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

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

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

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

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

Is Manufacturing Going to be the Spring Buzz Kill?

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

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

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

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

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

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

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

What the Heck is Up with Gas Prices These Days?

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

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

Brazil Emerging as Major Focus for the US

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

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

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

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

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

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

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

Japan Sees Some Results but Worry Remains

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

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

The Executive Intelligence Brief

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

What Really Motivates?

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

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

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

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

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

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

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

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

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

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

The Recession in the Eurozone Deepens

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

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

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

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

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

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

Scandal and Political Agendas

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

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

Bangladesh and the Textile Industry

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

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

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

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

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

Why All the Gas Price Fluctuation?

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

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

The Executive Intelligence Brief

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

Optimism

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

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

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

We’ve said to you many times that copper is one of the most interesting metals because it is a key component in anything with electronics. Copper leads on wiring and copper wiring itself are core components for every electronic device. And, today there are so many different products sold worldwide that have some degree of electronics in them. Therefore, when copper is going up, theoretically there

Compared to the currency situation in Europe or Japan or the United Kingdom the dollar is

The latest data shows that people are

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

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

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

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

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

Three Reasons for the Cautious Optimism of Economists

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

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

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

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

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

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

Why Have Workers Dropped Out?

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

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

Major Changes Ahead for the Oil World

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

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

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

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

Budget Cuts and Economic Growth

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

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

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

The Executive Intelligence Brief

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

Ignorance is a Real Problem

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

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

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

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

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

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

Five Reasons that the Newly Graduated will Find a Job

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

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

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

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

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

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

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

Dollar Expectations Rise

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

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

China Flexing its Muscles with North Korea

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

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

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

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

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

Iranian Election Will be Extremely Contentious

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

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

The Executive Intelligence Brief

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

Anything Worth Doing is Worth Doing to Excess

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

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