Every month there seems to be another small piece of data that promises an improvement and an end to the housing slump and every month there is another reason to stay worried. The end of the housing slide has been predicted so many times that few have much faith in the assertions anymore. Thus, you can take these latest signals with a certain grain of salt. Do they indicate that there is some improvement in the housing market? Perhaps. Do they mean that an end to the crisis is at hand and that the sector can be expected to recover? Unlikely. Does this mean that an imminent recovery is at hand and robust growth is imminent? Probably not.

First there is the fact that there has been some improvement in housing starts. Home construction grew by 2.6% from March and that is a 30% improvement year over year. Granted the miserable home building pace of 2011 it would be pretty easy to beat and 717,000 new homes look pretty paltry compared to the numbers in the boom years. This annual number is well short of the average of 1.5 million new homes built each year since 1959. The pace is far better than the 478,000 registered just a couple of years ago but assertions that the market has come back to life would be premature. The question is whether these totals are the new normal or if this is still a sign of a sick housing sector. The single family home dominated new construction as this accounted for 69% of housing activity. There was a much smaller gain in the number of multi-family units constructed.

The other development of interest is rate of mortgage delinquencies. The number of homeowners who are behind in their mortgages has fallen to the lowest number since the crisis began in 2008. That is the good news. The bad news is that banks are still dealing with record numbers of foreclosures and will be working their way through that mess for at least another year. The banks have been trying to get some of these houses off their books by renting them but this has done little but strain the rental market and depress the construction of new multi-family projects. The delinquency rates are falling fairly rapidly and that would suggest that most of those in financial jeopardy are already in the process and that the bulk of the existing home owning population has stabilized. This is actually pretty good news as there had been some concern that there would be another round of mortgage crisis when the last of the adjustable rate surges came due.

Analysis: The crisis in the housing sector has begun to ease a little. Is this a real sign of recovery? It would seem that some parts of the country are in better shape than others – as is usually the case. It is evident that the worst situations remain in the states that plunged into the abyss in 2008-2009. The rate of foreclosures is still highest in Nevada, California, Florida and some of the harder hit industrial states. The pace of growth in the Midwest has been relatively stable while that in the southern states has been slipping. The fact remains that housing is the ultimate local market so there can be growth in one section of a city and contraction in another.

Despite All, There is Optimism

The latest discussion taking place on the issue of employment surrounds the “missing” five million. There have been several variations on this theme in the press of late and this subject will be at the top of the political agenda for the rest of the year. This is not necessarily a new conversation but the implications are significant – not just for the coming election but for the economic recovery in general. The basic idea is that the demographic data shows a population increase of about 5 million but there are not that many people entering the workforce – where did they go? There are several suggestions but thus far it has been relatively challenging to determine. Are there really five million discouraged workers out there? Have the Baby Boomers been leaving the fold that quickly? Have millions of spouses elected to exit the workforce voluntarily? Are there that many people taking time off the job search to take classes? There is a qualified yes to all these questions but that still leaves the question of whether that really adds up to 5 million people.

The reason this matters politically is obvious enough. If there is a flood of job searchers just waiting to see some economic progress before they jump back into the game that could spell disaster in a perverse way for President Obama. The fact that the economy starts to improve could mean that he would be blamed for what appears to be a deteriorating situation. Right now the jobless rate is 8.1% but most assert that part of the reason it is so low is that many people are out of the workforce category. Should they come back in and get counted again the jobless rate could well spike to the upper 8s and even beyond 9%. That makes the situation appear worse than it is and forces the President to defend the management of a growing economy while the employment data is saying that conditions are getting worse. One can be assured that nobody running for office will be discussing the nuances of employment data in the months to come. It will be assault with a deadly statistic for the majority of us.

Analysis: The rate of labor market participation began to decline at the start of the century after almost fifty years of continuous growth. The phases of labor market growth are well known by now. There was the boom that took place after the end of the Second World War as millions of men and women came out of the military with broadened horizons and skills that allowed them to be engaged in the economy to a greater degree than in the past. Through the 1950s and 1960s there was wave after wave of job entrants. Women came into the workforce at a steady pace and the civil rights era allowed a vast expansion of the minority population in the general workforce. Then the pace slowed and in 2000 started to reverse a little. The three reasons for this shift include the beginning of the Baby Boom retirement and the peaking of female participation in the workforce. It appears that 60% of women desire entering the workforce and not much more. The pace of retirement is accelerating and it also looks like more women are opting out (at least for the moment.) Then there is rapid expansion of the student population in the last few years along with their new habits. The student in the 1970s and 1980s was reluctant to take on debt and the vast majority of them worked their way through college. Now the working student is the minority and students take on debt loads that are truly staggering. This is a whole other issue as it is now asserted that fully 30% of students will never be able to pay off that debt. They are in pursuit of jobs that will not pay enough to cover these loans unless they elect to give up on home ownership or sending their own kids to college.

The studies thus far assert that roughly a quarter of those who have dropped out of the workforce are those who have retired and that percentage is likely to expand slightly in the years ahead as the end of the Boomer generation reaches the retirement age. Another quarter of those who have left the workforce are those who have either decided to stay in school as opposed to working or teenaged workers that can’t get a foothold in the job market. This is yet another whole issue. The teen worker faces an unemployment rate of almost 25% and in urban areas that can be as high as 35%. Add in some other factors like lack of education and minority status and you have a jobless rate of almost 50%. This is not the population that is likely to come surging into the system when the economy starts to rebound and that means that they will not contribute to the expansion of the jobless rate but that hardly means that this is not a major issue for the nation going forward.

The unfortunate fact is that if a person has not held a regular job or has not been preparing for one through the acquisition of skills and education by the time they are 21 they will be unlikely to ever find a real job. They become part of the class of unemployable and that creates immense social problems that become progressively more serious. The single most important deterrent to crime is employment. The vast majority of criminal acts – especially violent ones – are committed by those without work and the prisons are filled with people who have never worked a regular job. The rate of suicide is higher and so is the rate of mental illness. The list is long and depressing – more spouse abuse, more child abuse, more alcoholism and drug addiction. The common factor in reducing all of these societal maladies is employment in an environment that provides some sense of a better future to be aspired to.

Once one accounts for the 50% of non-engaged workers there is still the mystery of who the others are. There is a certain number of people who have been rendered unemployed by structural changes in the economy. These are the people who have seen their working world altered to the point they can’t participate in it any longer. These may be those who once did assembly line work in a factory and have been replaced by robotics and technology. These may be some of the administrative assistants who once made up a substantial part of the female workforce. They too have been replaced by the technological options as well as by the overall economic downturn that has convinced many operations to reduce their payrolls. There are also legions of those whose skills are not needed right now as their sector is moribund. This is the case for those whose specialty is in construction. Until that sector comes back to life there is a limited need for everything from framers to dry wall guys. These are the ones who could be heading back into the economy at the moment that real improvement takes place. Much depends on how successful these people are at reinvention and right now that is hard to determine. The sense is that those under 40 will be more adept at this than those over 40 but that has yet to be proved.

The problem the US would like to avoid is having a mass of unemployable citizens that will either populate the underground economy or will remain government dependents indefinitely. There is a solution to much of this but it is far from easy to execute. The hiring engine for the US has been and continues to be the small and medium sized business. Finding out what it will take to get these companies to boost hiring is the trick.

Too Late to Save Greece?

The fact is that people and businesses do not necessarily wait around for the powers to be to make up their minds. The statements from the heads of the “troika” make it pretty clear that there is no patience left for the Greeks. Angela Merkel, Mario Draghi and Cristine Lagarde have all made their feelings known and this has triggered a response. Money is flooding out of Greece as anyone who can is shifting their assets somewhere else. There is an exodus of people as well. Millions of Greeks are moving and the majority of these are the best and brightest. Even if Greece stumbles towards some kind of compromise the country will be decades in getting these people and their money back.

Analysis: The major problem that faces development in many of the poorest nations is that those that would underpin an economy get fed up and seek greener pastures. The combination of brain drain and capital flight is deadly and Greece is on the verge of experiencing both on a third world level of intensity. If there is not some solution devised soon it may not matter what come next – there will be nobody left in the country to care.

Global Banks Stressed by Basel III Rules

The reform efforts continue and the global banks continue to try to determine just how to fit in to these new rules while maintaining their business models. The Basel III rules have been the topic of intense debate for the past few years and they have altered somewhat in the course of that debate. The new rules remain stringent enough that many banks will struggle to fit. The point of the reform effort has been to ensure that banks are strong enough to handle a crisis like the one that felled them in 2008. There is also a punitive aspect of the new regulation as there has been distress at what happened within the banking community to accelerate the economic collapse. The Basel III approach has been somewhat different from the efforts in the US under Dodd-Frank but there have been similarities as well. The US will be affected by Basel III as well but most of the impact will be on the European banks as they have not gone through the Dodd-Frank wringer.

The core of the effort is around bank capital standards, a position similar to that of Dodd Frank. The demand is that banks have more to back up their loans and investments so they are not dependent on government bailouts when their decisions turn out to be bad ones. The problem is that banks are far from having that kind of capital right now and will have to undertake some aggressive efforts to come into compliance. A recent study of the situation by Fitch Ratings indicates that the 29 largest banks will need to come up with an additional $556 billion in assets by 2018 if they are to be in compliance. This is 23% of their current assets and about three times their current combined annual earnings. The majority of the banks will have to start aggressive action on three fronts if there is to be any hope of meeting this demand.

They will need to drastically expand their retained earnings, expand the equity they issue and they will need to shrink their balance sheet. Banks in the US and Europe will have different challenges. The US banks will have a harder time with the capital requirements for riskier deals as the majority of the bigger US banks are more active traders. The European banks will struggle with the tighter definitions of what constitutes capital. In both cases the banks will have to pull back from their usual business activity in order to meet these requirements and that will affect the accessibility of bank funds for companies that need them. This has always been the danger of reform. Nobody questions the need to ensure that a financial meltdown like the one in 2008 is not repeated but heavy restrictions on banks can produce a similar impact on the economy. The worst part of the 2008 debacle was that credit essentially dried up and most companies were shocked into recession due to the lack of credit. That crisis has eased but stricter regulations could create a similar situation as banks become solely focused on meeting the Basel II demands by the deadline.

There is also the danger that banks will actually engage in riskier activity in order to meet these standards. If the banks try to deal with the capital requirements by expanding their equity they will be facing a situation in which the return on equity will fall from 10.8 to 8.5 and that makes it all that much harder to appeal to the investors needed to expand equity. It was suggested by the report that many banks may turn to more questionable and riskier tactics to boost earnings and keep the attention of the investor and that is the reason for the Basel II reforms in the first place – to reduce that risk.

Analysis: The banks are still recovering from the travails of the last few years. These were mostly self-inflicted wounds and few have all that much sympathy for the banks that got into their mess via dreams of avarice but the blame is not evenly spread. For every bank that played fast and loose with the system and took too many risks there were banks that played it down the middle and were swept up in the collective crisis. As with most things, a one size fits all mentality is not all that helpful. The fear is that banks will become even more insular in the next few years and this will make access to money even tougher than it has been. This will do the overall economic recovery no favors.

Are the Utilities Next in Argentina?

For the last ten years the power generators in Argentina have been prohibited from raising their rates. This has not meant that their costs have been similarly restricted and they have collectively petitioned the government of Cristina Kirchner for permission to hike their rates enough to survive. The power situation in the country has been deteriorating for years and there is real fear that brownouts and blackouts will become ever more common as the companies can’t even afford routine maintenance anymore.

Analysis: The most likely response from the Kirchner regime is that the utilities will be nationalized and most analysts expect that to make the situation far worse. The expectation is that access to power will begin to look like that in very poor nations as the infrastructure falls apart. To make matters worse there remains a reluctance to buy power from Brazil for nationalistic reasons. The summer was hot and power failure was common but next year could be far worse.

The Latest “Inside the Executive Suite”

The Executive Intelligence System is how we describe the various publications we produce. One of the most tactical is the IES. These are discussions of what takes place in the C-suite and can cover everything from management techniques to marketing insights and tips on travel. Take a look at the website to get a look at this next week. www.armada-intel.com 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 the companion publication to the Business Intelligence Brief. It 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 Matters to Road Warriors

It is best not to express one’s woes too publicly if one does not want to be humbled. A few weeks ago as I sat in yet another airport lounge I sighed and expressed my fatigue. The guy next to me made the appropriate comment – “long day huh?” I proceeded to lament my fate and talked of my travel schedule, confident that it would impress him due to its arduous nature. He responded with sympathy and then pointed out that he has been traveling three weeks out of every month for the past 25 years. His route is generally Boston to Miami to Dallas to Seattle and home to Chicago – three weeks out of every four. I felt like a wimp. As we talked it became obvious that three things stand out as key to the road warrior’s survival given the vagaries of travel.

The first is an airport that works. This means one that has power for laptops. It astonished both of us that one can still find airports with three plugs for the entire terminal. He favors Southwest for the same reasons that I do and one of them is the existence of the comfy chairs with the plugs. The second key survival issue is a hotel with a place to work. All too many hotels seem to forget that most of their guests are somewhat reluctant and are only there on business. The desk and the desk chair are much more important than the softness of the pillow.

Finally there is the big one – friendly and sympathetic people at the airline, airport and hotel. We both agreed that these were rare but treasured when found. Business travel is stressful. There is no relaxing vacation at the end of the journey. There are just all the usual demands from the office at the same time that one is facing delays and endless little hassles. The person behind the counter who seems to remember this becomes an instant friend. We all want a little consideration and attention. One of the things that struck both of us is that we find that friendliness in smaller, cheaper hotels more often than in the biggest ones. They often have the better desk chairs as well.

There is now talk of a developing bubble in the farm sector. The last couple of years have been good for the farm community in many ways and there has been a surge in almost every area of pricing. The limited crop output in some of the world’s other major growing areas has focused more attention on the farms in the US and thus far the weather has been generally more cooperative. That means that farmers will be enjoying some record prices for their output at the same time that there is expected to be some near record harvests. The very warm winter in the US has served to expand the growing season to the point that some are anticipating a three crop year. This surge in pricing for staples like corn, wheat, soybeans and the rest has provoked a corresponding increase in other farm related prices.

The cost of farmland has soared to exceedingly high levels in many parts of the country as speculation has come to the agricultural sector. There has been a marked demand increase for just about everything that connects to farming. The suppliers of farm machinery are struggling to keep up with demand and the food processing sector is likewise undergoing a resurgence although this has been spottier due to the still limited spending by consumers.

Does all this constitute a boom that will inevitably lead to bust? Not necessarily although talk of a farm sector bubble is not idle conjecture. The fact that investors have turned to farmland as a means to gain profits is perhaps the biggest concern as this makes farming all the more expensive. The actual farmer is finding it harder to expand operations at the same time that it gets more tempting to sell the valuable land they already own. This has always been a choice that farmers have to make but in the past the decision was whether to keep farming that land or give it up for development. Now the land is being bought by investors who want it to stay in production.

The jump in the price of land has been impressive over the last couple of years. Overall values went up by 19% in the first quarter but the hikes were even more dramatic when one looks at just the irrigated farmlands that have been more or less immune to the droughts of the last few years. Here the hike was over 30%. The impact on the farmer looking to expand has been somewhat limited by the low interest rates but when these start to go up the price of expansion will be prohibitive.

Analysis: The consensus is that farmers are in better overall shape than they were in the 1980s when there was a similar bubble and one that burst. Most farmers are in better shape as far as debt is concerned but that only protects for so long. The optimism that now rests on expanded global demand, good crop weather and the reduction in output from competitors will not last forever and the analysts are watching closely just how leveraged the farmer has become as they respond to these opportunities. There is no guarantee of a spectacular bubble burst as in the 80s but nobody expects current conditions to stay as they are.

A Greek Tragedy in Four Potential Acts

The failure of the Greek political actors to form a working government after four tries has the world considering the next steps and none of them are pretty. When the euro was created there were those who asserted that deep seated issues would one day surface and those critics urged the creators to address these problems early – before there were really no good options left. That opportunity was missed and now the options remaining are very limited. The Greeks are now headed for another election and polls suggest that the population plans to throw even more support behind the Syriza leftists and their message of defiance.

The rest of Europe is split between astonishment at the Greek attitude and admiration for what appears to be an act of self-destruction based on principle. The bottom line is simple enough. Greece fashioned a system of social support that it could not afford. The governments for years simply bought off the population with ever more generous programs while neglecting the revenue side of the equation. Greeks fail to pay taxes and yet the spending continued to increase. All of this was made possible by the Greek willingness to go into debt on a massive scale and the willingness on the part of European banks and governments to allow that debt to accumulate. The inevitable occurred and now the Greeks are essentially broke and without options as far as borrowing is concerned. The lenders are making stringent demands before more money is thrown at the Greeks and these demands will wrench Greek society into a whole new pattern – one that the population is furious about. To the surprise of nobody, the vast majority of people do not much like austerity.

Analysis: The reality of the Greek situation has not sunk in as far as the Greek population is concerned. This is not all that shocking but what is distressing is that there are political leaders who share this ignorance. The Syriza position is that all Greece has to do is refuse the austerity plan and the Europeans will balk as they will do anything to keep Greece in the Eurozone. This seems a ludicrous position but it is rooted in historical realities. This is exactly the stance that Greece took for years during the Cold War. They defied nearly every European demand made on them by simply threatening to bolt to the other side. After all, Greece as a post-World War II battleground state that nearly joined the other Balkan states in becoming part of the Soviet orbit. For decades the Papandreou dynasty worked this strategy. Greece did not really qualify for membership in the Eurozone but the powers that be looked the other way every time it was suggested that refusal would tilt Greece towards the USSR. That was the tool Greece used to bolster its financially inept system and that is essentially what Syriza is trying to do now. The only problem is that the USSR is no more and the Europeans are not all sure they even want Greece in the European Union – much less the Eurozone. The bluff is very likely to be called and the Greeks will be left with no position to play from.

There are at least four scenarios that are under discussion as regards Greece these days. The most likely at this stage is that Greece is booted from the Eurozone or saves faces by withdrawing on its own. This is the position that Syriza is taking in public and the average Greek thinks this is the way to go. The impact on Greece would be devastating but not right away. For a short period of time the government would survive by simply not paying its bills but sooner than later that backfires and the Greeks are cut off. Soon after that the country is unable to pay wages and benefits and the entire system falls apart. It is nearly certain that social unrest will accelerate into full scale riots and perhaps even a civil war. Banks will fail en masse and there will be rampant insolvency. There will be bank runs and a raging panic within the population as they grasp that nothing is holding up the system. The implications are incredibly severe and could end with utter civil destruction sufficient to galvanize a military takeover. In many ways this scenario is the end of Greece.

The next most likely is that Syriza tries a power play. They assert that Greece is too important for the Europeans to allow what happens in the first scenario and therefore they will come to aid the Greeks despite the fact that austerity will be off the table. This is the scenario that the Syriza leadership prefers and seems to believe is possible. It means that they will be seen as the heroic leaders that backed down the evil Europeans but the problem is that the nations that need to underwrite the Greeks in this scenario are making it as clear as they can that Greece is far from important enough to reverse their position. The Germans have gone from being frustrated to angry and resentful. If the Syriza leaders are trying this power play so they win the support of voters they should take a long look at what the voters of Germany are saying. The latest polls hold that almost 73% of Germans want Greece kicked out and nearly 100% of those voters indicate they would remove any German politician from power if they back a bailout for Greece without the austerity demands.

The third option is to renegotiate with the Europeans that have been backing the original bailout but this is coming from a position of no leverage. The only way this plays out is a surprise win at the next elections for the parties that started the austerity talks to begin with. They would approach the Europeans and point out that they are hanging on by a thread and need some room to maneuver. The lenders have thus far made it clear that they have gone as far as they possibly can and already made all the concessions they possibly can. The fact of the matter is that Greeks have not even experienced the bulk of the plan and rebelling against what they think is coming. This scenario depends on Syriza coming to the table willing to implement the bulk of the austerity plan and that is not very likely at this stage.

Finally there is the scenario given the least credence although it is the one that most agree should be the Greek choice. The country accepts that the profligacy of the past fifty years has placed Greece in this position and that it is now time to pay the price. This means that the parties step up to the task and basically tell the Greeks that there are no options left and that the focus now has to be on living within the means available and fixing the endemic problems in the country. This would be the first step towards a sustainable Greece but it will not happen. The preference seems to be some mad act of financial self-immolation that condemns the country to life as an isolated third world state clinging to the edge of a Europe that seems more than willing to be done with the Greeks.

Chances for Further Fed Stimulus

Is inaction as political as action? This is the dilemma that faces the Federal Reserve in an election year. The Fed is famously allergic to beikng politicized by the politics of the moment and that generally means that no big decisions are made about interest rates or other programs during such a year. The Fed does not want to be seen as playing favorites in the campaign but what happens if the Fed’s refusal to act is construed as being politically motivated. Right now there is growing support for something to get the economy out of its sluggish pattern and that has people talking about another round of quantitative easing. The logic is that inflation is still low and there is no chance of fiscal stimulus from Congress so the Fed is back to being the only game in town. The Fed could make a case for QE III but will not during the campaign as such a declaration would be controversial in the extreme. Is that a politically motivated move in itself?

Analysis: There are also many good reasons for the Fed to steer clear of the stimulus as there are serious questions as to how effective it would be right now. The Fed is still left with “pushing a string” when it comes to getting a response from the economy and few think that a QE III would do much other than make addressing inflation threats down the road that much harder. The Fed may have distorted the long term bond market too much already and there are plenty of critics who think the Fed should show restraint.

Russia Defies Expectations

There are not all that many bright spots in Europe these days – Germany thus far being the prime exception. The latest data from Russia has been a shock to most analysts as there had been a sense that this commodity dependent nation would be adversely affected by the problems in their key markets. This is still likely to be a big factor in the months ahead but for now the Russian economy is responding to an unexpected surge in consumer spending sufficient to produce nearly 5% growth in the first quarter (year over year). The 4.9% increase in the first quarter comes on top of a 4.3% increase in GDP last year. The motivation for the growth is still considered pretty fragile however and that could mean a pretty steep decline in the coming months.

The surge in the consumer spending category appears to be motivated by good old-fashioned electioneering, a time honored tradition in nations everywhere. In the months running up to the elections the government started pumping all kinds of cash into the economy in order to get the voter feeling better about their leaders. The votes certainly went the way that Vladimir Putin preferred and the Russians that received some of that largesse did what they were supposed to do – they spent it. The surge in activity will have its downside sooner or later as the government really could not afford that kind of outlay in the wake of all the negative economic news that has continued to pile up.

At the end of the day the Russian economy remains dependent on commodity prices. There is no manufacturing oriented towards the export market and there is little contribution from services in general. The surge in consumer spending did less for the economy than one might assume as a considerable portion of that outlay went to purchasing imports. The higher prices for oil earlier in the year provided Russia with a bit of a windfall but the impact has faded as the price of oil continues to fall. The Russians are also depending on a healthy demand for metals and their steel output and in both cases the lack of demand has affected pricing. The farm sector was in a shambles last year due to the drought and fires. There is little expectation of a major rebound this year and that will mean that Russia will be buying more food than is traditionally the case.

There have been some other moves by the government that affected the first quarter performance. The election pressure was sufficient to convince the powers that be that there should be no actions taken that would cause the population further distress so the decisions to raise the costs of utilities were delayed. These hikes will now be coming throughout the rest of the year and that will spark some serious inflation before too long. Nothing takes the wind out of the sails of the consumer like paying higher prices for utilities. The surge of spending has done about all it can do and Russia will be facing more normal conditions before too long.

Analysis: Russia is still suffering from a host of economic issues that will become more serious as the year goes on. The rate of capital flight is still far too high for comfort as investors have lost faith in the stock market. There has been a loss of over 20% thus far this year and that has definitely taken the bloom off the rose of Russian investment. The goals of the Putin regime have never seemed quite so distant as there was an intent to make Russia one of the top five economies in the world by 2015. That seems a far-fetched scenario as long as the nation is nearly entirely dependent on the price of volatile commodities. The effort to expand manufacturing past local demand has largely been unsuccessful.

Long Delayed Trade Agreement Starts

The trade agreement between the US and Colombia has finally gone into effect after a several year long delay caused by everything from trade issues to politics. The Colombians and the US do a considerable amount of business between one another but the welter of tariffs and restrictions have always limited that expansion. The US exported about $14 billion to the fourth largest economy in Latin America and the pact is expected to add another two to three billion to that total – mostly in the form of consumer goods. The first shipment to Colombia under the new rules included a Harley Davidson motorcycle from the Kansas City plant – without the 15% tariff that was once applied. Colombia sold about $23 billion in farm goods and other commodities to the US last year and that is also expected to rise by around $3 billion in the first year.

Analysis: Beyond the economics of the deal there is the political dimension as this will serve to cement some of the relationships between the two allies. Colombia has been one of the few stalwarts as far as the US is concerned and that made the delays in the deal more vexing for both sides. The fear had been that opposition from unions and some human rights groups would derail the plan and the US would end up alienating a nation that has been the US bulwark against the likes of Venezuela, Ecuador and Bolivia for the past few years. This seems to be less likely now that the nation led by a graduate of the University of Kansas just bought a Kansas made Harley.

Geopolitics

The Europeans have changed their rules of engagement when it comes to the pirates in Somalia. They can now attack their land bases and this strategy has begun. The expectation is that more such assaults will take place in the months ahead and that could well shift the advantage away from the pirates. Take a look at the website to get a look at this next week. www.armada-intel.com 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 the companion publication to the Business Intelligence Brief. It 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.

Get a Grip

Yesterday was one of those travel nightmares that come along every so often and this one had the added entertainment value of a knock-down fight between passengers. The first sign of trouble was the verbal sparring between some denizens of rural North Carolina and a couple of men whose sexual orientation apparently distressed them. That was unpleasant but the hope was that they would not be sitting close to one another. Once on the plane there was an announcement that there was not enough air to start the engines (who knew?). We pulled back to the gate to get more air and that was when the plane was filled with fumes from the engines. The smell was the same as one gets when one is not paying attention at the gas pump and dumps fuel on one’s shoe. The problem is that the excitable flight attendant decided to emphasize that these fumes were toxic. That is, they are if one is locked in a small space for an extended period of time. Given that the plane’s doors were wide open this was not an issue but the use of the word caused a near panic as people were screaming to get out. We were already evacuating at the time so I am not sure what these hysterics expected to happen. A giant can opener to peel the top off the plane? That was just the beginning.

The less than polite conversation that had started when the flight was boarding escalated as two of the women were screaming for their lives and wailing that they had been poisoned and would never bear children again (I am not making this up). One of the gentlemen who had been the object of their derision pointed out that this would not be such a bad thing and that prompted one of the women to take a swing at him with her purse. She missed and leveled a guy that was simply talking on his phone. His wife responded with a left hook to the purse swinger that brought her to her knees and then her son decided to avenge the insult and tried to punch another woman who had nothing to do with any of this. At this point a security guard finally arrived and ensured that their delay would be far longer than our five hours. Ain’t flying fun?

The thing about economists is that we are called upon to do what we have a fairly miserable track record for. Somewhat like the meteorologist in the middle of an event changing weather pattern – only without the cool weather maps. The old joke is that economists are expert in predicting the past but the fact is that data is always from what has happened and then we are left to extrapolate based on what people and businesses have done in similar situations before. Prediction is a risk and the basic decision is whether one decides to risk on the pessimistic side or the optimistic side. Most choose to err on the more pessimistic as they tends to upset people less when the accuracy is somewhat less than ideal. Nobody is likely to complain if things are too good but they sure will if things are far worse than expected.

The latest survey of economists from the Wall Street Journal indicates that most have the same basic forecast – slow and steady growth through the rest of the year but fully 70% of them believe that they are taking a more pessimistic approach when it comes to risk factors – in other words most think that the economy is more likely to do better than they expect. This a little convoluted as far as logic is concerned but it is based on what they think has been happening thus far this year. GDP is likely to be between 2.4% and 2.9% – falling just short of reaching the 3% that would have people believing that a recovery was around the corner. The US GDP average has been around 2.5% for the last couple of decades so this assessment is a normal but before there is much progress on the big political issues there will need to be growth much closer to the 3% level. This rate of growth will yield job expansion of around 185,000 per month but that falls short as well. To deal with the number of unemployed in the system there needs to be growth at close to 300,000 per month and nobody sees that coming for a while. The best the economy is likely to do is a jobless rate just south of 8% but much of that depends perversely on continued perceptions of a down economy. If there is an uptick in overall confidence the current collection of discouraged workers will return to the fold and that will cause the rate to spike – even though nothing has really changed in terms of who is working and who isn’t.

Analysis: The majority of those polled believe that there is more opportunity for good news than for bad in the coming months but there is no guarantee. There are always the unexpected shocks that take the economy back into semi-hibernation. There are two points that make the economists optimistic and two that make them pessimistic. The two upbeat assessments come from the stronger than expected manufacturing numbers thus far this year and the better than expected levels of consumer confidence. These could combine to provide additional stimulation and a better level of growth. The two worrisome issues involve a bigger collapse in Europe than anticipated and a crisis that drives oil prices higher again. These factors would alter growth expectations and consumer confidence in a negative way and that takes the expectation of growth back to below 2%.

Solving the Crisis of Long Term Unemployment

The issue of unemployment is always a concern for an economy – people out of work are wasted assets after all. Beyond the personal toll taken on the people who are not part of the formal workforce there are many economic issues that range from a lack of national productivity, increased burdens on government as they cope with helping those out of work and the establishment of an informal economy that can weaken the ability of the system to manage its own economic future. This is all apart from the social and psychological damage that is imposed on the people out of work. It has been noted that the person out of work for more than year is far more likely to have health problems, mental challenges and there is even a higher rate of suicide. Every nation has always had a percentage of people in that category but the US is now facing levels it has not seen since the 1980s or the 1930s and there is reason to believe it will be harder to reduce the number of long term unemployed than in the past. When the economy faltered in the past the jobs were lost but when the economic conditions improved the jobs started to come back. Thus far this has been an essentially jobless recovery and that is an extension of a trend that started some twenty years ago. This is not an economically driven loss of jobs – at least not in its entirety. There is a strong element of structural unemployment involved as well and that creates a truly complex crisis. The solutions to an economically driven period of unemployment are simple enough – grow the economy. Structural unemployment is far harder to address.

 Analysis:  Before the recession hit there was a relatively small percentage of the working population in the long term unemployed category – around 0.8%. That is close to or below the long term average and for the most part included people who were either unemployable or were in situations that allowed them to be very selective about returning to the workforce. There has long been a number of people who choose to stay out of the workforce in order to raise families, take care of elderly parents or just pursue additional skills before making the leap back in. These voluntarily long term unemployed have not been a major concern as the perception is that they could come back to the fold at any time. Today the numbers are far more intimidating. The estimate is that long term unemployed make up around 8% of those out of work. This is a rough number as there is no real way to count the number of discouraged workers that have given up the search in frustration. The number could be even bigger if one looks at those who are employed part time when they are really interested in full time positions. Precise numbers aside the fact is that many millions of people are struggling to find a foothold in the modern economy and unless there is a concentrated effort to deal with this issue there will be chronic social problems for years. The solutions are not easy but neither are they untried – at least in other nations. It is time for the US to look closely at techniques that have been used in the past as well as solutions that have been relatively untried in the US but have worked well elsewhere.

The analysts break the problem down into four major issues. The first is that people out of work for an extended period of time are without the competitive skills they need – at least in the regions where they currently live. The second is that there is far more reluctance on the part of business to hire than in the past. The third issue is that the businesses that do the most hiring are also the ones that struggle the most with regulation and other inhibitions. Finally there is the current system of handling job losses – it tends to reinforce the decision to let people go in a time of economic struggle.

The first of these is the skill mismatch and much has been written about this from all directions. There will never be a time when every person has the right skill match-up for every job – things change far too fast for this. The best that can be done is to combine efforts to keep people current. The responsibility has to be shared across a wide variety of people and institutions. The individual has to be willing to change and take responsibility for keeping current but the educational system has to pay attention to what employers want from one year to the next. The training programs that get established often fall behind as quickly as they start and fail to keep pace. Business has to get more engaged in its own formal training but that is often expensive and leaves the ones that train vulnerable to the ones that don’t as they simply poach the workers that the first group produced.

The second issue is as critical. Business has to be willing to hire those with the right skills and many have shown far more reluctance than would be expected at this point in the recovery. Most are still working their existing staffs harder and some are investing in technology and automation while still others are using an out-sourcing strategy. Most of the reluctance seems to be related to fears that the economy is not yet ready to take off but there are some additional concerns and that is where the third problem comes from.

Regulation costs small companies far more than it costs the larger ones. There are fewer resources that can be applied to the task in a small enterprise and this inhibits the growth in employment that would otherwise be taking place. The fact that many smaller companies limit their workforce numbers to less than 50 is because they can’t afford the regulations that come along with the additional employees. At some point this restriction will have to be examined and perhaps the definition of small business will have to change to be one that employs 100 or 200 people.

Finally there is the fact that the US system is something of an all or nothing proposition. Either you have a job or you don’t. The Germans have long used a system that allows people to stay in their jobs and to job share. The company moves them to part time status so they can ride out the financial crisis and the government makes up the wages lost. The company keeps their employees, the workers keep their jobs and their income and the government pays out less than it would in unemployment cost. Thus far there are some 23 states that have a version of this program in place but it needs to be more widespread and federal in nature.

Can a Nation Survive without Manufacturing?

Much has been made of the fact that manufacturing has been the only thing holding the US economy together for the last couple of years. This has come as something of a shock to those that had declared manufacturing dead in the US years ago. It seems that the US continues to make things but the world of the manufacturer is far different than it was only a decade or so ago. There are 6 million former manufacturing workers in the US at the same time that most companies are struggling to find the workers they need. How important is having a solid manufacturing core? Consider the fact that every one of the top twenty economies count manufacturing as at least a third of their overall GDP and those that are at the top of the list count manufacturing as over 50% of their GDP. Another way of looking at the role of manufacturing is to consider the number of jobs involved – directly and indirectly. If one takes the manufacture of a car and considers all that follows one gets 27 jobs that depend on each workers actually making the car. This includes the people that market it, sell it, service it, finance it, insure it, wash it, and fill it with gas and so on.

Analysis: The crisis in Europe has brought home the importance of the manufacturer as well. The weakest of these economies – Greece – has no manufacturing to speak of and thus has nothing with which to dig its way out of its financial hole. The strongest of these countries has been Germany, with one of the most robust manufacturing sectors in the world. Financial health means the ability to export and to export one has to make something to sell.

Germans Barrel Onward

These are interesting times for the Germans. This has always been the dominant economy in the region but never has this been as true as it is now and that has an impact on politics as much as economics. If the Eurozone manages to escape recession it will be because Germany grew at 0.5% in the first quarter as opposed to the decline that many had predicted. The last quarter of 2011 saw the German economy stumble with a 0.2% decline in growth. This created a great deal of concern within the ranks of the Europeans and led to the overall decline of the entire Eurozone. That quarter started the process of declaring all of the Eurozone in full scale recession as defined by two consecutive quarters of negative growth. The German expansion of 0.5% allowed the region to escape that fate and now the discussion shifts to whether the Germans will get any help in the rest of the year.

The growth of the German economy is instructive. It is based on two factors that the other nations in Europe would like to emulate but will struggle with. The first is that Germans have become very aggressive exporters outside the region that used to be their prime destination. They now sell the bulk of their export output to the emerging markets and to the US as opposed to the other European states. The expansion of trade with China, Korea, Japan and India has been impressive but so has their trade with Latin America. The US remains a solid market and all of this has allowed the Germans to avoid the slump that has affected their European counterparts as they had become far too dependent on selling to one another. The other key factor is that Germany sells to itself. The consumer in Germany has not fallen off the map as have those in the more financially stressed nations. It has been something of a virtuous circle in that better consumer demand has helped keep employment numbers up and low jobless totals have allowed consumer spending levels to remain robust. The other states in Europe are mired in a very awkward situation. High rates of unemployment depress consumers and that restricts spending, thus worsening the employment situation.

The most interesting conversation now is how all this will affect the German influence in Europe as a whole. Now that the French and Greeks have rejected the austerity message articulated by the Germans there is conversation over whether the Germans will back off and reduce their insistence on these reforms and adjustments. Given the performance of the German economy it is unlikely there will be retreat as the Germans have their own success to point to. Granted, there is far more to the German situation than an austere approach to budgeting but there are few who would assert that fiscal prudence has not played a role.

Analysis: Most importantly the Germans remain the only nation in Europe with the leverage of a successful economy. The Greek government can scream all it wants about the burdens of austerity but the fact remains that Greece has no cards left to play. The Germans have made it clear that no new deal will be brought forward so if the Greeks want German bailout money and support they will need to engage in the austerity efforts that the voters find so thoroughly distasteful. The French are not asking for German help and never will but they face a reduction in their influence over the coming years. The struggles in France will essentially take them out of the financial leadership of the region and that leaves the arena to the Germans. In the weeks to come the Germans will reiterate the message that has come from them over the last year. There is no alternative but to clean up the fiscal mess these nations have created for themselves over the past few decades. Without fiscal reform there will be no more assistance from Germany.

Dutch Austerity Plan on Brink of Collapse

The latest battleground over the austerity issue is in Holland and this is proving to be as disruptive as any issue that has ever faced the Dutch. The opposition from voters has utterly confused the political system as there is no clear left-right division over what to do with the austerity plan. To the degree that there is any support for the effort it is coming from the more educated with Holland. The plain fact is that they know that there are no real options unless the Dutch want to go the way of the Greeks and Spaniards. These are generally the voters that shade towards the left and the center-left. The opposition to the austerity moves come from the ranks of the less educated and the rural voters as these are the ones that will likely see the most aggressive cuts in programs they depend on. These are the voters who generally shade to the right due to their positions on social issues like immigration.

Analysis: The coalitions are fracturing at the seams as there are anti-austerity politicians coming from both the right and left at the same time that there are those who understand the need from both directions. The left parties are attacking one another with more vigor than they are attacking the right and the right parties are in a vicious competition as well. There is essentially a pro and anti-austerity coalition forming and that creates some very strange bedfellows indeed. The usual alignments have failed to coalesce and now the only question is what takes their place. It is now likely that an anti-austerity group will take control and that will leave the Dutch in a very uncomfortable position given what they have been demanding of other for the last two years.

Learning Lessons

The US is starting to try to see what can be gleaned from the experience of others and Germany has emerged as the model of choice on jobs and health care. Take a look at the website to get a look at this next week.  www.armada-intel.com  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 the companion publication to the Business Intelligence Brief. It 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.

Understanding the Lure of the Tropics

This first trip to the exotic 50th state was pretty short – three days is not a lot of time to grasp the lure of Hawaii but it is enough to tantalize. The pace is certainly slower and the priorities are largely oriented to the rhythm of the ocean. The environment is about as lush as it can get and the temperatures are sublime. There are other aspects of the place that strike one. The first is that this is quite the diverse community as it has become a real melting pot of Asian and American culture. Right now the strength of the yen and the weakness of the dollar has meant that Hawaii is the preferred playground of the Japanese tourist and one could be forgiven for thinking that one was in Tokyo at times. There are many nationalities present – both as visitors and residents.

The other striking aspect of the place is the separation from the US as a whole. The time difference is a big factor but mostly there is just a sense that everything is different in Hawaii and that makes the decisions taken in the rest of the US seem like those from some distant potentate. It is not an open opposition in most cases, just the indifference of a population that has a whole set of issues that are of no concern the mainland and vice versa.

I have not elected to jump from Kansas and start a surf shop just yet but there is much to recommend about the sense of community that seems to dominate within the ranks of those who reside there.

The US set records again this month when it comes to export activity. That would make four straight years of monthly export records. The US is clearly a major force in the world of global business and the vast majority of US companies now do a considerable amount of business in the rest of the world. Just a couple of facts to illustrate just how much has changed in the last decade. The number of companies that have an international credit function has increased by twentyfold since 1995 and the number of manufacturers with revenues under $1 billion that now sell in foreign markets has increased by a factor of four every year since the beginning of the last decade. Much of the reason for this surge in global activity is the weakness of the dollar. The pace of global expansion has been especially swift in the years since the start of the recession simply because the US company had become that much more competitive.

In addition to the currency advantage there is the changing nature of global business and the transformation that technology has brought. The smallest business can now have a global presence with a sophisticated web page. The communication breakthroughs have expedited business contact and the transportation companies have made global delivery of good nearly automatic. There is really nothing that stands between the US company and the global consumer these days and many companies have been taking full advantage.

These advantages work both ways of course and the US has also seen a flood of imports from around the world although mostly from China. Whether this is a good thing or bad depends on one’s perspective. To the US company that is forced to compete against product from a lower production cost nation, that import flood is threatening but to the consumer that is gaining access to less expensive goods from all over the world, these imports sustain their lifestyle. The US has been running a trade deficit for a long time as there has been an appetite for those imports for many years.

There is one other major input on the import side that has long had a big impact on the trade balance. The US imports a lot of the oil it consumes and even with the recession the US is still using about 18 million barrels of oil a day. It was not that long ago that the consumption was over 23 million bpd. In 2005 the US imported about 65% of all the oil it consumed and that number has been reduced to a little over 45% in 2011. The reduction in consumption and importation helps but when the price of that barrel of oil spikes to $120 or $125 the impact on the trade balance is considerable.

Analysis: There have been the usual alarmist headlines with the latest trade figures but it is good to keep all of this in perspective. If the US was not importing cheaper consumer goods from the likes of China or India or Latin America the average person in the US would be paying somewhere between $3,000 and $5,000  more each year for the goods they purchase. Then there is the fact that nations buy from the US with the money they make from selling to the US. Granted that particular equation doesn’t work all that well when one is speaking of China.

Mobility – Economic and Otherwise

The study on economic mobility has been making front page headlines for the last couple of days as this is one of those subjects that go the heart of the assumptions we make about society. Lately a lot of these assumptions appear to be under attack or at least revision. It was assumed that children would always collectively do better than their parents – that they would make more money and have more education. That is not going to be the case for the current generation. The recession has ensured that the college graduate of today will start at a disadvantage in wages that will likely never be made up. It was assumed that everybody wanted the “American Dream” of a house of their very own – complete with the obligatory 2.5 kids and a dog. Today the realities of the housing sector mean that many people are convinced that home ownership is not financially sound, they do not want kids and cats are now officially more popular than dogs. The world is changing and one of the changes may be the ability of people to improve their economic status. We have assumed that economic mobility was a given as long as one played by the rules. Get an education, work hard, keep that promotion in sight and be willing to move. This was the key. Now the data would suggest that it is no longer that easy. There are states where economic mobility is still relatively high and states where that mobility is quite stunted. The states in the northeast are generally well positioned with Maryland, New York and New Jersey in the lead. Those where mobility is constrained include Oklahoma, Louisiana and South Carolina.

Analysis:  What exactly does mobility mean? There are several definitions in use and they tend to overlap. The concept of economic mobility is based on how easy it is to move steadily up the income ladder. The states that see the most consistent and rapid mobility are generally the ones with the largest and most diverse urban areas. The reason for the high rank of Maryland, New York and New Jersey is Washington and the city of New York. Other states that boast mobility include those that host Boston, Miami, Chicago, Los Angeles and Dallas. If one looks at just cities and ignores the states that surround them the impact of urban centers becomes all the more obvious and there is really no mystery to this. Where are the majority of the jobs? In cities and their surrounding suburbs. If one is in a larger city there are more opportunities and more places where one can seek a promotion. But it goes beyond just opportunity.

There are three factors that have generally been linked to advances in one’s career and all three are more common in the city. The first and most obvious is education. The connection between higher education and job opportunities remains solid despite the challenges facing the education system. The connection between academe and the business community certainly needs to be improved but this is still the accepted pipeline for getting started in the work world. The second factor is the ability to develop a mentor who will guide one’s progress in the corporate or business world and these are far more likely to be developed in the city. The challenge in finding a real mentor is that the person chosen must have the power, position and connections needed to serve as a real advisor but they also have to be secure enough to have a protégé that is eventually interested in having the job the mentor has. The mentor has to be secure in the knowledge that they also have options and can take their skill set elsewhere if the need arises. Finally there is the power of networking and ossified networks are not all that helpful. Once one has made connections with a specific group there is need to move ahead and forge more connections with other groups. In a large urban setting there are far more options for engagement and those groups that people join are likely to see far more turnover and therefore more opportunities to develop a wider network.

In the last few years there has been the development of the electronic network – Facebook, Linked-In and the like. These are tantalizing but for most they have not replaced the personal interaction of meetings and conferences. The majority of networking starts very informally as people meet one another and establish connections that may or may not prove useful later. Thus far the electronic version is more deliberate and people basically stay connected to people they already know.

There is also the element of geographic mobility. The startling discovery is that the US population is much more of a homebody than many expected. Fully two thirds of the US population lives in the state they were born in and if one looks just at the rural population that percentage is almost 90%. In Europe only about 60% of the population lives in the country they were born in and only about 40% live in the district or city of their birth. This has changed radically since the creation of the EU but considering that moving in the US does not involve a language adjustment it is astonishing that so few Americans have relocated. Other studies have underscored the tenacity of geography. Over 60% of Americans have married people from their home town and 45% have married people they have known since grade school. There is a connection between economic mobility and geographic mobility. Those who are willing to relocate are far more competitive in the sense of job advancement than those who do not move and those who are willing to relocate have children that are willing to relocate when they become adults. Parents who have never lived anywhere but their home community had parents who did not move and they have children who will be unlikely to move – even from those communities that are struggling to find jobs for the young. Those who do leave the original community generally move to the nearest city and that usually keeps them in the same state.

Does the ability to move underscore economic mobility? Not as such. Those people who already live in the urban surroundings that promote mobility can get all the opportunity and diversity they require in the city they grew up in. Those who are not in an urban setting and choose not to leave the community they are in will be less competitive in terms of upward mobility but that says nothing at all about the quality of life they pursue. The person living in their home town with their lifelong friends and family may not be rocketing up the income ladder but they may well be far more satisfied than those who have chosen the more mobile life.

Budget Surplus Not All That Impressive but Better than Anything Since 2008

There’s nothing like tax day to boost the budget of the country. April of this year marks the first time since 2008 that there has been a monthly budget surplus. This was primarily due to the fact that it is in April that millions of people who owe taxes decide to pay them. The haul this year was $318 billion while the government spent around $260 billion. This is a decent level of income but nothing approaching the over $500 billion that was collected in 2008. The headlines have been the most interesting part of this whole discussion. There have been several who scream the accomplishment as if it represents some kind of significant shift in the nation’s debt burden and other have asserted that this is not much more than manipulation of numbers to make the administration look good. Can one tell that there is an election this year? The reality is that this is somewhat significant but not some signal that there is real progress on the debt.

Analysis: It is no shock at all that revenues spiked a little in April, they always do. From this point on the government sees markedly reduced revenue numbers as there is considerably less tax paying. The important part of the news is that government spending decreased and that is something that should carry on through the rest of the year. The fact that there was enough reduction in spending to allow a fairly meager tax haul to make an impact is essentially a good thing and it can only be hoped that this pattern continues. It is highly unlikely that there will be a budget surplus any other month this year but if the spending levels start to consistently level off there may be some chipping away at that debt. Long term changes will require consistent increases in revenue along with the cuts and that will require either faster growth or higher taxes. Most are pulling for that growth part.

Cooler Heads Prevailing?

About twenty four hours ago it looked certain that Greece would be facing another election in the next four weeks. The failure of the top two political finishers to form a working government left only Pasok with an opportunity to pull a political rabbit out of the hat. This was seen as highly unlikely as Pasok had been battered by all sides for its role in the crisis. Those on the right blame the profligacy of the Papandreous for the mess in the first place and those on the left have seen Pasok as a sellout for agreeing to comply with the demands of the Europeans and especially the Germans. The sense was that another election was certain and judging by the polls, the next election would yield an even more divided electorate. The comments from the Germans and others in the European leadership indicated that there was no more patience left with the Greeks and there would be no desperate moves to bail them out or keep them in the Eurozone.

Suddenly there is a light on the horizon and it comes from a smaller leftist party that has decided to split from the larger left party that came in second in the polls. The position of Syriza has been angry and contentious from the beginning and it has become very obvious that the goals of the party have nothing to do with the immediate problem. The leadership of Syriza is maneuvering for the second election as they believe that they will be able to gain more seats and could become the largest party. They also appear to believe that Greece should be out of the Eurozone and perhaps the EU as a whole. This has caused some alarm in the camps of the other left leaning parties. If Syriza really does gain some more seats it will doubtless come at the expense of the other and smaller left parties and thus they have no interest in supporting that strategy. Furthermore there is deep fear that separation from Europe will mean that Greece will be left on its own and only the radical left believe that the country will be able to survive that.

The rumors that are firing all over Greece is that Syriza wants the country out of the western orbit and intends to hand the nation over to the Chinese or the Russians. It is a fear based on the assumption that the nation is going to need a deep pocketed patron if it chooses to force the Europeans out of that role. The Pasok leaders are seizing on the defection as proof that they remain the one true party of the left and the only ones that can walk the current tightrope. To survive, the Greeks need to keep the Europeans engaged but they also need to address the pain of the austerity plan so that the Greek population manages to calm down. The first order of business seems to be to find some way to bolster the nation’s reputation in the European capitals that matter.

Analysis: The hope now rests with an uncomfortable combination of Pasok, the Democratic Left and the New Democrats. That is a coalition of a somewhat center left party (Pasok), a hard left party (Democratic Left) and a center right party (New Democrats) all held together by nothing more than  a desire to keep Syriza out of the government and Greece in the Eurozone in one way or another.  The coalition may indeed succeed but that will only be the first and probably the easiest challenge. Germany is not at all happy with the actions in Greece and has expressed their disgust at the inability of the nation to get control of a budget that has been crippling the country for thirty years. There is no remnant of the attitude that existed even six or seven months ago when Germany expressed its desire to protect the sanctity of the euro at all costs. Now they seem to be willing and almost eager to kick the Greeks to the curb and move on. This seems to have sunk in with some of the Greek politicians and now they seem to understand that their bluff is going to be called. Stay tuned – the outcome of this latest development will be clear enough soon.

French Layoffs Expected to Surge

The campaign was close and the majority of the French business community had no desire to take actions that would sway the voters against the candidate they supported. The result was that many companies delayed their decisions to fire people until after the elections were complete. The expectation is that tens of thousands of workers will be dismissed in the coming weeks. There will be many who assert that this is motivated by some revenge factor against those who supported the Socialist candidate but the majority are acting in accordance with their expected financial position. Most had already made the decision to reduce their workforce and now see no reason to delay any longer and some are acting on the assumption that they will see deteriorating business conditions in the coming months. Whatever the reason the firings will come as a blow and rebuke to the new Hollande government.

Analysis: France is not looking at brutal levels of unemployment on a par with those in Spain and Italy but there is a very real fear that France will be looking at rates of joblessness not seen since the recession began and there is a further concern that these layoffs will be concentrated in the manufacturing sector. These job losses will also underscore the criticism from Mario Draghi and others. France and many other nations in Europe have lost their ability to compete in a global marketplace due in part to labor issues and the decline in productivity. The workers assert that this productivity loss has more to do with poor strategic decisions and a failure to invest than it has to do with how workers are treated and paid.

Look for New Reports Next Week

The travel schedule has taken its toll – look for the reports on China’s military and the performance of the mid-market companies next week. Take a look at the website to get a look at this next week.  www.armada-intel.com  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 the companion publication to the Business Intelligence Brief. It 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 Business Vagabond

This has been one of those weeks that makes one question the sanity of previous decisions. I have been bouncing all over the country and now sit in the Honolulu airport waiting to connect with my long suffering spouse. She gets in four hours later than I did and I am waiting at the baggage carousel. While here I struck up a conversation with another traveler also waiting for others to catch up and I can really no longer complain. He has been on the road for over a month – racing from one crisis to another and hasn’t managed to catch even one day at home since the beginning of April. He works for power companies that are facing some kind of breakdown and there is never a moment to lose. He related some stories of others that he has met with very similar schedules and stories. These are the real road warriors and it is astonishing just how much we depend on them. Nothing much will change if an economist stops flitting about but if the guy that keeps the lights on gives up this mad world of travel you will notice right away.

At some point this weekend I will be just another pasty tourist in Hawaii but he will be busy sorting out the latest crisis as he has to be in North Dakota by Monday. There is something cruel about shifting from Oahu to Minot in less than two days.

“Winter wheat production is forecast at 1.69 billion bushels, up 13 percent from 2011. The area expected to be harvested for grain or seed totals 35.6 million acres, up 10 percent from last year. Based on May 1 conditions, the United States yield is forecast at 47.6 bushels per acre, up 1.4 bushels from last year.

Hard Red Winter, at 1.03 billion bushels, is up 32 percent from 2011. Soft Red Winter, at 428 million bushels, is down 6 percent from last year. White Winter is down 9 percent from last year and now totals 233 million bushels. Of this total, 14.1 million bushels are Hard White and 219 million bushels are Soft White.”

The supply/demand report put out by the USDA is long and tough to weed through, to be honest. For those of you most interested in details surrounding the report, you can find it here: http://www.usda.gov/oce/commodity/wasde/latest.pdf. But the net/net on the report is that the global marketplace at least “overplanted” this year anticipating demand to be extremely strong and the Eurozone weakness followed by recent economic slowing in India and China has lowered total consumption figures.

Therefore, for companies like rail providers – the report is bullish and those companies should see strong volume demand in the second half of the year. For consumers – food prices should ultimately ease. For food producers, we’ll have to see how global prices hold and whether there is too much supply chasing too little demand later in the year. For farmers now on their second or third year of difficult conditions (either poor growing conditions or poor market conditions), financial strain could actually increase this year if they can’t get strong enough prices for their commodities. We still haven’t accounted for any significant disaster-related events hitting worldwide crop production – something that typically isn’t a part of the overall forecast.

• Oil inventories rose 3.7 million barrels (higher than the 2 million barrel build analysts had expected). This makes oil inventories their highest level since 1990.
• Gasoline inventories in contrast fell 2.6 million barrels to their lowest level since November. The EIA’s indirect measure of gasoline demand, meanwhile, rose 2%. This will add to potential pressure at the pump despite falling crude oil prices worldwide. Part of the issue with falling inventories of refined fuels is the maintenance disruptions and production delays at refineries around the country. TheUS may face a significant refinery capacity issue – which could keep prices inflated.
• Distillate inventories, including heating oil and diesel, dropped 3.3 million barrels last week, compared with an expected drop of just 100,000 barrels.

What to make of this? Two things come to mind regarding what we see in the data. First, there are concerns about the type of “demand destruction” that we see in the marketplace. Imagine what

JP Morgan announced that it lost $2 billion in the last quarter stemming from a significant loss on a hedging strategy “gone wrong”. What concerns deep Wall Street analysts the most is that this comes in a side of the bank that should have been among the most risk-averse segments of its operations. Regulators want to know why the bank was taking this large risk in a portion that was designed to be the counterbalance to its high risk taking divisions.

On a conference call on Thursday, Jamie Dimon blamed “errors, sloppiness and bad judgment” for the $2 billion loss, which stemmed from the hedging strategy that backfired. The mistakes “were self-inflicted

One of the developments of the past few weeks that has attracted a good deal of attention has been the fact that consumers are accessing their credit again. The reaction to the surge in debt has been mixed as the numbers are pretty impressive. This was the biggest gain since 2001 – a $21.4 billion increase and a $5.2 billion increase in revolving debt alone. For three years the consumer has been avoiding their plastic or at least they have been limiting their usage. Now that reluctance to take on more debt has seemingly vanished overnight and nobody seems quite sure what to make of this given that nothing has really changed as far as overall financial conditions. Unemployment is still higher than expected and the average hourly pay for people only increased by 0.5%. The economists may not count the hike in fuel and food pricing when they calculate inflation but the consumer does and the hike in gasoline alone was 8.8% before the prices started to ease a little.

The question on the table is whether this additional debt accumulation is a good thing or bad. Is the consumer deciding to break out of their funk or are they not making enough money to handle their expenses without accessing their credit cards. As in most such situations, there is a bit of both behaviors taking place but the evidence suggests that there are more reacting to the former motivation than the latter. There has been an increase in the use of credit cards at stores that sell gasoline and that would indicate that people need credit to purchase the more expensive fuel but there was also evidence that credit was being accessed to buy apparel, jewelry and consumer electronics.

Analysis: These motivations matter. As the consumer is stressed by higher prices and is forced to use credit, the economy will start to slow down at some point. People will be less and less likely to use that credit for discretionary purchasing and that will affect retail expectations for the 2012 holiday season. If the use of credit is voluntary there will be more anticipation of further credit use through the rest of the year. One month or two is not going to tell the story – it will take a while before the patterns settle.

The rest of the new debt load seems to be pushed by an increase in student loans as more people seek opportunities to gain employment through the accumulation of new skills. There have also been more car loans in the last few months than had been the case earlier and that is music to the ears of the auto sector. What has not been happening are expanded mortgage loans. Even as the rates keep falling there are fewer loans available as lenders remain cautious. There have been some additional loans for recreational vehicles and some for home improvement but nothing approaching the volumes of seven or eight years ago. There are also far fewer vacation loans and that has been an inhibition for that sector. The average American is planning a vacation this year but they will be using the money they have as opposed to taking out a loan for a big trip. The expectation is that credit cards will be humming on those trips however.

A New Look at the Housing Crisis

There is a tendency to look for culprits when things go astray. It is human nature. We see something fall apart and we assume that something or someone was to blame and we tend to make some snap judgments and assumption based on what seems logical to us. There is a rush to figure out what went wrong so the miscreants can be punished and steps can be immediately taken to ensure that nothing like this will ever happen again. There are few economic issues that have attracted more of this instant analysis than the housing sector meltdown in 2008-2009. The problem is that when the issues are examined later there are many assumptions that prove to be inaccurate and that makes the suggested remedies less than effective. Recently a study was released that pokes many holes in the assumptions made about the housing crisis. These economists are from the Federal Reserve Banks in Boston and Atlanta and their conclusions may create some significant controversy as they challenge many of the conclusions that had been reached and therefore question many of the solutions. They describe their effort as outlining twelve myths about the housing crisis – twelve conclusions and assumptions that have shaped the policies that have emerged from Congress, the Fed and other agencies. A few of these really stand out but they are all worth taking a look at. The authors are Christopher Foote, Kristopher Girardi and Paul Willen and the name of the paper is “Why Did So Many People Make so Many Bad Ex Post Bad Decisions: The Causes of the Foreclosure Crisis” and it is available from the Boston Federal Reserve Bank.

Analysis:  One of the first myths is that most of the homeowners that got in trouble were the ones who took out adjustable rate mortgages and that they got in that financial distress when the ARMs reset and their mortgage rates increased beyond their ability to pay. The fact is that 84% of those that went into foreclosure were paying the same mortgage rate they had when they took out the loan in the first place. There was nothing wrong with the ARM concept except that the loan was given primarily to non creditworthy borrowers and that is going to be a theme for the next few paragraphs. The ARM reset was not the reason that people got in trouble – they were in trouble from day one with the original mortgage payment they agreed to. In other words they couldn’t afford the house they were in from day one.

Another assumption to note is that there was something new and untested about the mortgage products in use in the last decade. In fact there was nothing new in the last twenty years, all of these techniques had been around for twenty or thirty years and had been working out just fine. The sudden increase in their usage was unusual but there was nothing in the track record that would have caused alarm. The reduced documentation loan had been around since the 1980s but it was mostly used by lenders who knew the borrower very well and really didn’t need all that paperwork. The trouble came when this became known as the “liar’s loan” because lenders were offering this system to people they really didn’t know very well.

There has been an assertion that all of this mess stems from the decision by the government to force more banks to provide low income people access to home ownership. It has been suggested that it was this rush to get low down payment loans to the low income population that sunk the likes of Fannie Mae and Freddie Mac. In fact there was nothing new about the program itself as these low down payment loans backed by a government agency of some kind had been around since the end of the Second World War. The usage of these programs sharply increased in the 1990s and beyond because there was more encouragement from the government to be sure but there was also a desire on the part of lenders to get in on this expanded action. The government has always tried to boost home ownership and in the 1940s and 1950s it worked like a charm.

The fact that banks and other lenders made loans and then packaged these mortgages to sell to other institutions is also something that has been around for years. This was a tactic that goes back to the 1970s when the secondary mortgage markets develop and in the previous decades the bulk of the loans were sold to insurance companies. The same can be said of the “exotic” instruments like the mortgage backed security or the credit default swap. These have also been around for decades and the only thing that changed is that more banks used them and more investors were interested in them. It was not that these instruments were untested and exotic – it was that the volume changed and there was a willingness to use more for collateral than had been allowed in the past.

It has been assumed that the exotic stuff was just confusing the poor investor and they were therefore making poor decisions on the basis of bad information. It turns out that there was plenty of information and that investors had access to it with no problem. There is evidence that many investors simply looked at the triple A ratings that these securities received and that was the end of their research. It was also assumed that the ratings agencies were up to no good and gave false ratings but the study reveals that these securities passed all the usual tests and that ratings were consistent with the evaluations that had been made for years. There was plenty of warning for anyone who cared to look but the most fundamental questions were rarely asked. It was further asserted that investors were not told of the risks of the security but the study showed that the vast majority of the bonds sold contained very detailed and prominent warnings about what would happen to the investment if there was a collapse in the price of housing and most of the discussions asserted that such a collapse was a very real possibility. Granted, these reports also emphasized that housing prices could also keep rising and that the investment would be very lucrative if they did.

What went wrong then? Pretty simple really. People talked themselves into believing that their decisions were wise. The home buyers looking at a house that was out of their league convinced themselves they could pay that mortgage. The banker believed that the ARM would make sense and that the low down payment borrower would come through in the end. The investor believed that home prices would rise long enough for them to get their money. It simply came down to hubris, greed, over optimism, naïve assumptions and the blind faith of the average person. The study essentially showed that attributions of sinister intent are not founded. This was not some vast orchestrated conspiracy but the result of a very human tendency to see the good parts and ignore the bad ones.

Wholesale Inventories Dropping

For most of the last couple of quarters the growth of the economy has been supported by an expansion in inventory. The pattern of the last two to three years was to allow a reduction in that inventory to reflect the lack of demand and the anticipation of continued slack buying by consumer and business alike. The name of the game was lean. In the latter part of last year that approach shifted as there was expectation of an economic rebound. Inventory accumulation drove growth in the last quarter of 2011 and the first quarter of 2012 but now the pace of that growth has slowed considerably.

Analysis: The inventory to sales ratio is still a very lean 1.17. This is the number of months it would take to go through their current inventory. That is good news if there is a consumer surge at some point as there would need to be additional production to meet the demand of the consumer. The most significant drop as far as inventory s concerned took place in the petroleum sector where there was a decline of 5.9%. The expectation for inventory overall was that it would drop by 0.6% but it actually expanded just slightly – by 0.3% after a 0.9% gain in the previous month.

Slowdown Fears in China

The assumption is that China can decide to start growing again at any point. The sluggish behavior of the Chinese economy for the last few quarters has been attributed to deliberate policies pursued by a nation that is more concerned about the threat of inflation than any other economic issue. The rate of inflation had been creeping closer to 6% and had reached 11% when it came to food. These are rates that were deemed unacceptable and steps were taken to get control of these prices. The policies were both predictable and uniquely Chinese. There were several rate hikes by the Bank of China designed to pull some money out of the system and there were restrictions imposed on bank loans. There were some direct attempts to control prices as well – everything form prohibiting fuel prices hikes from the refineries to imposing price controls in the cities. The actions have had the desired impact as inflation has managed to recede a little. The question now is whether China is going to be able to reverse course and start growing again. The data released this week calls that into question. It may be that the soft landing that many had assumed was taking place in China has become a hard landing and one that will be much more difficult to reverse.

The growth of both exports and imports fell this month and to levels not seen in China in some time. Exports grew by just 4.9% and that contrasts with the 8.9% growth that notched in March. Imports grew by a very meager 0.3% as opposed to growth of 5.3% in March. This is an economy at almost a standstill and that is not good for the Chinese. The biggest concern is that job growth depends on a more robust economic pattern. China still needs to generate some 1.4 million jobs a month and that requires a more consistent rate of expansion in the export sector. The reduction in imports means that most of the Chinese manufacturers are slowing down and that soon has an impact on the nations that make their living shipping raw material and parts to the Chinese industrial community. Thus far the lack of Chinese demand has served to lower the prices of some of these commodities – steel in particular.

The analysts missed this trend for the most part as there had been an expectation that imports would rise by around 10%. The assumption was that the export sector would need some of these inputs and there was a sense that internal demand would be enough to drive some import activity as well. Instead there was a 2.1% decline in domestic demand coupled with a lack of export activity. This slowdown seems unrelated to the actions taken by the Chinese government and that means that China may not be able to do much to stimulate growth – even if it wanted to. The slower economy is not related to issues of bank lending and interest rates as much as it is to the generally sluggish nature of global demand.

Analysis: This is the situation that many analysts had anticipated a couple of years ago when it was apparent that no nation had been able to escape the impact of the economic slowdown. The pattern in most of the previous recessions was that there was a region of the world that managed to escape the ravages of the recession and they became the engines for global recovery. In the beginning it looked like the emerging markets were going to be the ones that escaped the worst of the recession but within a year of the collapse in the US and Europe these countries started to falter. It turns out that these nations were not able to grow their economies without the impetus gained from the developing states. The return to recession in Europe has had a negative impact on China, India, Brazil and all the others. The fact that the US has been very slow to recover its momentum has also been a significant factor. Since these nations are not able to grow without the engagement of the developed markets they lose their ability to drag the developed economies out of the mire. In the end the Chinese and the other nations still need the US to get its act together and they need Europe to pull out of its accelerating tailspin before these nations can resume their old growth patterns and that appears to be the case for the Chinese as well.

Bank of England Leaves Rates Alone

The decision to leave the interest rate at its current low of .05% was no real surprise to anyone. The BoE had been signaling its intent for days but most of the analysts agreed that a shift in rate policy would accomplish little at this point. There is more conversation about inflation but not enough to provoke a move on rates. There are some initial signs that the BoE is getting a little more concerned as they have pulled back on their bond purchases but there was no real desire to do more. By the same token there was no desire to push growth with anything drastic regardless of the financial situation. The BoE leadership continues to support the austerity plans put forward but they also point out that growth cannot be overlooked if there is to be a reduction in the debt and deficit.

Analysis: The BoE is working to ensure that the turmoil in Europe does not have a major impact on the pound. There has been some strengthening in relation to the euro’s fall but there are still few investors eager to load up on the pound.

The Mid-Market Look

The performance of the economy is never an easy subject to grasp. The behavior of the very largest companies will differ from that of the small and mid-sized companies. In the US it is the latter community that makes the real difference. In the Friday edition of the Executive Brief we take a look at the world of the mid-sized company. Take a look at the website to get a look at this next week.  www.armada-intel.com  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 the companion publication to the Business Intelligence Brief. It 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 an Adventure”

My first trip to the wilds of Alaska can hardly be said to be a definitive one. I have not been exposed to much of what makes this state what it is as I have been here to do my usual dog and pony show. But I listen to people and had the opportunity to spend some time with a former colleague who made the big move from the flatlands of Kansas to the great white north. There are several aspects of Alaska that strike even the most casual visitor. The first is that nature and its power is all around and obvious. Not that one doesn’t get the sense of natural events during tornado season in Kansas but my state is a pretty well tamed agricultural locale and there is a general sense of control. Not so in a state that has winters of the duration of those in Alaska. People are still talking about the record snows of this last winters and how they altered daily life. The mountains are very close and they impact the day in profound ways. The people here seem to ride these natural events with no real anticipation that they will ever be under control.

The second observation is the amazing diversity here. This is a city that has relatively few lifetime residents. The exception to that rule is the indigenous population and there is still an uneasy accommodation between the native Alaskans and the newer arrivals. In the couple of days I have been here I have heard conversations in fifteen different languages. This is still a place that draws those who are seeking to make a new life for themselves. There are lots more dreamers it would seem and it appears that business is as resourceful as the population has to be. Oil is the dominant industry and the one that transformed Anchorage but it is not the only game in town. The whole city follows the crews of the Deadliest Catch and the wilderness of Alaska is never more than a few miles away. It is a very relaxed place in many respects and appears to be a place that values its moments. The weather has been really fine since I have been here and the population is taking full advantage of these sunny days – especially given that they last until 10:00 at night.

Moscowleaked a story to the Associated Press on Thursday saying that Russian Secret Service forces had foiled a terrorist attack on Sochi, the home of the 2014 Olympic Winter Games. Russian Special Forces found caches of weapons and ammunition in Abkhazia. If Abkhazia sounds familiar, it should – it was the site of the 2008 Georgian war between Russia and Georgian forces, one that required President Bush to move

The Fiscal Cliff is a combination of events and conditions stemming from stimulus activity and austerity measures that collectively create what Nouriel Roubini (Doctor Death) called yesterday the financial “perfect storm”. The fear goes something like this:

• Assume every legislative action passed by Congress (or not passed by Congress) goes into effect in 2013 as planned – because Congress can’t head it off sooner and