Short Items of Interest—U.S. Economy
Not All Consumer Confidence Numbers Up
The University of Michigan report was as upbeat as ever, but the report from the Conference Board slipped a little from its 18-year high last month. This is not the time for alarm, however, as almost every analyst predicted there would be a tumble from that exalted high, but it does bear some examination. Last month, it hit 130 and this month there was a slight reduction to 127.7. That is still very high and shows a very confident consumer, but the reasons have shifted a bit. The majority of the confidence still stems from the very strong jobs market. The majority of people feel very secure in their employment as they do not expect to be laid off. They also do not expect they will have trouble finding a new job if they need to. The problem is they have less confidence in the ability of the economy to grow and have become more worried about the future.
New Richmond Fed Chief Attacks Fiscal Policy
The new head of the Richmond Fed—Raphael Bostic—has wasted no time in echoing a refrain that was more common under Ben Bernanke. At the time, Bernanke often turned his frustration to Congress and pointed out that mixed fiscal signals were making it very hard to set monetary policy. That is precisely what Bostic is stating now. The tax cuts have had an impact, but not in a universally favorable way. Now, there are more spending increases and therefore more deficit and debt concerns. Not to mention the reactions to threats of a trade war.
Ignoring Those Headwinds Again
The price of housing was slated to start coming down by this time. After all, the costs have been escalating fast for over two years. Now, mortgage rates have also been on the rise. It is true that consumers are still confident, but there are supposedly limits. The problem is that homes are still in short supply due to constraints on builders, such as lack of labor and financing for new construction. The result is that prices are up again this month and are expected to keep rising for months to come.
Short Items of Interest—Global Economy
Germany Split Over Russian Expulsions
It had been assumed the "grand coalition" would hit some rough patches sooner than later, but the assumption was that issues like immigration and the role of Islam in Germany would be the first tests followed by disagreements on budgets and even the German position on Brexit. Few thought the first strain would be over expelling Russian diplomats. The Russian government has been found complicit in the poisoning of a former Russian agent and his daughter by the British. For many in Europe (as well as the U.S. and elsewhere), this was considered a gross violation. The reaction has been swift and harsh with many diplomats sent home as a way of expressing that censure. Merkel wanted even more expelled. She has the support of the more centrist members of her SPD (Social Democratic Party), but the left-leaning members are unhappy and think the action was too hasty and ill-advised.
Slight Improvement in Brazil's Inflation Outlook
The rate of inflation has dipped a little in Brazil. The hope is that the average person in the country notices this prior to the election in October. Part of the reason for this reversal is that food prices have been either stabilizing or falling. The weather has not been as severe as it had been and the country has been able to import food more cheaply than before. The trend now would be for a longer period of growth without risking brutal inflation. It has been a long time since that has been the case.
New African Trade Bloc
The creation of the African Continental Free Trade Area is designed to get the manufacturing sector up to speed by opening the continent to itself. The idea would be to reduce or eliminate trade barriers that have been erected against one another and move the region from its dependence on commodities. However, it is a long step between asserting and implementing. Many states have been jealously guarding their manufacturers for years.
Will China Give Ground on Joint Venture Demands?
Among the primary aims of the current policy on China is to force a change in the way U.S. companies can do business in China. Right now, the Chinese demand that any company seeking to do business there be required to form a joint venture with a domestic company. The domestic company would have a controlling interest in that venture. This is not an unusual demand around the world, but is usually employed by nations considerably less developed than China. It is a means by which they avoid being controlled by the western partners. The problem is that this joint venture gives the Chinese company access to the technology of their partner as well as other trade secrets.
Analysis: The U.S. wants that requirement either ended or severely restricted. There are some signs of willingness on the part of the Chinese to give in a little. The question is where the two nations will find a middle ground. The U.S. wants the requirement gone completely, but China will not abandon this policy altogether and will instead offer exemptions in some select sectors. Will these be important enough to get the U.S. on board? One area that China has mentioned is auto manufacturing. The logic is that China is far enough long in this sector to do without the technology boost. They also assume the auto sector in the U.S. will lobby the Trump team to make a deal. The U.S. is open to the idea, but likely will demand more than the opening in the auto sector alone. At least they are talking. That has allowed the markets to calm a little.
'Secret' Visitor to Beijing
If you are one of the people who has been left perplexed and baffled by the diplomatic discussions that have been taking place between the U.S. and North Korea, you are far from alone. It stunned the world that Trump would agree to meet with Kim Jong-un. It looks more and more like it stunned the North Koreans as well. The majority of analysts still believe the meeting will never happen; this is just vintage Trump. It's a grand gesture with little substance followed by a lot of climbing back from that original stance. The thinking is there will be many conditions set before Trump actually meets with Kim. Most of these conditions would be far more than North Korea will agree to. Trump will probably assert the failure is all the fault of the Kim regime. Two developments seem to make this scenario more likely.
Analysis: The first is that Trump has expelled most of the moderates in his foreign policy team. He has replaced them with far more aggressive and hawkish people who have made no secret about how they would deal with North Korea and many other nations the U.S. has had issues with. John Bolton is now the National Security Advisor after replacing General H.R. McMaster. He has repeatedly called for overt military action against North Korea against all the recommendations of the U.S. military. He wants to start with surgical strikes against its missile systems and the facilities that might be used for developing nuclear capability. He has referenced the Israeli approach to these threats many times, but always seems to ignore that fact that even Israel has stopped short of attacking nations like Iran as they could most definitely inflict a lot of damage in retaliation. An attack on North Korea sets a lot of events in motion. There is no sense that most of these could be controlled or managed. North Korea would attack South Korea and likely Japan. If the U.S. strike was not total, they could attack parts of the U.S. The important wild card is China. That makes this mysterious visit by a "high ranking" North Korean leader on an armored train to Beijing so interesting.
By all accounts, the invitation by Kim was not supposed to get this reaction from the U.S. It was the usual ploy by Kim to make the U.S. and his enemies look like the recalcitrant ones. "See, I offer to meet these devil people and running dog imperialist war mongers and they refuse. WHAT? They said, YES! What do you mean they said YES? Now what do I do?" The secret meeting with China is likely to have two areas of focus. The first is to reassure the Chinese that decisions like this are not to be made without their approval. Nobody in North Korea knows Kim has been summoned and they never will. His visit will never be officially acknowledged as he is coming to the principal's office. The second purpose is to work out the response if this meeting does take place, or more likely, gets scuttled by somebody. The Chinese want the U.S. to call this off because Kim will not meet their demands rather than seeing the Kim regime back away as they know the whole world will assume he did so at the behest of the Chinese.
What It Will Take to Rebuild Iraq
It seems the height of insensitivity to assert that fighting ISIS and other terror groups for over 15 years may have been the easy part for the Iraqis. The devastation that has been the result of this grinding war is truly awful, but a hidden cost has been the inability of the government to focus on anything else. All the money and resources of the country have been poured into these wars. There has been tolerance of the most egregious forms of corruption as a part of that war. The warlords and faction leaders that have been needed to fight ISIS are allowed impunity when it comes to exploiting their own regions. For all intents and purposes, the regional leaders run full-fledged kleptocracies.
Analysis: It is hard to believe as one looks at Iraq today, but this is a country that has a great deal to offer to global investors and business developers. It is still a major producer of oil and gas and it still has an infrastructure as far as energy is concerned. It has a history of manufacturing and food production if stability could ever be restored. The Iraqi diaspora is vast with millions of trained and educated people all over the U.S. and Europe. They would come back if they could. The government has to find a way to move from the conflict to real development, but that means challenging the groups and people that allowed a victory of sorts over ISIS. While it is true that threats of a new Caliphate are gone, the ISIS fighters remain and have returned to old tactics. The bottom line is that somebody will have to take a risk on Iraq. That puts them squarely in the middle of a global competition. The U.S. would be the logical player, but there is considerable "Iraq fatigue." This opens the door to China or others. Russia and India both have been making overtures of their own.
Challenges to Orthodox Thinking
Years from now, there will likely be books galore written on this period of political, economic and social history as it seems that many or even most of what was accepted as doctrine is being challenged and perhaps even overturned. Sexual harassment has been a very unfortunate fact of life for women for decades and has been blamed for the dearth of women in many of those traditionally male-dominated avocations. The power and influence of the gun lobby in the U.S. has never been assailed as it is right now and Facebook is under attack for doing what they actually set out to do. The populism that has swept the democratic world is rooted in anger and frustration as people have grown tired of the broken promises from people they elected. This has resulted in Brexit as well as the rise of heretofore fringe movements like the AfD in Germany and the Five Star Movement in Italy. These are just the current headline grabbers. They may not even be the most disruptive in the long term. There are also shifts related to the rise of technology and robotics. People have turned the convenience of a cell phone into an addiction, social media is now seen as a destructive force in children's lives and the war on "fake news" has been all consuming, even calling into question the validity of elections in the U.S. and Europe. The robots are getting the majority of the new jobs in manufacturing and have been making inroads into construction, transportation and even health care. Not that these changes are not long overdue in many cases. The sexual harassment issue should have been addressed decades ago and the populists have a point that has been ignored by those who have mishandled their responsibilities. Technology brings a lot to the table. That likely offsets the problems, but it hardly means the fallout can be ignored.
Analysis: This much change coming all at once is a major challenge to society; especially to business. Uprooting patterns of sexual discrimination and harassment will not be accomplished with a new manual and a few sensitivity sessions. Changing the national debate on guns will involve a clash of cultures that will go to the core of how people believe. The adoption of technology is the future for business and consumer. For every advance, there will be steps back and patterns lost. At this point, it is even hard to determine what these will be.
Given my familiarity with the manufacturing sector, we can start with the immense complexity involved with adaptation to technology. It has been both blessing and curse. On the positive side, the advance of technology and robotics has been behind the resurgence of the U.S. manufacturer. There was a point when it seemed the U.S. would essentially vanish as a global manufacturer, but those days are gone as machines have allowed startling improvements in productivity across many sectors. This has not been without a price. The advance of technology is what resulted in the loss of some 20 million jobs as manual activity was largely replaced by robots and machines. There have been, of course, new jobs created, but these have not been available to those who lost their positions unless they were able to undergo extensive retraining. The sector faces large job loss and labor shortages at the same time.
Another aspect of the technological revolution is that manufacturers have become far more engaged in the global economy. This is good news to a degree, but it brings challenges of its own—especially in the current political atmosphere. The U.S. economy remains dependent on manufacturing for over 15% of its GDP. There is no sector that accounts for this much outside health care. The bulk of the export sector is manufacturing as U.S.-made products are now globally competitive. The U.S. doesn't make cheap consumer goods; it makes expensive and high-value goods like airplanes, machinery, mining gear, construction and so on. We sell to a fairly narrow selection of countries with economies that look like our own. This means the value of the dollar is very important and our relationships with these trading partners are pivotal. Lately, the U.S. has been pushing a policy called "America First," although it has been hard to figure out just what that really is. The Trump rhetoric is full of bombast and aggression, but seems always to be followed up with negotiations that soften the plan. The fear among U.S. exporters is that those nations that buy from the U.S. will tire of this pattern and will seek more reliable alternatives.
Guilt and Shame
Once upon a time, I took a class that described two kinds of cultures with two kinds of social norms. It seems there are two—a guilt culture and a shame culture, although most societies have a little bit of both. A guilt culture maintains the social norms by the conscience of the individual. One refrains from doing those things that society disapproves of because we have a conscience that tells us not to. That sense of right and wrong may come from our religion or from the way we were raised or from some other moral compass. The U.S. is said to be mostly a guilt culture. The shame culture is characterized more by the concern we have for what others think of us. We do the right thing because we do not want the disapproval of those around us; especially from family and peers as our bad actions reflect on them as well. Japan is often cited as the epitome of a shame culture.
It seems that neither of these is working very well these days. People don't seem to feel the least guilty about what they do in the way of transgressions. They certainly seem to feel little shame. If anything, we have shifted to the blame and excuse culture. Everything is somebody else's failure and we are responsible for nothing. It is very hard to find someone who can be an exemplar of good behavior—certainly not in the world of politics, but not in business or sports or entertainment either. We still have the precious few without feet of clay. Fortunately, we still have some of them in our families. But these are too few and far between. We are now surrounded by people who tell lies with every word uttered, people who have no integrity, no empathy and no awareness of those around them. It has coarsened the world we live in.