Strategic Global Intelligence Brief for June 11, 2018

Short Items of Interest—U.S. Economy
Will Job Market Continue to Baffle the Fed?
Right now, the tried and true strategies and tactics are not working as they are supposed to. Once upon a time, it was relatively easy to figure out the connection between the job market and the Fed. A very low unemployment rate would inevitably create wage inflation as there would be too few workers available. That would force the business community to pay people more—some getting pay hikes so that they would stay with the company and others getting higher wage offers so they would come to work. That would be a nearly automatic response and would trigger enough wage inflation to convince the Fed it was time to act and start hiking interest rates. Thus far, that automatic response has not occurred and there is no immediate need for the Fed to act. How long can this situation be expected to last? The Fed is going to have to make a call very soon. If they assume wrong, the damage could be extreme.
Fed to Hike Rates Tomorrow
At the start of the year, it was predicted the Fed would hike rates three times this year—March, June and September. It is now June and there is nothing that would seem to dissuade the Fed from that path. There is really not much suspense—the markets would go nuts if the Fed failed to hike those rates or if they decided to get more aggressive with a half-point cut instead of a quarter-point. The most important part of this meeting will be the rationale offered up by the Fed once they have made the move. They will also be releasing their assessment of the economy going forward. That is expected to be upbeat.
Retail Sales Finally Start to Perk Up
There were many expectations regarding the reaction to the tax cuts. Initially, the enthusiasm seemed to be limited to the business community as there was considerable investment in machinery and physical expansion. There was some additional hiring, but the availability of qualified workers has limited that impact. The laggard in all this was the consumer as retail sales did not perk up as expected. Granted, the first quarter is never very strong for consumers, but the hope had been that tax cuts would spark interest. Now that the summer vacation season has started, there has been more consumer activity and retail numbers have been improving
Short Items of Interest—Global Economy
Socialist Axis in Latin America Falls Apart
The grand experiment has crumbled and nobody really knows what the future will bring for the states of Cuba, Venezuela and Nicaragua. They once provided a great deal of support for one another with Hugo Chavez and Venezuelan oil at the epicenter. Cuba and Nicaragua both depended on that oil and the money Chavez funneled to them. Now Chavez is gone and the oil money has run out. Cuba is transitioning from the Castro family and is in bad shape financially as well. Daniel Ortega of Nicaragua is also out of cash and is contending with violent riots. There is no reasonable opposition left in these nations to offer an alternative. That means an almost utter collapse.
Bromance Is Over
Shinzo Abe of Japan and Emmanuel Macron asserted they had a "special" relationship with Trump for the last year or so. That assertion is no longer being made as the men have been bitterly disappointed by what Trump has done thus far. There was an assumption they would be welcomed as confidantes and advisors, but that is quite obviously not going to happen. Both have now become very vocal critics.
U.S. Pork Industry Under Full-Scale Attack
One sector that will be hit very hard will be the pork producers in the U.S. as China, Europe and Mexico all plan to target it. The pork producers in the U.S. are now talking about a coming disaster. The first wave will see prices in the U.S. plummet, but that will be followed by hundreds of operations shutting down. That will mean very high prices later as perhaps half the hogs in the U.S. are destroyed.
Why Does Trump Hate Allies?
This is likely a little harsh and provocative as headlines go. This is however the view that has been prevalent in the European media as well as in Canada and some of the U.S. The G-7 meeting was expected to be contentious and tense, but nobody expected this level of total breakdown and acrimony. Every diplomatic norm was ignored as Trump lashed out at Canadian Prime Minister Justin Trudeau as well as German Chancellor Angela Merkel. The members of the G-7 were actively calling for the expulsion of the U.S. and going forward as the G-6. This is likely a threat that will not be followed up, but it certainly indicates the level of anger. The question is why Trump takes this approach with nations that have been close and supportive allies for years. On the other hand, he has been conciliatory to Russia (and still is as he demanded that Russia be put back in the G-7 to make it the G-8) and has praised Xi Jinping of China and Kim Jong-un of North Korea. There was an interesting piece of analysis on this topic from a website called "The Globalist."
Analysis: The assertion is that President Trump's animosity towards Europe is rooted in an intense opposition to the way that European society is conducted and reflects the attitudes and beliefs that are common within the base of support that Trump motivated and relies on for his political future. Simply stated, Europe is far more comfortable with ideas that are branded as "socialistic" or "extreme left" in the U.S. There continues to be near hysteria in the denunciation of what some on the right of the U.S. political spectrum consider to be socialistic or left-liberalism. Most of the issues that anger that conservative community are embraced to one degree or another in Europe. There is state-provided health care that is accepted by even the conservative parties in Europe, there are very generous welfare programs, many nations provide free higher education, there is often free child care and far more tolerance for those who are addicted to drugs with widespread legalization and many programs designed to make drug use safer. Regulations are prolific and very often intrusive as the European attitude has long placed more emphasis on the community than on the individual. There is plenty more that differentiates Europe from the U.S. and there are certainly national differences within the EU. There are also many on the European right who share the antipathy U.S. parties have towards these programs, but they have generally fallen short of being able to shift overall direction.
President Trump ran as a hyper-partisan and has governed in the same way. His presidency did not do the usual shift to the center as he has stuck very closely to the ideas that dominated his campaign and motivated his base of support. The Democrats—especially those to the left such as Elizabeth Warren or Bernie Sanders—are seen as mortal enemies. There are absolutely no grounds for cooperation and compromise by Trump or his supporters. The Europeans are seen as allies to the left in the U.S. and therefore are looked on as mortal enemies as well. Much has been written about the "culture wars" that so deeply divide the U.S. Those wars divide Europe as well. European states are generally tolerant of abortion (even Ireland has changed its laws). To the U.S. right, this is state-sponsored murder. Europe has long been supportive of the rights of the LGBTQ community, while many on the U.S. right remain opposed to gay marriage. Attitudes differ dramatically over climate change and dozens of other subjects. In other words, Europe (and Canada) represent everything the right opposes happening in the U.S. This puts them at odds with Trump and his supporters. There would have been no gain for Trump to agree with the other members of the G-7—at least not in terms of domestic U.S. support.
This assessment of Trump's European policy is not universally shared, of course. For many, the Trump approach to trade is simply the reaction of an economic nationalist—somebody more inclined towards protectionism than globalism. This is not unique to President Trump these days as it has been informing the behavior of the U.K. with the Brexit decision as well as Italy with the new government formed from anti-European parties. Even Japan has behaved as more of a protectionist state than earlier in the decade.
What Does the Blow Up at the G-7 Mean?
There is always a chance that cooler heads will prevail, but it is going to be hard to put this nasty set of insults and exchanges behind them. This has all the ingredients of a full trade war that will be motivated as much by personal acrimony as by economics. The threats of tariffs and non-tariff barriers are under full discussion now. The nations affected can be counted upon to target parts of the U.S. economy that will hurt the most. This will mean emphasis on U.S. agriculture and manufacturing as well as the service sector. The U.S. currently runs a consistent surplus with the world when it comes to services like law, accounting, finance, marketing and so on. This advantage may be short lived
Analysis: The point was made by Trump and his team that most of these G-7 partners have many tariffs and barriers in place against U.S. goods already and always have. There has been an effort since the end of World War II to reduce these barriers, but the fact is that democratic nations all face the same dilemma. Those industries that seek protection and also have political clout can get the protections and support they need—extending to blunting the trade threats from other nations. The U.S. does it and so does every other state. Much of what is included in a trade deal is reducing or eliminating these barriers, but that process is never popular with the constituents that wanted those barriers and subsidies in the first place. Whether or not a given trade deal is completed depends on the actions and political strength of those that will gain and those that will lose from the provisions of that trade deal. The process gets immensely more complex when trade is employed as a tactic that informs other political issues—alliances on military matters, support for diplomatic goals and the like.
Chances for Summit Success
To note that there are more than a few skeptics regarding the summit between Trump and Kim would be the understatement of the year. The North Koreans have a very long record of reneging on deals and of teasing the western nations with promises. This has happened to nearly every president since the end of the Korean War (which has technically still not ended). There are many longtime observers of the Hermit Kingdom that hold out little expectation this will be any different than those other aborted efforts. The cynics all point out that Kim has already gotten much of what he wanted without giving anything up. He strides across the world stage as an equal to the president of the United States as opposed to the tinpot dictator of a tiny country that can't begin to feed its own people. There are also those who assert there may be something different about this attempt and there may actually be a tiny window for success. If there is an agreement of any kind or even a promise to continue meeting, it will be because Kim Jong-un has decided that the economy is the most important issue and he needs the help of other nations.
Analysis: We know very little about the inner workings of the North Korean dictatorship. We know that Kim has absolute power, but we also know that even that kind of authority has limits. At some point, even the secret police and the military and police can't maintain control over a starving and desperate population. Kim needs economic development and relief from sanctions. Instead, his rise to power has been marked by even less of this economic progress than had taken place before. In the simplest of terms, he needs cooperation from four countries in one way or the other.
The most important now is China, and that is how it has been for decades. It is not that China is planning to jettison the Pyongyang regime, but China has not been as solicitous as they have been. China has other priorities—they want more from Japan and South Korea than they want from North Korea. They are not willing to sacrifice their national goals to protect North Korea. The Chinese have been much more critical of Kim than was the case before. In short, China wants Kim Jong-un to be less of a distraction and an irritant. North Korea would also like to be less of an economic burden. That is something the Chinese want as well.
Japan and South Korea are next in importance as Pyongyang wants their investment and wants access to their markets. The South Koreans had been investing in many large projects in the North, but all of those stopped in the last few years. Kim wants those to gear up again. He also wants more interest from Japan. Realistically, he does not fear invasion by either of these nations.
Finally, there is the U.S. That may be the most important of them all. The North Koreans need three things from the U.S. The most important is an ironclad promise to respect its sovereignty and to give up any pursuit of regime change in the future. The U.S. is really the only state that has threatened the Kim regime. A promise to avoid this option will be critical. The second thing is money and a lot of it. There is no other nation that has the capability as far as investment and money. Whether the cash-strapped U.S. would pony that kind of cash up is another issue entirely. Finally, the U.S. is needed to provide legitimacy by treating the country as equal. This has already taken place with the agreement to meet.
Colombia Likely Gets a New Leader From the Right
To an extent, the election of Ivan Duque is being seen as the return of Álvaro Uribe and a major defeat for the left in Colombia. Duque will become the youngest leader of Colombia in its history. He has been an advisor to Uribe throughout his career—picked by the president when Duque worked for the Inter-American Development Bank in Washington. The two have been very close ever since. When the opportunity arose for him to run, he has been able to gather the supporters of Uribe to counter the efforts of the left-leaning candidate—Gustavo Petro.
Analysis: Duque will be focused hard on the economy and the development of the nation's oil. This has been controversial in the past as the oil region is where the insurgents were most active. There is still deep resentment of the government there. He has pledged a renewed effort against what remains of the insurgents and he has also targeted the drug cartels that have been weakened, but still hold considerable power. He is expected to be close to the U.S. That may be critical to U.S. policy given the likelihood that Andrés Manuel López Obrador (AMLO), the firebrand left-wing leader, will come to power in Mexico.
A Heartfelt Apology to My Kentucky Readers
I can be too trusting at times and certainly too optimistic. I have generally had good luck with Southwest when it comes to their scheduling. I have pulled off some trips that I should have never attempted. Thus it was that I confidently arranged to fly from Kansas City to Louisville via Chicago Friday, June 8. It was close to a direct flight as the plane simply stopped in Chicago and then went on to Louisville. It's easy as pie. No connections to be concerned over. My talk was at 2:50 and I was due to arrive at 11:30—simple enough. I can do this!
Then comes Friday and all these assumptions are blown to bits. A massive line of storms just hammers Chicago all morning and we can't take off. My 11:30 arrival now gets pushed to 1:30. I can still make it—I am convinced. But then we get to Chicago and the storms have disrupted the whole airport. Nothing was getting in or out for half the day and the plane waited and waited for permission to fly. All of the sudden my arrival time is 2:45—five minutes prior to my talk. I ended up sitting in the Louisville airport doing an impromptu webinar. Not my finest hour!
I am no longer going to be so trusting and will make sure I am where I need to be the day prior. I want to apologize to the Kentucky Society of CPAs and the people who sat through that awful webinar and promise it shall not happen again—whatever the weather in Chicago might be!!!