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Strategic Global Intelligence Brief for February 19, 2019

Short Items of Interest—U.S. Economy

Is Debt Really a Problem?
As with most things economic, the answer to this depends to a degree on one's perspective. The fact is that the U.S. national debt is larger than it has ever been. The Congressional Budget Office (CBO) predicts it will be 93% of GDP within a decade with annual deficits well over a trillion dollars a year. How can this be anything but a bad thing? Those who argue it is not a total catastrophe point out that current borrowing costs are very low and the U.S. has no problem selling its bonds to raise more money. The assertion is if these funds are used appropriately to develop economically, it is a good use of debt. Those who worry about the debt point out that borrowed revenue rarely meets that standard and the mounting levels of debt constitute a massive opportunity cost as that debt service mounts.

Rise in Consumer Sentiment
For three months, the level of consumer confidence had been falling as the various threats to the status quo continued to mount. There was worry about everything from the stock market failing to the impact of the government shutdown to the trade war. Now that it seems that some of these threats have passed, the general level of optimism has returned—at least to a degree. These are still concerns, but the big motivator for consumer mood is still the job market. As long as that data keeps coming in strong, the consumer feels relaxed about the immediate future. The shutdown was not as big a deal as expected. It turns out that consumer expectations for government are so low that nothing much surprises us any longer.

Amazon's Withdrawal
To many, the deal seemed ideal. In exchange for some $3 billion in economic incentives, Amazon would build a second headquarters in New York and bring some 25,000 jobs and roughly $27 billion in additional revenue. The deal fell apart as the critics attacked the idea of "bribing" the company to locate there. Those on the left in the Democratic Party cheered and the moderates cringed. It is standard for development schemes to look like this and many have succeeded to deliver just what was promised. The problem is that some are badly oversold and that investment by a given city or state becomes a waste. It is hard to see how this would have failed in New York given the track record for Amazon, but they are now looking elsewhere. There is no shortage of suitors.

Short Items of Interest—Global Economy

U.S.-China Trade Talks Still at Impasse
It looks more and more likely that additional tariffs will be imposed on goods from China in the near future as there has been precious little progress made in these talks. To be honest, the U.S. is asking for something no nation will be willing to give—a promise to change their political and economic system. It is not at all clear the U.S. wants an agreement in any case as the U.S. gets a lot of political mileage from attacking China.

Europe Will Counter U.S. Tariffs With Their Own
The Commerce Department has concluded its investigation and has determined that the import of Mercedes, BMWs, Volkswagens, Fiats and any other European cars is a threat to national security. Trump has 90 days to determine whether to impose tariffs. He has said he plans to. Europe is already preparing its response and will act to restrict imports from the U.S. Given the close relationship that used to exist between the U.S. and Europe, this will have more far reaching impacts than the trade war with China.

Defections from the Labor Party in the U.K.
Seven pro-Europe members of the opposition Labor Party have defected and formed an Independent Group in protest of the Labor position opposing a second referendum on Brexit. Both the Conservative and Labor Parties are seeing defections over the Brexit issues although none have been large enough to challenge the existing leadership.

Widely Divergent Attitudes Toward Foreign Policy
The Munich Security Conference was a three-day meeting focused on global security. In the past, these have been opportunities for the allies to rally around a set of common themes. Past meetings have focused on global terrorism, the Middle East conflict, the threat from North Korea and the incursions by Russia into its neighboring states. There have also been moves to deal with much larger issues such as climate change and the growing shortage of water and other resources. It has rarely been a forum for acrimony between attendees. This year has been a major exception to that rule. The speech by Vice President Pence was greeted very coldly and was contradicted by the Merkel speech that got a rousing reception from the assemblage.

Analysis: It came down to a clash of themes and intent. Pence extolled the virtues of the neo-isolationist policies adopted by the U.S., while Merkel blasted that thinking as prelude to real global chaos. The theme that ran through much of the commentary from the allies was that they would have to rethink their policies so they would be able to shoulder the burden the U.S. has elected to jettison. One of the key points made by Merkel and others was that Europe would not be bullied into compliance with U.S. policy. This was especially obvious as regards Iran. The Europeans are not going to heed the U.S. on this issue and will actively work to subvert it.

One of the key developments from this meeting was the arrival of a large delegation from the U.S. Congress—most of the Democratic leadership. They were eager to assert that not all the U.S. was pointing in that isolationist direction. Joe Biden was the lead spokesman on this subject and did his best to contradict the position outlined by Pence. The point to be made was that many in the U.S. still saw Europe as an ally and not an enemy.

For all the talk about Europe taking on more of its own defense, there was deep skepticism expressed by many of the European delegates as they pointed out that no nation had yet indicated they were ready to take on that economic burden. For all the talk of unity, there are really only three states that could reasonably be expected to pony up enough in the way of manpower and resources. France and Germany already carry the bulk of the weight and neither looks eager to add appreciably to that contribution. The U.K. has long been the third leg, but their withdrawal from the EU puts them on the outs. They may not be prepared to do more—even if they could, given the current state of their economy. The U.K. tried to assert they would remain connected to their traditional role in global defense, but given the impact of Brexit on the U.K. economy, there is real doubt as to their ability to do so.

There was a lot of conversation regarding the Middle East with attention mostly on Syria and the state of ISIS. The overall reaction of the attendees was that Trump was dead wrong on the state of ISIS and that his remarks only inflamed them. The European position is that ISIS will turn its attention to attacking Europe and Trump has given them something to prove. The Syrian subject is an extremely sore point in Europe as it involves everything from the immigration crisis to the expansion of Russian influence. The U.S. has been assailed for its intent to walk away from Syria, but there has also been plenty of internal criticism of the European response.

Data to Look for This Week
It is not yet clear whether the data released this week will make anything clearer or just contribute to the confusion among analysts and economists. As has been mentioned more than a few times, this is an economy in transition (again). This basically means some of the economic data is still pointing in a very positive direction while other data points are starting to show decline. As has also been mentioned a few times—"it is an ill-wind that blows no good." In an economy this large, there is never a point when everything is either good or bad. There are parts of the economy that do very well in an inflationary atmosphere even as others struggle. The same can be said for recessionary periods. It all depends on the industry and very often what part of the country a given operation is in. That said, there are data points that can be generally counted upon to indicate the direction of the overall economy. Some of them appear this week—delayed by the government shutdown in some cases, but finally here.

Analysis: Wednesday, the 20th, sees the release of the latest set of Fed minutes. They will attract more attention than usual. For the better part of the last year, the meetings have revealed the bias towards hiking rates as the prime concern had been that growth was fast enough to warrant some concern regarding resurgent inflation. Remember a year ago when the tax cuts were implemented? There was a good bit of concern about overheating of the economy as these cuts had come too late and the economy was already growing. It was assumed that the "sugar rush" of these cuts would over-stimulate and lead to some real inflation by the end of the year. That really did not happen as there were two inflationary factors that never quite developed as expected. The first of these was commodity inflation. For the most part, it has not yet played the expected role. The price of crude oil was once a sure-fire contribution to inflation, but production shifts have continued to flood the world with oil and the price has remained low. Metal prices have risen as a result of the tariff wars, but these costs are just now starting to work their way through the system.

The second factor that has yet to play out as expected has been employment. The old rule of thumb was called the Philips Curve. It simply stated that lower rates of unemployment inevitably led to higher wages as business competed for a shrinking population of ready workers. This time, the workers that have been available for hire are not commanding higher wages and thus inflation has been muted. What does all this mean for the Fed? The minutes will help answer that question. Given the commentary that has been emerging over the last several weeks, it seems clear that there is far less interest in imminent inflationary threats than was the case. Now, the Fed may be turning its attention to helping a somewhat stalled economic recovery, or at the very least taking a breather to see what happens from here.

Durable goods data will be released by the Commerce Department on Thursday. There is an expectation of some good news. The estimate is that these numbers will be up by 1.5%, but this number will be somewhat inflated by the fact that aircraft activity was up in December. That always tends to skew the numbers high. If these are subtracted, there was a decline of 0.6% since October. The sense is that factory orders are dipping in several categories, but that will not be made clearer for a while yet. The energy sector continues to boom and so has the health care sector, but there has been slowdown in agricultural equipment and automotive has not looked all that healthy lately.

The National Association of Realtors will release data on the existing home market by the end of the week and nobody is expecting much. Last year, the sales of existing homes fell to levels not seen since 2015. That was just another indication of a weak housing market in an otherwise good economic year. This is one of the areas that really perplexed the economic analysts. Generally speaking, the housing sector is the harbinger sector—it either signals growth with its own expansion or it warns of slow growth by faltering. For the past year, the housing sector has been anemic in most respects—declines in both housing starts and existing home sales. There have been plenty of reasons for this sluggish performance—everything from higher-priced homes to higher mortgage rates to Millennials unable to get into the housing sector. The strange part is this slowdown has not had the usual impact on the overall economy; nobody quite knows why.

Tariffs: What Are They and What Are They Supposed to Accomplish?
The use of tariffs by the Trump White House has exceeded what most presidents have used in recent years, although they were even more common a century ago. The basic idea is to make foreign purchases more expensive so consumers and businesses will feel compelled to buy domestic versions. It has been presented by President Trump as a tax paid by the Chinese, but it isn't. No money comes directly from China as the tariff is paid by the company or individual that buys something from China. The damage to China is indirect as it makes what they produce less appealing.

Analysis: The tariff idea works best when there is a domestic alternative to the good that has had a tariff placed upon it. If there is no real domestic option, the buyer is just paying another tax. Much of what has been affected by tariffs has domestic alternatives, but the prices have been higher than the imported item prior to the tariff. The next round of tariffs may be the most problematic as many of the goods affected are not produced in the U.S. It will simply be another tax on the U.S. consumer and business community unless and until a domestic producer appears to take advantage of the opportunity. There will likely be some of this activity, but most of the imported goods will still be cheaper than the domestic alternatives. The most likely reaction will be for consumers to pay more for the items they buy and for businesses to do likewise.

Populism and Immunizations
The trend towards political and economic populism has expanded to hit a wide variety of other areas—such as the medical community. The fundamental precept behind most versions of populism is that nobody in authority can be trusted. Everything is a conspiracy designed to enrich the few. This has been behind much of the opposition to climate change and now has been contributing to outbreaks of disease that had once been considered under control. The rapid growth of measles after years of being nearly eradicated has been attributed to opposition to vaccination. The assertion is that this process leads to autism despite the overwhelming lack of evidence.

Analysis: One of the primary inhibitions when it comes to development in much of the underdeveloped world has been disease. Great strides have been made in terms of eradicating scourges like malaria, smallpox and others, but there are dozens more that create havoc and impose tremendous burdens on these economies. Now the same distrust and suspicion that has inhibited these economies has been appearing in the developed world. Measles has been at the forefront of concern as it seems that people have forgotten how dangerous that disease once was. In 1980, prior to the widespread use of vaccines, there were 2.6 million deaths from the disease—80% were children. In 2014, that number had been reduced to 74,000. The death toll is now going back up again.

Why Such Distrust?
Over the last several months, I have been regularly bombarded with the fact that many millions of people maintain a great distrust of anyone who claims some kind of expertise. There are people in my own family who have the position that "doctors don't know anything, they are just after my money." These are the same people who will believe a posting on Facebook or a headline in National Enquirer, but not the statement from a person well trained in a given discipline and armed to the teeth with facts. I see it in discussing everything from health to economics to any sort of science. Where does this skepticism and rejection of expertise come from?

I suspect there are several reasons, but two strike me. The first is the experts are frequently telling somebody that what they are doing is wrong and should be stopped. Too many want to stick their head in the sand and ignore it rather than change in any way—better yet, find some weird alternate "truth" that allows them to keep stuffing their face with sugar, smoking, ingesting drugs and otherwise engaging in utterly reckless activity. Secondly, there is the fact that too many "experts" proved to be anything but honest and reliable. That eroded trust in expertise in general. The "scientists" that defended smoking for decades and the stories of deliberate manipulation of data for personal gain had a corrosive impact.

Most importantly, I think the issue is that we collectively forgot how to engage in critical thinking. To be honest we all need to develop better "BS" meters and know when to disbelieve and challenge. It doesn't matter if we are challenging some quack or some acknowledged authority.

Neglected Tropical Diseases
There has long been a connection between the prevalence of disease and the ability of a country to develop economically. Health has been judged as equally important to education and closely tied. The majority of the diseases that inhibited the development in Africa, Latin America and Asia have been considered neglected tropical diseases (NTDs). Not that these maladies do not affect millions of people, but these are nations and populations that lack the money needed to address these diseases. There has been some progress on malaria and some of the newer deadlier varieties, but most go untreated. The toll on these nations remains very high.

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Wednesday, 22 May 2019