Tuesday, September 27, 2016

Strategic Global Intelligence Brief for September 27, 2016


Short Items of Interest—U.S. Economy

Which Vision?
There was a lot to differentiate the two candidates in the debate, but their take on the status of the U.S. economy is one that matters most to people. Is the U.S. a collapsed third world nation with a limited future, or is the state of the economy relatively good? In truth there are elements of truth in both positions. It all depends on where one lives and what one does for a living. The data suggests that the economy has been growing, but at a slower pace than would be preferred. There are surging sectors and those that are languishing, but that is always the way the U.S. economy has looked. This is a nation where every state has a GDP the size of a country and one that sports an $18 trillion GDP. One can find failure and grinding poverty and one can find success and growth—the question is which of these are dominating the future. The data thus far suggests more rather than less growth in the years ahead, but we all know how fast this can change.

Is the Fed “Doing Political Things”
This has been a consistent assertion by the Trump campaign. It is certainly not the first time the Fed has been accused of taking positions that favor a given president or regime. The Fed system has always frustrated political leaders—not just here, but in other nations where the central bank is independent. The powers that be would like to make monetary policy their own, but that is why the banks are made independent. Yellen and company have held rates low for nearly a decade. It is a very long stretch to assert that recent decisions are politically motivated. The same rationale for low rates exists today as existed at the start of the recession.

Foreign Exchange as Forecast
This is the point in the campaign when every little shift or shudder in the economy is used to try to predict outcomes. In the past, the behavior of foreign currencies has pointed to who will win a given contest as these investors are trying to determine what their positions should be. The basic reaction is generally that turmoil in the U.S. makes people want to seek safe havens elsewhere. This tends to mean a rising value for the yen. As the traders reacted to the debate, the sense was that no big changes are coming to the U.S. and the yen didn’t surge. This seems to suggest the foreign currency traders are expecting Clinton to win and for there to be continuity.

Short Items of Interest—Global Economy

Not Much Expected from Oil Meeting
If the markets are any indication, the meeting of the OPEC oil states will not accomplish much. The per barrel prices are falling again as there are few analysts who think the assembled ministers will be able to agree on any sort of oil production limit. The glut that has affected the oil market has been persistent and only two developments will alter the situation. There either has to be a big hike in demand or a cut in available output. The latter was always the chosen means to manage oil prices. However, there are too many states not engaged with OPEC and they have no plans to reduce their market share.

Saudi Arabia Tightens Belt
For the first time in decades, the public sector in Saudi Arabia is shrinking as the country struggles with declining oil revenues. The public sector is bloated with patronage jobs and sinecures. Now that system is in jeopardy as the country lacks the revenue it once had to support this system.

Peace in Colombia?
The deal made between the president of Colombia and the leaders of FARC is going to go ahead after winning approval from the population. There are many steps yet to be taken, but the opportunity is at hand to end a decades-long war. The big test will come as elements of FARC choose to ignore their leaders and decide to fight on. There is a substantial part of FARC that is heavily involved in the drug trade. They are quite unwilling to lay down their arms.

Debate Economics
To begin with, the debates between the two candidates are not really about substantive policies—these are designed to see the two contenders in a pressure-filled environment and to get a sense of their personality in a format that favors one-liners more than nuanced discussion. This is also the point in the campaign that voters start to get more serious and engaged. Generally, that means that economic issues come to the forefront. Much of the debate was atmospherics, but by now both have outlined some of their policy positions.

Analysis: Few economic issues matter as much as jobs and the two have fairly divergent policies in this regard. Most of the Trump plan rests on three moves that would result in economic stimulus with enough growth to support jobs. There would be big tax cuts aimed at the wealthier population and business with the assumption these cuts would boost investment and business growth. At the same time, there would be an effort to reduce and limit regulation with an eye to getting more business expansion (especially in the energy sector). There is a major emphasis on trade as well with the assertion that current trade patterns are unfair to the U.S. economy. The plans that have been put forward here are the most radical as far as the platform is concerned. There has been talk of setting very high tariffs on all imported goods and punitive tariffs on goods from China.

The plans put forward involved a lot of government spending—everything from major infrastructure programs to increased defense spending to border security. The budget of the U.S. is to be reduced at the same time by going after “waste,” but the biggest sectors of that budget are considered untouchable (Social Security, Medicare and Medicaid). Critics from within the GOP have been most upset with this part of the plan as they assert that debt and deficit levels will rise sharply if this plan were to be implemented. There is much in the plan that requires response from governments over which the U.S. has no control. Trade terms are never set unilaterally. The plan as stated will not go over well with any of the countries the U.S. sells to.

The Clinton plan is more traditional and loaded with policy moves—many of which have been tried in the past with mixed results. Many of these are also likely to be long-term solutions that may not yield all that much growth in the short term. There is an emphasis on education—everything from extensive job training programs to providing at least community college at a steep discount. There are also plans to reduce student debt loads. These will not result in immediate economic improvement, but few argue against the need to provide better and more relevant education. Like Trump, there is an emphasis on infrastructure spending by the government, but the projects vary somewhat. Both want to see the transportation system brought up to standard, but Clinton talks more about issues like broadband access and places emphasis on poor regions and urban centers.

She has placed an emphasis on factors that she says limits the ability to get and keep good jobs. This means providing child care assistance and revising immigration laws to enable those in the U.S. to better integrate and get engaged in paying taxes. She also supports raising the federal minimum wage over time to $15 an hour (with some exceptions as far as younger workers are concerned). Most of the policies that she supports as far as jobs are consistent with the policies that were developed under the Obama White House. The means by which all this would be paid for would be hiking taxes on the wealthy. Also, to some degree on corporations although she has backed tax reforms that would lower the corporate rate while closing loopholes and reducing tax breaks and incentives.

Why Has the Economy Slowed?
The debate did not focus on this issue all that much, but the campaigns of both Trump and Clinton have been assessing the situation and have (no shock) reached far different conclusions. The Trump position has been outlined by several of his economic advisors. They lay the blame primarily on trade deficits and over regulation. The assertion has been that too many jobs have been lost to other countries as U.S. companies move overseas or source from somewhere other than the U.S. This has obviously been taking place over the last 30 years, but Clinton’s economics team asserts that the real culprits have emerged in the last 10 to 15 years. The big rush to outsource has ended, or at least is not as common as in the 1980s and 1990s. Today, the issue is the rise of technology and robotics and the impact of demographics. The Clinton position is in line with most of the mainstream analysis of the economy, but there remain differences of opinion as to whether this technological pressure is a good or bad thing.

Analysis: The issue of labor productivity is at the heart of this conversation. There remains quite a bit of controversy over whether the U.S. is really losing its productivity edge. The rise of tech has created a dilemma. On the one hand, it has improved the competitiveness of the U.S. manufacturer and allowed the U.S. to regain markets lost, but these gains have come without a great deal of hiring. The way that productivity is measured is essentially output per person. There are those who argue this method is not as relevant as in the past. The Google economist—Hal Verian—has been arguing for a better system that takes tech into account. There are others suggesting that we are undervaluing contributions of both labor and capital. Blaming trade for the slowdown doesn’t seem to hold as most of what the U.S. buys is consumer goods and commodities, while most of what is sold is high-worth capital goods and industrial output.

Trade and the Cities
There has been a recent study released that indicated that 156 major metropolitan areas in the U.S. exported more than $1 billion each on our way to $1.3 trillion in total U.S. exports. The point of the data is to suggest: (1) that major metro areas are the most likely to see a significant amount of traffic in and out of their ports, and (2) that there are more than 156 port regions that have significant export volumes. This suggests that there are a lot of places around the country that need the infrastructure and ability to handle outbound and inbound cargo—and with growth rates accelerating, that infrastructure need will likely increase at a rapid pace.

In a world that seems to see increasing globalization, despite many of the challenges being highlighted on the presidential campaign trail, the demand on systems, people and transportation infrastructure is continually increasing. Many still predict that the infrastructure in and out of port areas will be among the most strangling aspect of U.S. growth trends over the next 20 years. Many areas will see demands for freight processing outpacing their ability to grow quickly enough to handle it. And, that strain comes at a time when annual U.S. GDP growth rates are struggling to exceed 2.5%. Imagine what would happen if the U.S. were growing at 3-4%. That would be a nice problem to try and work our way through. But, nonetheless, it would create a whole new set of challenges.

We also have to remember that the U.S. has not experienced a fully functioning economic environment at the same time that we have an expanded Panama Canal. Since the reopening of the expanded and improved Panama Canal, we have been in a weak trade environment. We don't know what the expanded canal will mean for port volumes in the Gulf and along the U.S. East Coast as yet. It may not have much impact, that's what some have predicted. But, others feel that it could overwhelm infrastructure in many areas if we see economic growth and output rival rates we saw prior to the Great Recession between 2007 and 2009.

Analysis: The U.S. has been struggling with an antiquated trade infrastructure for some time. This has occurred during a period when there has been relatively slow growth. If there is an increase in the pace of economic expansion, the creaking transportation infrastructure will be tested severely and is likely to fail. There will be far less efficiency as congestion increases. The cities are already burdened by the traffic volumes that exist and this with freight transportation near a 20-year low. The ports do not get the kind of attention that highways and mass transit often get, but in the long run, the challenges are more pressing as the economy starts an uptick. The biggest fear is that these issues will stall that recovery and blunt the impact of an improving economy.

Draghi Urges Tough Position on Brexit
Those that are trying to reduce the impact of the Brexit decision in the U.K. had been under the impression they would have an ally in the head of the European Central Bank. The thinking was that Mario Draghi would want to reduce the stress on the European financial community. Also, that he would want a smooth transition for Britain—that he might become an advocate for retaining some key relationships even as the withdrawal was completed. That is not happening as Draghi has now added his voice to those who want no special dispensations for the Brits.

Analysis: The key issue for both Great Britain and the European Union is movement of people as both have staked their hardest positions on this topic. The Europeans have built the EU on the foundation of free movement of people. Britain has been deeply opposed to the idea that anybody who wants to can move to their country. The immigration crisis is current in Europe and the fear is that resentment of the migrants is about to alter the politics of Europe forever. It is not just the British that have questioned the movement of the population—this is the concern that is fueling the right-wing populists in Germany, France, Italy, Spain and elsewhere. Draghi holds that free movement is critical to Europe’s competitiveness. Many agree that this is the only way to deal with the advancing demographic threat.

The British had been seeking a deal with the EU that would preserve most of the trade and financial interaction while allowing the British to set their own policies as far as immigration, but that now seems a faint hope. The European Union is perhaps open to a new set of economic ties, but not until the British give ground on migration. This would be a very dangerous political position to take in the U.K. It is very unlikely that any of the major parties would suggest a real compromise with Europe. The more likely scenario now is that the Brexit break will be far harsher than what was originally expected.

Animal Homecomings
The videos available on the Internet show the many occasions when animals welcome their human buddies home. The dogs that go nuts to see their soldier return are heartwarming. The explosions of excitement are touching even as we suspect these dogs greet the return from the grocery store with the same level of enthusiasm. There are those who assert that cats are not so inclined to abandon all dignity in response to the arrival of the human. To be sure, my crew is not as demonstrative as some of those canine welcoming committees, but I know they miss me.

Of course, Scoot is at the top of the list of greeters as I have been her person from the beginning. She is always where I am. When I am leaving, she knows it and tries to talk me out of it. She demands more attention than usual, brings toys, rubs everything in sight and mostly just looks forlorn. She knows I come back though and isn’t as distraught as she used to be. When I finally do return, I know she will be plastered to me at every opportunity. The others are slightly less demonstrative, but are relieved to have the family unit back again.

Lucky for me—everybody at home welcomes my return. My wife rarely brings me toys, but she likes to be cuddled up next to me as well.