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Strategic Global Intelligence Brief for August 8, 2018

Short Items of Interest—U.S. Economy

Warfare Accelerates
The U.S. will have imposed tariffs on some $50 billion worth of Chinese goods by the end of the month. Meanwhile, more of these taxes have been promised by an administration that still insists they are "winning" this war. China has been responding in kind and has imposed tariffs on a like amount of goods coming from the U.S. The majority of what China has been attacking has been in the farm sector, while the U.S. has been attacking China's industrial sector. There has been plenty of damage inflicted on U.S. farmers and exporters already; this lack of business will likely start to show up in Q3 numbers. China has also been hurt and has seen economic growth numbers sag. They have been able to find substitute suppliers for those farm exports from the U.S., but they have been more expensive and global crops have been down this year—making future prices even higher.

Few Doves Left at the Fed
During the peak of the recession, there was quite a lot of differentiation within the ranks of the Federal Reserve. There were clearly hawks and doves; they argued it out with every meeting. When one looks at the current collection of 12 regional Fed presidents plus the permanent members, there are still many issues that separate. It would be accurate to describe them as relatively hawkish and dovish, but that would not be evident as far as their position on Fed rates for the year and into next. Even those who would self-describe as dovish are expressing solid support for higher rates, although not for any kind of rash or rapid set of increases.

Union Victory in Missouri
The plan to reverse the state's right-to-work law had become a national litmus test for the strength of unions. Those who wanted to keep Missouri a right-to-work state and those who wanted to eliminate that designation poured money into the campaign. In the end, the voters overwhelmingly rejected the law the legislature had passed a couple of years ago. It is not clear what this means for the unions in the year ahead, but it certainly showed that unions can carry the day on matters of most interest. It was presented as a pure pocketbook issue—assertions that right-to-work states have generally lower pay. The causality has not really been proven as many right-to-work states are among the most poverty stricken anyway.

Short Items of Interest—Global Economy

Has Portugal's Austerity Plan Worked?
It all depends on who one asks. It was hailed as the ideal alternative to the plans that were dominant in or at the time of the crisis a few years ago. It was not ignoring the issue as Italy tended to do and it was not draconian as was forced on the Greeks. It seemed a measured way to reduce spending and to get back to reasonable budget levels that would attract more investment. That new investment was key. The problem has been that it has not really kept pace. The budget has been tight for 10 years. That has strained every agency and public sector entity to the point of breaking, which has been leading to widespread protests.

Saudi Arabia Dumps Canadian Assets in Protest
The sharp rebuke from Canada directed at Saudi Arabi has not gone down well. The female activist, Samar Badawi, has been an outspoken critic of the way women are treated and impatient with the reforms trotted out. She has family in Canada. That is what gave the Canadians some standing to intercede on her behalf. The reaction from the Saudi rulers has been swift and extreme as the order has been given to sell off anything that is related to Canada—"regardless of cost." This has hit Canadian markets hard.

Ivory Coast Pardons
The president of the Ivory Coast has pardoned some 800 activists and political prisoners—including the wife of the former head of state overthrown by Alassane Outtarra. Simone Gbagbo was one of the leading critics of the current regime and is expected to continue to be. The effort is directed at stopping a development of another major civil conflict.

Shifting Priorities in Russia?
Perhaps the issue of the economy has yet to be a big part of the U.S. campaign, but it appears to be the issue of the day in Russia—albeit a little late to have any impact on electoral politics for the time being. It was only a few months ago that Vladimir Putin cruised to a very decisive victory in Russian elections on a platform that emphasized Russian nationalism and patriotism. His attacks on the western nations over sanctions constituted the bulk of his economic policy. There was a lot of amorphous reference to the Russian historical role and its presence in world affairs, but little about the economic issues that would vex the average Russian. It has been months since the election, but suddenly the economic issues are front and center. People are angry enough to protest and demonstrate for changes.

Analysis: Russia has a GDP of around $1.2 trillion, which makes it smaller than the state of New York and the 11th largest economy in the world. Russia lives and dies by commodity prices as oil, gas and industrial minerals underpin their export sector. The public in Russia has been sliding backwards when it comes to GDP per capita. They are now 65th in the world. That puts them behind such luminaries as Poland, Romania and Argentina. This is not where the average Russian wants to be.

Did the Primaries Mean Anything as Far as Economics Goes?
Over the years, those who study the vagaries of the political season have come to some conclusions regarding the voting behavior of the American public. These are not all set in stone; however, there are years that leave analysts scratching their collective heads, but this has not been one of those years. Mid-term elections are always a little different from the major elections that include the presidential poll. At present, we are only at the primary stage. These campaigns are insider affairs for the most part—contests within the respective parties in preparation for the main event in November. Even with all these caveats, there are some takeaways from the elections from yesterday. These will likely be important as the bigger campaigns unfold.

Analysis: The first trend is that Democrats are not yet unified on how they want to approach this year's election. Most of the primary battles within the Democratic Party pitted a committed progressive candidate against a more pragmatic and moderate one. The term "democratic socialist" was once the kiss of death, but has now become a rallying call with the support of leaders such as Bernie Sanders and the new candidate for New York Representative—Alexandria Ocasio-Cortez. In many of the primaries, this was the wing of the Democrats that won. Now they will be running against the decidedly more right-wing Republicans. But it was far from a sweep and there are many moderates on the ballot. The test for the Democrats will be whether the two sides will back one another in the coming election.

There is a similar split within the GOP, but there has been a more aggressive attempt to hide these divisions. In the primaries, few were going to risk open criticism of President Trump, but there were clearly those who placed his agenda as a higher priority than others. The hard-right conservatives ran on issues like immigration, abortion bans, opposition to gay marriage and other similar social issues. The more traditional GOP candidates spent less time on these issues and tended to focus on the usual Republican platforms—tax reduction, regulatory reform and economic growth. There was no clear win for either side, but it is clear enough that the president's base has not been affected by any of the criticism directed at him. The question is whether that consistent 30% of the electorate is enough to win seats for the GOP.

A third trend which is likely to shift by November is the role of economics. The issue has been far more subdued than would normally be the case in an election, and for fairly obvious reasons. The economic data has been very good for the last several months—growth hitting 4.1% in the second quarter, unemployment levels below 4% and virtually every indicator pointing to better days ahead in the near future. Granted, there are plenty of warnings about what is to come in the months ahead, but the specter of inflation remains pretty distant and is not really affecting the mood of the voter during primary season. This has meant that "culture war" issues have been paramount. It is likely that economic issues will become dominant by the time of the November vote as both parties will be reaching out to engage the people who didn't vote in the primaries. These voters are traditionally less partisan and react less to cultural issues and more to the pocketbook issues.

The fourth trend has been the role of the traditional influencers. Some of these generally take a backseat role in primaries because they do want to alienate the people who eventually win by backing their opponents. This time, there has been early engagement by President Trump as he has campaigned for primary candidates, a strategy that can come back to bite him if that candidate loses. Usually, national politicians stay out of the party fights and get engaged when the enemy is clearly the other party. The big money contributors were out in force as well—earlier than usual. They wanted to see certain candidates do well. By most accounts, this was the most expensive primary year ever as the use of TV was heavy. This group will be even more active in the coming months. Most expect campaigning to be almost constant between now and the Nov. 7 ballot. There will be more emphasis on economics as well because the groups with the most money have important economic agendas to address—everything from taxes and regulation to issues like trade and tariffs.

Worker Shortage—Beyond Acute

By now, only those who have been living in a cave are unaware that there is a labor shortage in the U.S. There are now 6.7 million jobs openings in the country. That far exceeds the number of people who are looking for work. The sectors that have been most affected are familiar as well—transportation, construction, manufacturing, health care, and now, one can add retail and even food service. Despite a lot of hand wringing and the yeoman efforts of some states and communities, there has been precious little progress and very few real solutions presented.

Analysis: A big reason for the lack of progress is the U.S. continues to turn its back on the most obvious supply of needed workers. In fact, the U.S. has made it even harder for this group to contribute. Unless the U.S. plans to revoke people's retirement and demand they work to age 85, there is no solution to labor shortage other than to bring people in from other parts of the world. This does NOT mean throwing the door open to illegal immigration, but it does mean opening the country to much expanded legal immigration and an aggressive campaign to recruit people needed to fill these jobs. Instead of this recruiting, the U.S. has been focused on making it even harder to get a work visa, restricting people from becoming citizens and even denying those who join the military from progressing towards inclusion in the U.S. workforce when their tours of duty end.

Manipulation of Information

There has been considerable concern expressed over the state of political communication these days. There are accusations from politicians around the world regarding media bias and the media has been just as quick to assert it is the politician that is lying. The fact is that obfuscation has been with us for a very long time and has always extended far beyond the political realm. In business, it is just part of the competitive game to extol the virtues of one's own product or service and denigrate the offerings from a rival. Part of what has led to the recent concerns is the explosion of social media and the destruction of the "gatekeeper" role media once played. It was not that long ago that people relied exclusively on the interpretations provided by a handful of news outlets and depended on the business community for information regarding their products. There was little independent media and little opportunity for the consumer to express opinions on a given product or business. Now, those who seek this kind of information feel they have been asked to drink from a firehose.

Analysis: Despite all the fears that have been expressed about the amount of inaccurate information, there is a silver lining as far as social media is concerned. The same outlets that allow the presentation of all this bogus information and deceit will expose the attempts to lie and fool the public. The purveyors of rumors and innuendo have gotten off to a faster start, but they are now facing a more aggressive defense of the truth and accuracy. People are learning to cultivate a healthier sense of skepticism so that they can decide for themselves what is taking place and what it means to them. The same social media platforms that disseminated these lies and distortions also distribute the facts and the accurate assessments if one makes an attempt to find them. There seems to have been a progression as far as information gullibility is concerned. This process provides some hope for the future.

It was not that long ago that people accepted the statements from business at face value. It didn't seem to matter that it was in the best interests of that particular industry to tell a story that might not be all that accurate. The most egregious example was the tobacco industry, but even more benign products were touted as perfectly safe when they really were not. Over time, consumers became more and more suspicious of these claims and sought out alternative sources of information. Today, it is quite hard for any company to make the kind of claims that were once common as the consumer has ample opportunity to check facts and do their own evaluation. It has fundamentally changed the nature of advertising and marketing. It can be argued that it has led to better products, fairer service and more accuracy in business communication. Is this a path that politics can also go down?

In the wake of the latest primaries, there has been the usual set of questions posed to potential voters. In a highly contentious and political year, why are voter turnouts still low? Communities that had been reporting very high turnout capable of slowing down voting machines revealed that only around 30% of eligible voters showed up. In other less dramatic races, the turnout could be as low as 10%. The question is why people don't vote. It seems that information plays a big part. There is reported to be very deep distrust and skepticism regarding all who are running. For the candidates, this becomes the No. 1 issue. Will people learn to be savvy as voters as they are consumers? It is not clear yet, but perhaps it is starting to trend that way.

Glimmers of Hope for the Future
Thus far, the Millennial is getting all the press—just the way it should be. There are some 43 million of them, more than the Baby Boom generation. The oldest members of that cohort are in their 30s and will be the next wave of owners and managers. Unfortunately, they scare us to death (us meaning Boomers) as they are different than what we are accustomed to. Sometimes the analysis of their ways and behaviors clash with what we think appropriate. But their days in the spotlight will start to come to an end as the next generation has started to arrive. Gen Z is next up. The oldest members are now in their early 20s. The reports so far are anecdotal but encouraging nonetheless.

A friend who teaches high school has been the advisor for student council for years. He used to pull what was left of his hair out when there were elections. Nobody really cared; it was always just a superficial popularity contest. If there were "platforms" they were either silly or stupidly disrespectful. The last two years have seen a change. The candidates were serious and really campaigned on issues, such as supporting the teachers, raising money for students who lacked what they needed and community service. What has been even more encouraging was the number of kids that voted—way up from past years. The student council has been active in local and school issues, but they also engage in bigger national issues such as school shootings, gang violence, sexual harassment and cyber bullying. I don't know about you, but this makes me a lot more confident about the future.

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