Strategic Global Intelligence Brief for January 25, 2019
Short Items of Interest—U.S. Economy
The Jobless Dilemma
It has been apparent for years that the shortage of qualified labor has inhibited the U.S. economy and reduced productivity. It has been a subject that gets beaten half to death by pundits from the right and left. Today, there was an interesting opportunity to hear a couple of perspectives. The new governor of Missouri has made workforce development one of his top-two priorities. He outlined what he planned. It was not radical and relied on the tactics that most have tried before—training, training and more training. It is hard to argue against this, but why has this proven to be so hard? This is where the observations of the man who runs a company supplying labor come in. He has jobs to offer, many, many jobs to offer. Jobs that pay well, jobs that will train and allow people to advance. He can't fill them as the people he finds are essentially unemployable. It is not their lack of training that is at issue—they do not know how to work, do not want to work and devote their energies to gaming the system so they will not have to work. This may be the greatest challenge of all.
Why Mexico and the U.S. Are Winning the U.S.-China Trade War
China and the U.S. had grown very dependent on one another, but the dependency was an uneven one. The U.S. depended on China to supply its voracious consumers with the cheap goods they craved and China depended on the U.S. to keep its manufacturers busy. If the two now decide to divorce and divide up the assets, the Chinese have the more difficult task of finding someone else to buy their output. The U.S. just has to find somebody else to supply its consumers. Right now, that somebody else is Mexico and the U.S. Mexico has proximity and habit on its side, but the U.S. has the collapsed pound and the desperation for a new market brought on by the Brexit fiasco.
Taxing the Wealthy
As the opening salvos are fired for the 2020 elections, the Democrats are staking out a familiar position. Tax the wealthy has always sounded like a grand idea as it takes from those who have the most and provides for those who have the least. Conceptually, it has always appeared reasonable, but it nearly always fails pragmatically. The rich move and hide their money because they want to and can. Countries that seek to tax the rich generally have better luck taxing what the rich buy. The wealthy can be guaranteed to do everything in their power to escape income tax, but a higher sales tax on a yacht or luxury car will not discourage many from buying it.
Short Items of Interest—Global Economy
Transformation of Tsipras
Not that many years ago, the Greek leader, Alexis Tsipras, was vilified as a leftist, populist fanatic that would destroy Greece and take the rest of Europe down with it. Today, he is being hailed throughout the region for his successful negotiation with Macedonia and the diplomatic wrangle involved with that name. At the same time, he has relied on fiscal rectitude to repair the Greek economy and get it back in Europe's good graces.
Russia Warns U.S. Not to Meddle in Venezuela
It is unclear what Putin would propose to do should the U.S. move to support the coup against Maduro in Venezuela, but it is assumed the Russians would seek to stir up an area of strategic importance to the U.S. and might go as far as placing Russian troops in harm's way as a deterrent.
Mood Shifts on Brexit
The pound has been gaining a little as investors now seem to think that a hard exit from the EU is unlikely. The EU has not given any ground, but the U.K. leaders are now actively talking about everything from a delay in the March deadline to the possibility of a second referendum. That makes people slightly less nervous.
Is Anybody in Control of Venezuela?
For the better part of the last two years, the analysts have predicted an imminent coup in Venezuela. The current leader, Nicholas Maduro, is not only an autocrat, but an especially incompetent one. To some degree, his issue can be attributed to the fact that erstwhile allies have either been unwilling or unable to work with him. Cuba is broke and has no ability to handle its own challenges, much less take on those of the Venezuelans. China has the money, but has lacked the interest in bailing out such a bankrupt nation where 80% of the population lives in poverty and where Caracas has become the crime capital of Latin America. Russia has interest in supporting this nation just to get under the skin of the U.S., but there is not enough cash to do that. Maduro failed to understand that he had run out of options and let the nation deteriorate to the point that few even think it can be rebuilt in less than a decade.
Analysis: The coup attempt was not a shock, but the way it unfolded has been. It was assumed that any threat to Maduro would come from one of three sources. The first and most likely was from one of the branches of the military or the national police. They have been running out of money and some have not been paid. They are also in the front line and know they are being asked to attack their own people. Loyalty to Hugo Chavez was unshakeable because he was one of them and made sure they got their money. Maduro was a bus driver; his only skill was as a sycophant to Chavez. Thus far, the military has sworn loyalty, but nobody believes it is very heartfelt.
The second most likely source of a coup attempt was one led by expatriates that fled the country under both Chavez and Maduro. Roughly 10% of the population has fled with the wealthy ending up in Florida and others seeking refuge in Colombia. It is not clear how they would create an army or who would lead them, however. There is also no guarantee that Venezuelans would welcome back those who fled.
The third group would be the oil workers. They staged a coup attempt on Chavez years ago and their union was purged by Chavez. They still control the wealth of the country (or at least the potential wealth) and still deeply resent the way they have been treated and the way the government has exploited them.
None of these scenarios came to pass, but any of the three may come into play now that the young and dynamic leader of the National Assembly, Juan Guaido, has declared himself the legitimate president of Venezuela. He is the president of the National Assembly, the last bastion of democratic opposition to Maduro. Immediately upon his declaration, he was recognized as the real head of the country by the U.S. and several other Latin American countries. Others have reserved judgment and wait to see what the outcome will be. Unless Guaido gets support from one or all of the other groups interested in ditching Maduro, his attempt will be short-lived. He will either be imprisoned or killed—assuming he doesn't escape and go into exile.
Even if Maduro survives this attempt, the writing is certainly on the wall and another attempt will be made. The nation is well aware that Chavez came to power in a military coup. There are plenty of disgruntled members of the Maduro military despite the show of support from the top brass—the political generals. None really have the support of the troops—that is in the hands of the colonels and majors. They may find a Guaido regime more to their liking.
Trump and Venezuela
The instant response from President Trump in support of Guaido was not unexpected, but has been welcomed by the foreign policy traditionalists who have been seeking a way to depose Maduro from power. The big question is whether this statement of support has any teeth. Everything President Trump has done in the last several months signal a policy that shuns engagement. Troops are being pulled from Syria, withdrawals are underway in Afghanistan, threats are made to leave NATO and calls for disengagement are still tweeted every day. Will Trump help Guaido if he should need it or ask for it? What would that help consist of?
Analysis: There is no realistic scenario in which the U.S. commits ground forces, but will air power be used to protect territory if Guaido seizes any. Will the U.S. supply dissident military units so they can fight Maduro? Will the U.S. back moves by the expats living in the U.S.? Will the support be nothing more than lip service that promises support but delivers nothing tangible? Should Maduro be driven into exile, will the U.S. commit the kind of money needed to actually rebuild Venezuela? At this stage nobody knows. It is entirely possible that Maduro crushes the rebellion and then doubles down on efforts to hurt the U.S.
A Collection of Data That Points in a Variety of Directions
Are you Pollyanna—always seeing a bright and shiny future ahead? There is something in the recent collection of data that will justify your outlook. Are you Cassandra—always seeing the future but never being believed? You are likely seeing the dark clouds behind these silver linings, but nobody seems to be paying attention. The major difference between these readings seems to be timing. That which describes what is happening right now still looks pretty good as there is some momentum carrying forward from 2018. The data that looks ahead by a few months is less certain and appears more worrisome.
Analysis: One of the more comprehensive looks at the future comes from the Conference Board. Its index of leading indicators fell back a bit in December. It fell by 0.1%—what many economic analysts assumed it would be. This index is made up of 10 indicators that are all future oriented. They include: (1) average hours worked per week in manufacturing; (2) average weekly initial claims for unemployment insurance; (3) manufacturers' new orders, consumer goods and materials; (4) ISM Index of New Orders; (5) manufacturers' new orders—nondefense capital goods excluding aircraft orders; (6) building permits—new private housing units; (7) stock prices—500 common stocks; (8) Leading Credit Index; (9) interest rate spread—10-year Treasury bonds less federal funds; and (10) average consumer expectations for business conditions. This decline is not dramatic or unexpected, but that makes it all the more believable and reinforces the notion that 2019 will be a bit slower (and maybe a lot slower than 2018).
A piece of data that serves to encourage a more upbeat approach to the coming year is the lower level of mortgage rates. There had been concern that rates would be climbing sharply as the Fed continued to raise rates, but the mortgage rate is more sensitive to long-term bond rates. They have not been driving the mortgage numbers up that aggressively. This news encouraged the housing market as it will presumably make it a bit easier for middle income people to buy a home. The situation is not likely to change for the more expensive homes as the buyers are affected more by the volatility of the stock market than by mortgage rates.
Another key indicator that should bring some joy is the initial claims for unemployment data. These numbers are down to levels not seen since 1969, despite the fact that some of the furloughed federal workers have been have been applying for assistance. This data is a proxy for layoffs. The low number suggests that companies are very reluctant to let their current employees go. This is both good and bad news. It is obviously a good thing when companies are growing and need to hang on to their workforce, but the evidence shows that even companies that are not doing so well are hanging on to their workforce rather than fire them in order to cut costs. The ability to fire and hire at will used to dominate this conversation, but now companies are unsure they will be able to staff up when they might need to and will keep existing workers longer. This is good for the worker unless the business conditions really deteriorate and the company is forced to shut down. It also has to be pointed out that getting laid off can be an unexpected benefit as the opportunity now exists to find a new and better job. The fact is people tend to stay where they are whether there are better jobs out there or not. The known is preferable to the unknown. The fired worker is quite likely to be the treasured acquisition for another company—especially in these times of chronic labor shortage.
The last piece of data to consider is still pretty rough; it has been hard to quantify. The government shutdown has lasted a month and the situation is now dire for individuals and business alike. The entire economy is slowly grinding to a halt. That process will accelerate as more and more federal employees become desperate and fed up. Absenteeism is reaching critical levels; agencies are unable to do their jobs—making it impossible for many companies to operate—much less expand. Had the impasse ended a week or so ago, the economic impact would have been minimal. But at four weeks, the damage has already been done and first quarter growth will likely be down by as much as a full percent. Long term, there will be fewer companies that want to do business with a government that refuses to pay them. Many workers are already quitting altogether and taking jobs in the private sector.
Automation—Winners and Losers
Twenty or 30 years ago, the specter that haunted the manufacturing and agricultural sectors was the rush by business to off shore jobs and production. The enemy of the blue-collar worker was Mexico and Asia. Today, that outmigration has slowed dramatically and the development that terrifies the blue-collar worker is the robot. A recent Brookings Institution study asserts that 25% of the current workforce (some 37 million jobs) is in danger of being rendered obsolete in the next 10 years or less.
Analysis: This is the uneasy and threatened population that has been backing many of the populist politicians. The demagogues really don't offer much in the way of a solution, but at least they share the rage and frustration of people who thought they were playing by the rules and working hard. Now, they face unemployment and an inability to compete for the new jobs with the skills they currently have. The adoption of technology and robotics made the U.S. a competitive nation in manufacturing again, but there has been a very steep social cost. Studies have equated this job loss with everything from opioid abuse to family violence and suicide. Platitudes, shared outrage and bombast will not solve the problem, but there is no easy solution. It will involve retraining to be sure, but it will have to be immensely more intricate than has been the case in the past as those who are training have to be earning a living at the same time they learn those new skills.
'You Should Write a Book'
This came up again at a dinner with some friends and colleagues when I was in Milwaukee for a meeting. We were gorging on the mammoth servings on offer at a very old, traditional German restaurant. Soon there were lots of stories circulating. I am not considering such an endeavor as writing a book, but it does get me to thinking. The stories I am telling are not actually my own—my life is not that noteworthy. I have the opportunity to meet a lot of very interesting people. It is their stories that I would collect.
There was the gentleman who attended my talks to the retired military officers who was a Tuskegee airman. Then, there was the charming former army nurse who eventually held the rank of general and had stories of combat in Korea and Vietnam. There is Bill—the 96-year chief machinist who still pulls a 50-hour week at his job shop. There are the businessmen who nearly got trapped by a coup attempt and the ones who concealed a young man in the trunk of their car who had thrown a rock at some jack-booted thugs in Ukraine. The list goes on and on. I don't know that their stories will live on once they are gone, but I hope so. If I ever decide to write a book, when I have loads of spare time, it would be a real honor to tell these stories and the many others I have been privileged to hear.
Hyperinflation Spiral in Venezuela
The International Monetary Fund (IMF) predicted the inflation rate in Venezuela would be 13,000% by the end of 2018. They were incorrect. It was 15,000% and has continued to climb. It is a totally non-monetized economy today as people survive with barter and access to foreign currency. The latter is drying up fast. That contributes to the fact that 85% of the population now lives in poverty. The two most common ways to earn a living are robbery/burglary and prostitution. Venezuela is the murder capital of the world. The army is warned not to go out after dark as they will likely be killed so that their weapons can be stolen.
