Strategic Global Intelligence Brief for July 23, 2018
Short Items of Interest—U.S. Economy
Industrial Policy for the U.S.?
Many nations in the world have been major advocates of what has been termed industrial policy, but the U.S. has long resisted that idea. There are many ways this kind of policy has been set, but the motivation is usually similar. The government is tempted to favor certain business interest over others and put policies in place that benefit that sector. This may be due to the fact this sector employs lots of people or it may be due to some perception of where the country wants to go in the future. The help is often a mix of subsidies and breaks coupled with protection from foreign competition. The U.S. has always been of the opinion that these decisions are best made by the companies themselves and the government should mind its own business. That policy is in full reversal under Trump as his approach has been to favor some industries and take steps that damage others.
Watch for GDP Numbers This Week
At the end of the week, there will be the initial release of Q2 numbers for GDP. Few data releases have been so anticipated. The growth in the first quarter was anemic and kept getting lowered with every new revision. It ended up at 2%, a far cry from the 3% growth that was notched last year in both the second and third quarters. This report is likely to be far better and should show growth at just over 4% although some very ambitious forecasts hold that 5% growth is possible. The only downside to this number is that it will certainly get people focused on inflation threats by the end of the year. Will there be positive or negative revisions to the GDP data in the months to come? Upping the number will be an even stronger indicator of the inflation threat.
This little blurb is not enough to even introduce the topic, much less provide a solution, but we will be writing more on this in the future weeks and months. The crisis that has loomed over the rural parts of the U.S. is likely to become crippling very soon. The collapse in the market for U.S. food exports will put as many as 25% of the livestock operators out of business and prospects do not look any better for growers of grain for that sector. In fact, the decline will drag almost every bit of the rural community down with it. The small farm is hanging on by a thread and survives only because they borrow against their land. The U.S. is not in a position to bail this sector out. That creates a major cascade of economic and social problems.
Short Items of Interest—Global Economy
Iraq Divisions Ramp Up
From the moment the U.S. became involved with Iraq, there were many analysts who asserted the U.S. misunderstood one of the most basic aspects of that society. In the briefest of terms, the country makes no sense at all given the deep division between the people of that region. It was an arbitrary collection of nationalities cobbled together by the British and has only held together when there has been a strong autocrat willing to use violence to ensure that Kurds, Sunni, Shiite and Turkoman would coexist. The autocrat is now missing and the country is on the very edge of splintering into these regions in a civil war.
Colombia Greets FARC Members in Legislature
After many decades of conflict between the Colombian government and the leftist guerrillas under the FARC umbrella, there has been a peace deal. The senior members of FARC are now in the legislature although in small numbers. They have entered just as the country has turned to a right-wing leader as their next president. The FARC candidate for president did not fare well and not a lot is expected from these delegates.
Israel Remains Wild Card as Far as Iran Is Concerned
Israel's Prime Minister Netanyahu praised the angry comments from Trump regarding Iran. However, that only makes people more uneasy as Iran could well be the target of Israeli strikes. This is a path that many fear would lead to a more serious and open conflict with the U.S.
First Major Casualty of Trade War—Farmers and Ranchers
The U.S. rancher is facing one of the toughest years in decades. The expectation is that as many as a quarter of livestock operations will fail by the end of the year. This was an expensive year to start with as costs soared for everything from fuel to feed. The weather was brutal and now comes the trade war. Meat is piling up in warehouses all over the country and prices are collapsing. The U.S. consumer has increased their demand a little, but foreign demand has dried up completely as retaliatory tariffs on the U.S. have been aimed at the farm sector. This has driven the cost of meat to levels these populations can't afford. The majority of these nations have started to buy from elsewhere. The U.S. will struggle to get that market back.
Analysis: From the start of the trade disputes, it has been asserted the farm sector would take the brunt of the burden as this is what the U.S. exports. There are other manufactured items, of course, but these are often unique. Even higher prices will not really erode the demand for them. Farm goods are not unique. China, Europe, Mexico and others will not find it hard to buy what they desire from other parts of the world.
When Did Europe Become a Foe?
Unless there is some unexpected gesture coming from the White House in the next few days, there will soon be a very serious trade war erupting between the U.S. and Europe. Not that the prospect of a trade war seems to discourage President Trump as he has managed to pick fights with every nation where the U.S. does business; but this is far different than the one brewing with China over the last year. It can be successfully argued that China has been just as uncooperative as the U.S. has been of late. China has established a long pattern of exploiting trade deals in highly inappropriate ways. The U.S. is far from the only nation that has taken exception to the ways of China. Europe is not in the same league by any stretch.
Analysis: Trade between the U.S. and Europe is classic trade between equals. Europe is not exploiting a low-paid population and is not taking advantage of a non-regulated environment to gain an edge. If anything, the European workers are paid more than U.S. workers, have better benefits and the region has far tighter regulations. The things Europe sells to the U.S. are virtually the same as what Europe buys from the U.S. Industrial equipment and technology make up a significant amount of trade between Europe and the U.S., while the U.S. sells more agricultural output. This kind of trade is differentiated by company and brand rather than by its low cost.
If a U.S. buyer elects to buy a Mercedes, Jaguar, Volkswagen or Fiat, the motivation is not that this vehicle is the cheapest option on the market. When the Europeans buy a Ford or GM car, they are likewise not reacting to price. They want that car for all the emotional reasons people have to buy a given vehicle. The interaction between the U.S. consumer and the foreign producer has led to dramatic expansion of auto production in the U.S. BMW makes cars in South Carolina, Volkswagen makes them in Tennessee, Honda is in Kentucky, Nissan in Texas, Toyota in California and so on—the list is long. Meanwhile Ford, GM and Chrysler have their operations in Europe (even before the tie-up between Fiat and Chrysler).
Trump now wants to impose more tariffs that would add 20% to the cost of these imported cars and parts from Europe. There is no motivation akin to that with China. These are not imports to the U.S. that are taking advantage of the trading system as one can assert of China. This is quite literally denying consumers in the U.S. the opportunity to buy what they want. It also invites retaliation from an EU that is the recipient of 25% of the U.S. export market. The list of goods that will be hammered by the Europeans is a long one. They have been well targeted to hit key U.S. industries. The damage to the U.S. economy will be severe, while the potential gains from these tariff barriers are meager in comparison.
Even the rationale for action is weak as compared to the logic behind the steel and aluminum tariffs. It can be argued that the steel sector has been hit very hard by everything from competition to U.S. government mandates that have compromised the size of the steel market. It really has needed help to cope with things like more fuel-efficient cars with far less steel involved or bans on scrapping ships. The auto sector has been on a roll for several years now. The U.S. carmaker is now as competitive in global markets as it has ever been—expanding dramatically in China and even India.
Yet Another Series of Threats
There was another round of explosive and threatening tweets from Trump over the weekend as he responded to the statements made by Iran's president. Hassan Rouhani is now walking a tightrope internally as his population is angry and demonstrating against the economic privations they suffer. It was thought he would bring an end to the sanctions, but the U.S. killed that plan. Now he has to ally with the hardliners if he wants to preserve his position. Trump's immediate and furious response prompted the price of crude oil to jump up. This is likely to continue for a while.
Analysis: There are three scenarios in play. The first and most likely is that all of this remains a war of words and threats with neither nation willing to push the issue to the point of actual warfare. Scenario two holds that there is enough emotion tied up in this exchange to provoke a reaction that leads to real conflict. This could also mean the U.S. gets involved in the Saudi efforts in Yemen as a way to show anger towards Iran. Then, there is the wild scenario that asserts that Trump has been here before with his angry tweets and insults directed at Kim Jong-un of North Korea. Maybe the next dramatic summit is between Trump and Ayatollah Khameini. There has been a willingness to sit down with longtime adversaries and autocrats with this administration. Could it happen again?
What Is With Media Anger?
This may be slightly off the usual topic of economics and business, but when has that ever stopped this author. In fact, this piece results from a conversation or two that took place at a meeting of accountants and financial professionals. When one thinks about it—perhaps this is not so off-topic as it would seem. The issue is the media. Specifically, why there is so little trust in the media to which we are now exposed. There are many reasons why this distrust matters as it is the media that provides the information we act on for everything from business decisions to our investment directions. We live in an age when checking accuracy has never been easier, but instead of availing ourselves of these demonstrable facts, we decide that they are not true and we choose to believe things that are demonstrably false. There have always been those who choose to deceive and manipulate. We have always had to be on guard to some degree, but it seems that we swing the pendulum wildly as we reject those with the data and knowledge in favor of the loudly opinionated who trots out conspiracy theory and personal opinions as proven fact.
Analysis: When did we make this shift? Not that long ago, we all waited to hear what Walter Cronkite or the team of Huntley/Brinkley said and we walked away satisfied. Now the media is the enemy and commentators spend more time taking shots at each other than they do providing real data. Not that I have anything close to the answer to this question, but here are four theories that evolved from this conversation.
The first is that the media lost its status as the provider of the truth. This doesn't assume that deliberate lies are being told or that there is a conspiracy of manipulation and obfuscation. Today we can (and do) hear from a wide variety of people beyond the few we once did. These people have a much deeper understanding of the issues that interest us the most. We are not as satisfied with what we hear from the reporters as we might have been. We slowly decide that nothing from the media is all that precise or accurate. We also tend to forget that good reporters do just that. They tell us what happened and we decide what to make of that information.
This leads to the second critique voiced. Those who claim to be reporters are taking on the duty of assessing, analyzing and providing value judgments. These are perfectly legitimate actions as long as there is no doubt in anyone's mind this is taking place. This newsletter is pure analysis—we do not claim to have the resources to break stories or even to engage in investigative work. We assess the facts as presented and interpret them through our own prism. We state openly that we have a bias towards what is good for the business community and the growth of the economy. There has been some erosion of that distinction with some media channels. It creates frustration as well.
Others in this conversation asserted that the media is less at fault than is the public these days. There is a very broad gap between maintaining a healthy skepticism and dismissing everything that one disagrees with as "fake news." Even the term is a misnomer—if something is fake it is, by definition, not news. There is either accuracy or there isn't. We have the right to question what we hear and read, but along with that right is responsibility. We have to have the tools to judge what is and isn't true. That means understanding enough about statistics to know when there is manipulation. It means knowing enough about a subject to have an informed opinion. Nobody should pay any attention to my opinions on why a computer is not cooperating as my default position is that demons have possessed the motherboard or the "uncleboard" or whatever. On the subject of economics, I am more trustworthy. We need to know who we can trust and that means gaining enough knowledge to make choices.
This latter point led to assessments of the public that are none too flattering—essentially that too many of us are apathetic and lazy, and barely engage. The number of people eligible to vote but don't, regularly outnumber those that do. Then they sit back and wonder why some extreme wing of the political environment tends to dominate. The polls suggest every year that most of the population takes centrist and moderate positions, but those candidates who represent that position rarely emerge victorious. This group pays no attention to the media at all. That is where we left it—nobody quite sure where the real fault lies, but everyone worried about the implications.
Entering a Club Nobody Wants to Be Part Of
Apparently, I have started an unwanted transition and am discovering a lot of my contemporaries are making that same journey. As a friend put it the other day—"I used to wake up on Saturday with expectations of all that I would accomplish. Now I am just grateful that some parts of my body are functioning at all." I am shocked that I have actually reached the age of retirement. Not that this is even a remote option for me, but my colleagues are often focused on winding up their careers and contemplating what happens next. This has been a rough year from a health perspective and I was not ready. It has been new to me and frustrating. I am still very fortunate as compared to many who are facing much more serious challenges, but my own maladies still bug me.
One of the great pleasures of my life was eating. My wife is a gourmet cook and we have long enjoyed trying out new cuisines. After all the radiation and chemotherapy, my taste buds have been destroyed. Everything I eat tastes vile—like some combination of very salty library paste and compost. I am told they might come back in a year or so, but never completely. My retinal surgery went as well as can be expected, but everything has been blurry since Memorial Day. That makes finding one's way in a strange place more than challenging. I am the original Mr. Magoo these days.
At least, I have the sense to recognize my new set of limitations as opposed to a buddy who still saw himself in some sort of athletic prime. He elected to play a little pick-up game of flag football with some of his son's friends. Twenty minutes later he was in the emergency room with a ruptured Achilles tendon, a separated shoulder and a broken elbow. That was from just ONE play. I get the majority of my exercise from jumping to conclusions—this is how it will remain.