Strategic Global Intelligence Brief for July 13, 2018

Short Items of Interest—U.S. Economy

Record Unemployment Lows May Not Be a Good Thing
There are several analysts suggesting that the already low rate of joblessness will get lower still and could bottom out at around 3%. This is likely a good news, bad news situation. Part of the reason for the low rate is the U.S. has started to run out of workers. There have been acute labor shortages in a wide variety of sectors for years, but now there are very few that have not started to experience these shortages. Companies admit they have given up trying to hire people with appropriate qualifications and are just looking for people with the right attitude so they can be trained. This lack of a workforce is due primarily to retirement, but millions have left the system for other reasons. Failure to build a new generation of workers will mean more imminent inflation threats and reduced productivity.

Worries Mount Over Trade Spats
The Federal Reserve is now weighing in on the economic impact of the trade war. As with the other assessments, the conclusion is that there will be problems for the economy should these warnings turn into actions. They assert that their prognosis for the economy will be far worse if the full range of tariffs is imposed. Thus far, the Fed has been upbeat about the growth of the economy this year due to the tax cuts and the general recovery of the consumer, but they also point out that much of the growth this past quarter has been "defensive." Exporters are trying to sell and ship as much as they can before the tariff barriers are erected and importers are trying to get as much inventory in place as they can for the same reason.

Inflation Threat Becomes Real Enough
The inflation numbers are not so high to cause panic yet, but it may not be too long before they become a more salient issue. Consumer inflation is up again this month according to the latest Consumer Price Index—highs not seen in six years. Granted, this is still a period in the middle of the last recession, but even these modest price hikes will have an impact as there have been very minor hikes in terms of wages. Even a little bit of inflation will erode consumer spending power quickly. At the current pace of wage growth, it will be a long time before the consumer can catch up.

Short Items of Interest—Global Economy

Trump's Trade Policies Under Attack in Congress
This is not likely to be seen as an outbreak of bi-partisanship nor will this be seen as the emergence of a new era in Congress, but there seems to be one issue that has started to create some unity within both GOP and Democratic circles—opposition to the president's trade war policies. These are legislators who are reacting about as they would be expected to. They are concerned that the trade wars with China, Europe, Mexico, Canada and nearly every other country is having a negative impact on their state's economies and they are pushing back.

IMF Sounds Warning Regarding Joblessness in the Middle East
The International Monetary Fund (IMF) undertook a research effort a few years ago to determine the impact of unemployment in the Middle East. It has long been assumed that these high rates of youth unemployment fed violence and terrorism, but now that connection has been made even more explicit. The worst situation is created when the person has committed to formal education (often college and beyond), but still can't get a job. The disillusioned job seeker is either turning to some kind of self-destruction or towards attacking the institutions as the blame for their circumstances.

Natural Disasters and Aging
One of the somewhat unexpected issues facing many countries as they cope with an aging population is that natural disasters hit the older population hardest. They are more vulnerable to disease and injury, but perhaps most important is that they do not react to warnings. They do not evacuate areas in a timely manner and seek shelter far later than they should.

The Price of Oil—Up or Down?
The supposition was that oil prices would start heading down again after Russia and some of the OPEC states (most notably Saudi Arabia) started to produce near their capacity again. The Trump assertion has been that he talked the Saudi Arabians into this decision as he thought the price of oil was too high. It turns out that Trump had little or nothing to do with the Saudi position on oil production as they had already elected to boost output to keep prices from getting out if control. On the other hand, it has been President Trump's decision that has led quite directly to limited global oil output and thus higher prices. The International Energy Agency has issued a report stating that there has not been a market this tight in many years. The reasons cited for the current situation are all very familiar—increased demand at the same time that supply has been constrained. This is not a situation that can't change, but it is going to require either a decline in demand or a surge in supply.

Analysis: Roughly two years ago, Saudi Arabia, some of the Gulf oil states and Russia agreed to limit their production in order to get the price of oil out of the $40 range and into the $70 to $80 range. This was as far as they wanted to go, however, as they know what happens to their market share once prices rise too high. They know that the global economic recovery remains fragile and could be reversed if commodity prices get too high, and that just reduces the demand for oil these states rely on. Furthermore, they know that higher oil prices will bring some of the dormant competitors out—most notably the oil shale operations in the U.S., Canada and Mexico. The decision to bring production back to more normal levels was theirs and not much influenced by any of the comments of oil consumers. They have as much interest in protecting their market share as they have in maximizing their per barrel prices.

The issue driving the price of oil up now is the return of sanctions on Iran. The expectation was that Iranian oil would be flowing normally again since it seemed Iran was playing by the rules and wanted to stay in the good graces of the western states as far as the development of their nuclear capability was concerned. Nobody expected the Trump position on re-imposing the sanctions on Iran. The oil markets did not price in what it would mean for Iran to bow out again. Now that this seems imminent, the markets have been scrambling to figure out what this will mean to overall capacity. Iran was once one of the largest oil exporters and could be again if these sanctions were lifted on a more permanent basis.

The removal of Iran's supply from the global oil market would have been enough on its own to affect oil prices, but it has not been the only supply issue. There have been ongoing issues with Libyan and Iraqi production as well; these are not likely to be sorted out soon. There has also been some reduction in output from Nigeria. The non-OPEC states that produce the most oil include Canada and Mexico. The output here has been constrained as well. The sense is that NAFTA talks will need to proceed before there is any confidence in what either of these nations will deliver.

On the bright side, the U.S. will be the No. 1 oil producer in the world next year—just based on current capacity and the intent of those in the fracking business. The rise in oil prices used to be considered a generally bad thing for the U.S. as the country was predominantly a consumer. Higher oil prices simply meant damage to the motorist as well as business in general. Now, there is a significant production interest in the U.S. and money can be made from selling. This doesn't make it any easier for the consumer who pays the higher price, but it makes the economic value greater.

There is nothing to suggest that demand will weaken for oil and there is nothing to suggest that there is sufficient capacity for an expanded supply of oil as long as Iran continues to be frozen out by the U.S. At some point in the near future, the price per barrel will start to climb rapidly. There will be little that can be done to reverse that trend without involving Iran.

Why Is the U.S. Not 'Energy Independent'?
In the past, there was not a political speech by anyone which did not have that catch phrase in there somewhere. The U.S. had been shaken to its core by the events of the 1970s—the oil embargo and the subsequent crisis that gripped a nation completely dependent on its cars. The shock provoked a lot of hand wringing and pious declarations holding that the U.S. would never again allow itself to be that vulnerable. Oil exploration spread offshore and to places where it had been banned, conservation measures proliferated and so on. Then hydraulic fracking began and the oil shale reserves were opened. Now the U.S. is the world's largest producer of oil. Why are we still not wholly independent?

Analysis: The major issue is that we really don't want to be. We now have the ability to sell crude to the rest of the world and we do. It is often far more profitable to sell that oil to other buyers than to use it ourselves—at least for the companies that are producing that oil. The oil business is unchanged in that respect as the idea is to sell to the highest bidder. The other factor is infrastructure. It is simply more expensive for east coast refineries to get oil from the American mid-west than by ocean cargo from the Middle East. The refineries on the U.S. coast will continue to buy from elsewhere as long as it is cheaper to ship by tanker than by rail as there are no pipelines that can handle the volume needed by these facilities. The U.S. is not as vulnerable as it was in the 1970s, but it has a major role to play as far as setting the price for oil globally. The U.S. will continue to import oil from wherever in the world it can be obtained at a good price.

A Peculiar Outburst and a Baffling One
As President Trump left the NATO meeting, he called another unplanned press conference and issued a statement that caused yet another uproar among members of the alliance. It may have been the most peculiar set of remarks among a rather lengthy set. Very few people expected this kind of broad and consistent attack on NATO that Trump delivered. It was not surprising that the issues of burden sharing came up—the U.S. has been bringing this to the table for discussion for years. However, the tone President Trump took was far more hostile and acrimonious than had been seen previously—at least by a president. In past meetings, it was often the ranking military officer who delivered the report outlining U.S. objections. This trip that position was taken by President Trump himself and the Defense Secretary was left to mollify the allies.

Analysis: The most perplexing message from President Trump was the one delivered at the end. He stated in a highly self-congratulatory tone that he had achieved what he had set out to do. He had forced the NATO allies to speed up and increase their level of spending on NATO and their own defense. Actually, the NATO allies had done no such thing. The members reiterated the fact they had all promised to bring their spending on defense to 2% of their GDP and that they would reach that goal by 2024. This was an agreement set two years ago and nothing has changed. There had been some vague reassurances that members would "redouble their efforts" but this only means some additional imploring of their legislatures to act. After these statements by Trump, the delegates exploded in a fury of declarations that no such agreement had even been suggested—much less agreed to. There were furious reactions in the press and in these parliaments as leaders denounced the bullying and lies.

So, the question is why would President Trump assert something that was patently untrue, knowing that the other attendees would be able to contradict him immediately? There are two theories in play right now. The first holds that all of this theater was intended for domestic U.S. consumption. There are many issues that matter to one degree or another to the Trump base. One of them is the persistent notion the U.S. pays far more than its fair share in the world. The notion is that the U.S. pays for most of NATO and the UN and all the other global organizations. It is assumed the U.S. forks out the lion's share of global aid and assistance and doesn't seem to get anything back for its efforts. While it is true that the U.S. often contributes more than other nations, the U.S. contribution is often proportionately less—a smaller percentage of our budget or GDP than others. Many assume Trump was playing to the audience that believes the U.S. is regularly exploited, while ignoring the fact that the U.S. is more often far less than generous as compared to other less wealthy states.

The second theory is that Trump was using this meeting to set a tone for the meeting with Putin. The long and drawn out investigation of Russia's role in the 2016 election has by now obscured the fact that President Trump had a plan for Russia as early as his campaign. President Trump has been very confident of his ability to charm and make deals. He showed a willingness to break with decades of tradition when he reached out to North Korea and it is obvious that he once thought he would be able to do the same with Putin. If that rapprochement had indeed taken place as Trump visualized, there may have been a different outcome in Syria and perhaps less overall tension with Russia. Trump has had to adopt the more traditional stance towards Russia. This dustup with NATO right before meeting with Putin may be designed to show good faith to the Russians and get that rapprochement back on the agenda.

So Much for the Special Relationship
There has been an assumption that among all the foreign relationships the U.S. engages in, the one with Great Britain would always remain rock solid. In one day, Trump has altered that assumption dramatically. It started with a very nasty interview with one of the British tabloids and deteriorated from there. He attacked the sitting Prime Minister, Theresa May, accusing her of failure over the Brexit talks and indicating that this failure would kill any trade deals with the U.S. He finished off by suggesting that her rival in the Conservative Party would make a fine prime minister. Even Boris Johnson tried to distance himself from that comment.

Analysis: It would not be an understatement to assert that Britain is seething over this treatment. The anger is palpable from both the Labor Party and the Conservatives. There are already moves underway to pull the U.K. out of any shared missions with the U.S. in places like Afghanistan and the Middle East. Opinion polls show that Trump is considered the single-most-dangerous threat to world peace and prosperity by the British at the moment. What is most baffling is what all this invective and criticism was supposed to accomplish. It seemed to be basically a personal attack on May for no real reason. That attack caught everyone by surprise.

Our Social Circles
There is an old adage that states we should try to walk a mile in another man's shoes if we want to understand them. Good advice but amazingly hard to do. I was once under the impression I was exposed to a pretty broad cross section of the population. After all, I am on the road constantly and hitting every part of the country. The groups are pretty diverse, or at least I thought so. There are accountants one day, manufacturers the next and credit managers the day after that. For pity's sake, I have spoken to the Outdoor Bird Feeder's Association and the Northeast Laundry Association. I get to see a pretty broad variety on the planes and in the airports, and chat with my fellow passengers more often than not.

Yet I realize that I don't have contact with a huge swath of the country. I am not exposed to people expressing vile racism, or people treating women like objects. Nor do I know the people who are subjected to that racism and sexual bullying. Granted, I only know most people through brief encounters, but I certainly don't see this behavior among those I know well. I don't run into Islamaphobes or people who despise the gay population or those ready to use violence to solve their every problem. I don't even have exposure to people with serious drug and alcohol addictions—at least that I am aware of. Moreover, I do not know people struggling with poverty and the despair that comes with that. I really don't know why people act the way they do. I have not been in their shoes.

I did not know people facing serious health issues either—until now. I used to think I understood what people were going through and I thought I was as empathetic as the next guy. Then, I walked a few feet in those shoes and now understand that I knew nothing of what they felt and really still don't. My cancer "scare" was about as threatening as a case of the flu. After a few weeks of chemo and radiation, all was well. It may be a long time before I can taste anything or get a normal voice, but I now know a lot of people facing death, lifetime disfigurement, crippling aftereffects and the realization that their life is never going to be the same. The broader lesson for me is to not take understanding for granted and not to let assumptions replace actually knowing.