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Strategic Global Intelligence Brief for June 17, 2019

Short Items of Interest—U.S. Economy

Options Not Available
The presumption behind a tariff imposition is that companies have options. The economic motivation behind a tariff or any kind of trade restriction is that its existence will push companies and consumers to do their purchasing elsewhere. The tariff is supposed to help a domestic producer compete by making that rival product more expensive. The supposition falls apart when there is no alternative to that imported product. The result is consumers simply have to pay more for the product. It becomes nothing more than a punitive measure designed to either attack a given producer or something aimed at the domestic consumer for some reason. The tariffs imposed on China are affecting goods that are not available anywhere else. That has created a huge demand for exemptions.

Puerto Rico Cuts a Deal
The impasse that has derailed the rebuilding of Puerto Rico shows some signs of breaking down. The territory has been trying to find a way to restructure the massive debt accumulated over the last decade or so and creditors had been reluctant to do so. Part of the problem was the U.S. Congress had been balking at providing more aid to get the region past the damage caused by the hurricane. Now that some of that aid is flowing again, the creditors are willing to work with the financial authority to restructure that $35 billion debt. This is not going to solve all the island's ills, but it is perhaps a step in the right direction.

Consumers Are Still at It
The consumer is still on board with the idea that the economy is doing OK. Spending in May was up more than expected given all the talk about trade tensions. Retailers reported good numbers across most categories and even the big-ticket items were doing better than had been anticipated. One of the sectors that suffers most when the consumer is feeling cautious is auto sales. They have been flat for the last few months. There are some renewed signs of vigor although the big concerns remain—will tariffs drive price inflation later? It is hard to tell at this point, but there is some speculation that people are expecting price hikes and have decided they should do their buying sooner than later.

Short Items of Interest—Global Economy

Chamber of Commerce Weighs In
Opposition to the ongoing trade war is mounting. The U.S. Chamber of Commerce has added its voice to the chorus of those attacking Trump's trade policies. It has just completed an analysis that holds the trade war will cost the U.S. economy in excess of $11 trillion dollars in the next decade. This opposition has been picked up by many in the Senate as well. These are people who have been supportive of Trump in other areas, but now question the efficacy of this strategy. It is simply not yielding what had been expected and is hurting more U.S. business sectors every day.

India Under Siege
The nation that may be hit hardest by shifts in the climate is India. This year, the nation has experienced the worst heat waves in modern history with temperatures that exceed 115 degrees day after day. The monsoon rains have been late and when they come, they have been unusually intense. The country has been making strides towards being able to effectively feed itself, but these weather patterns are making that goal more distant. This may end up being the greatest challenge for Modi's second term given the impact on his rural base.

Colombia's Challenge
The U.S. and Europe have their immigration crisis, but nothing compares with the situation facing the new leaders in Colombia as Venezuela falls apart. The number of refugees that have streamed into Colombia has been estimated at close to three million, while thousands more enter daily.

Posturing or War Preparation
It has been hard to determine what exactly the Trump strategy towards Iran has been. In many respects, this particular set of policies has been similar to other patterns—alternately threatening and cajoling. One minute there are belligerent warnings that some kind of military intervention is imminent and the next minute there are statements suggesting talks could begin at any time. This has been the Trump style as far as the trade talks with China, Europe, Canada and Mexico. It is not clear these tactics have worked, but the fact is that negotiation is often a combination of carrot and stick. The problem with using that approach in the Middle East is the issues are far more serious and history plays a huge role. The U.S. has no relationship with Iran to fall back on—as is the case with allies like those in Europe, Canada and Mexico. There is not any sort of mutual interdependence as exists between the U.S. and China. The relationship between the U.S. and Iran has been overtly hostile and confrontational from the moment the Shah of Iran was overthrown in 1979. The U.S. has a history of military engagement in the area with the two wars fought against Saddam Hussein, the engagement with ISIS in Syria and the ongoing intervention against various insurgencies and rebel groups. The Iranians have no reason to think the U.S. is not willing to invade them as well.

Analysis: The U.S. has stepped up efforts to paint Iran as a clear and present danger. The oil tanker attacks have become the latest effort. The U.S. asserts these attacks were carried out by Iran and involved mines placed on the ships by Iranian divers. The owners of the ships assert this is not what happened. They have video that shows their ships were struck by small arms fire and not by mines. The U.S. claims its video shows mine placement. If the attack was by small arms, it is possible some group other than Iran carried it out. It might be doing so at the behest of Iran or out of solidarity or it could be pirates trying to intimidate the ships. Nobody will ever be able to know. Iran asserts it had nothing to do with the attack, but what else would they be expected to say.

The tensions in the area are ramping up and fast. The U.S. has ships there and more on the way. The talk of late is the U.S. will act to protect its interests in the region, which includes firing on Iranian vessels. The Iranians have just announced they will resume the activity geared toward developing their nuclear weapons capacity. Israel subsequently warned it reserves the right to unilaterally attack. The sense is that everybody is spoiling for a fight. All it will take is a spark that sets it all off again.

The economic implications are as they always are in this part of the world. Oil prices react to political events in the Middle East. Lately, these reactions have been more muted than in past years. The tanker attacks caused a short-term rise in the per barrel price, but soon that reaction calmed down. The reaction will be far more dramatic if there is outright war or if the nations involved seem to be taking real steps toward that kind of conflict. The U.S. has the ability to keep oil prices down with its own production, but that is not enough to counter a massive disruption of output from this region. At this stage, it is hard to see what will take tensions back to a reasonable level as there is real anger in Iran and a desire to somehow punish the U.S. Moderates in Iran fought hard for the nuclear deal and feel betrayed by the U.S. This has allowed the hardliners to gain traction in Iran. They think the U.S. is nothing but bluff.

Stemming Immigration Tide
There is a great deal at stake in this battle. It is one being waged in the U.S. as well as Europe. There has always been a certain level of illegal migration into these wealthier nations from the poorer ones. The drive has always been simple. The prospects of better jobs and incomes attracted the people who wanted a better life. For decades, the illegal migrant was mostly male, young and concerned with making money. Today, the U.S. and Europe face the same issue. Migrants have changed and are now better described as refugees. They come in fear of what is happening at home—civil wars, drug gangs, extreme poverty. They come to escape and may never be able to go back home. They are far more desperate and therefore less easily discouraged.

Analysis: The approach taken by the U.S. and Europe has been similar up to this point. The idea has been to make the journey as hard as possible. Entry into the U.S. illegally will result in arrest and detention, and likely expulsion. This was somewhat effective in slowing the traditional migrant as the possible costs against the opportunity had to be computed. The people streaming to the U.S. have no options but to try. They have no homes to go back to. This pushes countries to try something else, but nobody really knows what that new strategy would look like.

Busy Week for Data
This will be a week that might shed some light on the U.S. and global economy as it enters the second half of 2019. Thus far, the year has been a little bit of a tease. It started out like gangbusters with the residual momentum from 2018 to propel an unexpected first quarter. Even with all the trade tension and confusion the consumer was not deterred and continued to spend. There were some worrying signs in the data as many companies were reacting to the tariff threats with additional inventory accumulation. This is a good strategy if the tariff threat becomes reality, but will not prove so useful if it doesn't as these companies will be saddled with stuff they may struggle to sell. The weaknesses started to worry the investment community by the start of the second quarter. That was much of what started to push them out of the equity markets and into bonds. The manifestation of that unease came with all the talk about the inverted yield curve. This week, there are new housing numbers as well as commentary from the Federal Reserve and other global central banks.

Analysis: First up is the latest data from the Commerce Department on housing starts. In April, the data was better than expected as there was an unexpected surge in the construction of single-family homes. There is reason to think these numbers are not really sustainable and all eyes will be on tomorrow's release. The first factor worrying some is that permits have been down for a few months in a row now. The second concern is that most of these new homes have been in the more expensive range. The motivation for this building differs from the norm. Usually a surge in building is driven by factors like lower mortgage rates or some good employment news—changes that impact the ordinary home buyer who is shopping for a starter home or a modest upgrade. The majority of the new homes are higher end and these buyers are more affected by the vagaries of the stock market. The market is still strong, but getting queasy of late. That may affect the willingness to buy. Most expect numbers to have weakened a little, but few expect a real crash—at least not yet.

Later in the week, there will be more housing data from the National Association of Realtors as it assesses the market for existing homes. This is by far the larger of the housing markets and best captures the mood and attitude of the ordinary home buyer. Last month, sales were down. That marked the second consecutive month of decline. The expectation is there will be a modest uptick, which would signal the market might be stabilizing a little. The bigger issue is what has been happening regionally. Housing is the ultimate example of local economics. There will be substantial variation within a city—not to mention differences throughout the country. There are still many very hot markets where housing is expensive and demand high. The challenge for some of these hotter markets has been keeping pace with that demand. The chronic shortage of skilled construction labor has combined with land shortage to drive up prices and slow down the pace of development in some areas. Other communities are simply seeing price acceleration of the type that forces many people out of the market.

The lack of affordable housing has become a major political issue in many cities. This has taken on elements of a crisis and affects a host of other economic issues such as infrastructure development, transportation and wages. People who are not paid well enough can't work in certain communities as they can't find housing they can afford and lack the transportation alternatives they would need to be able to commute. Just as an example—the rule of thumb for the establishment of a minimum wage is that it provides a percentage of the cost of living in a given community. This implies that a minimum would need to be different according to where one lives. The move towards a $15 minimum would make people in some parts of the country very happy and in other parts it would make no real difference. A minimum wage in San Francisco would need to be close to $50,000 a year just to afford housing.

Beyond the new housing data, there will be meetings of the Fed and the Bank of England (BoE). Neither institution is expected to make a change to their interest rates. Both are expected to talk a lot about what they have in mind for the future. That conversation is likely to be complex. The Fed is talking about the possibility of a rate cut, but that will not happen at this week's meeting. The attention will be focused on what the Fed thinks is most likely to justify such a move. Long term, the Fed wants to keep pushing rates back up, but in the short term, there is worry about the slowdown in global growth. That is the same concern expressed by the BOE. The sense is current economic strain is "man-made" and could be easily reversed if there is a will to do so. The No. 1 factor dragging global growth down has been the incessant trade war being fought by the U.S. Thus far, the threats have affected growth in China, Japan, Europe and most of the emerging market. It has done the U.S. no favors either as growth has started slowing as the export sector dwindles. If these tariff moves ended, the expectation is global growth would jump up by at least a point or two. Settling Brexit without a crashing exit would boost U.K. growth by as much as three points and European growth by perhaps two points.

Consumer Electronics Will Take a Big Hit
If you expect to be in the market for a new cell phone, laptop or game console, you would be well advised to make that purchase right away. The next round of tariffs planned against China will hit these sectors very hard and prices will rise fast. The Chinese companies that manufacture these goods or the parts for them have been largely unaffected by the tariff battle thus far, but that changes now.

Analysis:Consumers are already starting to feel the pinch from trade wars. That will be really obvious very soon.

The Stuff We Talk About
Given that I am on the speaker's circuit, I get many opportunities to visit with others who make the same treks. As one would expect, we compare notes—best and worst airports and airlines. Which hotels we like and which are not so hot. We talk about the unexpected delights and the travel landmines. We also talk a lot about how we are handled by the various groups where we speak. This varies a lot. The best situation is when the group is professionally managed as these people are skilled organizers that know how to keep everything running smoothly. The worst are the ones where some random person gets the meeting dumped on them.

I am in the midst of a not very good experience as most of what one wants as a speaker has been missing. The starting point was lacking a place to stay. The common approach is having one's room arranged by the group as this seems to get the group better rates and saves us the hassle of invoicing for the room. This time that was not done and I am miles from the venue. Then, there is the matter of equipment or rather the lack of it. The list goes on and on. None of this is so vexing as to cause real issues, but it creates tension when it is not necessary and over-complicates things. This is perhaps the most common lament that one hears about most everything these days. Too many tasks seem to overwhelm those that are trying to accomplish them. It is hard to determine why this is the case.

Home Price Index
As if you didn't have enough to cause you some sleepless nights, there are those that see another housing bubble about to burst. It is mildly reassuring that not every housing analyst sees the same thing, but there is some reason to look at those who do. We are not looking at the same kind of lending profligacy that lead to the big crash, but prices are high and getting higher. That is a problematic setup. The two scenarios referenced are essentially bad and less bad.

Small Businesses Feeling Positive About Months to ...
Builder Confidence Strong Despite June Letdown
 

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Wednesday, 24 July 2019