in Europe – Spain, Italy and France. The only little bright spot is that Ireland is no longer in the company of these struggling nations although they are staying out of full recession by the skin of their teeth. Perhaps the most important difference between the situation in 2011 and the one today is that the German economy was booming in 2011 with consistent growth rates of 3% and higher. Today the German economy has managed growth of 0.1% from the fourth quarter and that is stall speed by anyone’s estimation.

The most distressing development in the last year or so has been the swift decline of the French economy. Back in 2011 the situation was not great but the economy was growing and there was some expectation that conditions might improve with the election of Francois Hollande. His campaign was full of promises regarding the economy and its revitalization. There would be progress on the debt and deficit as there would be higher taxes on the wealthy. The government would reverse some of the policies that had been put in place under Sarkozy and that would allow the government workers and union members to consume more. The business community would be protected from imports and there would be demands from the government that would halt layoffs at companies – both those that were headquartered in France and those that were not. These changes would allow the country to make some real progress and that would improve the position of French bonds. Nearly all of these plans were shattered and Hollande is now the least popular President in modern French memory. The tax scheme was ruled inconsistent with French law and the wealthy rebelled in any case. The government workers and union members didn’t choose to spend and the companies that were faced with provisions that prohibited layoffs simply shut down altogether. The plans were a mess to begin with and the attempt to implement them created even more economic dislocation than existed in the first place.

There is simply not much in the way of strategy regarding how to get Europe out of this current situation. The first impulse has been to abandon the austerity efforts that have been in place as if these were the cause of the crisis. In most respects the austerity plan was a reaction to the crisis more than cause. The economic travails of the Europeans stem from the general economic collapse in the world as much as it did from anything happening in Europe itself. Exports have dried up as the markets that Europe depends upon have stumbled badly. The US was 25% of the export market for Europe and it is now half that. There is very little demand coming from the eastern states and that had been a sustaining economic region for almost ten years. China and Asia in general was a big factor for most of the decade but they have slipped as well.

The rebuilding of Europe will depend on a resumption of that export level, the engagement of the European consumer and a renewed level of investor confidence and the challenge is that one of these has to happen before the others. There will be little investor confidence or even business confidence until there are signs that the export market is coming back to life. That will not happen until there is progress in the markets that Europe sells to. The domestic consumer is not spending as long as they are worrying about their jobs and they will not see an improvement in the job market until there is more enthusiasm from the consumer. It is simply a series of Catch-22 situation – one thing can’t happen unless other things happen that are dependent on the first thing.

The analysts that are trying to determine what could break this economic logjam are looking outside Europe. The help will have to come from the nations that have the money to sink into European recovery. That essentially leaves China and the US and at the moment neither of these states seems willing or even able to play that role. They would need to become major investors in the region – enough to be stimulative but that is a lot of money and there is nothing to suggest that Europe really wants to see China or the US buy a major share of the region.

Scandal and Political Agendas

The victory of President Obama in last year’s election was more impressive than it had been expected to be and there was a sense that the second term agenda would be ambitious and even doable. There would be movement in social issues like gun control and immigration as well as those that concerned the economy. At the start of the year few expected to see the sequester process take place without major change but six months into the year it would appear that the wheels are coming off.

Analysis: The emergence of several high profile issues in the last few weeks could not be coming at a more inopportune moment as they are distracting the members of Congress as well as the general public. The frustration at the White House is evident as it is suddenly forced to address the IRS and its actions at the same time that it has to deal with the Justice Department and its examination of the e-mails of journalists. Add in the other smaller issues and the momentum for the bigger issues has slowed. Only a few weeks ago it appeared that immigration reform would progress nicely as both parties seemed to have a stake in the deal. Now it looks as if it is clinging to life support. The ambitious agenda has been stalled and that does not bode well for progress on economic strategy going forward. The White House now looks weaker and more beleaguered than it did at any point in the first term and unless there is a reversal this is going to be a long period of lame-duck leadership on the economy.

Bangladesh and the Textile Industry

In 1911 New York was rocked by the most deadly industrial disaster in its history and one that would never be exceeded. The fire at the Triangle Shirtwaist factory caused the deaths of 146 garment workers – including two 14 year old girls. The majority died of the fire and smoke inhalation but some plunged to their deaths as they jumped from the windows. The exits were blocked and doors were locked and there was no fire code enforced. It was a disaster waiting to happen and the tragedy forced a radical change in the way that factories were regulated. The conditions for garment workers improved dramatically – right up to the point when they all lost their jobs. The safety codes were enough to tip the scales when it came to profitability and the textile industry left for the southern states in the US. At some point these operations became too expensive and the industry moved to China. A few years ago China started to get too expensive and textiles moved again – this time to Bangladesh where the monthly wage is $39 compared to the $200 or $300 paid in China.

There is a theme here. The textile industry is a simple business when it comes down to it and the quest is to find the cheapest place to make clothes. The relentless push for cheaper and cheaper production is the result of consumer demand for very, very inexpensive clothing. If somebody tries to sell a t-shirt for $20 or $30 they will be stuck with a whole lot of unsold shirts. The consumer is now accustomed to essentially disposable clothing items.

The tragedy in Bangladesh boggles the mind and there is a reaction that is akin to what happened after the fire in New York. Dozens of retailers are now solemnly signing agreements that are designed to ensure that factories in that nation and other states will comply with safety codes when it comes to fire and other issues. One of the major problems with this effort is that none of the new pledges would have affected the factory that collapsed and killed over 1,000 workers. The building did not catch on fire; there was no stampede for the doors. The facility had no locked and blocked exits and it had all the fire equipment required. It had first aid stations and all that. What it did not have was structural integrity because the whole building was constructed illegally and with no inspections from the government. It looked ok from the outside but there was almost no structural steel in the cement building and when the upper floors collapsed the whole place turned to powder. Nothing in the new rules covers this.

The majority of companies are rushing to sign on to the agreement on safety but Wal-Mart and some others are balking as there are some provisions that are anything but clear. The regulation will fall in some respects to the outside groups that have become engaged and nobody has a clue what their intent and qualifications will be.

Analysis: The biggest issue and one that has been the most awkward to discuss is what happens to the industry in Bangladesh if these provisions are actually adopted and the rules enforced. This is the lesson from the New York tragedy that is most often ignored. As long as the key to clothing and textile manufacturing is selling at the lowest possible price there will be a reluctance to stay anywhere the cost of business is rising. The most likely outcome of much stricter regulation is decamping for cheaper locations – as has happened so many times in the past. The textile industry is about the only sector that provides income for this impoverished  nation and the leaders of that state worry that they will be in a far more serious crisis if they lose the sector altogether. The textile sector is already looking at Africa as the next stop. It is a very challenging balance. If the safety situation is not improved the workers in Bangladesh will continue to be exposed to the most dangerous conditions but too much and they are all unemployed in a nation that has no other real options. In the end the only way that conditions change is when consumers in the US and Europe and elsewhere agree to pay far more for the clothes they buy. That is easy enough for those with higher incomes but what happens to the poor population as they face a clothing budget that triples or quadruples?

Why All the Gas Price Fluctuation?

The consumer is confused when it comes to gasoline prices. On the one hand they are being told that the US is not as dependent on the foreign oil suppliers as in the past. They know that all kinds of oil is coming out of those formations in the Dakotas and Texas and if they catch the financial news they know that crude oil prices have been falling under $100 a barrel lately. The price at the pump has not been so benign. They are also confused when some parts of the country have far bigger jumps than others and they suspect some complex master plan at work. The reason for the jumps and the disparity is not nearly that complicated or conspiratorial.

Analysis: The short answer to the question posed in the headline is that the US has an antique system of oil refining. The last new refinery built was in the 1970s and most of those that are in operation are in need of almost constant maintenance. The industry estimates the average refinery is off-line about 20% of the time. There are planned shutdowns for maintenance but it is the unplanned shutdown that wreaks temporary havoc. In the last several years the refineries have been subject to more and more safety and environmental regulation as well. Problems that might have been ignored for a while cause shutdowns now and all of this interferes with the supply chain.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

Optimism

It would seem that optimism would be in short supply these days. After all the economic data is not exactly glowing. The GDP is slowly growing but the emphasis is on slow. The unemployment rate is too high; the housing market is better but not great and so on. Plenty of reasons to pull the covers over one’s head and refuse to leave the house. Despite all that bad news the world is still bursting with entrepreneurial zeal and the desire to improve one’s position. I spoke to a couple of groups yesterday – not huge numbers of people but solid. There were maybe twenty or thirty in each group and in that smallish population I ran into five people who were just now starting their own business. They had good jobs and plenty of room for promotion with good companies but they yearned to have their own thing and are prepared to risk it all.

There is nothing quite as phenomenal as the entrepreneur. Nobody who has not taken that leap quite knows how this feels. It is not that others don’t feel the threat of business uncertainty. They know that they can lose their job at any moment but in the end their fate is not their own. If things go wrong it is not really their fault – their boss is the culprit. If one is the boss there is nobody to blame. The failure is one’s own but so is the success. The risks are huge as there is always money on the line – loans or investors or just the willingness to run up the credit card.

It takes real guts to make that call in any economic situation but sheer stubbornness to do this in an economy that is far from healthy. There is nothing that sets the US economy apart more than that willingness to risk it all. I know the feeling well as it was about 13 years ago that Keith and I took that leap of faith. We survived and I wish the best of luck to the people I met yesterday.

The latest data on retail sales has been unexpectedly positive and this has provided some additional evidence that there is a very slow but somewhat steady economic recovery underway. The increase was not especially significant – a rise of just 0.1% but this comes on top of a decline of 0.5% in March. The more important aspect of April’s data is that there was a switch from strictly utilitarian purchases to some that would be described as luxury or discretionary items. There was spending on clothing and sporting goods despite the unseasonably cold spring. There was also some additional purchase of electronics and in some parts of the country the outdoor equipment season finally got started.

The price of gasoline also played a part in all this. At the start of the year gas prices surged and that took a bite out of the consumer’s budget. The timing could not have been worse as this was the time that most consumers were starting to experience the rise in the payroll tax. The impact was as expected; people were spending on necessities and had less to spend in the first place. The retail numbers faltered. For the past month or so the price of gas has drifted lower and that allowed the consumer to spend more on other things. There is also evidence that consumers started to adjust to the loss of the payroll tax break by using their credit cards a bit more aggressively. The impact of the tax hike has been blunted somewhat by the fact that enough consumers had regained some financial leverage and had credit to fall back on. This is not something that can be relied on indefinitely but for the moment that helps to underpin some of the retail activity.

In the last week the price of gas has shot up again in some areas and that will likely have an impact on May’s retail numbers. It is likely that there will be further gains as the consumer is finally seeing the arrival of spring but if gas prices stay high or get higher a significant amount of that retail gain would be accounted for at the pump. The price per barrel of oil has been falling under $100 so the hikes in the price at the pump are mostly related to refinery issues as well as transportation problems. The fact is that refineries are very old and mostly past their “expiration” date and that makes them far more susceptible to maintenance issues and break downs.

Analysis:  The retail community plays a disproportionate role in the economy – not just because consumption is the basis of the US economy. It tends to be a pretty solid indicator of what is happening in the overall economy – manufacturing, wholesale activity, exports and imports all are affected by the patterns of retail activity. If the consumer is in a good mood much of the rest of the economy hums but when there is too much caution the whole thing stutters. The May numbers are now the big concern. If they follow the April pattern there will be some renewed confidence in the growth of the economy but if they look more like March there will be more talk of the “spring swoon” and that is not what people want to hear right now.

The two big factors as far as the consumer is concerned remain and nobody expects much change in the near future. One is trending in a positive direction and the other is not moving much at all. The housing market is solid and getting better month by month but the employment situation is not responding as fast as would be preferred although there has been a reduction in the layoffs and some small movement as far as new hires are concerned.  Once the job market seems healthier the likelihood is that consumer activity will improve more consistently.

Three Reasons for the Cautious Optimism of Economists

The latest survey of economists from the Wall Street Journal indicates that there is widespread but subdued optimism among forecasters. The poll is not always the most reliable as many of those asked do not always respond to every question and the population is somewhat limited – 52 economists mostly in the private sector. These are the economists who work for corporations or investment groups and banks as opposed to those in the profession who work in academe or the government. The poll has been pretty accurate over the years however and when there is a strong consensus among those polled it is usually a pretty solid statement. This latest poll shows that kind of consensus but at the same time the opinions reveal that most expect a pretty anemic pace of growth and an economy that is vulnerable to a host of threats. The sense is that the economy will stagger along at between 1.5% and 2.5% growth unless one of the threats identified becomes real and has enough influence to derail the slow progress.

Analysis: Just to be different let’s start with the good news; there is always time at the end of this piece to introduce the depressing stuff. At the top of the list of things to be optimistic about is housing. It helps to look backward a little to remind ourselves what this sector has meant to the economy in the last few years. The surge of growth in the last decade rested on an unusual combination of factors that underpinned a massive expansion in the housing market. There were many elements to this surge – a government led desire to get more people into homes, banks eager to cash in on the interest in mortgages and investors eager to get in on the rush through purchase of these mortgage backed securities that were rated so highly (but inaccurately as it turns out). There was the massive expansion of the sub-prime market that made real estate moguls out of the most unlikely of people. There is hardly time to detail all that went wrong in this period but when the whole house of cards collapsed it took the overall economy down with it. Suddenly the bottom was cut from the economy and the banking system – the Great Recession followed. The important thing to note when looking at the current housing situation is how high the market got during that period. It was the most active housing had been since the end of World War II and the price of homes soared beyond all reason.

As the housing market recovers, as it is clearly doing in 2013, the price of homes has risen but there is no way that they will reach the levels of a decade ago and that is a good thing overall. The recovery is bringing home prices back to a respectable level and there has been all the economic gain that this implies. There are fewer people underwater on their mortgages and fewer facing foreclosure. Granted, the reason for the decline is that most of the at-risk population has already been pulled into that financial crisis but it is still good news that the market has started to clear a little. The average person is looking at an appreciation of their most important asset and that is good news.

The second factor that has economists somewhat more upbeat than they were even a few months ago is that employment trends are improving slowly. It is not that there is a robust rebound underway but the consensus view of those polled was that there would be an increase of around 180,000 jobs a month over the next twelve months. That is short of the ideal but far more than the average last year. It would be ideal to see gains over 200,000 and most expect to see numbers like that from time to time but there is also an expectation that there will numbers lower than 130,000 in some months. Much will depend on how much additional hiring takes place this summer. If the consumer gets back in the vacation mood there will be more demand for the younger workers but thus far the travel and entertainment folks are not expecting a great season – especially not with gas prices jumping back up.

The caveats are as they have been all year. The most consistent fears revolve around three issues that have been affecting the economy for the past few years – European crisis, slowdown in China and the ongoing gridlock in Washington. The order of these concerns has changed from month to month but these are always the same three that rise to the top. Right now the Europeans are at the top of the list as there seems to be a reversal of policy underway. The strains of the austerity plan have proven to be too much for the states in the Eurozone and support for the plan has eroded in every country except Germany. The ECB has even given in to the pressure and dropped its interest rate. The fact that Europe seems to be without a strategy makes the US business community more than nervous. China is the next big worry as this is the only nation that can serve as a global growth engine alongside the US. The data suggests that China is going to be growing far more slowly this year than they had anticipated and slower than the global economy requires – perhaps 7.5% as opposed to the double digit growth numbers in previous years. Remember that when comparing the US GDP numbers with those from China that zero growth in the US is equivalent to 6% growth in China. This is a nation that has to somehow generate some 1.4 million jobs a month just to keep pace with normal population growth and migration and that is not possible with less than 6% growth. A rate of 7.5% in China corresponds in many ways to a rate of 1.5% in the US.

Finally there is the political problem and the uncertainty that this creates. There is no pressing deadline at the moment so there has been an opportunity to relax a little. That will not last long as the budget process is stalled again and there are many decisions that must be made sooner than later. The issue of the Fed’s loose monetary policy is also part of the debate. The fact is that most of the business community is far more cautious and reserved than would normally be the case and that reticence is attributed to the gridlock in Washington. Until that changes there is always the chance of another crisis brought on by that uncertainty.

Why Have Workers Dropped Out?

The answer to this question is crucial. The prevailing theory has been that there are two prime reasons for the shrinking workforce participation rate. The people who have been out of work for an extended period of time are people who have the wrong skill set for the current workforce and it is assumed that companies are reluctant to hire people who have been out of work for an extended period of time. These reasons seem logical enough and there is evidence that there is some truth in these assertions but a study from the San Francisco Fed reveals that there may be less to this theory than originally thought.

Analysis: It is almost good news to discover that the main reason for the lack of hiring is that overall demand is down. It seems that many companies simply are not hiring anybody – whether they have the right skills or employment history or not. It is a demand factor that is playing the largest role. There is simply not enough business taking place to justify adding staff. This is good news only in the sense that improved economic conditions should lead to more hiring – all across the board. If the workers with limited skills that have been out of the workforce are expected to get job offers when the economy improves that is a far different situation than an improved economy that doesn’t want to look at these workers.

Major Changes Ahead for the Oil World

In not too many years the analysts will look back on the last few years as the ones that fundamentally changed the world of global oil. The shifts in production and consumption are already profound and expected to become more dramatic in the very near future. The quest for an alternative fuel will be focused on natural gas and not on the ephemeral dreams of solar and wind and electric cars. The sense is that these will remain extremely limited sources of power and may be decades away from practical use. Meanwhile the gas industry will roar ahead at the same time that the US emerges as one of the dominant oil states in the world. The latest report from the International Energy Agency paints a very intriguing picture and one that has the potential to affect everything from economic growth to geopolitical relationships.

The latest estimate is that the US will account for one fifth of the new oil discoveries in the next five years. The US produced 800,000 barrels a day last year and that is a record level of output. The IEA expects the US to regularly surpass that level of output – reaching an additional 2.3 million barrels a day. The Canadians will be contributing an additional 1.3 million barrels a day and that means that demand for OPEC oil will be down consistently. The share of OPEC oil will drop from 30 million barrels a day to 29.2 million bpd. That obviously leaves OPEC as an important player well into the future but one that is losing its share of market steadily.

As the US emerges as one of the key players for both demand and supply the oil world changes. Part of the reason that some of that change has not yet occurred is that the US remains hamstrung by antiquated laws, regulations and attitudes that stem back to the oil shocks in the 1970s. At that time a law was passed that prohibited the sale of crude oil outside the US. At the time it was a seen as a knee-jerk political response to the oil crisis but nobody much cared as the US was no longer producing much of its own crude – at least not enough to make a big difference in the market. There was demand for all the oil the US could produce and then some as the US became the world’s largest importer of crude. As recently as 2005 the US imported 60% of the crude that it required and today that percentage is down to less than 20%. The US could be making a substantial amount of money as an exporter but for that law. The US has always exported refined products but now there is potential for considerable crude oil surplus. Some have asserted that this would be a good thing as the price of crude in the US would surely fall as that surplus built. This tends to ignore the business decisions that come with an impending surplus. Those that bring the crude oil up lose their desire to continue doing so as they do not stand to make all that much for their effort.

Analysis: The other element to consider is the rise of natural gas as the fuel of the future. For many years this has been the preferred fuel for heating homes and the utility industry has been willing to adopt gas as an alternative to coal – especially since the rules imposed by the EPA have made coal all but impossible to use. The real breakthrough when it comes to gas is its use as a vehicle fuel and that day is coming far faster than many had assumed. The trucking fleets are already converting to gas rapidly and there is talk of the “gas highway” that will allow these fleets to find the natural gas they will need from coast to coast. The rail sector is also pushing hard to replace their diesel locomotives with gas in the form of LNG (liquefied natural gas). The rail industry in the US is the second largest consumer of diesel in the country – behind only the US Navy. The use of gas for the passenger car is still some time in the future but not due to any technological issue. It is simply a matter of getting the fuel to the driver in an efficient manner. Right now the option is too rare and few will accept the limitations but the fix is not all that complex.

Budget Cuts and Economic Growth

Before sequester activity hit the country in March, there was one specific area of the automatic cuts that many were most concerned about. That area was the Defense Manufacturing sector. The furlough of air traffic controllers captured a lot of attention because the public feels it and sees it. That’s why there were bills introduced into Congress to reverse some of these laws on spending cuts. But, the ones that are impacting the economy the most remain intact.

There are many different sides to the Defense spending debate. Many, including the senior military staff, believe that the US can cut military spending without changing US readiness.  The defense sector has a 7 to 1 multiplier impact on the economy and job creation. One dollar of spending creates approximately 7 dollars of economic activity. The timing of these cuts was the most critical element.  At some point, when the economy was moving at a robust pace, the cuts could be made without much impact. However, at this time, the national economy is growing at approximately 2.5% with a 1.9% inflationary impact. That creates a net growth of less than .6% – which isn’t enough to sustain the economy. Part of this weakness is due to the uncertainty that continues in the marketplace – much being aimed by politicians at higher earners and corporations that in their minds “owe more in taxes”. That will continue to stifle growth and investment.

Analysis: Left to its own devices, the economy should be growing at about 4.5% at this time – according to the Congressional Budget Office Report from last summer. The fact remains that there is a record amount of cash sitting idle in safe haven accounts and corporate profits remain strong. The logical conclusion is that they still (for a variety of reasons) are still concerned about the marketplace environment and the risk that they need to take in order to stimulate growth.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

Ignorance is a Real Problem

It was one of those days. It seemed that every report I read or heard on the radio highlighted the dangers of ignorance. There was the story of the slaughter of rhinoceros in Africa because people in Asia believe that rhino horn is good for male virility or curing cancer. It is the same stuff that fingernails are made of so why don’t people just gnaw on their own digits and leave the rhino alone. Then there was the story of the woman in financial distress who didn’t read the fine print when she borrowed money from a high interest rate lender. Now she wants someone to rescue her. There were stories of people engaged in all manner of self-destructive behavior and apparently unaware of the consequences. Ignorance is not new by any means but one would think that in today’s environment it would be harder to maintain that state. One can always Google the answer right? Perhaps that is part of the problem – given that there is so much really idiotic advice available at the touch of a cell phone.

The stories are shocking and irritating – even infuriating. The bigger problem is that we are far too ignorant when it comes to the bigger issues as well. We don’t really understand the economy we live in, we don’t really understand the technology we depend on and we struggle with understanding what medical science tells us. I have long advocated a book from Steve Allen called “Dumbth”. He was a true renaissance man and this was his effort to introduce critical thinking. It offers 101 ways to be less ignorant and a more disciplined thinker. I can’t recommend it more highly in an era where we are surrounded by such demonstrations of less than disciplined thinking.

One does not openly lobby to become the head of the Federal Reserve – that would be in poor taste and would make it seem like a political appointment. Of course, it is a political appointment but with a key difference as compared the majority of the Cabinet positions and other appointments that are made by a President. The choice of a Secretary of Commerce is one that can made with little attention to the constituent base of the department and can go to some loyalist in the administration’s inner circle on the basis of their skills as a campaign fund raiser. The choice of the head of the CIA calls for a little more demonstrated aptitude but high profile politicians can make it to that post as well. Even Supreme Court Justices can be chosen without paying all that much attention to the opinion of the legal field although they are certainly consulted. The Fed Chief is the one position that demands near universal approval from the affected parties – if the financial and investment communities do not think much of the selection the economy stutters and if they are actually opposed there is a very good chance that a collapse takes place.

The Fed Chair has to be respected as an economist first and foremost and has to have a background in monetary issues as they will be expected to guide and manage the nation’s money supply. Once these basics are established the next question is whether they hold views that are consistent with the financial and monetary community in general. As Ben Bernanke is in the last months of his tenure the conversation now turns to those who would replace him and the quest is to determine what their position will be on the key economic questions of the day.

Analysis:  One of the most commonly mentioned candidates thus far is the vice chair of the current Fed – Janet Yellen. Prior to being elevated to that position she was the Fed President in San Francisco. She is a Yale economist and one with a reputation for careful research on the positions that she takes. She was one of the first at the Fed to issue warnings about the housing bust. She has been an advocate of the Bernanke focus on unemployment and in many ways has more of a spearhead on that issue – putting her at odds with those who remain focused on inflation as a bigger issue. She has indicated that she is fully capable of reacting to inflation when the time comes but for now the bigger issue is the high rate of joblessness. She has joined Bernanke in criticizing the inaction of Congress and asserts that the Fed would not be called on to do as much as it has were it not for the inability of Congress to act to stimulate the economy.

She is reputed to be close to the President and he seems to have turned to her for advice more than he has relied on Bernanke. This makes her a good choice for the White House but could complicate her approval process at the Senate level. Her positions on loose monetary policy will trigger real opposition from the GOP and will almost guarantee that she will not get a single vote from the Republican side – she may even lose some of the fiscal conservatives among Democrats. Her path to this position is certainly not unimpeded and there are several other names that crop up. Larry Summers has been Treasury Secretary and Chairman of the Council of Economic Advisors but has a lousy reputation as a consensus builder, Tim Geithner was Treasury Secretary and is an Obama loyalist but he is not an economist. Roger Ferguson’s name has popped up lately. He is a former vice chair of the Fed under Clinton and Bush and is currently the head of TIAA-CREF. He would be the first African American Fed chair. His Ph.D. is from Harvard.

Five Reasons that the Newly Graduated will Find a Job

The story at the end of last week was pretty depressing – the five reasons that many of those who are trekking across the stages of American universities will soon find themselves living in their parent’s basement while pondering why four years of expensive college education got them no better than a job as a pizza delivery person. This story is meant to be something of an antidote – the five reasons that these former students will find a place in the work world sooner than later. It should be remembered that whether one is talking about failing to land a job or finding the employment of one’s dream the specifics are what matter and each person is going to have a different path based on their unique set of circumstances. There will be people who majored in underwater basket weaving who will land a job that puts them on a career track that leads to CEO and there will be those with degrees in petroleum engineering that will not find jobs. There will be something about that basket weaver that transcends the norm and something about that engineer that gives everybody pause.

Analysis: The first and most obvious reason that the newly minted college grad will have an opportunity to start their new career is that the economy is doing better than it has in the last few years. Not that the growth is spectacular or that all the issues have vanished but compared to the last several years the job opportunities are better. This is not universal of course. There are far more opportunities for the engineer and the accountant and the good old fashioned business major than there are for the kids that decided to major in psychology or literature but even these latter majors are seeing better opportunities than in past years. The economy is growing and expected to continue growing at a 2.5% pace for the year. This is not going to allow much progress on the long term unemployed but it should be fast enough to allow the new graduates to get a foothold.

The second reason that there will be some more hiring is that there are still shortages of needed skills in the workforce. This is a little complicated in that this means good prospects for those who are getting the right education and training but not so much for those who are not matched up with current need. This is more than just having chosen the right major although that is a key point. There is a new mantra in corporate America as a result of the recession – “do more with less”. This is the era of the mean and lean and that translates into having a very flexible and multi-talented staff. The hiring patterns suggest that business is paying more attention than ever to the intangibles beyond major and grades. The old-school manager who only supervised others has been replaced by the “doer/manager”, a person who can do the assigned tasks but has the ability to lead and manage as well. Since this may not show up in the academic record there is now attention paid to whether that person took the opportunity to manage and lead in college. Were they team leaders in sports or at their sorority or fraternity? Did they engage in activities that allowed that skill to develop? It appears that they are getting some additional job opportunities.

The third reason to be encouraged for this year’s crop of graduates is that there is more confidence in the education of the graduate than in past years – at least as reported by some of the colleges and universities that are polling the business community. The most dramatic gains in confidence have been seen at the community college level but this is not much of a shock given the fact that these two year programs are designed to funnel students into specific careers. Nevertheless the opinion is that students are coming out better prepared to work than in the past. That same confidence is also starting to emerge with the more traditional four-year institution. There has been an attempt to weave far more “practical” classes into the system and there is more use of faculty that come directly from the working world and that has helped make the education more focused in many cases. Many of the traditional faculty at these schools have become more engaged as consultants and advisors to business and that allows them to bring more real world examples into the process.

The fourth reason for the improved hiring opportunities is related to the third. One of the keys to the complete college education is the network that is built and two trends have added to that network creation. As mentioned above the average faculty member has become more engaged with the working world and is bring that experience to bear along with all the contacts that can be made. There is also the fact that classes are far more diverse than they have been in the past as many older students have enrolled in the courses that were once dominated by the young. These older students have their own networks and now these have become more accessible to the younger students at the same time that the older students are getting access to the networks of the young.

The fifth reason for the increased likelihood of graduate employment is that the current class has lost some of their hubris. Previous classes were polled and many expected very unrealistic job offers. In past years these graduates turned down many jobs they felt did not pay enough, did not offer enough benefits or were in undesirable locations. This year the evidence is that graduates are far more realistic and are willing to take what is on offer. This is good and bad as the jobs that are on offer right now are often lower paid than in the past and there is the risk that this generation will never really make the money they had expected to. On the other hand they are getting a start in the business world and that allows them to make progress at some later moment in their career.

Not that the world of the graduate is rosy at the moment but it is far better than it has been in the recent past. The expectation is that the graduates of 2014 will be in even better shape and that may mean that a lot of the current crop will elect to stay in school pursuing graduate work.

Dollar Expectations Rise

The investment community is becoming more and more certain that the doves will be in retreat before long and that means that the Fed will start to back away from some of the stimulus measures that have been put in place. Nobody expects to see interest rates hike but there is more confidence in the Fed’s decision to retreat from the $85 billion a month purchase of bonds. The hawks within the Fed have been demanding that this take place for months and now they are getting some support from the more dovish elements within the ranks of the regional Fed Presidents. There are still those that think that the Fed should go all out as long as inflation remains low but some are now suggesting that this would be a comfortable time to let some of these plans elapse.

Analysis: Just the hint of change has been enough to drive the dollar higher in the currency markets. It has been gaining against the yen of course but that has far more to do with Japan than the US. The gains against the euro and pound are more related to the changing opinion of the Fed’s intent. The increase thus far has been minor and is not expected to affect trade in any significant way. On the other hand there now seems to be a belief that the US is moving towards addressing inflation in the future and that could keep that dollar rally going for a while.

China Flexing its Muscles with North Korea

For some months it has been the tail wagging the dog. North Korea is a nation that is almost wholly dependent on China but recently this has not been the way that the regime of Kim Jung-eun has acted. In this whole series of provocative acts and public bluster the Chinese have been trying all manner of subtle pressure to get the activity to tone down. It is not that China expects the North Koreans to suddenly want to do business with South Korea, Japan and the United States. One could even argue that the North Korean attitude sometimes plays into the bigger goals of the Chinese given their desire to keep the region somewhat off balance. The pattern in the past has been that China tolerated and even encouraged the North Koreans to go so far and no further. The Pyongyang regime was supposed to know its place and to respond when the Chinese demanded it. In the last few months the Chinese have been sending all the usual signals that they wanted Kim to cool it and the Chinese have been ignored.

There have been political comments and diplomatic visits that have been met with the usual cordial atmospherics but when the delegations returned to Beijing the North Koreans went right back to their confrontations. The Chinese sent generals and they also got the full charm offensive. They went home satisfied that Kim and his generals got the message and within hours the North Koreans would engage in more brinkmanship. The Chinese have become more and more frustrated with Kim and those around him. It seems apparent that the Pyongyang power struggle is well underway and that much of the bombast and histrionics is for domestic consumption – Kim trying to prove that he is a tough leader to the generals who do not trust him and would like nothing more than a chance to show their might and determination.

China has now taken a step that they have never taken before and this says that Kim has really angered the new Chinese leaders in a very profound and fundamental way. Chinese banks are cutting the North Koreans off. The Chinese had agreed to the UN resolution that would deny North Korea access to cash transfers if they would be connected in any way to weapons acquisition and development but the actions of the banks has gone far beyond that sanction. Chinese banks are not handing cash transfers of any kind. Thus far this is only the largest of the Chinese banks as some of the smaller institutions are still working with North Korea but the message is clear. The pressure can very easily be increased and these small banks can also be required to cut the Kim regime off. It is hard to overestimate what this means to the Pyongyang regime. Without Chinese financial support the North Koreans will face financial ruin almost immediately and this is a nation that barely has the ability to survive as it is.

The Chinese are fed up with the antics of the Kim regime and are essentially demanding some demonstrations of fealty sooner than later. Kim has yet to make a pilgrimage to Beijing as he knows full well that he will be get a rather direct and strong reprimand. The observers that watch China and North Korea do not think that relations have soured beyond repair but that is the trend and they suggest that if Kim doesn’t do some repair work soon he may find the Chinese backing a coup of some kind. There are many in the military that may have more loyalty to the Chinese generals that trained them than they do to the Kim regime itself.

Analysis: The US, Japan and South Korea have been urging China to take steps to control the North Koreans and the timing of this bank move may have been very deliberate as the US has just started some of naval maneuvers that have been scheduled. The Pyongyang regime has stated that these exercises would be considered an act of war and there were threats of retaliation. China has just sent a message of its own. Ignore our demands and wishes and your regime will collapse. Look for lots of bluster but no missiles.

Iranian Election Will be Extremely Contentious

The plan to place another fundamentalist in the position of President of Iran may be far harder to execute than the clerics intended. At the very last possible moment the powers that be got a challenger that will be very hard to contend with. Ayatollah Akbar Hashemi Rafsanjani is in the race and with this decision the whole election has been thrown into turmoil. He is the most powerful member of what would be considered a reform wing and he has the reputation that could carry him to victory. His daughters have been among the most vocal of critics and they have both been beaten and jailed for their efforts. His attitude towards his former colleagues is now quite hostile and he will make no secret of this. Meanwhile the man that the current President had selected to be his successor has been disqualified from running. The leader of the clerics – Ayatollah Ali Khameini did not trust Mahmoud Ahmedinejad and was not eager to see his guy come to power.

Analysis: The plan was to have three or four fundamentalists run against one another so that it would appear that the country was being offered a choice. In reality all of these candidates would have been selected by the Ayatollah Khameini and would all be considered loyalists. The appearance of Ayatollah Rafsanjani changes the plan and will force the choice of one candidate to represent the fundamentalists. That means that this person will have to come out of the shadows pretty quickly so that they can get some name recognition quickly.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

Anything Worth Doing is Worth Doing to Excess

It was the first real spring weekend (despite frost on the grass on May 11!!!). This meant that there was a loud and insistent call from the assembled multitude of plants that festoon the yard. “Plant me” screamed some, “get rid of these weeds” said others, “water me and feed me” said still more. It is like the Little Shop of Horrors except they are outside and not demanding human flesh – at least not directly. I did manage to encounter my fair share of cuts and scrapes. I would like to say that this is close to completion but there are easily 200 or 300 plants in the driveway that need to be given their new home. As any serious gardener well knows this is hard work – especially after an extended winter sitting on one’s derriere.

The part that makes this all worth it is the beauty. I feel like I am living in a park or some garden spot. Since the house was built about eight years ago we have planted 128 trees and there will be more. I can’t even estimate the number of bushes and annual and all the rest. It is a big garden to say the least. My Master Gardener wife is about as dedicated as they come and I am but the faithful assistant – ready with the shovel and whatever other tool is needed. It is all worth it when we finally sit down and look at all this stuff. The Japanese maples dot the yard and I dearly love the two odd oaks that have purple leaves in the spring that turn green and then red in the fall. I like the little orchard that flowers in the spring and like the winding rock work with all the assorted hostas, hydrangeas, and thirty five other things I can’t name. There is really nothing quite like nature to calm the nerves and part of the appeal of this work is that there is nothing like some physical labor to get the mind off the unpleasant stuff that happens in the world.

One of the more controversial parts of the White House budget is a provision that would write off billions of dollars of student loan debt over the next decade. The plan is referred to as income based repayment and calls for the borrower to make payments based on their income – 10% of the money they earn after taxes and a deduction for basic living expenses. If they make regular payments for twenty years the balance of what they owe is forgiven and that forgiveness can occur in ten years if they are working in the public sector or for a non-profit organization. This program would apply regardless of how much the student borrows and regardless of the school decisions made regarding major or length of time in pursuit of a degree. Students would not be required to graduate to be eligible. Under these rules nearly every student enrolled since 2007 will qualify for the program. This program exists now but is more stringent than the White House budget calls for – 15% of one’s income, payments spread over 25 years and there is a cap of $57,500 for undergraduates but none for graduate programs

Those who have been most concerned about the impact of mounting student loan debt are supporting the move and assert that widespread student loan default in looming unless something is done to address the issue. They point out that students who are saddled with large debt payments will be slow to engage in the economy as a whole – they will likely delay starting a family or buying a house. The supporters point out that jobs have been scarce for those coming out of college for the last few years and when students have been hired they are being paid less than their predecessors and this will keep them from fully engaging as consumers in the future. The advocates also point out that many other nations routinely subsidize students directly – allowing them to attend school free.

The opponents to the plan point out that this is extremely discriminatory towards those students that have chosen to pay for their education on their own – by working through school or by getting assistance from their families. They point out that students will be encouraged to borrow far more than they would in the past as they would know they would not have to pay the loan back in full. There would be more students electing to major in areas that give them little chance of landing a job and there is also the sense that this will subsidize the very expensive private school as students can take out massive loans with the knowledge that they will be held accountable for only a fraction of the debt. Then there is budget busting part of this deal – somebody gets to pay for all these loans and that somebody would be the taxpayer.

Analysis:  The anger that has been registered against the program often centers on the assertion that the education system does a very bad job of linking the college experience to real life. The total cost of the expanded program is estimated at $300 billion over the next ten years – the current cost is $16.4 billion through 2021. Under current rules student loans can be obtained for tuition and school costs as well as living expenses and emergency loans can be obtained to pay for home repairs, medical issues, child care and a host of other non-school related needs. It is essentially a means by which to subsidize a person as long as they are enrolled in some education program and even Education department officials agree that there is a great deal of fraud involving non-accredited schools and student loans. This is a very emotional issue for many as it seems to be a subsidy for those who are seeking educational advantage at the expense those working.

Five Reasons that the Newly Minted College Grad is Going to be Unemployed

The graduation season is upon us and all across the nation there will be a great many fresh-faced men and women striding proudly down the aisle as they get their diploma. Families will cheer and beam at their newly minted graduate clutches their symbol of achievement and joyously flip the tassel to the side of the funny square hat. It is a good time in the lives of many millions of people but then there is the day after and this is when the saying becomes reality – this is the first day of the rest of your life. The good news is that millions of kids will enter the work world soon after this ceremony – many have been working for some time already. Many elected to go to the “right” school and major in the “right” subject and find that they are coveted and that they will be able to field offers and make a choice. Unfortunately many millions will not have that experience. They didn’t choose so wisely or they didn’t have the options that others had. They will struggle to find a job and may end up feeling that the whole experience was a waste of time and money.

Analysis: There are many reasons that an investment in education will not pay off as expected. Sometimes it is simply a matter of bad timing. No matter what major one chose or what school one went to the recession of 2009 dashed a great many hopes and that year’s graduates have been set back permanently in terms of their career opportunities. The situation has improved steadily since then and by the spring of 2013 the economy is growing albeit slowly and unevenly. It is not a great time to be entering the workforce as unemployment is still 7.5% and there are estimates that some 15 to 20 million people are either out of work or underemployed. It is not great but it isn’t disastrous either. There are five reasons that the new graduate will not find the job they seek.

The first is the most obvious and one would assume that the graduate would be well aware of the limitations imposed by choosing a major that does not make them competitive. The five majors that are listed as the ones with the lowest rates of starting salary and the least likely to provide quick entry into the workforce are psychology, social work, sociology, arts & literature and education. Part of the reason for this may be that undergraduate work is not enough (psychology) or that the institutions that do the hiring in that field and strapped for cash (social work and education). Some majors just don’t easily translate to the business world – arts & literature for example. Choosing a major like accounting or engineering or even mathematics will make one more competitive. Then there are the millions of jobs that are available for those who do not take the traditional college route at all – these are schools that train the much in demand skills of manufacturing and logistics and the like.

The second barrier is the school itself. As in any field there are the institutions that are at the top of the list and there are those that aren’t. The function of a school is more than just providing instructors and classrooms. The key to making the most of a college education is having access to the intangibles. If the school attended has a good or great reputation in the community it is an advantage. That is improved if the school as an active placement department and an active alumni organization that seeks to help students find their way. Beyond these efforts there is the fact that a good school attracts good students and these become the graduate’s colleagues. The network built at school is often the first meaningful one in building a career.

The third problem is that the graduate didn’t learn the right things to get hired. This is more than a matter of what the major chosen was. There are many aspects of the college experience that do not necessarily happen in the classroom. Once in the work world communication and teamwork become crucial. This will evident from the moment the interview process starts. If one can’t speak confidently and can’t make a case for themselves there is little chance that a company will choose them. The teamwork skill is not one learned in class and if there is no evidence of having tried to work in a group for some common goal, the interview may not last long. The activities outside the academic environment take on added importance at this stage. Then there is the fact that a given employer may want the applicant to know things about other subjects. The ad agency that has engineering clients wants their employees to understand engineering principles even though their major may be marketing.

The fourth problem is often hard to have a discussion over – it seems to stifle the creativity and uniqueness of the individual but there is no way to escape the reality of the hiring process. The company that one applies to is in control at this stage – they are making a choice as to who will fit in their culture and with their customer and they will make judgments accordingly. The tattoos and piercings that celebrate one’s world view may render an applicant unacceptable the moment they step in a room. This may be discrimination but it is perfectly legal and common. The decision to get some ink may have been a good one at the time but it affects the future in a variety of ways.

The fifth issue is that there is simply not always a good fit. This is just as likely to be a decision by the applicant as by the company or institution doing the hiring. There is nothing at all wrong about concluding that a given company is not going to be the place for you. The interviewer may conclude that you are not a fit for their culture but that is also a decision that the applicant can make. There are companies that demand all of one’s time and dedication and state right from the start that personal life will have to be subordinated. If one’s plan was to have a family and to remain close to friends and relatives this would be a bad fit. Another company will be more family friendly perhaps. This means that finding an employer may take longer but it is better than taking a job that one will either quit or be fired from.

Sharp Hike in the Price of Homes

The average price of a home has jumped to year-over-year levels that have not been seen since the recession started. This would suggest that the recovery in the housing, market is real and sustainable. That will provide a real sigh of relief for the economy as a whole given that the house remains the key to the financial position of the population as a whole.

The median price of a home is now $176,600 and that is 11.3% more than it was last year at this time. This is a substantial increase but it still has to be remembered that the price of homes had fallen to decade lows just a few years ago and this recovery still does not have most homes back to the value they had before the collapse.

Analysis: The impact on the economy as a whole is already being felt. There is substantially more employment in the housing sector than in the last several years, people who were underwater on their mortgages are recovering value, people wishing to sell their homes are getting the offers they need and there are neighborhoods that regaining value. In the longer run communities will prosper as the homes are reassessed and taxes are increased. The new home building means more lumber, cement, appliances and furniture – not to mention all the other purchases that come with new homes.

Japan and the Impact of Abe’s Plan

There yen is sliding fast and setting new records every day. It is now trading at levels against the dollar that have not been seen in over four years – 101Y to the dollar as of today. This is something that was intended the moment that Shinzo Abe unveiled the massive stimulus plan designed to get Japan out of a deflation funk that has lasted some 15 years. The yen fall is extremely good news for the exporters in the country as they have suddenly become highly competitive in markets all over the world. It was just a year or so ago that the yen was rising in value as it was turning into a hedge currency for many investors. That was killing the export sector in a nation that remains highly dependent in its ability to sell to other nations. The yen is likely to keep falling in the short term and this is prompting all kinds of reactions from countries that compete with Japan to one degree or another. South Korea has already lowered its interest rates in an unexpected move. It is likely that they will consider another such move as long as the Japanese yen keeps falling. To some degree the decision by the Australian Reserve Bank to lower rates was inspired by the Japanese moves.

The fear at this point is that Japan has triggered a series of reactions that will soon resemble an out-and-out currency war and the Abe team has been criticized for this already. Thus far the sense is that Japan is not focusing on the yen per se but on a plan to get the economy off dead stop. The impact on the yen is just a coincidence and one that the US and Eurozone have experienced as well. The dollar is trading high against the yen today but a couple of years ago the situation was the reverse and many nations are still blasting the loose monetary policy of the Federal Reserve as it has affected the investment flows and the currency value in other nations.

The impact on Japan has been profound and generally positive and that suggests there will be no policy reversal any time soon. The economy of the country is actually moving and there are renewed signs of confidence in the business community, within the ranks of the consumer and in the investment community. There are suddenly many who are buying foreign bonds and that is a reversal of the patterns from the last few weeks. The Bank of Japan had been aggressively buying domestic bonds as a way to push investors into some of the riskier foreign purchases but that had not been taking place at the rate expected. Now the investors are moving in that direction as there were more purchases of foreign bonds than sales. It appears that the investment community did not trust the Japanese government to allow the yen to keep sliding and now that it is apparent that the currency will indeed be encouraged to trend downward there is more willingness on the part of the investor in Japan to spend. The analysts are now suggesting that the yen could be at 105 to the dollar or even 110 in the not distant future.

Analysis: In general there seems to be more confidence in Japan than has been the case in many years. It is taking on a feeling of nationalism and that is certainly consistent with the image that Shinzo Abe has been cultivating. There are some observers who think this is deliberate and an attempt to get the Japanese to rebuild their economy through a form of angry patriotism. A couple of years ago the Japanese economy slipped behind that of China and they became the third largest rather than the second largest in the world behind the US. At the time there was not much of a reaction from Japan – nothing more than a shoulder shrug signaling that they didn’t care all that much. China on the other hand couldn’t stop gloating over their gain and slowly this rankled the Japanese. Now Abe is taking full advantage of this “insult” and has made China an issue. The two nations will certainly not come to blows but the old patterns of conciliation are fading to be replaced by competition on all economic fronts as well as through some low level military statements and diplomacy. The surge of nationalism is being channeled by the government as a means by which to build the economy and thus far it seems to be working.

Pakistan Headed for Weak Government

The elections are this weekend and there is no party that is seen as commanding a lead. It was thought that Nawaz Sharif was headed to a showing that would allow him to form a government but his poll numbers have started to slip and he is holding at around 24% support. In the last few weeks Imre Khan has gained a real following and is now at around 23% support. This would mean that these two parties would have to find some way to coalesce but Khan’s popularity with the urban young stems in part from his attacks on the old political class represented by Sharif. In the last couple of days the Taliban extremists have kidnapped the son of the former Prime Minister as a protest against elections that they deem to be hostile to Islam. The ruling party (PPP – the party of Ali Asif Zardari and the Prime Minister whose son has been abducted) is falling behind in the polls as well. Since the assassination of Benazir Bhutto (Zardari’s wife) the PPP has lost its momentum as Zardari is considered utterly corrupt and many even suspect that he had Bhutto killed so that he could take over.

Analysis: The fear is that there will be no government formed for months as the parties wrangle and in that vacuum the Islamic extremist will be able to expand their influence – already considerable. Both Sharif and Khan are considered friendlier to the Taliban than Zardari and they would be trying to restrain the most extreme elements – but first there needs to be some kind of ruling coalition that could be relied upon.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

My First Trip to Fenway

I finally saw the Green Monster in person and it really is pretty awesome. The conference organizers for Riemer Week are known for their attention to the fun part of conferencing and this year a trip to see a Red Sox game was in order. Unfortunately for the home crowd the Minnesota Twins chose that night to wake up (with the help of a bad call at home – I must say). The experience was unique to say the least as I was designated as the representative of the group and was introduced on the jumbo screen with the team mascot and a young man who was my guide. I was not expecting this honor and was probably not quite decked out appropriately. The other honorees were replete with their Boston garb and I stood there with my sweatshirt and hat from the Burlington Bees – a single A team in Iowa that used to be a Royals affiliate. I just liked the fact that they are called the Bees! I must thank Lois and Kristine for their gift, it was great fun.

The rest of the game was just what one wants from baseball – cold beer, an Italian sausage and good company. It would have been nice to see a home town win but I was sitting next to some quiet Yankee fans and they did not seem to be broken up about the Red Sox loss. The play on the field was exciting as the game was relatively high scoring. The most interesting thing is the way that Fenway just sits in the middle of the city. I am more accustomed to the ballpark surrounded by a sea of parking lot but not in Boston. I have no idea where people put their cars but they don’t surround the stadium. It nestles in and around the bars and restaurants and that really gives it a unique feel. I have to say that Bostonians really like their Red Sox and even a pretty frequent rain did nothing to deter them. An evening well spent.

The recession of the last decade has had a disproportionately serious impact on the younger population in the US – those under 35. The main reason seems to be that this population is far more dependent on the value of their home. The collapse in the housing market meant that many millions of people watched the equity in their homes vanish and the younger population had very little else to rely on as far as household wealth. There is also evidence that this generation was subject to more layoffs than those older. The loss in equity for those under 35 was 59% compared to 26% for the population as a whole and 49% for those between 35 and 44. The younger population had been buying into homes at the peak of their prices and tended to go deeper into debt than the older population. The young also had far less in the way of alternative income from stocks and bonds as many had not had time to see much accumulation from their 401K s and other retirement tools.

The unemployment rate for the younger population was higher than expected and continues to be an issue. For almost four years the hiring of college graduates has been meager and those with less than college have struggled to find work of any kind. The older workers have been better protected by longer term contracts, union agreements and a bias towards keeping those with experience over those with less. Some fields continued to favor the younger employees but they tended to be the exceptions and the current population of unemployed still skews to the younger cohort – those under 40.

This has some implications for the economy going forward. There is a sense of a lost generation of college graduates between 2008 and 2011. They were the least likely to find a foothold in the economy and they have been the generation that has had to accept far lower pay to start. It is doubtful that they will be able to catch up over the course of their working lives and will be paid relatively less than those who went before them or those who come after them.

The concentration of wealth in their homes will also affect their financial future as they will be hard pressed to make up the losses – even as the price of housing starts to increase. There will be gains in the value of their home but it will be far slower than the loss was and it may take decades to get back to where they started.

Analysis:  There are short and long term implications from all this. The younger consumer is simply not going to be the consumer their elders were. There is evidence already that this cohort has been slower to buy expensive items like cars – the average age of a car is highest among those under 35. There is less investment in other expensive recreational goods and there is some evidence that decisions on having children has been delayed. It is some time away but there are already concerns about what this generation will do about the costs of college. They will not have had the opportunity to build up savings and that will severely limit the options available for their kids. Even further down the road is retirement but there are already concerns about the ability of this generation to save enough to quit work as scheduled. It has been noted that people in their 50s today are less prepared to retire than their parents and the coming generation is even further behind than their parents. The sense at this stage is that people between the ages of 20 and 35 will be facing some of the most serious economic challenges of any cohort since the end of the Second World War. This could affect everything from the growth of the overall economy to political and social trends. It has become the most watched generation in years.

Banks Fighting Back

The collapse of the economy in 2008 has been the subject of intense scrutiny since the moment the whole system seemed to convulse. The shock was intense and it seemed that few anticipated just how devastating the situation would become and almost nobody predicted the fact that it would take years to see any sort of recovery. From the start there have been three kinds of response and reaction. One group has focused on what can be done now to get the economy back on track. This group has been less interested in what happened other than to understand what factors are still weighing the economy down. The second group is intensely interested in what caused the collapse so that measures can be taken to ensure that this kind of thing can’t happen again. The focus of this group is institutional and strives to find a balance that leaves the good parts in place while dealing with the bad. The third group seeks to understand what happened so that those found culpable can be punished. They are far less interested in the economy of the future and far more interested in retribution of some kind.

Analysis: Even after five years there is not all that much consensus on what happened and in what order. It is very hard to identify one set of actions or culprits. The general sense is that the crisis started to gain momentum in the housing market but there were signs of trouble in terms of government debt long before that. There are many who assert that the real issue was loss of manufacturing jobs before that. These debates will rage for many years to come. Most agree that the crisis that triggered the actual recession was in housing and that the banks became both perpetrator and victim as the sub-prime mortgage sector blew up.

The economic impact of the mortgage crisis was evident – banks were not well positioned to handle the collapse and they threatened to fall apart completely. The destruction of the largest banks prompted a radical response from government and that has triggered some of the most intense and passionate debate among the three schools of thought. The bank crisis prompted the creation of TARP and led to the comment – “too big to fail”. That phrase was a misnomer from the start as it was quite apparent that these banks were not too big to fail – they were dropping like flies. The proper phrase should have been “too big to allow to fail”. The banking system is at the heart of the economy and without a functioning financial community everything grinds to a halt. All one needs do is to look at what happened to the manufacturers and retailers in the latter part of 2008. Most of the business community was prepared to see a pretty solid end of the year but suddenly there was not a speck of credit available and the whole system just shut down. There is no debate as to the role of the banking system but there is intense discussion over what the role of the government should be and what the emphasis should be as far as the banks are concerned. The bigger debate that looms over all this centers on the role of risk.

At its heart the business of banking is very old and it has always been a little odd. Other businesses are pretty straightforward and off those who run the business a significant level of control. You start a company to provide some kind of service or product as long as there are consumers interested there will be money to be made. The bank doesn’t work that way – they give an entity their money and hope that this entity does well enough to pay them back. Obviously the details are far more complex than this but that is the essence. A bank can be very cautious and lend to only those who are absolutely sure to pay them back or the bank can choose to be more risk tolerant and lend to those who may not be as successful as anyone would prefer. The banks stand to make more money if they lend to the riskier ventures as they can generally charge more for access to that money. The banks have been trying to find ways to be more risk tolerant and that has led them to develop ways to spread that risk or protect from it. This is where the controversy has become intense as one of the protections was to rely on the government to bail them out and another was to shift the risk to investors by creating securities based on the loans that the banks had made.

In the last few years there has been an attempt to change the way that banks work and there are those who want to punish the banks in the process. This is what the biggest banks are now organizing to fight. The most basic provision that has come from the bank reform effort is to require banks to have far more “skin in the game”. This means demanding that banks have much higher levels of their own capital at stake when they make loans. All agree that making loans when less than 2% of one’s own money is at risk leads to reckless decision making. There is intense debate over how much is the right level – 5%, 8%, 30%, 55%. All of these have been on the table. The higher the amount required the more that the biggest banks will be forced to sell off to make the limit and at some point these banks will be forced to reduce in size. Is that a good thing or bad? It all depends on who one talks to.

The big banks assert that only institutions of their size can underpin the large companies in the US. If they are forced to shrink the big banks of Europe and Japan and China will be the only ones that can step in. The smaller banks have thus far refused to ally with the bigger banks as they assert that these banks are indeed too big and have engaged in reckless activities that have compromised the small banks. The business community watches the clash of these behemoths with intense interest as the outcome will affect whether they will have access to credit. A stiff capital requirement will certainly make it less likely that the banks will have to turn to the taxpayer for help again but it will also mean billions and billions of dollars taken out of circulation and that will limit the loan activity that business needs for expansion.

What is the Value of College These Days?

There has been a very apparent bias towards the college degree for years. The assumption is that the college degree is vital if one wishes to get employed or make money. In many respects that remains true but the argument is not quite as compelling as it once was. The unemployment rate for those with a high school degree and no college stands at 7.4% – almost exactly the same as the national rate of joblessness. The rate for those with a college degree is 3.9%. The gap has narrowed and this is causing some rethinking on the value of college given the much higher rates of tuition charged these days.

Analysis: When the value of higher education is broken down it becomes patently obvious that two things matter more than anything else. The first is the choice of a major. If a student insists on a major with very limited business appeal they should not be too shocked to discover that their investment in college is not going to yield much in terms of employment or salary. The problem is that too few students seem to understand this until they actually hit the job market. The second factor is the quality of the school chosen. Those who enroll in less well respected institutions soon discover that a degree from that institution doesn’t open many doors. There are also fewer opportunities to leverage well placed alumni. The explosion of new schools that are based almost completely on-line has been a challenge as most employers have no connection to them.

Mexican Reform Agenda Pays Off

There was a great deal of skepticism when Enrique Pena Nieto was running his campaign last year. His speeches sounded good – full of commentary on the need to reform the ossified system in Mexico. Critics all agreed that he was saying the right things and that he had identified the biggest barriers to Mexican growth but he was from the political party that had basically put these provisions into effect and had been defending them for many years. The Permanent Revolution Party (PRI) had created the monster known as Pemex and they had developed the complex banking system that restricted lending to only those most well connected. It was the PRI that created the patronage system that has long been seen as the biggest impediment to Mexican growth. How is somebody who is from the party that created the mess going to be the leader that changes that structure? As is often the case it takes an insider to make the changes needed and thus far it appears that Pena Nieto meant what he said and plans to wrangle with the institutions that have hampered Mexican growth for so long.

The latest incarnation of that reform agenda is a long desired bank reform proposal that will stimulate far more lending and borrowing in the country. This has been seen as one of the most crucial changes to take place in the country. The banks in Mexico have been among the most conservative in the region due to rules that made it very hard for them to recover from bad loans. The banks are lending less than 26% of the nation’s GDP. In contrast the banks in rival states like Chile and Brazil lend over 100% of the national GDP and there is a far more developed entrepreneurial culture in these nations as a result. The reforms are designed to stimulate more bank competition but they will also allow banks to cover their bets more effectively. There is to be a change in the nation’s bankruptcy laws so that it will be far easier for banks to claim the assets of companies that default. To this point there has been little penalty for stiffing a bank and that is one of the reasons that the banks have been so cautious in their lending. They have done business only with the people whom they know well or who have political connections. Even this has not protected them from bad loans and in some cases the situation has worsened because the politically connected know that there will be no price to pay for a default.

This reform has come on top of measures designed to open up the oil business. Pemex has been less of an oil company and more of a massive patronage tool that has allowed politicians access to jobs and cash. The country has all but banned the engagement of foreign oil companies and that has resulted in a slow deterioration of the sector. Mexico is running out of currently accessible oil but it lacks the resources to exploit the off-shore opportunities. This may be changing as Pena Nieto is spearheading reforms that will allow US, Brazilian and European companies to become involved in developing these Gulf opportunities.

The reform activity has prompted the ratings agencies to look at Mexico more favorably than in the past and Fitch has just upgraded Mexico to BBB+. This is as high as Mexico has been ranked in many decades and that sets them up to get far more attention from investors than in the past.

Analysis: Much of the success that has come to Mexico of late has been due to their ability of the new President to create coalitions with the opposition PAN leaders. The election of last year was not quite as bloody as some have been in the past as the two strongest contestants were Pena Nieto and Josefina Vasquez Mota from the PAN. The previous election was one that pitted the PAN’s Felipe Calderon against the firebrand leftist – Andres Manuel Lopez Obrador. That was a nasty confrontation and led to months of protests and riots in the capitol city. This election stayed civil for the most part and every time the President has brought another reform forward he has been flanked by the progressive members of his own party as well as members of the PAN. It is not quite a national unity coalition but the business community of northern Mexico has been the supporters of the PAN and right now they are backing the efforts of the new leader. There are still many pitfalls to navigate and Mexico remains far too dependent on what happens in the US but there are some encouraging signs.

South Koreans Lower Interest Rates

The central bank in South Korea had been talking tough for months and there was no real indication that they were about to shift their position but yesterday the interest rates were cut by a quarter point to 2.5%, the lowest they have been in some time. The government has been pushing for the rate cut but there had been resistance based on the fear that inflation would start to become a problem. In the end the issues of slow growth overcame these fears. South Korean exporters have been especially concerned as they have been watching their rivals in Japan. The drastic plan put in place by Japanese Prime Minister Shinzo Abe has resulted in a much lower value yen and that is having a negative impact on the exporters in South Korea. The economy is very sluggish – growing at less than 1% and most now expect no more than 2.5% growth for the year.

Analysis: Given all this the expectation is that the central bank could well cut rates again and some analysts are now convinced that the world is entering a race to the bottom when it comes to rates. The Australians cut their rates earlier this week and now come the South Koreans – all motivated by a need to protect their exports from the impact of strong currency.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

A Reminder of What is Really Important

I had an opportunity to visit the Boston Tea Party museum yesterday and it got me to thinking. The reenactors were the right combination of serious and amusing and the guided tour through the museum offered some real insights into what prompted the famous demonstration of frustration. As you no doubt remember the colonists in Boston elected to dump the cargo of two British ships into Boston Harbor as a form of tax protest. The tea on these ships carried a high tax that would be imposed the moment that cargo was unloaded on the docks. After almost a month of trying to get the British to back away from that tax and send the ships back to where they came, the frustrated residents boarded the surprisingly tiny ships and threw the tea overboard.

These were not mobs of disaffected rabble – these were the merchants and the professionals in town. Picture a demonstration today of people who are in the local Chamber of Commerce. The issue was taxation without representation as these assessments were imposed by a parliament they were not allowed to participate in. The bigger issue is that these relentless taxes were killing business – there were taxes on just about everything and the breaking point had been reached.

The men and women who fought this battle and the many who were to come did not object to the idea of taxation. They knew full well that there was need to gather public money for the public good. The objection was to being taxed for some King’s set of foolish decisions. George III squandered the equivalent of billions and was bringing the British to the edge of financial ruin. The debt was massive and there was no desire to reduce it – just find some ways to fund it at somebody else’s expense. If this is sounding distressingly familiar you are not alone.

This is the kind of research that takes one aback a little. How can something like owning one’s own home have an impact on whether somebody can get a new job? It would seem that there is no conceivable connection and that this is merely a coincidence. The fact is that getting a new job is often a matter of proximity. When there are large layoffs and an overall increase in an area’s level of unemployment it is due to the fact that a major employer is struggling. The more dominant that employer the more likely it is that a whole community will suffer from the fall in employment and those who have lost jobs will be required to move away in order to find work.

The last time that the US economy was facing high rates of unemployment was in the mid-80s and this was a very different time. The majority of those who lost their jobs were not homeowners and that allowed them to relocate more easily than is the case today. People now are faced with the task of trying to sell their homes and until recently this was taking place in the worst housing market facing the country in many years. This move is made more complicated by the fact that the areas with jobs are booming and prices for homes (and everything else) have risen sharply. The unemployed are more likely to be underwater on their mortgages as well.

There are other factors that have made people far less flexible when it comes to relocation. The average family in the 1980s was dominated by a single major wage earner and today the majority of homes are dual wage earner households. One of the two may be willing to make the move but the other one has become the bread winner and may not be in a position to find a new job if they leave the current location. There are also frequently issues of child custody that keep people from leaving their current location. Even a longer commute within the same general region can complicate taking a new job – especially if the job is not paying as well as the one lost. The price of gasoline and the number of hours on the road can have a profound impact on the appeal of a new job – especially in heavily congested regions.

Analysis:  At some point people make the sacrifice they have to make but the decisions are not simple and there will be delays in responding. It has been noted that in the current environment many companies have stopped offering relocation help for all but the most senior positions and that serves as an even more serious inhibition for some who once would have been offered some help. The estimate for a family of four moving from Chicago to Boston with a professional mover is between $8,000 and $10,000. That can be a real disincentive to seek employment outside a given region.

The challenge of dealing with between 11 million and 20 million unemployed will continue to dominate economic planning for the next few years. In general the consumer seems a little less worried about job prospects and that has been reinforced by a rise in the “quit rate”.  It is still not the level seen before the recession but at 1.6% it is higher than it has been since. This is the number of people who have left their current job voluntarily in search of something else. During the height of the unemployment period there were few people willing to risk a search for something new and the quit rate declined drastically.  As that number increases there will be a sense that there are more opportunities. The big issue remains matching up the skills needed in the workforce with the skills possessed by the jobless but the mobility factors figure in.

The New Guy at the WTO

For the most part the average business person loses little sleep over the actions of the World Trade Organization. It is just another of those acronym organizations that pepper the business world. In most respects it is the least well-known and most dysfunctional of the three “Bretton Woods Sisters”. Its forerunner was called GATT – General Agreement on Tariffs and Trade and it came into existence at the same time as the International Monetary Fund and the International Bank for Reconstruction and Development (World Bank). Given that the WTO doesn’t hand out money the way the other two do, it has been the forgotten sister more often than not.

The impression of the WTO as a never ending series of arguments over trade by nation that really only want to gain an advantage over one another is not altogether accurate although that has been part of the problem for the organization. When it was GATT the aim of the organization was to convince the nations of the world to stop imposing punitive tariffs on one another so as to facilitate more open trade relations. The mission has expanded since then but the goal remains building trade relations.

Analysis: The most high profile activity for the WTO of late has been the ongoing failure of what was once termed the Doha Round of trade talks. These started in November of 2001 and nothing of substance has come from them since. In 2008 the talks stalled utterly and there has not been a serious attempt to get them started again. During the course of these talks there have been two Director Generals of the WTO. They started under the direction of Supachai Panitchpakdi but in 2005 the organization came under the leadership of Pascal Lamy and he has presided over most of the more tumultuous meetings.

Now there is a new Director General and the race was a tight one. For the past several weeks this has been a two man competition between Latin American candidates. The winner was Roberto Azevado from Brazil. He was considered the front runner from the beginning but at the end he was facing a serious challenge from Herminio Blanco from Mexico and in the process of campaigning the two men outlined some very different visions for the WTO.

Azevado has been Brazil’s ambassador to the WTO for many years and he was far better known by the delegates than the former Finance Minister from Mexico. The fact that Brazil has a far wider diplomatic reach in the world also benefited Azevado. As the race came down to the end Blanco was backed by the United States and Europe but Azevado had the support of most of Latin America, Africa and Asia. In some sense the fact that Blanco was favored by the developed nations may have hurt him in the estimation of the less developed states. He may have been seen by some as something of stalking horse for the US but there may also be something deeper in terms of the support given to both men.

The discussion during their campaign turned to what the WTO would do about these stalled trade talks and while both men talked about trying to get them started again the approach was noticeably different. The divide within the WTO is obvious every time these talks start up. On the one hand you have the developed economies of the US, Europe and Japan and on the other you have the developing economies in the rest of the world. The most consistent point of contention is that of access. The less developed nations want to be able to sell to the developed world and that means gaining more access to the farms sector as that is the product these states are in the best position to sell. This provokes a major backlash from the farm sector in the US, Europe and Japan as the local agricultural community would have a hard time competing with the output from these nations. The developed world wants access to the manufacturing sector as well as modern service sector and high tech. This makes the developing nations nervous as they feel they will lose control of these sectors and that this will inhibit their ability to grow beyond being exporters of food and low cost consumer goods. There has been no willingness to compromise on these issues for over ten years.

The position taken by Herminio Blanco is that free trade is a good idea for the developing world and that imposition of tariffs and barriers will always distort and inhibit growth. He was one of the prime architects of the NAFTA agreement with the US and Canada and has been a leader in the Mexican effort to engage in as many free trade pacts as possible. Part of the reason that he was backed by the US and Europe was his clear stance on free trade. The position taken by Azevado is still somewhat unclear given his position as the Brazilian representative. The government of Brazil is fundamentally more protectionist than is Mexico and many of the other Latin states and as the ambassador he was duty bound to reflect these positions at WTO meetings. His statements during the race against Blanco suggest that he is personally more attuned to trade matters and that he would take different positions as the head of the WTO as he took as ambassador.

There are two schools of thought thus far as regards his ability to get the trade talks started again. The optimists assert that Azevado will have better rapport with the developing nations and will thus be able to get them to make the concessions they have resisted in the past. The pessimists assert that he will not have the confidence of the US and Europe and will not be able to get these nations to relax their opposition to the provisions of the trade talks that favored the less developed countries. The WTO remains the best hope for a trading system that works and the slowdown in the global economy has been attributed to the almost total paralysis of trade. It would be nice to see the WTO regain some clout.

Bees in Trouble

This is a story that has personal significance for me as I have been an erstwhile beekeeper for the last few years. The reports from the USDA suggest that this was another bad year for hives – a 31% decline. That amounts to some 800,000 hives and one of those was mine. The decline in the population of honeybees threatens some major economic calamity as some $250 billion worth of crops depend on the pollination carried out by these tireless collectors. The reasons for the bee die off are as complex as any challenge and there is really no one factor that can be pointed to. This year the culprits ranged from disease to parasites to poor nutrition and exposure to systemic pesticides. The drought last year robbed many hives of the flowering plants they depend on for food and there continue to be major issue of Varroa mites.

Analysis: Without some aggressive action the bee population will fall to dangerous levels. Beyond addressing the issues that cause the hive collapse there simply need to be more beekeepers. In the old days the farmer that needed pollination had his or her own hives and now big commercial beekeepers haul their hives all over the country to set up in the orchards and fields where they are needed. The hobby remains rare but research has shown that the health of the “hobby hive” is superior to the commercial hive – mostly because the hobbyist is more likely to invest in food and medicine and will take steps to control the parasites that plague hives. All I can say is that bees make pretty darn good pets – the cats have never managed to provide me with honey!

Long Term Crisis in Employment

There is nothing good about high unemployment. It is obviously bad for the people who are struggling to keep their financial house in order without steady income but from a purely economic point of view it is a total waste of resources that could be used to advance the success of the system. People out of work are not contributing to the growth of society and they are not contributing to their own growth. There are types of unemployment that are more vexing and serious than others. At the top of that list is youth unemployment. The International Labor Organization estimates that the global rate of youth joblessness is 12.4% and it is expected to be close to 13% by 2018. Many other analysts assert that the real rate is even higher than this.

There are four aspects of youth unemployment that make this issue more serious than garden variety joblessness. The first and perhaps the most damaging is that failure to start a career when one is young will virtually guarantee that the person will be behind as far as earnings for the rest of their lives. Studies have shown that people really never catch up as they will always be behind those who started their careers at the traditional point. The first jobs are the ones that teach the basics of employment and when there is not a first job until well into one’s twenties or even thirties there is a lack of experience and understanding that may never be fully overcome. It is something of a rite of passage and it can be somewhat painful. Suddenly the carefree life of youth is replaced with the need to observe deadlines, work long hours and learn to take orders from superiors. That is something that is far easier to adapt to when one is between 16 and 20 than when one is in their twenties and older. The person who is delayed in the workforce will be delayed when they buy a house or start a family or so any of the other things that consumers do.

The second major issue is social. The unemployed young person is far more likely to become engaged in criminal and anti-social behavior – almost four times more likely. The unemployed kids will be likely to join gangs and they will be far more likely to engage in crimes related to property and income – robbery, burglary and selling illicit goods. The fact is that young people are prone to some of these anti-social actions under the best of circumstances and without the civilizing impact of employment the situation become far more of a problem.

The third issue is that unemployment creates a major issue of brain drain in the hardest hit nations and regions. As the opportunities for the young worker dry up they are far more likely to migrate in search of new chances to make a living. The regions that lose their young people will soon begin to die and there is almost nothing that can be done to resurrect the options for that region or place. The young worker is more mobile than their elders and will move much more quickly.

The fourth issue is exploitation. The inability to find work makes many very vulnerable as there has been no time to develop assets to sustain someone through a bad patch. The regions that are facing the highest rates of unemployment see many young women lured into prostitution and there are far more drug operations. There are more opportunities for unscrupulous companies to establish sweat shops and what amounts to modern day slavery. The connection between sex slavery and high unemployment is very direct.

Analysis: The ILO report is long on the threat and very short on the steps that would need to be taken to correct the problem. It comes down to three responses. The first is to ensure that there is access to relevant education. The young people who have not acquired the needed credentials will be doomed to a marginal existence – even in the developed nations. The second requirement is economic growth in the small business community as this is the sector that hires the majority of the young workers. Finally there has to be a balance between the government’s interest in equity and the needs of business. The hike in the minimum wage always results in less hiring of young people as business simply chooses to hire more experienced workers as opposed to paying more for somebody who needs a great deal of training.

Malaysia Facing Divisions that Impact Economic Goals

The elections in Malaysia have demonstrated that this is a deeply divided nation and it isn’t at all clear that there will be much unity of purpose in the short term. The National Front has ruled in Malaysia continuously for decades but this election left it with a minority position in the parliament for the first time in years. The National Front will have to form a coalition with some smaller entities and independents if the new Prime Minister is going to make good on his promises. Najib Razak is the son of the second Malaysian Prime Minister and had the support of the rural population and the Malays. The opposition was led by Anwar Ibrahim – a man who spent years in prison for his challenge to Mahathir Muhammad – the near dictator that ruled Malaysia a decade ago. His party has the support of the urban areas and the ethnic Chinese who make up 40% of the population.

Analysis: Malaysia isn’t the wunderkind of the Asian region anymore and that has created some real economic stress for the country. There needs to be radical modernization and that will mean that unity will have to evolve. The urban Chinese are the key to growth and they are feeling frustrated and vulnerable.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

I Think They Are Out to Get Us

I have long been of the opinion that machines are not to be trusted. Perhaps this is due to reading far too much Isaac Asimov as a kid but I think the machines around us are more alive than we give them credit for and I think they are possessed of malevolent intent. Just yesterday I discovered that the hard drive on my laptop died and of course this occurs before I can decide to preserve what is on the thing (luckily this has happened before and I am better at backing up than I used to be). At the same time that the machine was choosing to abandon me an elevator had trapped my business partner and was threatening to plunge him to his doom. I think the laptop put the lift up to this in one last gasp effort to attack.

In the last few weeks I have had confrontations with chain saws (this never goes well) as well as trimmers and power drills. As I have tried to get from place to place I have witnessed airplanes that seem to have lost the will to soar (this never goes well either). The point is that these machines have become integral to our lives but they remain deeply mysterious to me. The computer starts to do weird things and all that I get is incomprehensible nonsense that might as well be in Urdu. I don’t really understand how most of these tools I depend on actually work so when they fail I am left with no other recourse but swearing. It doesn’t really help.

I am no Luddite – I know these things are useful. I also know that it is my own fault that I don’t really understand how these things work. I am also aware that generally they work better than things used to. That doesn’t make me feel any better when staring at a dead computer or when I am worrying that my business partner is being held hostage by an angry elevator.

It has been pointed out that measuring unemployment is challenging. It is a constantly moving target and a great many of the decisions made about hiring and firing do not show up in the economic statistics for weeks and months. This makes the revisions more important than the original announcement in many cases but it also creates ample opportunity to seek out other indicators of the jobless situation. Among the more offbeat has been the Vixen Index – created over a decade ago in Florida. It asserts that when the average waitress at a restaurant or coffee house is more attractive than usual this is a sign of higher unemployment and for some 16 years it has tracked accurately if somewhat subjectively. A better measure of the broad employment trends is the Conference Board’s Employment Trends Index – a compilation of eight of the better known and respected measures of employment. Some of these tend to be leading indicators, some lag and some are concurrent.

The eight measures include 1) number of respondents who say that jobs are hard to get in their monthly consumer survey, 2) initial claims for unemployment insurance, 3) percentage of firms with positions not able to fill right now (from the NFIB), 4) number of employees hired by the temporary help agencies, 5) ratio of involuntary part-time workers to all part-time workers, 6) job openings, 7) industrial production and 8) real manufacturing and trade sales. Note that none of these measures are the ones that get used to describe the job situation in shorthand – none of these are based on survey data other than the first one that comes from their own survey. In the last few years the ETI has tracked the movement of jobs and employment far better than the household survey used to determine the overall unemployment rate reported in the media.

Analysis: The latest ETI is showing better numbers than at any time since 2008. Five of the eight are trending positive and the cumulative number has risen from 111.61 to 111.68. That is 3.8% higher than it was a year ago and that marks one of the most significant jumps in the last few years. The biggest gains were seen in the hiring of temporary workers.

This is more significant than it might seem at first blush. There is a pattern when it comes to how companies react to improved economic circumstances. The first step is to work existing staff to death as the company is not sure yet whether the improved business conditions are something they can count on. Once they are more confident (or their staff starts to drop from exhaustion) they enter the second phase. This is when many businesses start to hire temporary workers as a kind of audition. This allows the employer to see if the increased business is going to be sustained and there is an opportunity to see whether some of these workers will fit in with the company. The third stage is hiring permanent employees and here is where it gets tricky. It would be great if this is when companies started to hire the unemployed but in many cases the people hired are people who already have a job. They are being poached by one company from another so that the hiring company doesn’t have to train them from scratch. The hiring of those who have been jobless for a while is a slow process and may not occur until the pool of other candidates has been reduced and companies are left with no choice.

Meanwhile – Back at the Ranch

The economic and financial news has been coming like a torrent from a fire hose for the last several years. In the furious coverage of the latest economic or fiscal crisis it is easy to lose track of what has been happening in all those states that once dominated the news. This is a brief review and opportunity to catch up. It would be nice to say that there has been some improvement in the prospects for nations like Greece, Spain, Portugal and Cyprus but that is simply not the case. In most respects the situation has worsened as the efforts devised a few years ago have largely failed to accomplish much.

The Greek economy has been in full recession for over five years now and the Cypriot economy is expected to be slammed into recession for at least that long or longer. The majority of the rescue that was implemented in the last few years has centered on the national budgets of these nations and the goal has been to reduce the size of the debt and deficit. The money that has been poured into these states has come largely from three sources – the Eurozone itself (almost entirely from Germany), the European Central Bank and the International Monetary Fund. The idea was to stabilize the national budget so that some more far reaching reforms might be tried. The rescue was seen by many as too little and too late and the reforms have not been all that successful thus far.

Analysis: In many respects the Greeks played the role of patient zero. It is not that they are the only nation to be in financial distress (as has become obvious) but they were the first to fall into crisis sufficient to trigger a European response. The frantic efforts of the government of George Papandreou were unsuccessful and the Greeks had to be bailed out by the “troika” as they bought the Greek bonds that had been rendered worthless by the crisis. In the early stages it seemed almost simple for the Greeks to fix the system as there were some pretty glaring problems. This was the poster child for profligate spending, corruption and inefficiency. All the Greeks had to do was streamline the bloated public sector and figure out a way to clamp down on tax evasion. Some four years into these reforms there has been almost no progress on either of these. The unemployment rate in Greece is close to 27% but this has all come out of the private sector – the public sector employees are still protected by their unions and the patronage system. The government has not been able to significantly reduce the budget as there has been little change in the workforce. The only way to reduce the outlay has been to reduce the work that the government does and that means that millions of Greeks are losing the benefits they used to receive and the government has severely reduced the number of projects undertaken. In short the government is doing far less than before but with roughly the same number of employees.

The problem of collecting taxes remains a major impediment to progress in Greece. The majority of the business community and the general population refuses to pay and in most respects the problem has become worse as the system breaks down as the average person or company wonders why they should be paying more and receiving far less. It now appears that Greece will need to ask for more help from the countries and institutions that bailed it out in the first place and thus far there is precious little sympathy for the Greeks and even less desire to throw more money at the government. The population is near revolt as they have seen no progress and still face the same issues they have faced for years.

The Cypriot government is also teetering on the edge of collapse as the population starts to understand what the future holds. The banks in the country have been bolstered but only to a point and they have been cut off from the source of their former income. There is a realization that the middle class lifestyle of the nation was built on some very flimsy foundations. The only real hope for a national income comes from the development of the gas resources that lie off the coast of the country but gas has been a notoriously fickle commodity when it comes to pricing. It can be good for an economy when demand is high but then there is the inevitable fall and income is reduced. The island nation is currently experiencing a massive outflow of talent as the job prospects in the nation dwindle and that brain drain may take longer to recover from than the recession itself. The collapse of the banking system has also led to some major changes in the banks throughout Europe that engaged in some of the same practices. The murky world of secret banking rules that allowed people and countries to evade rules and laws has been shattered and exposed in a manner that was wholly unanticipated just a few years ago.

The Spanish crisis continues to build and there are few who seem to have an idea as to what can be done at this stage. The austerity efforts have yielded very little and the unemployment rate continues to soar. Unlike Greece the government jobs have been affected alongside the private sector and that has meant much reduced activity on the part of the system. The protests are turning into riots and there has been a significant out migration of young Spaniards that see no real future in their own nation. The plan had been to offer a stable economic environment that would lure investors back to Spain but thus far this has not panned out. Nothing is growing in Spain at the moment as the manufacturing sector remains moribund, the tourist dollars are not flowing and there is not much in the way of export activity to counter any of the domestic collapse. The only real income for the nation has been that which is coming from the rescue plans and there is clear donor fatigue here. The Spanish are trying to figure out a way to become more engaged in the growth taking place in Latin America but with limited success thus far.

Sub-Prime Collapse Attributed to Politics

New research from economists at the UCLA Real Estate School shows that much of the crisis in the sub-prime market was fed by political manipulation and gamesmanship. From the start of the housing crisis observers were very perplexed by the swift emergence of the sub-prime lending crisis. This was something that good banking practices would never allow to happen and there was no real warning to the system as nobody anticipated such a reversal in traditional behavior. By 2008 45% of those who had taken out sub-prime mortgages were underwater and by 2010 almost 50% of these loans were in default. The vast majority of those who had received sub-prime mortgages should never have been offered a loan under any circumstances but legions of unqualified borrowers entered the system. There has always been a question as to why. How did traditionally cautious banks suddenly become profligate – handing out “ninja” loans (no income, no job or assets)?

Analysis: The study suggests that the blame can be placed pretty squarely on politics. The research shows that the sub-prime industry targeted select representatives in order to get changes in the law that would make sub-prime loans easier to make. It is also evident that these sub-prime lenders targeted certain regions of the country in order to make loans in districts where key legislators were in place. The loans were going to people whose incomes did not remotely qualify but the local representative could take credit for getting the lenders to make these offers. The focus of the sub-prime industry was on districts with low income residents who had been blocked from mortgage activity due to their lack of qualifications. The sub-prime lenders made these representatives look good and in return they got the rule changes they sought.

How Costly is Immigration Reform?

There are lies, damned lies and statistics and right now the immigration debate is full of the latter. The debate over what to do about the estimated 11 million illegal immigrants in the US is driven by emotion on both sides. The proponents of reform point to the exploitation of people who live in this illegal no man’s land and they point to the family crisis that has been caused by the long term nature of much illegal immigration. Others suggest that the economy will struggle mightily without the workers that now labor in everything from food service to the farm and factory sectors. Still others assert that there is no practical alternative when dealing with numbers this large. The opponents are concerned with national security and the rule of law and they are fearful when it comes to the impact of cultural change. Lately the two sides have been trying to break the issue down to economics and numbers and the manipulation of data is extensive.

The latest salvo has come from the Heritage Foundation as they have asserted that granting these 11 million immigrants some kind of legal status will cost the over $6 trillion. This number is arrived at by assuming that all 11 million immigrants will receive full benefits from the US – Social Security, Medicare, food stamps, public housing and so on. The assumption is that 11 million of the immigrants will immediately stop working or they will remain in very low paid off-the-books jobs where they will owe little in taxes. The computation goes beyond these direct benefits however – it also prices out the cost of police and fire protection as they will now legally benefit from these services. The cost of parks is computed as the immigrants will be allowed to legally sit on a bench and feed the ducks as opposed to their flagrantly illegal park use now. The cost of the roads they drive on and the bridges they cross are computed as well as the weather reports that come from the National Weather Service and the defense from invaders that is provided by the US military. In other words that $6 trillion figure is ludicrous as it prices every single thing that a citizen of the US has access to – never mind that the vast majority of these services and offerings are enjoyed by the illegal population now.

There is a case to be made when it comes to the cost of direct benefits. There will be additional expenses incurred by the welfare system and in some states these costs will be substantial. On the other hand these workers will be paying taxes and that will offset some of these benefit payouts. Just as the opponents play fast and loose with data so have those who are in favor of the reforms as they assume that most will find decent jobs and that their children will graduate and take even better jobs. The reality is that it may take a generation or two for the currently isolated populations to integrate and in the first decade the costs will be higher than they will be later on.

There is also the issue of how the flow of illegal migration is slowed or stopped. The current population is one thing; a flood of others will leave the country in the same situation it faces now. The solution is anything but simple and will need multiple tactics – everything from better border security to an improved Mexican economy that can employ more of its own people.

Analysis: The most frustrating element of this debate is the attempt to make a complex issue even more complex with distortions and outright manipulation. The cost of immigration reform is nowhere near the $6 trillion that the Heritage Foundation is asserting and their numbers are nothing more than scare tactics. The point is that making 11 million illegal residents legal in some way is going to cost money and quite a lot of it. It is not necessary to engage in obfuscation to make that point. On the other hand the reforms will bring progress and taxes and it is not necessary to assert that every child of an immigrant is destined to become a doctor to make that point. It is impossible to separate the emotion from this debate but at the very least facts should be allowed to speak for themselves.

Australia’s Reserve Bank Cuts Rates

The interest rate in Australia still looks pretty high as compared to the other developing nations but it is now at record lows after the Reserve Bank reduced it by .25% to 2.75%. This is the lowest point since the bank began to move aggressively against inflation back in 1990. The reaction is a response to the challenges that have been presented by the slowdown in China and the fact that Australia is too much the one-trick-pony. The commodities that Australia sells to the Chinese and others have been the foundation of the economy for decades and there is no reason to think that this will not be the case for years to come. The government is concerned that commodities are not enough – especially as the population grows and there is more demand for jobs. The manufacturing sector in Australia is anemic to the point of irrelevance and there are growing concerns about a rising unemployment rate that mining will not address.

Analysis: The idea behind the lowered rates is to boost the domestic economy and encourage the manufacturers to expand and extend their operations. The fact is that Australia is a challenging manufacturing platform under the best of circumstances. The distance to market is vast and they are sitting in the middle of a region known for cheap manufactured goods. There is no way that Australia competes with China in the production of consumer goods and that leaves competing with the US, Japan and Germany in output of industrial machinery. All three of these states have low interest rates and low valued currency and that means that Australia needs their own interest rate edge.

The Executive Intelligence Brief

Readers of the Business Intelligence Brief are invited to take a look at the companion publication from Armada Corporate Intelligence. If you have not taken advantage of our trial offer on the Executive Brief we invite you to sign up for some free issues by contacting ksanchez@armadaci.com. The Executive Intelligence Brief is part of the Armada Strategic Intelligence System and is more detailed than the BIB. It is our subscription based publication and is available to BIB readers at a discount.

It’s Happening Next Door

I am essentially a pretty private person and do not really want to invite my neighbors to become heavily engaged in my business but over the last few weeks I have been struck by a theme that has run through many of the tragic stories of the last few years. The latest is the story of the three women held captive in a quiet Cleveland neighborhood. Nobody knew they were there. Nobody knew what the Tsarnaev brothers were up to. Nobody knew about the kid in Newtown or the kids that shot up Columbine. People are unaware that there is a grow house or a meth lab next door. There are prostitution busts in the quiet neighborhood and nobody knew the lady of the house was a madam. On a less public note there are child abusers and spouse abusers next door and there are people in serious emotional crisis.

I have talked about this before and I don’t pretend to have the answers. We have to find ways to pay attention to those around us. Most people will not ask for help and many don’t even know they need it. Those who are dangerous and malevolent count on anonymity and the silence of their neighbors. They hide in plain sight. Perhaps it is time to launch a national campaign – “take a pie to your neighbor”. There is no normal person that will refuse a pie and this should give ample opportunity to engage in conversation. Maybe it will just be an opportunity to reach out to a lonely soul that needs a friend but if you see towering marijuana plants in the front room or see groups of people trying to figure out how to arm a surface-to-air missile it may be your apple pie that saves the world. This is not to make fun of a serious challenge but a genuine suggestion that we find ways to know those around us better.