Strategic Global Intelligence Brief for August 27, 2018
Short Items of Interest—U.S. Economy
Some Odd Signs of a Strong Economy
There has been a very low level of unemployment for some. That starts to have an impact on certain sectors of the economy after a while. The fact is many jobs are not all that popular and will not draw applicants until there are far too many people for the supply of good jobs. Right now, there are far too few people and the good jobs get snapped up along with the not-so-good ones. There are shortages as far as many of the high-skilled jobs are concerned; we have been noting that for years. There are also shortages of people to work those unskilled but unpopular jobs—far fewer than are needed for everything from lawn mowing to trash collection and food service. This shortage has become acute in many areas where many are finding easier and more lucrative work.
Powell Sounds Note of Calm
One of the biggest concerns that emerged from the conversation regarding the tax cuts at the start of the year was that they had come too late to really help with the growth of the economy. They would instead overheat the system and create a real need to attack the inflation issue with higher rates. Thus far, the overheating has not manifested. This is the point that Fed Chair Jerome Powell has once again reiterated. This seems to mean that there is no desire to push interest rate hikes any faster, but there was also no signal to suggest that he was thinking about slowing the current plan down.
Trip to North Korea Cancelled
There was supposed to be another trip to visit North Korea by Secretary of State Mike Pompeo, but that has been postponed and likely canceled. The crux of the issue is that there has been very little compliance from the North and there doesn't seem to be a lot to talk about as long as there is this intransigence on the part of Kim. None of the promised steps have been taken despite the U.S. adhering to what it had promised. There has been a delay in sanctions, an end to military maneuvers with South Korea, aid shipments and the like. North Korea has responded with stonewalling and obfuscation. The U.S. may be losing patience, but is in something of a bind.
Short Items of Interest—Global Economy
Uighur Crackdown in China
One of the Chinese ethnic groups that comes under the greatest pressure from Beijing is the Uighurs of the far western regions. These are mostly nomadic herders. Only under Chinese rule has there been traditional development. The idea is that the Han Chinese would move to these far-flung territories and slowly eradicate the local culture through intermarriage and assimilation. This has not taken place with the majority of Uighurs as they are Islamic and have no willingness to abandon the culture and religion of their ancestors. China has been unsuccessful assimilating the population. Now, they have resorted to violence.
Some Comments on the Passing of John McCain
Right from the start, I have to point out that I have been a big fan of the former Senator from Arizona for a long time. I have been supporting his various runs for president and have deeply appreciated his efforts and his reputation as a maverick. Not that every choice he made was the right one, but Sarah Palin notwithstanding, there were many to support. I was always fond of his interactions with foreign leaders as he mixed critique with diplomacy. He was fiercely critical of "allies" that left all the heavy lifting to the U.S. He also demanded a lot of change around how we conducted trade, but these were never presented in a way that would guarantee even more aggressive response. He was a strong advocate for the U.S. and rarely resorted to tactics that alienated those he wanted to bring into agreement with him. His was a truly independent voice on most issues. He really didn't even talk like a politician very often. There never were many like him and now there is one fewer. It can only be hoped there are others who will step up and fill the shoes of this iconoclastic leader.
Who Takes Control of the ECB?
The time has come to consider who will replace Mario Draghi as the head of the European Central Bank (ECB) as his term starts to wind down. It was assumed that the leading candidate would be the head of the German central bank (Bundesbank)—Jens Weidmann. It has been argued for years that it was time for a German in that position. Many remember that a German was all set to take the job a few years ago, but at the last minute, Axel Weber took himself out of the running and there was a scramble to find a replacement. Draghi was seen as something of a compromise candidate. Now it would seem it is really the turn of the Germans, but Angela Merkel has not been pushing his candidacy. She is much more interested in seeing a German head up the European Commission. It is not likely that Germany will be allowed two high-profile jobs. If Weidman is not going to be the next head—who might be considered?
Analysis: There are eight names being floated at this point. The supposed favorite is French economist Benoît Coeuré, seen as a safe choice and someone with increasingly hawkish views. Then there is Ardo Hansson from Estonia. He is somewhat unknown but Harvard educated and would come from a so-called periphery state. Klaas Knot is the Dutch Central Bank head and hawkish. It would be very close to having a German at the helm, which might be enough to satisfy Merkel. The fourth is Cristine Lagarde who has name recognition as head of the International Monetary Fund (IMF), but lacks monetary experience and background. Philip Lane is the Irish central banker and is supported by the southern-tier states that think the ECB has been slow to help them. Erkki Liikanen was the central bank head in Finland and has a reputation for toughness, but isn't as polarizing as the Germans can be. The current Finnish central bank head is an option as well—Olli Rehn has extensive background in monetary policy. Finally, there is a French banker that would come from the outside—François Villeroy de Galhau.
Data Mining the Week Ahead
This will be an interesting week as far as new data is concerned. It is the week that second quarter GDP data gets its first set of revisions—most think there will be a slight reduction as far as that growth is concerned—maybe from 4.1% to 4%. This is not a big shift obviously, but the important point is that it didn't get any stronger. There had been some expectation that it would have. The most volatile part of GDP data is generally consumer spend and to a slightly lesser extent, the level of exports. It was observed that much of the growth of the Q2 GDP was due to those categories with exports alone accounting for a full point of growth. The trade war and tariff threats have had a somewhat perverse impact on the economy. Those that rely on overseas sales did everything they could to sell as much as they could before the restrictions set in. By the same token, the importers did as much as they could to beat whatever deadline might arise. That motivation will largely be gone by now. It is expected that third quarter growth will be somewhat more subdued than Q2. This will all depend on the consumer as their spending habits drove the Q2 activity at least as much as did exports. Most of the analysts are holding to their assessments for the year and are asserting that by the end of 2018, the annual growth will be near 3%. This is very respectable growth for the U.S. and about half a point faster than the norm of the last 10 to 15 years.
Analysis: The GDP revisions will come on Wednesday. The day after, there will be data released that will indicate what is going on with the consumer and their spending. The consumer played a huge role in the Q2 data and will obviously play a major role in the subsequent quarters as these are the ones that coincide with the holiday spending season. In June, there was a solid increase in the rate of consumer spending—a rise of 0.4%. This has significance for the year to come. It means they have the capacity to spend and the willingness to do so. It also seems to signal consumers had finally been responding to the tax cuts earlier in the year. The tax reductions for the average family were not really large enough to stimulate a great deal of unusual spending—data shows that most of the population simply used the additional income to retire debt. It also appears that some intended to use the money to spend later in the year. That may start to become evident with this month's data on personal income. The expectation is there will be growth similar to what was seen in June. That would be a good setup for the advancing holiday season. It appears that spending on back to school has been holding up pretty well. Next, there will be intense interest in Halloween—a holiday that has rapidly become the second-largest spending holiday of the year (adult costumes have outsold kid's costumes for five years now).
There will be data releases from various other nations this week. Some will be pointing to bigger issues for the year and beyond. Brazil will release numbers this Friday, which will be more than depressing. This was once the lead nation as far as the BRICs (Brazil, Russia, India, China) were concerned. These were supposed to be nations that were coming into their own as global competitors—enough that they would be able to rival the western states. China has more or less lived up to expectations and India has had its moments, but it has been abundantly clear that Russia has fallen far short. Brazil is in many ways the biggest disappointment as they have once again fallen victim to the corrupt politics that keep an iron grip on the economy of the country. The growth numbers released this week will be recessionary and made the more so by the fact they will reflect the truckers' strike that paralyzed the country for weeks.
China will also release some new data on Friday. It may play a role as far as the trade talks with the U.S. are concerned. The Chinese Purchasing Managers' Index (PMI) is expected to have slumped further. It will not be falling into the contraction zone, but it will not be looking healthy either. The factory sector remains closely tied to the export market. There has been deep concern that trade wars with the U.S. will compromise the ability to sell effectively in the global market. The fear among Chinese officials is that many companies in China will start producing outside China to avoid the restrictions.
Breakthroughs in Talks with Mexico?
The talks that have been taking place over the weekend are not specifically related to NAFTA, but until some of these issues are dealt with, there is little opportunity to move forward on the bigger NAFTA issues. The sticky issues have involved everything from content requirements to labor rule to how to settle disputes. It now appears that several of these are close to some kind of resolution. That might allow a rethink of the NAFTA deal which all three nations can agree on.
Analysis: There will be some industries that will be exempt from the dispute settling provisions of the NAFTA agreement. U.S. companies have complained that the system is stacked against them as the decision-making is equally weighted. This sets up a system where the U.S. is always one against two. There will also be a more U.S. favorable system as far as content in cars are concerned. This will ensure that more of the cars are assembled in the U.S. and they will involve the use of more U.S. parts. It is also likely new rules will be imposed that provide higher wages in those sectors that compete with the U.S. This is a development heartily supported by the new president of Mexico who had been promising higher wages in his campaign. There will also likely be agreements between the U.S. and Mexico that remove threats to impose tariffs, although it is not clear yet which of these areas will be exemptions. There is strong pressure from both Mexico and Canada to remove the tariffs on steel and aluminum. The idea is popular in many manufacturing circles, but the problem for the steel sector is that Canada was the No. 1 supplier for U.S. and Mexico was in the top five.
What Is the FSB and Who Will Head It Up?
The Financial Stability Board (FSB) was created in 2009 as a reaction to the utter meltdown of the global banking system. It is made up of central bankers, the heads of the treasury or finance portfolios and heads of organizations like the IMF, Organization for Economic Cooperation and Development (OECD) and others. The perceived need in 2009 was a board that would have the mandate to assess and address the kind of issues that led to that breakdown of the system and the subsequent recession. It is not a board that set up to sanction or even to really punish. It is more advisory than this and is there to provide a forum for dealing with problems before they get out of hand. Up until a few months ago, it looked likely that Randy Quarles from the U.S. Federal Reserve would get the nod as far as chairing the group. He serves as Vice Chairman for Bank Supervision and has a long history in terms of regulatory issues. He has been attacked by those who want to see even tighter bank rules and regulations, but he has long been an advocate for letting banks function as they were designed to do. That is a message many in Europe are now interested in sending as well. His path to the chair seemed fairly assured until earlier this year. Now, there is significant opposition to his advance. Almost none of this opposition is actually directed at Quarles himself.
Analysis: There is a great deal of anger and frustration over the comments made by President Trump regarding a whole host of international organizations and foreign governments. Interactions with the European governments and leaders have been fraught with tension and in many cases overt hostility. There have been scathing attacks on the EU, NATO, ECB, IMF, OECD and so on. The commentary on the leadership of Germany, the U.K. and even France has been harsh. The Europeans have not been amused. The sense now is that they do not want to reward the U.S. with a position like this one—even if they have nothing against Quarles specifically.
There has been an attempt to soothe some ruffled feathers and even Quarles as stepped in to assert that he is not a member of the Trump administration as he is a member of the independent Fed Board of Governors. His policy positions will be worked out with his colleagues at the FSB and through his other contacts. He will not be taking orders from the White House.
This internal battle exposes the two kinds of reform efforts that generally develop. There is no doubt that any group benefits from critiques; none will be perfect. The question is how best to engage in reform. The dominant school of thought for years has been that change is easier from the inside and is best done through negotiation and convincing people of the merits of the idea. This assumes there is really a common goal and that members are basically on the same side. The other alternative is to critique from the outside and to be prepared to go as far as destroying the organization in order to build something new. The U.S. has usually opted for the first of these tactics and only rarely gets so frustrated that destruction seems the only option. The Europeans are shocked at President Trump's approach as they see this as destruction.
Problems
|I have repeated this quote from Tommy Lasorda a few times, bit it always seems worth repeating—"Talking about your problems is no good, 80% of your friends don't care and 20% are glad you have problems." I note this almost constantly while observing the population. Granted, my exposure is a little narrow as most of the people I see are in airports, airplanes and at various conferences, but the contrast between the two can be stark. Most of the conference attendees know each other a little and some have become quite good friends over the years. They seem very sensitive to the needs and moods of one another and exhibit a lot of patience and care. I don't know how far this concern goes, but at least they are civil to each other. If they don't know you, there is an assumption you have something in common or you would not be at the meeting in the first place.
Not so in the wild and wooly world of the total stranger. I am always astonished at the hostility directed toward those that are contending with physical limitations. Eyes roll at the sight of the pre-board line, people push the wheel chair bound out of their way as they race to their destination. The same studied indifference and outright lack of sympathy is directed towards those flying with kids. I am no big fan of listening to a child wail, but that is why I own noise-canceling earphones. Be glad you are not the parent contending with the little one and all the confusion that is inherent in air travel. Somewhere along the way, we have to find that happy medium between our concern for friends and our utter disregard for the stranger that may need or appreciate our help.
