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Strategic Global Intelligence Brief for July 22, 2019

Short Items of Interest—U.S. Economy

Targeting Matters
Recent studies seem to show that it matters when someone gets government assistance. Those getting help as adults generally do not see much change in their circumstances and will likely stay in the welfare system one way or another for years. The circumstances that placed them in this dependent situation are not likely to change. The study also showed that aid to children has a significant impact. In most cases the kids that receive help go on to leave the welfare system altogether. It comes down to the ability of the recipient to use the help as an assist toward goals. The younger the child, the more significant the help and the more likely the person lives independently as they become adults.

Existing Home Data Due
The latest data on existing home sales will be released tomorrow. The expectation is the news will be decent. There was an uptick in existing home sales in May although the movement was modest. Expectations are that June numbers will be up as well. The sales of new homes have been reacting to the stock market, which is why the upper-end homes are selling. Mortgage rates and house prices are far more influential in the existing home sector. There has been stability in both of these. That is being reflected by the fact that demand has been up.

New Motivations
Many jobs have long been seen as essentially temporary. The employers do not really expect the workers to stick around at a restaurant or retail store all that long and the employees do not see this as a career either. Things have changed as the availability of workers has altered the perception of employers. They now care about retention and about getting qualified people. This is why many have been hiking wages and finding ways to offer perks. The two most requested perks are having highly flexible schedules and getting the opportunity for employer-paid training and education. These are far stickier motivations than pay alone.

Short Items of Interest—Global Economy

Johnson Ahead in Polls
Despite his very low ratings with British voters, Boris Johnson seems to be heading to the prime minister's office as he has the votes within the Conservative Party. Jeremy Hunt had some momentum early on, but the strength of the Brexiter wing of the Tory party was too strong. Johnson worries many of the traditional conservatives, as he seems Ill-suited to lead the party in the next election. On the other hand, the Labor Party has a leader that is equally unpopular. Jeremy Corbyn has been mired in scandal over anti-Semitism and he continues to worry those that do not share his left-leaning views.

Ukraine's New President Wins Majority
Volodymyr Zelensky, the comedian turned politician, has now led his brand-new party to a majority in the Parliament. The population still knows very little about the new president, but they know he is not part of the discredited collection of former leaders. This will not automatically lead to reform as the majority of those in his party have no real position other than opposition to the status quo. The trick will be to develop their own plans.

Slightly Better News for Thai Exports
The expectation had been that Thailand would see another big slide in export numbers this month—a decline of 5%. Instead, the decline was only 2.5% as there was some recovery in the export of electronics. This is a nation hit hard by the trade and tariff war that has engulfed China and the U.S. as many of the component parts have come from Thailand over the years. These disruptions in the supply chain have negatively affected the Thai economy as well as many other Asian states.

Why Latin Economies Are Not Emerging
The rise of the "emerging market" has been an important story for the last several years. At the start of the 2008 recession, there were those who asserted the emerging states had somehow become immune to the travails that were bringing the developed regions down. For a while, the future of the global economy seemed to be in the hands of the BRIC nations (Brazil, Russia, India and China). That period of confidence was short-lived. Today, all four of these countries have regressed in the face of some pretty severe economic reversals. That doesn't mean the emerging states are not vital to the progress of the world economy, but it suggests there are many issues that need to be overcome. The share of global growth accounted for by the emerging states was just 37% in 1980, but is now at 60% and rising. China and India still account for the majority of that growth, but there have been gains in many other Asian and even African states. The region that has not lived up to its promise has been Latin America. At one point, it appeared Brazil was coming into its own at last and Argentina was also climbing out of its dysfunctional past. Colombia was a bright spot and so was Peru and Chile. Of course, there were still real-basket-case nations such as Venezuela and Bolivia, but even Paraguay was making strides. Over the last few years, that progress has halted. It can be argued that many of these nations have been backsliding both from an economic and a political point of view.

Analysis: It would be easy enough to point at some of the endemic issues that have long affected the states in Latin America—corruption at the top of the list, but also including commodity dependence which makes these nations subject to the vagaries of global pricing. One theory that gets a lot of attention these days holds that the main problem is a lack of anything in the middle of the economy. The majority of these states have only two classes of people—the very rich and the very poor. There is not much of a middle class in terms of either the consumer or the business community. That limits the ability of the overall economy to create more of that middle. The lack of small- to medium-sized enterprises has created a chronic issue.

The reasons for the lack of small- and medium-sized business are varied and complex. One of the issues that stands out is it is very hard for these companies to start up and survive as there are many regulatory barriers, and taxes on these companies can be very high. The big companies can get around many of these taxes and are rarely subject to the regulations imposed on these smaller concerns. This is where the corruption issue comes in—the bigger operations can use their influence to get deals. That also provides them with near monopoly power. The small companies face a daunting path and most fail.

A second issue is consumers in Latin America are highly brand conscious and will often shun the small operation as they trust and prefer the offering from the bigger operation. This is especially true of the business community which shuns not only the small business offering, but also prefers the imported good. The only place small businesses thrive is in small-scale retail and food service. The small manufacturer that is the basis of developed economies is hard to find. The same issue applies to construction and transport. The nations also still sport a lot of state-owned operations that crowd out smaller competitors.

Confrontations in Middle East
The exchanges continue between the Iranians and the U.S. and its allies. The latest moves are part of a series of escalations that make the region more unstable with each passing day. The U.S. shoots down an Iranian drone and Iran seizes a British-flagged oil tanker. The two sides keep poking and testing one another, but to what end? The Iranians do not wish to appear weak and neither does the U.S. or Europe. Everybody thinks they are in the right and that the other side has violated the terms of past agreements. The impact on the rest of the world has been mixed.

Analysis: Oil prices have not risen as would have been expected, but they have gone up and there has been far more price volatility than was the case a year ago. The tensions between the Palestinians and Israelis have ratcheted up and there are similar divisions within Iraq between the Shiite and Sunni. Egypt has been affected by unrest and terror threats. That has caused travel restrictions to be put in place. The situation is not yet suggesting an imminent war, but the hair-trigger atmosphere has many worried. The most serious concern is that one of these exchanges between Iran and the U.S. (or the U.K. or Europe) will involve significant casualties. That would undoubtedly provoke retaliation to the point of significant military commitment.

Time for Global Stimulus?
There appears to be a consensus building among central bankers and many governments. The view is the global economy has slowed enough to warrant some direct action on the part of the banks and the politicians. For the most part, these moves are meeting with approval from economists and analysts as well. The logic is simple enough and based on weaker-than-preferred economic performance by both developed and less-developed countries. The eurozone is struggling to get to 1% growth as Germany stutters and Brexit continues to vex. Japan remains mired in slow growth and deflation. China is sitting at the slowest pace in 20 years and India has been hampered by everything from weather to politics. The U.S. has been holding its own, but the Q2 GDP numbers are expected to be far weaker than they were in the first quarter. It would seem an easy choice to engage in some kind of stimulating sooner than later. The criticism of the 2018 tax cut and spending hike in the U.S. was that it came later than it should have. This time the U.S. should not hesitate.

Analysis: The problem is that stimulating comes with a price as there are only two ways it can be accomplished. The central banks will need to lower interest rates, but this is not always a sure-fired tactic. The stimulating is dependent on the banks electing to make loans. That depends on whether there are businesses that want to borrow. The banks need creditworthy customers. During challenging economic times there are fewer of these. There may also be some reluctance on the part of business to engage in borrowing when the economy is not performing all that well. In other words, the stimulus that comes from the central banks is often described as "pushing a string." It is impossible to determine just how effective the effort will be. There is very often a delay of some months before the business and investment communities respond.

Then there is the means by which the central banks directly intervene—by pushing money into the system through the sale of government bonds. This approach creates debt and that adds up fast. The U.S. Federal Reserve had a balance sheet of around $800 billion when the recession started in 2008, but now sits on one that is over $4 trillion (it was over $6 trillion before efforts were made to bring it down). This approach is what has saddled the U.S. with a national debt that is larger than its total GDP. If the Fed and the other central banks elect to engage in another stimulus effort, there will be more debt accumulated. The companies that respond to the lower interest rates will be racking up more debt as well. Granted, it will be a good rate, but it is still debt and will have to be paid off at some point.

The biggest issue surrounding interest rate reductions at this point is whether they will do any good in the first place. The current rate in the U.S. is in a tight range around 2.5%. While this is higher than it has been over the last few years, it remains at an historical low and can't be seen as much of an inhibition when it comes to business borrowing. If the Fed does follow through with its plans to drop rates from 2.5% to 2.25%, it is unlikely there will be some great unleashing of pent-up borrowing demand. As a matter of fact, it has been the argument of the hawks on the Fed that rates needed to come up so that a reduction of them in the future would matter more.

The other technique involved in stimulating involves the government through a reduction in taxes and an increase in spending, but by now everyone is familiar with the downside of that approach—mounting debts and deficits that have placed the U.S. in a most unenviable position of running far past the size of the total GDP. The bigger issue is what the additional money is spent on and who gets the tax cuts. Ideally, the extra spending finds its way into the pockets of consumers so they will spend more, and at the same time, taxes will be reduced on those same consumers so they will have more disposable income. The pattern is often one that reduces taxes on the wealthy and government spending is on the poor. The middle gets left behind despite the fact they are the consumers that should be pushing economic growth.

Debt Ceiling Debate
The U.S. needs another reset of the debt ceiling—something that has become about as predictable as hot weather in July. The U.S. Congress always acts like this is some kind of shock—that it never occurred to them that passing a budget that calls for more spending than there is revenue to support will require borrowing. Once again, the U.S. faces the dilemma of not having enough revenue to accommodate the spending. There is a group within the GOP demanding that any increase in the debt ceiling come with plans to reduce spending. They will be a factor in the current negotiation as Trump wants a bill that meets at least some of their demands.

Analysis: There are those within the ranks of the Democrats that hold to the new theory of budget deficits called Modern Monetary Theory (MMT). In overly simple terms, it asserts there is really nothing wrong with running huge deficits as governments can always print the money needed. It means hikes in the budget do not have to be paid for with revenue hikes—that as long as there is demand for U.S. treasuries the U.S. can borrow endlessly. The MMT approach is far more nuanced and complicated than this short description, but it is turning the conversation in different directions with the emphasis placed on what the government uses these borrowed funds for. As usual, there are lots of suggestions ranging from repairing infrastructure to financing "Medicare for all." By most accounts, a debt ceiling expansion will be passed in the weeks ahead, but the bigger debates will rage on.

My Yard Has Super Powers
As a tender youth, I was a devotee of comic books as were all my friends. We always managed to find the weird and obscure along with the more traditional fare offered up by the likes of Superman and Spiderman and others. One such obscure hero was one who could command and control plants. Not very tough you say? Au contraire! He could tie villains up with vines, could make forests appear in front of an advancing army and so on. I am now convinced this super hero took control of my yard.

I spent most of the weekend whacking and hacking at runaway vegetation. There were trees whose branches were assaulting the roof and gutters, bushes that were climbing to the second-floor windows, vines that were engulfing all in their path and weeds that regrew even as I pulled them. The only things not going ballistic were those plants we deliberately put in the ground. I swear that if ever we had the temerity to vacation during growing season, we would come back to find our home completely consumed by the greenery. It reminds me of the cartoon from "Far Side" with the guy standing on his porch engulfed by a vine that was rocketing around the house as his wife yelled: "look out—here it comes again."

Despite this, we plant more and more and more. This year it was the installation of Sugartina Summersweet—20 of them. They took the place of some Nine-Bark Diablos and Sumac that did not fare too well. So, the process involved cutting and digging out the old so the new could come in. Oh, the joys of being the assistant to the resident Master Gardener or as I like to think of myself—the Sorcerer's Apprentice.

Iran's Actions Raise Oil Prices
There are two important conclusions that can be reached by looking at this chart. The first is that threatening actions by the Iranians can provoke a significant hike in the price of crude oil. The latest incidents resulted in a rise of two dollars per barrel in a matter of hours. The second conclusion that can be reached is that not much changes as a result of this increase. The price per barrel remains in the low 60s. It was not long ago that a crisis like this would have been accompanied by oil prices at $120 or $125 a barrel. Today, nobody sees that number returning.


Existing-Home Sales Fall Short in June
Chinese Tariffs Discourage US Fashion Companies
 

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Friday, 23 August 2019