Strategic Global Intelligence Brief for July 31, 2018
Short Items of Interest—U.S. Economy
Another Bold Initiative?
There is a pattern to President Trump's approach to foreign policy that is certainly unique, although not as much as one would assume if one looks at history. He has shunned traditional diplomacy and has opted for the personal with his efforts to deal with implacable enemies such as North Korea and Russia. Now, he has offered to meet with the leaders of Iran with no prior concessions. It is something of a repeat of the offer made to Kim Jong-un; we have yet to see how that meeting will ultimately work out. Iran, however, may be an even bigger nut to crack. The president will meet fierce opposition from allies such as Israel and Saudi Arabia. His approach is very unusual in the modern context, but not so unusual historically. The president who employed this technique most often was Teddy Roosevelt. He frequently backed his overtures with shows of military might (speak softly and carry a big stick). Even into the modern era, there was more dialogue with Eisenhower and Kennedy at the helm.
No Fed Fireworks This Week
There will be no big statement and certainly no change in the interest rates announced at this week's Fed meeting, but that hardly means there will be nothing of interest taking place. The Fed still plans to hike rates in September and perhaps December. These intentions will likely be addressed at this week's meeting. This will be the first meeting for the group since President Trump started to question their commitment to hiking rates. It will also be the first meeting since the release of those good growth numbers. The meeting will likely feature a response to both developments as the Fed starts to lay the groundwork for the September hike.
U.S. Engagement in Asia
The speech by Secretary of State Pompeo sounded very familiar as it echoed the commentary that accompanied the development of the Trans-Pacific Partnership (TPP) during the Obama years. This is not much of a shock given the realities of the modern economy. Asia is crucial to the development of the global economy and the U.S. needs to be a part of what goes on there. At the same time, this region is closely tied to China and they are clearly the dominant player. The idea behind the TPP was to establish a connection between the U.S. and the nations of the Pacific that would not really include China. In Pompeo's speech, that was exactly what was suggested for the U.S. going forward.
Short Items of Interest—Global Economy
Bank of Japan Bucks Trend
There has been some expectation that Japan's central bank, the Bank of Japan (BoJ), would join the parade and start to pull back on their ultra-easy monetary policy as most of the other major central banks have done or at least talked about. Thus far, this is not the case as the BoJ has met and made only very minor adjustments to the plan. The comments from the head of the BoJ—Haruhiko Kuroda—made it clear that he doesn't think Japan is nearly out of the woods and needs all the help it can get—at least for a few more months. This has sparked a little rally in global bonds and may also serve to strengthen the yen some.
French Inflation
The rate of inflation in France hit levels not seen since 2012 as the price of two critical items for the French culture have been rising. The cost of energy has gone up all over Europe. France is no exception, but it tends to hurt France a bit more than in other nations as the French are more committed to their cars than other Europeans. The other price hike was for cigarettes, which really stings. What next? Higher priced berets?
Bad News on Eurozone Front
Despite the surge in inflation in France (which would suggest growth), the pace of growth for the eurozone as a whole has been slower than it was last year. That is creating a lot of concern—even if it was somewhat expected. The growth in the second quarter was a spectacularly anemic 0.3%, and that was down from the 0.4% in Q1. This is slower than it has been in two years and not at all what had been anticipated based on last year's performance.
What Does the Credit Managers' Index Tell Us This Month?
Each month, the Credit Managers' Index (CMI) analysis is provided to the National Association of Credit Management. The information is compiled from a survey of credit managers who rate whether factors in their business credit cycle are better, worse or the same as the previous month. The full survey report can be found on the NACM website.
There have been lots of troublesome rumblings as far as the performance of the economy is concerned. One can already see people shaking their heads and mumbling about the ways of the economist—always finding the dark cloud behind the silver lining. What could be wrong with an economy that is sporting the fastest quarterly growth seen in four years (4.1% in Q2), the lowest rates of unemployment in years (between 3.8% and 4%) and a dramatic expansion of exports? It seems that credit managers are seeing some of these warning signs and are not as impressed with these good news reports. In fact, some of the issues can be read in those same reports. Much of what drove the fast growth in Q2 came from higher export levels, which took place as buyers of soybeans and other agriculture products rushed to get their orders filled before tariffs took effect. Sales will now start to fall like a rock.
Analysis: Looking at this month's Credit Managers' Index (CMI), there are several areas that seem less than encouraging. The combined score slipped a bit from 56.3 to 55.5—still well into the mid-50s and the expansion zone (anything above 50), but with a score lower than it has been the last two months. The index of favorable factors dropped, but it remained thoroughly within expansion territory at 63.1 after hitting 64.9 the month prior and 65.7 the month before that. The index of unfavorable factors stayed close to what it had been previously—50.5 after a reading of 50.6 in both May and June. As always, the story is in the details.
The sales category fell from its unusually high level of 69.6 to a reading of 63.9, the lowest since January. The impact of the tax cuts may have started to fade, but these numbers are thoroughly in the 60s and still solid. The new credit applications category improved over last month with a mark of 61.2 compared to 60.5. This is quite a bit less than was notched the month before in May when it hit 63.8. The always mercurial dollar collections number dropped by quite a bit, but still stayed in the 60s as it went from 63.2 to 61, while the amount of credit extended stayed close to what it has been for the last few months at 66.1. It was at 66.2 in June and 66.8 in May. This suggests that bigger requests from larger companies are being handled.
The rejections of credit applications improved a little from 51.2 to 52.5. This is especially important given that requests in general are down. There had been some hope that accounts placed for collection were going to steadily improve as they had broken back into expansion territory last month with a reading of 51.3, but this month the reading was back in the contraction zone at 49.9. The data for the disputes category dipped further into contraction with a reading of 47.7 after 48.3 in June. The dollar amount beyond terms category has been problematic all year—that variability has been responsible for much of the total index volatility. It was at 49.2 last month and fell to 47.4 this month. The dollar amount of customer deductions is now at 47.9 after being at 48.1 in June. The best news of the month comes from the category of filings for bankruptcies, which improved quite a bit from 55.7 to 57.4. It seems that most companies are continuing to muddle through whatever challenges they are facing and have not elected to give up altogether.
The fear now is some of the factors that had been keeping the economy functioning reasonably well are starting to fade. Inflation threats are becoming very real with the recent rise of wages to accompany the rise in commodity prices. If there are further hikes due to the tariff and trade wars, the inflation threat becomes imminent and serious and very difficult to walk back from.
Manufacturing Sector
The sector that seemed to get the biggest boost from the tax cuts was manufacturing as many of the small- and medium-sized companies struggling to emerge from the recession were finally able to purchase the machines they had needed for years. The larger companies spent more of that windfall on stock buybacks and internal activity, but the mid-market stuff has been taking off. The problem that lies ahead is that this same group will feel the impact of the trade wars and tariff battles through the end of this year and into next.
The combined manufacturing score this month is very similar to what it was last month. It barely moved, going from 55.9 to 55.4 and is nicely placed in the middle of the 50s. The index of favorable factors slipped a bit from 64.6 to 62.1, but readings in the 60s remain very solid and thoroughly in expansion territory. The index of unfavorable factors also showed a lot of stability with a reading of 50.9 after June's 50.1. There was quite a lot of stability this month, but that may not be the case for much longer.
The sales numbers fell quite hard, but last month was also unusually high at 69.1. This month, the reading was 62.4, certainly still very acceptable. The new credit applications category fell out of the 60s for the first time since January as it went from 60.2 to 59.5. The dollar collections number slid a little as well, but not all that far (63.3 to 61.5). This has been a volatile number all year, but has recently calmed down quite a bit as it seems that fewer of the manufacturers are having cash flow issues. The amount of credit extended stayed almost the same at 65.1. May's reading of 66.4 was followed by June's 65.7.
The rejections of credit applications improved quite a bit from 50.6 to 53.5. This is especially good news in light of the fact that credit applications have generally been down and those applying are creditworthy. The category of accounts placed for collection was exactly the same as it was the month before at 50.6. There has been very little movement in that category for the year, bouncing between 49 and 51. The disputes reading shifted deeper into the contraction zone going from 47.9 to 47. Dollar amount beyond terms at 48.1, which has also been very volatile, stayed close to what it was the month before (48.7). The dollar amount of customer deductions also showed stability with a reading of 46.9 after June's 46.6. The best news of the month comes with the category of filings for bankruptcies as it went from 56.2 to 59.1, as close to 60 as this category has come in several years.
Manufacturing has been on a roll for the bulk of the year. That has been obvious by looking at the favorable factors and their persistent positioning in the 60s. What is worrisome is that there are still lots of sagging readings in the nonfavorable sectors. If companies are still struggling to get out of a rut this long into a robust recovery, what will they look like when there are issues later with a slowing economy?
Service Sector
The service sector was strong enough last month to avoid the dip that manufacturing experienced, but not strong enough to avoid it two months in a row. The sector is a very broad one, which always complicates the process of assessing what happens in the category overall. It includes retail, health care, professional services, construction and transportation (among others), and they do not perform in lock step.
The combined score for services was 55.6, just a little less than it was in June when the number was 56.8. This remains in the middle of the 50s and healthy. The index of favorable factors slipped from 65.2 to 64, and the index of nonfavorable factors dropped from 51.1 to 50.1. This is not a big change, but more of a change than was registered the month previous.
The sales reading dropped from that startling high of 70.1, but is still very solidly in the 60s at 65.3. The new credit applications number improved quite a bit. It is the time of year for this to take place as retail starts to build inventory. It was at 60.9 and is now at 63. The dollar collections number slipped a little though and is teetering on the edge of the 60s (from 63 to 60.5). There was a little improvement in the amount of credit extended as it went from 66.8 to 67.2.
The rejections of credit applications stayed almost the same as the month before, dropping slightly from 51.8 to 51.5. This is still good news given there was a substantial increase in the number of new applications. The accounts placed for collection category slipped back into contraction territory with a reading of 49.3 from a respectable 52 in June. The disputes category stayed firmly in contraction at 48.3 after being at 48.6 the month before. The dollar amount beyond terms also languished in the 40s with a reading of 46.8 after being at 49.7 in June. This has been a troublesome category for months as slow pays have been rising one month and falling the next. The dollar amount of customer deductions also fell (49.6 to 48.8). As with the manufacturing data, the bright spot was filings for bankruptcies. There was not much change and the numbers stayed in the mid-50s with a reading of 55.8 after last month's 55.1.
The month-to-month curve has been pretty flat—basically a good thing given the fact that the favorable factors have been in the 60s consistently and the nonfavorables have been clinging to the bottom of what would be termed expansion territory.
No Clear Winner in Zimbabwe
After nearly half a century, the people of Zimbabwe had a chance to vote. The turnout has been high—estimates are that over 80% of those eligible cast their votes. This is one of the reasons it is not yet clear who has won the contest. It will take several more days before the rural vote is collected and counted, but thus far, the election seems to have been conducted more fairly than many had expected. The two candidates have been running on the same platform of change, anti-corruption and a break from the crushing tyranny of the Mugabe years.
Analysis: Emmerson Mnangagwa was Mugabe's longtime vice president and head of security, but was also the man who led the army coup that toppled Mugabe last year. He is the head of the Zanu-PF party that was founded at the time the nation broke way from Great Britain and still has considerable support in the rural areas and among those that were part of Mugabe's inner circle. The opposition is led by Nelson Chamisa, a well-spoken lawyer and pastor who is very popular in the urban areas. It is already clear that his party—Movement for Democratic Change—won the urban vote as well as the educated vote. Two-thirds of the electorate are in the rural areas; they are the ones that have remained loyal to Mugabe. It is not clear if they will switch their support to Mnangagwa since he can be seen either as the man who deposed Mugabe or as the man who would carry on his policies. The country's financial future depends on this election and the willingness of the candidates to support the one who wins. If a civil war breaks out after the polls, the investing community will continue to shun the nation. It appears that Chamisa will avoid that conflict if his opponent wins, but should Chamisa win, it is not clear that Mnangagwa will leave office.
Familiarity Breeds Contempt
I used to ponder the meaning of a phrase like this. It seemed a little counterintuitive to me. Wouldn't a person become closer to someone with whom they were becoming more familiar? If you decided you didn't much care for someone, why would you continue to be familiar with them? As I have aged, I realize there are many people that one becomes very familiar with but would not necessarily count as friends. They may be colleagues at work, neighbors, the people seen often at the stores we frequent or the parents of our kids' friends and so on. In the good old days prior to the advent of YouTwitFace (combination of YouTube, Twitter and Facebook), it was not all that easy to know much about those we only had casual connections to. It turns out these were days of blissful ignorance.
Today, I am "treated" to every thought and opinion held by almost every person I have come in contact with. I do not really want to know most of this. As hard as I try, I can't seem to ignore things that color my perception of that person. Political differences are not that bothersome as I have always liked a good debate. However, many of my friends have radically different opinions when it comes to political positions. Two areas that vex me most are attitudes that expose bigotry. I understand the desire for protecting the border of the U.S., but don't tolerate the hatred that is directed at those who are seeking to come to the U.S. by whatever means they can. I also do not tolerate the hatred that is directed at the LGBTQ community or any other such prejudice. And, don't even ask about those who would abuse animals in some way. Not that many I am acquainted with fall into either of these categories, but I have been shocked to learn that people I know are engaged in dog fighting or routinely elect to shoot stray animals that wander on their property.
Then there are the people that post pictures of their food. That isn't really a deal breaker, but I still can't taste much due to my exciting radiation therapy. I am convinced these people are just taunting me!!!
