Thursday, August 16, 2018

Strategic Global Intelligence Brief for August 16, 2018

Short Items of Interest—U.S. Economy

One Out of Three Ain’t Bad
There are three elements involved in U.S. industrial production numbers—somewhat related, but not precisely. The most important part is manufacturing. The second most important is the mining category as this includes the development of oil and gas reserves. The third leg of this tool is utility activity. The latest industrial production numbers are an improvement over last month by the narrowest of margins—up by just 0.1%. This rather anemic rise covers an important fact however. Both the mining and utilities categories slipped from last month, so it was the growth in the manufacturing sector that accounted for what progress there was. A lot of that manufacturing growth is related to stronger consumer demand for goods produced in the U.S. The bulk of that demand has been coming from the domestic consumer, but there was also a contribution from consumers in Europe and Asia—the U.S. export numbers have been rising of late.

Market Jitters
It is probably a good time to remind everyone that there is rarely a direct connection between the stock markets and the performance of the economy at any given moment. The markets are always focused down the road so as to determine the value. They tend to be highly reactive—not waiting to see how things eventually pan out. The market has been nervous this week despite the fact that most of the economic data is solid right now. What has the attention of the market is the potential for issues like inflation or a slowdown in consumer activity. It has been the same concern for years—the length of this market expansion is already very long. It ought to be coming to an end, although economists are having a hard time determining just when that would be.

Jobs and Housing Data
By the end of the day, there will be some additional information regarding jobless claims and housing starts. There is unlikely to be a surprise in either data release. The number of new claims will still be low as business remains in a hiring mode and few companies are considering any kind of layoff at this point. The struggles of the housing market will continue. That will also come as no surprise. Most expect a small rise in the number of starts, but not so much that anybody will think the market is back to its fast-growth pattern.

Short Items of Interest—Global Economy

Turkish Confrontation Escalates
What happens when two men with reputations for extreme stubbornness and an aversion to ever backing down get into a confrontation? The U.S. and Turkey have not been close for many years, although they continued to count one another as allies as recently as last year. Turkey has backed the U.S. in Iraq and in Afghanistan (not to mention the Korean War and the Vietnam War). They are a NATO ally and have backed Israel more than a few times. Erdogan is not all that close to the U.S. and never has been, but now he feels backed in a corner and is searching for new allies—namely Russia. This crisis has been precipitated by the U.S. demand for the release of an evangelical preacher who was loosely connected to the Gulenist movement that Erdogan accuses of plotting a coup.

Investors May Take Control of Venezuela’s Oil
The crown jewel of Venezuela may end up getting seized by creditors that have not been paid by the Maduro government for years. The only assets the country has left are oil related and they were pledged to get loans. Realistically, the Maduro regime will fight such a move. However, getting this oil some other way is not an option. It sets up a massive confrontation as Maduro will never relinquish control without a fight.

Argentine Corruption
The former President and First Lady of Argentina Christina Fernandez de Kirchner was defeated a few years ago by Mauricio Macri and has been fending off legal attacks ever since. She has now been accused of a massive bribery scheme. She will be hard pressed to escape judgment on this.

Immigration and Populism
There is always a danger from trying to oversimplify. Populism has surged in the U.S. and in Europe. Much of that new-found popularity can be attributed to the issue of immigration, but it would be a mistake to assume this was the only motivation for the rise of these right-leaning parties. There are very real issues of economic insecurity and deep feelings of resentment as nobody seems to be interested in preserving their way of life. That said, the immigration issue has galvanized populists all over Europe and the world—even in nations that have a long-standing policy of being open to migrants and refugees. The right wing in Scandinavia has made a substantial comeback on the heels of these resentments.

Analysis: What is behind the antagonism and fear? There are many factors and issues that are peculiar to each person but three are nearly universal. The first is that people are uncomfortable and feel threatened by cultural differences. The resident population doesn’t like the clothes, food, religion or the habits of the migrants. That leads to bigotry at worst and intolerance at best. The second issue is genuine fear of job loss or economic challenge as the immigrant is willing to work for less and undercuts the leverage the local worker may have had. The third factor is that local populations are afraid of crime and confrontation. The struggle to survive in a new place may tempt some to break the laws, and in significant ways. Most do not turn to crime, but enough do that suspicion is cast on all from that part of the world.

Very often, the supporters of populism are the marginalized populations. As such, they are frantically seeking to stay connected and deeply resent being shoved even lower down the totem pole.

It’s All About the Consumer
There are aspects of the U.S. economy that are simply unavoidable and indisputable. At the top of this list is the dominance of the consumer when it comes to the performance of the economy. Not that every nation in the world is not consumer centered to one degree or another, but nowhere does the consumer play such a major role—accounting for over 80% of the national GDP. The business of dealing with consumers accounts for around 80% of jobs as well. We consume a great many goods and services—some of them necessities, but much of our purchasing is not. The bulk of our paychecks are spoken for by bills—everything from housing to medical care, utilities and so on, but that which is categorized as discretionary spending is a huge sum and drives the global economy as much as it drives the U.S. There is a trade and tariff war because the U.S. market is so tempting to the rest of the world’s producers. Everybody wants a piece of this market. To determine the future of the U.S. economy is to determine the future of the consumer. There are few groups that can be as fickle. Many factors play into the mood of the consumer. It is that mood that will determine what they will spend and what they will buy.

Analysis: Each consumer is unique, of course, but collectively there are important similarities. These play out in the economy. The most important of these similarities is what motivates a consumer to spend. It is a combination of feeling financially secure, optimistic about the future and having a desire to accumulate. In the U.S., the latter motivation is nearly constant. There has never been an issue with U.S. consumers not wanting to buy new things. It would seem logical to assert that consumers all over the world would have this same motivation, but there are factors that are unique to the U.S. One of those is personal space. The U.S. home is huge compared to those in the rest of the world. That provides a lot of space to put things. Regardless of how acquisitive a Japanese or European consumer is there is a limit to what can be stuffed into an apartment.

The first two motivators are arguably more important and are certainly more volatile. Financial security means very different things to different people. Some equate this with the security of their job and others are more concerned about the shape of their investment portfolio. Regardless of how people choose to measure their security, the important thing is they have to feel good about where they stand before they feel like spending. The sense of optimism is also crucial as this defines people’s risk tolerance. There are many factors that affect a sense of confidence as well. One has to feel secure about one’s job, but also have confidence that the company one works for will survive. This is also where concerns about the national economy come into play. If there is a fear that recession is coming or that inflation is going to get worse, there will be a reaction from the consumer that often makes the situation worse. If there is a fear of inflation, the temptation is to buy what is desired right away. That spurs the very inflation people had been expecting. Recession fears make people stop spending as they try to prepare for the worst. That makes the recession worse. What is good for the individual is often not good for the economy as a whole.

The powerful growth noted in the second quarter was driven by the consumer as well as by a couple of unique developments. One of the unique factors that motivated growth in Q2 was a surge in exports as many businesses tried to sell as much as they could into China and other targeted nations before tariffs and other barriers were imposed. That motivation will likely not be a big factor in the third quarter. The estimate has been that these additional exports may have accounted for as much as one point of that 4.1% growth. The speculation is that third quarter growth will be as solid as Q2 was, but without the export boost—leaving a very respectable 3.1% growth rate.

Taxes and Infrastructure
Yesterday, we wrote about the crisis that has started to affect European infrastructure. The collapse of the bridge in Italy that killed over 40 people has brought the weakness of the system to the forefront. This prompted a lot of commentary from readers. There has always been a lot of interest in national infrastructure issues as this is often the most consistent contact people have with their government. We all drive these highways and cross these bridges and avail ourselves of the subways, trams, bus lines and trains. Government has supplied these systems with only a few privately run exceptions.

Analysis: There has been a long struggle over how to pay for all this. Most of that effort has been concentrated on trying to get those who use the system to pay for it. Gas taxes have been the main approach, but there are flaws. Electric cars use these roads and bridges, but they buy no gasoline. There have been suggestions of a mileage tax that assesses based on how many miles are driven, but that lumps fuel sippers into the same category as gas guzzlers. Some cities have a mass transit alternative if people don’t want to pay the tax bill, but many do not.

There is also an objection to treating infrastructure needs this way to begin with. There have always been those who argue that infrastructure is a core function of government and thus should be handled with general tax revenue as most government services are. For instance, it is not expected that those receiving welfare work for the government so they can pay back that investment. It seems inefficient that infrastructure work should be dependent on how much gasoline people buy. Then, there is the issue of technological advance. What if electric vehicles really do take off? This means a major new drain on electricity grids that will already be strained trying to deal with hotter summers. Where does the money come from to support that expansion?

The Brain Drain
This is an issue that used to get lots of attention, but doesn’t seem to gather the headlines as much anymore. That might leave the impression the issue has been addressed and perhaps even solved. This would be an incorrect assumption as the problem has actually expanded and worsened over the last few decades.

Simply stated, the issue of brain drain is the process of losing the best and brightest from a given society or nation. The people with the education and skills can find opportunity anywhere in the world. They will be impatient with their own home country if there is no real opportunity for them. This was once considered a factor that affected development in emerging markets and developing nations only. They nearly all made the same investments in education and largely succeeded in developing talent in critical areas such as medicine, engineering and the like, but those people who had gained these skills and education could find few places to work in their own nation so they very often remained where they had trained.

This inhibited the ability of these nations to grow while allowing even faster growth in the developed world economies where these people relocated. What is making this issue more threatening than ever is the brain drain now affecting many of those developed economies who never expected to be on the losing side of this equation. In Europe, there has been a mass exodus from struggling economies such as Greece, Spain, Portugal, Italy and some of those in Eastern and Central Europe. These nations desperately need the talents of those who have departed if they are to stage an economic recovery, but the majority of those who have left have no desire to return—at least not until the economies of their home states improve.

Analysis: Ironically, the only factor that has kept this brain drain from worsening is the hostility that even these educated and qualified migrants encounter in their new homes. There seems to be an opportunity for some kind of mutual accommodation given the circumstances. The countries that are losing their best workers and their educated elite want to keep them. The people that are doing the migrating do not want to leave their homes. There is resistance to their arrival by the populations of the countries where they seek to move. Much energy is expended trying to make entry hard and to protect borders, but it has been hard to point to any effort that has really been successful. Perhaps the better approach is finding ways to help nations hang on to their skilled and educated people. That means investment in developing these economies. Unfortunately, there are elements that fight this as well—asserting that companies are abandoning their home nations to get better deals in these poorer nations. There is some truth to that assertion, but at some point, all these issues will have to be considered as part of a bigger and more all-encompassing challenge.

Losing Credibility
There have always been plenty of parental warnings about how quick one’s reputation can be ruined. As with most kids I was warned to take note of the company I keep. I was made to understand that a good reputation takes years and years to build and just minutes to destroy. It is perhaps not fair, but all the good one does can be dismissed and ignored if one takes a single wrong step. This is why one strives to live a life of integrity. One of the problems with society as I see it now is that many of the institutions we once trusted have lost their credibility for the majority of us.

We no longer trust the political leaders to have our interests at heart. We don’t trust the media either. We have lost faith in many from organized religion and we don’t have the blind admiration of role models in sports or anything else. The comments I hear are jaded, sarcastic and dismissive. I am right there with them. My lack of trust has reached as far as contempt in all too many cases. I understand fully that it is unreasonable to expect perfection—we are all fallible humans after all. I am also aware that we live in a social media-driven fish bowl where every mood and gesture is captured. We trusted people in the past since we didn’t know all that much about them.

I realize that too many politicians brought this on themselves by playing fast and loose with the truth. The media tries to be both entertainment and news. However, these are not always compatible. I am not sure what has to come first—our willingness to trust what people tell us or people finding a way to prove they are trustworthy.