Strategic Global Intelligence Brief for August 24, 2018
Short Items of Interest—U.S. Economy
Lining Up Behind the Chair
For the most part, the Fed is a body that rules by consensus. The members of the Open Market Committee are the permanent members of the Board of Governors plus four of the regional heads of the Fed that rotate on and off the FOMC on an annual basis. The Chair represents the views of the group but rarely has to express an opinion that differs from the majority. There are often dissenters, but they offer their opinion and leave it like that. Right now, the whole of the FOMC is making it clear they are on the same page and have supported the current plan to hike interest rates slowly and methodically. Trump has expressed his opinion as presidents do, but his critique is having no more impact than that expressed by others in past administrations. There is little reason to expect the Fed to deviate from the current plan of hiking rates next month and again in December.
Durable Goods Orders are Off by 1.7%
This decline was sharper than expected, but it is the fault of the transportation sector as there was a dramatic reduction in the sale of aircraft. Most of that decline is predictable and has to do with the usual pattern of aircraft sales—slow this time of year. One additional factor has been the threats to the aluminum sector. The tariffs could force makers to pay higher prices or find other sources, and that has many parings back on assembly until the dust settles. The cost structure is going to change but nobody quite knows how at this point. If one pulls the aircraft sector out of the equation there was a modest rise in the level of durable goods.
Fed Research Suggests Waiting is not Good Idea
One of the factors that has been cited as reason for the Fed to be cautious on rate hikes is there has been a disconnect between the low rate of joblessness and inflation. It has been assumed that when the rate gets this low the costs of wage hikes will kick inflation into high gear. The lack of available workers means employers will be compelled to pay them more to work, and they will also have to pay existing workers more to keep them from defecting. That has not been the case of late, and this new research indicates it would be folly to wait to act on inflation with higher rates. It is pointed out higher rates will take almost a year to have any real impact on the economy, and that certainly means the time is right for a series of hikes.
Short Items of Interest—Global Economy
Pressure Mounts on Germany
The Germans have provided a record surplus equal to 2.9% of the nation's output. These are record numbers, and there is no shortage of ideas as to how to spend that windfall. There are those who want the money to go back to the Germans in the form of deep tax cuts, and there are those who want to see the government spend it on infrastructure or education or even an extended space program. Other suggest saving it and paying down the debt that Germany ran up in previous years.
Erdogan Blames U.S. for Turkey's Troubles
The Turkish economy is in crisis and the vast majority of economic analysts know why. They look at the profligacy that preceded the vote for president and point out this has been the preferred tactic all along: spend money that one does not have and get bailouts later. Now the bailouts have ceased and the economy is in tatters. Erdogan has blamed the U.S., and a conspiracy against Turkey and the polls suggest most of the Turkish population is right with him on this subject.
White House Defends Taiwan
The Chinese make a habit of pressuring nations to decide whether to recognize them or Taiwan as the "real" China, and most of the world has chosen Beijing. The few remaining holdouts have included El Salvador, but the PRC has offered a lot of investment money for them to switch sides and they have—much to the annoyance of the U.S.
Central Bank Spotting in the Mountains
The annual central bankers retreat in Jackson Hole, Wyoming, gets underway today, and there will be the usual combination of official and unofficial activity. The conversations that take place out of the formal setting are likely to be the most focused and significant as this gathering allows the assembled bankers and analysts to discuss and coordinate reactions. In past years, there have been times when attendance has been light and even times when the Fed's Chair has not been present. This is not one of those years as there will be near universal attendance from the U.S. Federal Reserve System as well as most of other major central banks. In addition to these authorities, there will be several economists and experts in monetary policy who will be called on to deliver papers and report on their research activity. The formal focus for the meeting is a discussion of competition and monopolies in the world and the impact that this concentration of economic power has had and will have.
Analysis: There are many issues that arise with the concentration of corporate power. Most governments continue to monitor the power of monopolies and oligopolies as it is assumed this kind of concentrated power is inevitably bad for the consumer, and it creates weakness in the overall monetary system. The concentration of power reduces the options for the consumer as it gives the monopoly too much pricing power and reduces the need to innovate and adapt to what the consumer may want. This is not the area of most concern for the central bankers, however. They see this kind of concentrated power as a challenge to their role as monetary managers, and they worry about heightened risk to the economic system—should these companies fall on hard times and lose their ability to drive the economy and overall production. It is not clear what the central bankers think can be done about this concentration, so the focus of the meeting seems to be on developing ways to cope with that power.
There will be several less-formal conversations taking place through the weekend. One will be reactions by the U.S. Fed members to the latest comments from Trump. He has been critical of the Fed's plan to hike interest rates, and he has gone so far as lamenting his choice of Jerome Powell as Fed Chair. To a degree, this is harsh yet has no real affect as Powell has a term that doesn't expire for years, and the people who have been nominated to take positions at the Fed by the administration have not been wild radicals by any stretch. The majority have been centrists, and the majority of the regional presidents have likewise been squarely in the middle. If there is any reaction to President Trump's displeasure it has been subtle as nearly all the Fed officials have reiterated their support for the policy of hiking rates twice more this year and likely two or three more times next year. There will be discussion among the Fed officials as well as the analysts in attendance but this policy seems set unless there is some major disruption in the U.S. or global economy that would threaten growth. All eyes remain on the potential for more aggressive trade policies coming out of the White House. It is not clear that these would have a major impact on the growth of the U.S. economy—at least in the short run. If this does create a slowdown, the Fed may rethink that pace as far as interest rate hikes are concerned.
Trump will feature prominently as far as these less-formal talks are concerned. It is not clear he really wanted a radically new approach from the Fed—at least that is not what his appointments have been indicating. He had a chance to utterly remake the Fed with the number of vacancies he faced. All of his selections have been mainstream thus far; Powell as Chair and Randal Quarles have been the only two approved thus far. He has nominated Marvin Goodfriend, Michelle Bowman and Richard Clarida and still has one more opening to fill. All are essentially mainstream, and they are opposed to the suggestions that Trump has been making. Goodfriend is still struggling to get confirmation from the Senate, but his policy has been very hawkish in the past. He has opposed most of the stimulative policies pursued by Bernanke and Yellen and wants to see interest rates climb much faster than they have. His position is completely opposed to that of Trump.
Controversy in South Africa
The issue in South Africa hit the global community because it warranted a series of tweets from Trump expressing sympathy for the white farmers who were losing their land and facing deadly attacks. The South African government immediately responded there have been no killings (although violence in the rural areas is common). There has been no renewal of the land distribution plan from the 1990s, but those efforts that started years ago are still in the works. The question was where these inflammatory allegations were coming from.
Analysis:It was quickly established these accusations were coming from the deposed and disgraced former leader of the nation: Jacob Zuma. He has been busy spreading rumor and accusations against the leaders in South Africa that engineered his removal from power on corruption charges, and he has had help from his former supporters who have likewise lost power. The mistake made by the Trump team was wading into the controversy prematurely. There will always be tension in the rural areas as this was the part of South Africa most committed to apartheid, and there is little of more value than land in these areas. The vast majority of the white landowners and farmers are now secure in their ownership, and there are many successful black-owned farms now as well. This has not meant total peace. Zuma was able to manipulate some local and U.S. media into believing his account of controversy, but closer examination reveals he duped those who are not there to see for themselves.
Trade Talk Progress is Limited
There was not a great deal expected on the trade front this week. The talks between the U.S. and Chinese negotiation teams had been described previously as timid, but it was also acknowledged that it was a first step toward some kind of deal, and this was a good sign of at least some interest in working something out. At the same time there have been ongoing talks with Canada and Mexico over what to do next as far as the North American Free Trade Agreement (NAFTA) is concerned. Again, there was no sudden breakthrough, although the NAFTA discussions have been extended through the weekend, and that opens up the possibility for some kind of announcement by Monday.
Analysis: Has there been an opportunity to learn anything from these halting attempts at rapprochement? Of course, there has been. Talks like these have four phases—generally. The first phase sounds like something out of Festivus: the airing of grievances. This is generally done quite publicly and is designed more for domestic audiences. It establishes the reason for engaging in these discussions in the first place. Most of this is bombast and doesn't have a lot to do with the ultimate talks, although some of the more public statements are hard to back away from later.
The second phase is where the U.S. and China are now. This is when there are some serious priority discussions underway. What are the negotiable issues and what are not? There are some public aspects of this, but for the most part, it is kept more private. For the U.S., these are areas that are of the greatest significance, including 1) protection of intellectual property, 2) a demand that China reduce the support it provides for its export sector and 3) a demand that China buy more from the U.S. Not that other issues are not important, but they are not the ones that trade deals will make or break on.
Phase three is when there is a compromise process underway. Some of the high priority changes will take place, and others will be held over to another period of negotiation. The betting at the moment is that the U.S. will focus the majority of its attention on the first and last points. The second point is very close to the bone in China, and it would be very hard to get China to alter these internal policies. Getting protection beyond what is offered now plus a slightly easier path to selling into China would get further in the discussion.
The fourth phase is selling the plan to the rest of the interested players. Congress has to ultimately buy in and so do the voters to some degree. If there has been too much deviation from the ideas put forward in phase one it becomes very hard for the U.S. to pull the deal together. Chinese leaders are not as sensitive to consumer and voter opinion.
The hardest part of this process is obviously phase three as this is where the real work gets done, and it is the place where all the affected parties from within the U.S. and China weigh it. There has never yet been a trade deal that pleases everybody: someone wins and someone loses. The choice is made in phase three as to which group gets the attention of the U.S. and/or China. In the past, the U.S. usually came down in favor of what was best for the consumer, and that meant a more welcome attitude toward the importing of goods. But this is no longer a given as the decision-making process has been murkier.
Australian Prime Minister Ousted
As many had expected, the battle over Malcolm Turnbull's tenure as prime minister did not end with his defeat of party rival Peter Dutton. Almost as soon as Turnbull emerged as victor over the controversial Dutton, there was another effort under way, and this time Turnbull lost. The new leader of the Liberal/National group is Scott Morrison, a former treasurer and somebody who apparently has the ability to bridge the gap that has widened within the party. The supporters of Turnbull could not accept Dutton as he is too far to the right and too controversial, but Morrison was seen as acceptable for the moment. He becomes the sixth prime minister in 10 years, and this underscores the fact that division is the name of the game for both the major parties—Labor and the Liberal/Nationals.
Analysis: The burning issues are all very hot ones. The price of energy and other items has gone up—dramatically. The immigration issue remains an awkward one despite the fact that Australia has heretofore been effusively praised for the work that has been done to accommodate those who have arrived in the country from all over the world. Turnbull has indicated he will resign his seat in parliament, and that could prove deadly for the ruling party as they only hold a one-seat edge over Labor. The disarray in the Lib/Nat party is giving a real edge to Labor in next year's election, unless the Morrison government can heal the rifts.
The one thing that can be said about the animals in our various households is they generally have their priorities straight. Over the last several months, I have been required to wear a variety of contraptions to address the lingering effects of my health issues earlier in the year. I have a pump that I wear on my head and chest once a day that pushes the waste through my damaged lymph system, and when I am not in that, I have a compression garment that goes around my head and neck. Both are fetching beyond all imagination, and I am sure they will soon be all the rage as guaranteed magnets for the opposite sex. It does, however, freak out the cats at first.
The initial reaction was to assume I was under attack, and they enthusiastically hissed and growled. That I emerged intact later seemed to reassure them, but they do their best to avoid even a glancing contact. All but Scoot, the faithful desk cat whose duty it is to sit next to the laptop. She leaves when the machine starts up but soon returns and positions so that she can stare at it. Her eyes never leave it, but lately she has been trying naps again as long as I reassure her that I am still in there somewhere. The important thing is that she is getting her allotment of stomach rubs and other entertainments.