Strategic Global Intelligence Brief for July 25, 2018
Short Items of Interest—U.S. Economy
Deficit Leader
The U.S. has the dubious distinction of being the world's leading contributor to deficits. This is the result of the policies that have been pursued for years by the U.S. and its inability to come to grips with its own deficit and debt. At times, there has been incessant talk about trying to get the deficit under control. There has also been much handwringing over the size of the national debt, but when it comes down to it, the U.S. has been unwilling to do anything tangible. There has been no real effort to reduce spending as witnessed by the decision to suddenly spend $12 billion to bail out farmers hurt by tariff decisions imposed in response to the U.S. tariff. The U.S. has not been able to improve revenue either as witnessed by the decisions to cut taxes rather than to use the additional revenue produced by a growing economy to address the debt. Once upon a time, there seemed to be genuine interest in dealing with these dual overhangs, but not so much anymore.
Transportation Sector Affected by Input Costs
As the various transportation companies report out on their latest quarter, one issue is standing out. It has serious implications for the future. The companies have seen some good revenue numbers and demand has been up. The strength of the economy has been reflected in the need for more trucks, trains and planes, but with all this revenue, there has been little profit as the costs are going up faster. The biggest culprit has been oil, of course, but it isn't the only issue. There has been a growing labor problem for years. Now it has become crucial as it has gotten expensive to find drivers, engineers and pilots. This shortage is only expected to get worse. That means the transportation sector is living up to its reputation as the harbinger of things to come—namely inflation.
U.S. Business Fights Tariff Plans
The collection of U.S. companies testifying before Congress was essentially a cross section of the country's industrial community. They are furious with the tariff and trade war. Most came armed to the teeth with data showing how much they will lose and how they will have to cope with the plans. The estimate at the moment is that between 500,000 and one million jobs will be lost. This is likely high and designed to make a point, but it is hard not to expect job loss when there is such an interruption of a company's market. The overall message is that companies organize for a global economy and trying to revert to nationalism is unworkable.
Short Items of Interest—Global Economy
Elections in Pakistan
This is only the second time that Pakistan has seen a civilian government give way to another civilian government, but that doesn't mean there has not been substantial military engagement. One of the two candidates for the presidential post is in jail on corruption charges, but that doesn't stop the military from backing Nawaz Sharif. His opponent is the former cricket star Imran Khan. He seems to be leading in the polls. The elections have been marked by extensive violence and bombings—one more today. If the polls are correct, Khan will win, but forming a government will not be a simple matter.
What Does Inflation of One Million Percent Look Like?
Venezuela is about to find out. Estimates are that inflation will hit this staggering number very soon. The impact is not likely much different than what things are like now, however. The system has broken completely and barter has taken over. The currency is useless and most cash transactions are using other countries currencies. The bulk of exchange now is direct trading of goods for goods and services for goods. The underground economy is now the normal economy. There is no going back even if President Maduro's idiocy ended today.
Farm Bailout—Needed but Not Very Popular
The farming economy is tough under the best of conditions. When things are not going all that well, it can be next to impossible to achieve consistent success. There are simply too many variables to manage; risk is the nature of the business. The farmer is at the mercy of nature as there is little that can be done about the availability of water or the right temperatures. The inputs needed (seed, fertilizer, herbicides, insecticides, etc.) vary in cost every year. So does the fuel needed for the machines. Labor shortages have been chronic in the farm sector for decades. Then there is the fickle market. The farmer secretly hopes for the best conditions on their land and a hailstorm in the neighboring state as there is fierce competition. It is not that farmers don't want to cooperate with one another as they most certainly do. The issue is that corn is corn. If everybody has a good year, the price of corn falls to the point there is no profit to be made. Farming is the process of spending money 364 days a year and getting paid on the 365th. Add in disruptions to the export market and it is extremely difficult to make a living.
Analysis: As has been pointed out by most analysts, the first real casualty of the trade/tariff war has been the farmer. China is an enormous market for U.S. food exports—one that agricultural interests have been working to develop for many years. China buys just about everything the U.S. grows and has become nearly dependent on U.S. soybeans, wheat, sorghum and corn. China has changed drastically when it comes to food consumption and the U.S. has been a very big part of that transition. This is a nation that once faced famine nearly every year. Today, China not only feeds itself, but exports food to other nations. It has also changed its eating habits through the consumption of far more meat than in past years. This shift to a more expensive diet is what has driven demand for U.S. food. The Chinese know full well that U.S. farmers need their market. They also know they can get the food needed from other countries so they are hitting the U.S. agricultural sector with tariffs in retaliation for the tariffs the U.S. has imposed on China.
The farm sector will be in a great deal of trouble sooner than later as this has not been a good year from a weather perspective. There have also been higher-priced commodities to deal with. The farmers have made it abundantly clear they will be stressed beyond the breaking point if these tariffs from China are maintained. The U.S. response for now is to authorize an emergency bailout of $12 billion to help the farming community weather this crisis. This is certainly not the first time farming has been the recipient of government help as this is a volatile business and needs help from time to time. This is the notion behind programs like crop insurance and the subsidies that are offered to produce certain crops in certain areas with certain communities in mind. The farm community generally appreciates this current offer, but it is not what they would prefer. They have worked long and hard to develop these markets in China, Europe and elsewhere and do not appreciate the fact they may lose them permanently due to these trade wars. Once China finds alternatives to U.S. farm output, what would convince them to return to old patterns?
The $12 billion is a temporary program—at least as it is conceived right now. These payments would be made to farmers this year based on how much of their crop they have sold to China or other nations, but the truth is that it is not easy to determine whose output is going where. There will inevitably be payments to those who have not really been affected and money will not find its way to those who need it. It is also not clear this payment will offset the general fall in the price of these crops. If the U.S. can't sell its output, the value of that production declines and prices fall. There is already a glut of meat in cold storage all over the country as demand has been affected by the tariff walls already. That sets up an all too familiar pattern. Prices will tumble due to the glut and livestock operations will suffer. They will react to the low price by limiting further expansion and letting their herd size dwindle. That eventually results in shortages and prices rise sharply. The consumer would be advised to buy a few more freezers and wait for the price hikes.
Beyond all this, there is what that $12 billion does to the debt and deficit numbers. Remember these? Once upon a time, the U.S. seemed concerned over mounting debt and larger deficits—at least it seemed the Republicans did. Now the GOP is as free and loose with big spending efforts as the Democrats. The debt and deficit numbers have gotten larger and larger. It is hard to argue that farmers do not need this help, but many are questioning why they had to be put in this position in the first place.
Who Gets the Next Bailout?
Thus far, there has been no talk of adding another industry to the list of those that will get government largesse to get through the trade war, but that may not remain the case for long. Outside of food, the single-biggest category of goods shipped overseas is manufactured goods. These are not just any manufactured material as the U.S. doesn't engage in much consumer-centered production these days. These would be sophisticated, expensive machines and technology. The U.S. makes airplanes, construction and farm equipment, transportation equipment, health care machinery and so on.
Analysis: The tariffs that other nations are looking at will affect these industries as much as they are affecting the farm sector. The question will be whether they get assistance. After all, there will be more jobs at stake and these products make up the bulk of the U.S. export total. It will be hard to pull off a bailout for the likes of Boeing and Caterpillar or John Deere, but these companies are likely to be hit harder than the farmer should these tariffs continue as planned.
Be Careful What You Wish For
It is an old adage and as relevant as it has ever been. Sometimes getting what you think you wanted is not all it was cracked up to be. In 2016, British voters shocked the establishment of both major political parties and decided they wanted the U.K. to leave the European Union. Granted, the British have always had an awkward relationship with the EU and Europe as a whole, but the British were certainly full members of that community. There were lots of reasons to want distance from the EU and voters reacted to them all. There were those in the business community who chafed at the regulations imposed by Brussels, there were those in the financial community who felt that Germany and France were getting a far better deal than the U.K. However, there was one overarching motivation for the majority of those who voted for Brexit—immigration. The British working man had come to blame the arrival of millions of people from East and Central Europe for their woes. The sense was that they were taking jobs that otherwise would go to Britons, but the reality is that many of these jobs had been shunned by the British worker. As with every wave of migration, there have been culture clashes as people arriving in a new country try to hang on to their old identity through their customs, food, language and the like. The Brits who voted for leaving thought the universal migration process for EU members was untenable and they wanted to shut the door.
Analysis: At the time of the split, there were some assumptions made that proved wholly inaccurate. It was nearly a case of hubris on the part of the British. They assumed that their economy would be so important to the Europeans that all kinds of accommodations would be made to keep the economies of Europe and the U.K. linked. It was thought the EU would fall all over itself to preserve that relationship and simply understand the U.K. didn't want all those foreigners showing up. This is most definitely not what happened as Germany and France essentially said "don't let the door hit you on the way out."
Now, the British public is turning against the Brexit plan. If the vote were taken today, the decision would be very different as the "stay" numbers are far higher than the "leave" numbers. It has become obvious there will be economic damage. That translates into slower growth numbers and loss of jobs. The financial sector in London is weakened and many operations have already moved to New York, Berlin and Paris. The problem is that there are no do-overs as far as Brexit is concerned. Europe is adamant as regards the British and is convinced the EU is far better off without them. The British assumed they would be able to offset the impact of Brexit with a new trade pact involving the U.S., but there has been no indication of U.S. desire to do anything of the kind. Europe has now slammed the door permanently and advised U.K. leaders to submit an application for membership once they are willing to comply with all the requirements of European engagement.
A Matter of Semantics?
What exactly does one think of when the word meddling is used? It tends to conjure up images of a backseat driver giving all manner of unwanted advice. The term has been applied to the Russian efforts to impact the U.S. elections in 2016 and their ongoing efforts to affect the process this year. It is not an appropriate use of that term. The Russians have a formal name for the activity and a department within the GRU (military intelligence). It is referred to as "information warfare." It is considered a form of real war—an effort to destabilize an enemy from within by sowing discontent and destroying faith in the systems of government. If the population no longer believes in its own democracy, its leaders or the press, it has severely weakened itself.
Analysis: Russia is a far smaller economy than the U.S.—it has a GDP smaller than that of New Jersey. It can't realistically compete with the U.S. on any level. Not economically and not militarily. Granted, it still has nuclear weapons, but any use of these would invite absolute devastation from the much larger U.S. arsenal. It can't even support nations the way it once did. After a year or so in Syria, the Russians could no longer afford the venture and largely pulled out. It has relied on more subtle means of attack—hollowing out its adversaries with relentless attacks on what these nations hold dear. The shocking aspect of the effort is not that the Russians are engaged in the effort—that has been happening since the advent of the USSR in the 1920s. The amazing part is the sheer gullibility of the U.S. citizen who is willing to believe the most ludicrous stories while rejecting demonstrable proof and facts. The Russian goal has been simple—keeping the U.S. divided by internal strife so that Russia can be free to intervene in places like Syria, Ukraine and other states on its periphery. It allows Russia to appear much larger and important than it is.
Ignoring the Odds
The news of the day can be crushing. It seems that so many things are going wrong all at once. We hear of shootings every single day, road rage, property crimes and so on. There is some natural disaster somewhere that kills hundreds, another terrorist attack and we watch political leaders more interested in fighting one another than leading. It is overwhelming and makes us fell puny in terms of our ability to impact any of this. What can one person possibly do?
While watching another of those veterinarian shows, I was struck by the determination of one man who simply ignores the odds and soldiers on. He is dedicated to saving the wombat of Tasmania from extinction. Their population has been ravaged by a mite that overwhelms their system and eventually kills them. There is a cure that consists of an injection that kills the mite, but it has to be administered by a vet. In this episode, he has enlisted an Australian vet in his effort. They set about catching the wombats so the injection can be given. This means catching a wild animal in their habitat. In a solid day, three of them caught six wombats and treated them. This was a roaring success. That was only six animals out of perhaps hundreds.
It makes one realize that being overwhelmed is no excuse. If this guy wasn't out there, the six that were caught would soon have been dead. Each one of us can do something and rely on the fact that something is better than nothing. A guy I know saw a woman at the side of the road with a small child—victim of a broken down car at rush hour. Nobody stopped but he did. She was sobbing and it was soon apparent that her child was ill. They had been on the way to a doctor when the car died. The free clinic was all she could afford and it was not close. He drove her there and decided to stick around until she was seen so he could take her back home. While sitting there, he learned her story. It was one of bad breaks—sick mom that caused her to drop out of school and crummy jobs after that. There was a man who lied about being married and so on. My buddy decided to get her car towed and repaired. One thing led to another. Eventually he and his wife decided to have her move in with them and help her get an education. This was about 10 years ago. Today, she is his office manager and was there to take care of his wife when she got cancer. One life saved (actually two as her daughter has thrived as well).
