Short Items of Interest—U.S. Economy
Massive Farm Bill Set to Pass
At varying points over the last couple of years, it seemed the Farm Bill would never make it through Congress despite the fact it is critical to the survival of the agricultural sector in the U.S. This is the legislation that authorizes the myriad of subsidies and assistance programs on which farmers rely. It also supports the research done by various agencies. The most controversial part of the Farm Bill relates to the Food Stamp program. This was what was holding up its passage. Conservatives wanted a strict demand that recipients work in some capacity before being eligible for the benefits. In the end, that demand was removed. Some Republicans will not support it, but the Democrats who had been opposed will back it. Now it is expected to pass (it has already passed the Senate).
Root of U.S.-China Confrontation
There are many issues that separate the U.S. and China. This has led to the trade wars and tariff battles. There are many who assert these are not the real issues, however—they are only small battles rather than the real war. The U.S. is the world's dominant tech power with a near monopoly on the majority of systems. The Chinese want their piece of that world and the U.S. wants to defend its position. This is why there has been such emphasis on intellectual property protection and opposition to technology transfer. The U.S. economic advantage is rooted in tech. That makes this battle critical.
Labor Shortage in Low-Skilled Categories
We have all become familiar with the shortage of skilled workers in sectors such as manufacturing, construction, transportation and even health care, but now, that shortage situation is spreading to low-skilled positions in everything from food service to retail to maintenance. This will have an impact on wages as business will have to pay more to recruit even the low-skilled worker. It will figure into the immigration debate as there are simply not enough people in the U.S. to fill these low-paid and often difficult jobs. Then, there is the fact that increasingly unqualified workers are doing a lot of customer facing jobs and doing them badly.
Short Items of Interest—Global Economy
Will U.K.'s May Survive?
By the time you read this, the Prime Minister of Great Britain will have been subjected to a vote of no-confidence. That could mean the end of her government. There are many in her party who want to see her go as they are angry over the Brexit deal she made. On the other hand, there is no obvious replacement for her within the Tory ranks so they may stick with her a little longer. What is abundantly clear is that she has lost most of her influence.
Struggles for the SPD in Germany
The Social Democrats (SPD) really wanted to see the rival Christian Democratic Union (CDU) select the billionaire Freidrich Merz as their new leader. The fact that AKK (Annegret Kramp-Karrenbauer) won has the SPD in a bind as she is the leader of the moderate wing of the CDU and its policies are not all that different from the SPD. The German voter is starting to look at the Greens as the real opposition party and have been defecting to them over the last few elections. The disappointed right wing of the CDU may also defect to the populist AfD. That leaves AKK in charge of the middle.
Global Trade and Tariffs and the U.S. Farmer
The farmer in the U.S. can't seem to catch a break these days. The Chinese are not buying U.S. output at anything close to normal levels. This has meant piles of unsold soybeans in many regions. The storage situation has been made worse by the fact that steel tariffs have driven up the price of the metal used to build that storage. The attempt to compensate farmers for lost business has been paltry and will leave most with massive losses. The prospects for next year don't look any better than this year.
Did China Just Blink First?
The latest round of negotiations between the U.S. and China were not expected to yield much beyond a lot of posturing and accusations from both sides. It appeared both nations were more interested in ratcheting up the tension than in getting down to any sort of common ground. The U.S. was accused of torpedoing the talks with the demand for the arrest of a prominent Chinese business leader on the ground that the Huawei executive Meng Wanzhou was breaking the law over the Iran sanctions and had been involved in trying to steal U.S. technology. She has been detained in Canada and for now the Chinese are directing their ire at the Canadian government. The U.S. position has been predictably aggressive as statements from Director of the White House National Trade Council Peter Navarro have been getting ever more pointed and hostile. With this as a backdrop, it was not expected to be a productive meeting in any respect, but the Chinese have led the talks off with a statement that indicates they are willing to bend on one of the issues where the U.S. had been demanding progress. They will lower the tariffs on imported U.S. vehicles from 40% to 15%. This is not completely giving in as the U.S. had been asking for no tariffs at all, but it is significant. Does this mean that China needs a deal more than the U.S. does?
Analysis: From the start of the fight between the two biggest economies in the world, there have been three rather obvious realities that now shape the conversation. The first is that both the U.S. and China will suffer some economic pain in the short term. The U.S. has many companies that depend on supply from China and many that rely on the Chinese market. China is in the same position. The only real question is whether the countries can withstand the impact. The U.S. economy is currently stronger than the Chinese economy and therefore will suffer less damage. This does not mean the damage done to the U.S. economy will be minor. It is likely this dispute can peel as much as 1% off U.S. GDP growth. The damage to China would be more pronounced and could drag their economy down to under 6% growth.
The second issue is which of the two nations stand to lose more in the longer run. The hard truth is that the Chinese have a more challenging future. They have to find a consumer like the U.S.—that simply doesn't exist. The U.S. is a consumer-based economy which relies on that consumer for roughly 80% of its GDP and a like percentage of jobs. The U.S. has always imported a great deal of the goods that consumers buy as the cost of making most of this in the U.S. is prohibitive. The consumer in the U.S. would not pay that much so the imports allow for a more robust lifestyle. Prior to the emergence of China as the "world's manufacturer" the U.S. imported from dozens of countries around the world. Today, most of these goods come from one place. This is what allowed the Chinese economy to surge to its current levels. In short, China really needs the U.S. to buy the stuff it produces. In contrast, the U.S. needs to find a new source for the consumer goods. It is not really that difficult an assignment given where the U.S. once acquired the goods it now gets from China. The shift from China to places like India, Vietnam, Sri Lanka, Brazil and so on will take time. The costs may not be as cheap as they were in China, but they will be comparable. The Chinese advantage lies in their infrastructure and the support provided by the government. Other nations will be hard pressed to match this.
The third issue is how the trade conversation relates to other economic and political issues in the respective countries. The leader of China has made no secret of his interest in reforming the Chinese economy. Xi Jinping has stated many times he wants to move the Chinese economy away from dependence on exports to an economy that can survive and prosper with its own consumer class. This means placing more emphasis on domestic production and less support for the export sector. It also means accommodating that new middle class and its desire for imports. It is not that China wants to be like the U.S. or even Europe in terms of import demand, but there is a desire to be more like the rest of the world. Xi has opponents that do not share this vision. Perhaps the most influential is Li Keqiang. He was the favorite under the previous leadership of Hu Jintao and Wen Jiabao, but was passed over. He still feels he should have been the head of the country and has carefully criticized the Xi plans. Li is deeply concerned that China is compromising its growth by failing to accommodate key markets. He does not think China is ready to walk away from the strategy that brought them this far.
Back to the question that appears in the headline. Did China blink? It would seem it has made the first concession although it has not dealt with the three issues that Navarro and others have asserted are most important. The U.S. wants protection of intellectual property, an end to demands for technology transfer and a more open attitude towards U.S. exports. The agreement to lower tariffs on imported cars is a step towards that latter issue, but it remains to be seen whether the U.S. reacts positively.
Dirtiest Air on the Planet Is in India
The industrialized nations of Europe and the U.S. were once the air pollution centers in the world. The combination of factories, power plants and massive numbers of vehicles insured that these nations would have a major impact on the amount of pollution in the world. This has impacted issues such as climate change. Over the last several decades, the U.S. and Europe made huge strides towards cleaner air through everything from more efficient machines to rules and regulations that pushed clean air. There are still issues, but they pale in comparison to the problems of the past. Now, it is the developing world that has the greatest challenge. India has the most significant air pollution in the world, only slightly worse than China. In the great debate over what to do about climate change, the decisions of these two countries will be crucial.
Analysis: In the simplest of terms, the Indians have the biggest air pollution issues due to advances in prosperity combined with a very weak government response to the threat. India has become an industrialized nation in the last few decades with factories replacing farming as the most important employment opportunity. The modern lifestyle of the major cities demands ever increasing levels of power generation. The quickest way to get that capacity was to build coal-fired plants. The growth of vehicle ownership has been staggering (and in China as well). As recently as 20 years ago, only about 20% of the population had their own cars. Now, that percentage is over 50% and rising fast.
The 10 most polluted cities in the world are all in northern India and the health impact has been severe. Doctors report that only about 30% of those they are treating for lung cancer are smokers now. It used to be 80%. Today, those who are fighting lung disease are those who live in northern India or in other populated and industrial areas. It has not been just the rise of the factory that is at fault. The Himalayas form a barrier that does not allow the air to move from the cities of the north and temperature inversions are common.
The push on the part of the world to address climate change faces this dilemma. The most polluted places on earth have limited resources. India is in no position to stymie growth and development since it desperately needs the jobs and revenue from these factories. The money to ameliorate the impact of air pollution is not there either. The climate talks nearly always stall on this issue even when the U.S. is an active participant. To lower the risk of climate change and pollution without altering the situation in India and China and nations like them is next to impossible unless the developed nations take their contributions to zero. That would be expensive and would place an immense burden on the business community as well as taxpayers.
Producer Prices Rise Slightly
The expectation had been for a significant hike in producer prices in November after the October rise of 0.6%. Instead, there was a very minor increase of just 0.1%. Before anybody gets too excited, it must be noted that much of this has been attributed to the fall in the costs of energy. That is a factor unlikely to be repeated this coming month. The decision by OPEC and Russia to reduce output has already pushed costs up. These will be reflected in the coming months.
Analysis: There are signs of burgeoning inflation, but nothing suggests a real surge that might compromise the Fed's plan for raising rates. The inflation threat is clear enough, but it has been manifesting slowly. Every other month something seems to occur that reduces that threat.
The issue of whether to build a wall along the southern border of the U.S. has taken on a life of its own. It has never really been more than a political ploy as opposed to a real effort to ensure border security. The Border Patrol has never indicated the wall is important or even effective as far as protection is concerned. The system in place now uses a wide variety of tactics—walls and fences where appropriate, patrols, electronic monitoring, aircraft and so on. In places where there is a wall, there has been an issue of frequent breeches through the use of tunnels and from people destroying or damaging the structures. The idea of a wall to span the entire border was never seen as a good plan, but became a symbol of President Trump's position on immigration.
Analysis: The weird spectacle at the White House was pure theater as the protagonists played to their base. President Trump thundered aggressively over his determination to get the wall, while Congressional Minority Leaders Nancy Pelosi and Chuck Schumer railed against the idea and declared there was no way the funding would get through a House controlled by the Democrats. In the end, the exercise may have set President Trump up for problems as he finally declared that he would be "proud" to shut the government down over the issue. The response from Pelosi and Schumer was instantaneous. From that point on it was referred to as the "Trump shutdown." The polls show Americans are still pretty divided on the need for the wall—about 50-50. But when it comes to the issue of shutting down the government, the polls are sharply against it. Over 57% of responses want to see a compromise developed—71% of Democrats and 27% of Republicans. If the wall is the reason that millions of people and businesses are thrown into financial chaos, the White House will be blamed or credited—depending on one's take on the issue as a whole.
Holiday Spirit—Part Deux
The deed is done. All the yard art is in place, trees are draped in lights and wreaths dangle. It is the time of year that I learn some valuable lessons and once again marvel at physics. Lesson No. 1—keep fireman from seeing the ways you have chosen to employ extension cords. I am quite sure I am defying every tenet of electric sanity (thank goodness for automatic breakers). Lesson No. 2—never expect lights that worked last year to work this year. I am convinced that twinkly lights are all part of a master plan by the Chinese to attack us. They make these strands where half the lights work and the other half doesn't and arrange for you to find this out only after you have attached them to your roof. Once the entire population of the U.S. is engaged in a losing war with tangles and burned out bulbs, they will invade. We will be too exhausted and frustrated to react. Lesson No. 3—wind is not your friend. In order to keep the yard art from looking like it is determined to catch a nap, one must stake the penguins, horses and deer to the ground. The frozen ground….with plastic stakes….and a sledgehammer.
I have, over the years, defied logic and experience and purchased stuff that is supposed to move. The vast majority of these things worked for perhaps a season and then died. But there is always the exception. The two penguins in the top hats move their heads from side to side and their arms move up and down. They have been faithfully repeating that activity for over 11 years now! It is like the Hallmark card featuring Hoops and Yoyo. Generally, these cards with the little speaker imbedded work for a few weeks and then give up. The one I carry with me when I travel has been going strong for almost six years. It is a "romantic" card that informs the recipient they have "some sugar coming your way" and makes kissing noises. I play it over the phone for my wife every morning I am on the road. It has thus far refused to die.
Total Acreage Burned
The chart below has been sparking a great deal of controversy and has been challenged by some and hailed by others. For those who are connecting the wildfires in the western states to climate change, it felt like repudiation. For those who have been opposed to the climate connection, it has seemed like vindication. The fact is one has to understand what is being measured. It also helps to understand the detail. There are two important factors to be recognized here. The first is that the vast majority of the acreage burned from the 1920s to 1940s was in the Southeast. The second factor is that this chart includes "incendiary" fires as well as actual wildfires. These are the fires deliberately set to clear forest undergrowth and to simply remove forest land so it can be used for other purchases. It was routine to burn forests that were going to be flooded so that the trees would not be navigation hazards. There was also a lot of dam building back in that period.