Strategic Global Intelligence Brief for January 23, 2019

Short Items of Interest—U.S. Economy

Home Sales Data Slows
Sales of new homes fell by 6.4% in the last month, the slowest month recorded since 2015. This was not a huge shock to the system as there have been a variety of "headwinds" that evoked a lot of comment these last few months. It has been the usual issue of higher prices and higher mortgage rates (although these rates have been down a little from what they were). The slowdown was influenced by different factors according to the cost of the home. The smaller house and the starter home were affected by the price increase, but the more expensive home was affected more by the volatility of the stock market. The buyers of these more expensive homes were the ones affected by the declines in the market. Other factors remain solid—low levels of unemployment and the fact that people are still moving a lot to find the jobs they need.

Bad Moods at Davos
This will not go down as one of the most upbeat meetings of the World Economic Forum. In the first place, there are many leaders from Europe and the U.S. not in attendance as they have bigger issues at home. The business leaders who have arrived are putting on a brave face, but their comments suggest most of them are expecting a rough year in 2019—not a repeat of what they enjoyed in 2018. One of the persistent comments has been a lament. There is little faith in the ability of the global political leadership and it is hard to identify a dominant character with the clout to make real progress. Globally, Trump is not looked to for leadership, Macron in France is fighting his lowest approval ratings and Germany's Merkel has become a lame duck leader. That leaves autocrats like Putin and China's Xi—not encouraging.

USMCA Stalled by New Demands
The fate of the USMCA lies in the legislatures of the three nations. The U.S. Congress is now deeply divided along party lines. The Democrats in the House are not at all eager to hand President Trump a victory on the trade front. It may well be rejected even if the changes that have been demanded are made. This throws the whole issue of North American trade back to square one and will likely have a very negative impact on all three economies. The fate of the pact in the Mexican legislature is far from assured and even the Canadian parliament is suspicious.

Short Items of Interest—Global Economy

Car Bomb in Colombia Shows Conflict Remains
When the FARC decided to end its insurgency against the government of Colombia, there was an immense sigh of relief and supreme confidence that the nation would be able to develop and grow without the threat of terror hanging over it. The attack on police cadets by a smaller group that did not end their war shows that Colombia still has some challenges to overcome. While most of the FARC leaders elected to turn to the ballot box, there were many who rejected the shift and vowed to keep the war going. They are very hard to root out and will continue to wreak havoc when they have the opportunity.

Nigerian Opposition Leader Focuses on Oil
Nigeria lives and dies by the price of oil as it accounts for the vast majority of the national budget. There have been complaints for years that oil companies took advantage of previous governments and cut deals that were not in the best interests of the Nigerians. This is the issue that Atiku Abubakar has been taking to the voters in his attempt to unseat the incumbent. This message has been resonating and his poll numbers reflect it.

Brexit Delay?
The investment community seems to think this is a possibility as the U.K. and EU negotiations drag on. There is now some sense there will be an extension of the March 29 deadline and maybe even a whole new referendum.

Asian Developments
The challenge of keeping pace with global events is that there is always competition for those lead headlines. For the past several weeks, the attention of the world has been held by the U.S. government shutdown and the Brexit deadlines that are looming in the U.K. and Europe. The activity in Asia has not broken through other than a few remarks regarding the slowdown in China's economy. In fact, there has been quite a lot taking place in Asia and much of that activity has implications for the rest of the world. China has attempted to reach out to the U.S. on trade talks before the March deadline, but has been rebuffed by the Trump team. Japan's Shinzo Abe has not been able to push through his wage hike plan; the level of exports from Japan has been falling to lows not seen in two years. The North Koreans are pushing for another meeting with President Trump, but have done little to make good on previous promises. India is facing an election that has suddenly become far closer than had been expected. The Asian states that do business with China are affected both positively and negatively by the confrontation between the U.S. and China. The U.S. has been alternately engaged and disengaged in what has been happening in Asia.

Analysis: A few weeks ago, it seemed there was some room for the U.S. and China to reach a deal on trade—at least on a few issues. The U.S. had shown some willingness to delay the next round of tariffs and restrictions, while China seemed to be taking this gesture as an invitation for more consultation and movement. Thus far, the U.S. has refused to get engaged in more of these interactions and the global markets sagged a little on that news. There has been deep concern that the U.S. will be unable to reach a deal with China because such a gesture would disappoint Trump's base. In a recent move over immigration, he tilted ever so slightly toward a deal with Democrats and was vilified by the right-wing commentators as a traitor offering amnesty to illegals. Given his near-total dependence on that base, he can't stray very far from their position.

One of the countries inadvertently hit by the U.S.-China trade dispute is Japan. The two most important markets for Japan are the U.S. and China. The export machine that drives Japan relies on sales to these two. That makes their problems a problem for Japan. The slowdown in the Chinese economy has meant a dramatic reduction in imports from Japan. At the same time, the U.S. has been making it harder for some Japanese products to enter the U.S. The steel tariffs were imposed on Japan, which damaged their steel output. The revisions to the NAFTA deal—creating the new USMCA—meant newer domestic content laws. That limited the importation of many industrial goods to the U.S. from Japan.

North Korea is eager to get attention from the U.S. again and is pushing for more nuclear talks. The Trump position has been encouraging and statements have been made that suggest Kim Jong-un has been taking steps to denuclearize the country. Unfortunately, the Trump administration has been the only one to see that progress. North Korea has failed to live up to any of the promises made at the previous summit.

Just a few weeks ago, it looked certain that Narendra Modi and his Bharatiya Janata Party would sweep back to power in this election. After five years in power, Modi was still very popular and still considered incorruptible. His opposition was fragmented among several parties that showed no desire to work together. Suddenly, that has changed and now there is the possibility he could lose power over parliament and be forced to create a coalition. His opponents have managed to unite and are attacking him in his most supportive regions: the poor Hindu states in the north that have been referred to as the "Cow Belt." He has doubled down on his campaign and is still ahead in most polls, but by a very narrow margin.

Russia and Turkey Compete in Syria
The U.S. has elected to disengage from Syria. Now, it is only a matter of time before either Russia or Turkey asserts nearly total control over the shattered nation. The bets are strongly in favor of the Russians in this conflict as they have signaled they intend to bolster the regime of Bashar al-Assad with whatever it takes in terms of money and military support. Turkey is focused on the Kurds and not on Syria itself. They want to end the Kurdish insurgency (or what they perceive as an insurgency) and plan to attack the Kurds that are in northern Syria.

Analysis: The U.S. has warned the Turkish government not to attack Kurds that have been allied with the U.S. There have been warnings issued to Russia as well, but the U.S. has signaled its withdrawal and has essentially lost all credibility in the region.

What Worries the Intelligence Community?
The U.S. National Intelligence Strategy is a report prepared periodically to direct the activities of the various intelligence agencies that assess threats to the nation and carry out a response to these threats. The last one released was in 2014. It focused quite a lot of attention on economic issues given that the country was still recovering from the recession along with most of the world. These reports always read like a litany of every crisis that can befall a nation or government and can be fairly depressing reading. On the other hand, it is designed to help sort out these threats in terms of which should take priority, which can be addressed by the government and which will have to be dealt with alongside other nations.

Analysis: The current report continues to focus a lot of attention on economic issues—especially those efforts to back away from free trade policies that have been in place for decades. There is a theme of sorts that runs through the report. The assertion is that the U.S. has entered a period of isolationism. This has created a whole series of dangers and threats. The U.S. is no longer the leading advocate for free trade and no longer takes a leading role in organizations engaged in global development such as the IMF, World Bank or any of the other groups that promote development. There is little interest in engaging with global security organizations such as NATO and there has been a definite drift away from allies as long-standing commitments are all being challenged. The appetite for engaging in global conflicts has eroded and the U.S. has been withdrawing from places it has been engaged with for years.

These moves have been supported by both Republicans and Democrats at some level as there is a sense that many Americans are no longer interested in the U.S. as global policeman. Engagements in Iraq and Afghanistan have lasted for years. It is hard to point to a lot of success. The engagements with other nations seem to benefit those other nations far more than they benefit the U.S. and a sort of engagement fatigue has set in. The intelligence assessment acknowledges this fatigue, but points out that the U.S. withdrawal from these alliances and entanglements has created a vacuum that is being filled by Russia and China. The fact is these nations do not represent the ideals held by the U.S. Neither is remotely democratic and neither supports a real free-market approach to economics. Both are bitter rivals and seek to usurp U.S. authority every way they can. The report asserts that the very tactics that have been deployed against China in the current trade war are benefiting China more than the U.S.—at least from a global influence point of view. As the U.S. has pulled away from global economic development, China has been aggressive in filling that void.

Economic issues are not the only concerns the intelligence community has expressed. There are some very major issues that pose long-term threats and a whole host of short-term threats that vex the U.S. on a daily basis. Among the big issues that will require major policy reactions are the global shortage of water and the development of continuing climate disasters. The water issue is expected to be the No. 1 cause for local civil conflict in many parts of Africa, Asia and Latin America. It will also affect development decisions in the U.S. and will impact who lives where. The intensity and frequency of major storms will present a bigger and bigger challenge. Even more serious will be the impact on agriculture and the migration of people whose regions are no longer able to sustain the populations living there. The report suggests that in the near future almost 70% of human migration will be caused by climate change and the subsequent altering of land use and sustainability.

Among the other issues that are explored are some familiar threats and some very new ones. The terrorist threat is alive and growing. In no sense has the threat from Islamist groups like al-Qaeda, ISIS or others ended. These groups are larger than ever and have morphed their strategy many times to take advantage of weakness. Right now, they have abandoned the notion of territorial gain and have embraced the older strategy of terrorist assault on their enemies. There are also concerns regarding the development of civil conflicts and wars that would affect everything from migration patterns to the availability of raw materials and key commodities. The longer-term issues include the potential for a space race that would drain U.S. resources in an attempt to militarize space. Technology in general has become a major threat as the issue of cyber warfare becomes more and more acute. The vulnerability of systems that control everything from finance to communication has made this a major concern. The fear is that these attacks are coming from governments as well as from within criminal networks.

The basic overall message is that the U.S. has allowed too many of its advantages to slip away in the last few years. There has been too much friction between allies and too little defense of the U.S. position in the world. This has allowed the rivals to the U.S. an opportunity to gain at the expense of the U.S.

Movement on Ending the Shutdown?
The Senate will be considering a couple of pieces of legislation that aim to end the shutdown, but neither is expected to pass. One is from the Democrats and the other from Republicans. There has not been an attempt to reconcile the differences. The optimists hold that these bills are meant to fail and are just a means by which to establish the positions of the Senators. Once that is done, the next step is a real bi-partisan effort.

Analysis: The economic impact is clear now. The lack of pay for employees has created a real personal crisis. There have also been major issues with those businesses that do work with and for the government.

Winter Wonderland
My friends living in warmer climes would be gazing at what I am seeing out my hotel room window with a mixture of feelings. They would doubtless comment on the beauty of the new fallen snow and its blanket of white. Then, they would look at the snow-covered cars and the streets and the people desperately trying to escape the elements. They would remember why they live in Southern California, Arizona or Florida. I can appreciate the lovely snowfall with the best of them, but right now, I am wondering if I can get an Uber driver to slog me over to my destination and whether there will be anyone there when I arrive. Then, there is the issue of getting on that plane later today so that I can go home.

There is nothing like this type of storm to remind one that control is illusive. The snow arrives and life changes whether one wants it to or not. The same feeling (only amplified) exists when there are hurricanes or tornados or just your garden variety deluges that flood everything. And that doesn't even include earthquakes and volcanoes or asteroids hurtling on a collision course (you never know). The point is that there is much truth in the adage that life is what happens when you are making other plans.

Terrorist Attacks by ISIS
Declaring that a terrorist enemy has been defeated is very challenging. These are not organized armies or governments and have always been self-perpetuating. The movements tend to ebb and flow with efforts to bring them to heel. Leaders are killed or captured and new people take their place. The sense is that ISIL or ISIS is far from defeated although their dream of a caliphate and territory of their own has been dashed for now. The U.S. and the rest of the world will be battling terrorists under one banner or another for a long time to come.