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Strategic Global Intelligence Brief for March 30, 2018

Short Items of Interest—U.S. Economy

The Rush for Summer Help

This is the time of year when the U.S. business community really clashes with the aims of those opposed to immigration into the U.S. It has been the argument of the anti-immigrant groups that these low-skilled jobs need to be filled by Americans looking for work. Low-skilled immigrant visas should be reduced despite the ever-increasing demand for these workers. Most of these jobs are utterly unwanted by Americans. Even though they may be classified as a low skill, they are really not. The average low-skill U.S. worker can't handle the farm work that needs to be done. With the jobless rate at an all-time low, it is even harder to find people. The farm community is especially concerned about losing money this year by not being able to plant and take care of crops.

Defending Williams

Critics of John Williams of the San Francisco Fed (candidate for the NY Fed) have not actually been critical of him as much as of the process. The selection is not public and not part of the mandate of the Senate confirmation process. It is internal and behind closed doors. Critics want the various candidates identified, but that puts people in a very awkward position of indicating to their current employer they are willing to leave. Then, there are those who want Senate hearings, but that simply introduces even more political pressure on what is supposed to be an independent group.

Hoenig Fires Parting Shot

As the head of the Kansas City Fed, Tom Hoenig was a rock on the issue of bank exposure and was perhaps the most hawkish of them all. He consistently broke ranks with the other regional heads to oppose keeping rates low. When he left to become part of the FDIC, he continued his critique of the way big banks do business. As he leaves that post, he has fired off another salvo at the idea that restrictions should be lifted on the biggest banks as far as their capital requirements are concerned. He has been an advocate for the smaller banks and the community banks, but the big banks still need far tighter restraints in his estimation.

Short Items of Interest—Global Economy

Another Landslide Victory for Authoritarian Leader

The victory by current Egyptian President Abdel Fattah al-Sisi is assured and overwhelming, although the bulk of the population has not even bothered to go and vote. There is no opposition as they have either been banned outright or so intimidated, they dropped out long ago. The country that launched the "Arab Spring" is now in the dead cold of winter. The populace is weary of the whole exercise and craves some kind of stability. That is what the military rulers have been able to deliver along with repression and very little progress on any of the economic issues that might have driven more policy debates.

Canada Sees Major Drop in Oil Output

This has been enough to hit at overall Canadian growth and is threatening to make first quarter numbers far less impressive than had been expected. The oil sector has suffered from a reduction in exports to the U.S. and a generally weak demand for crude worldwide. It is expected, however, that oil prices will rise in the months to come. That should help the Canadians get some bounce back as far as the greater economy.

More Chaos in Venezuela

After a point, it is not clear how much a given state can endure before utter collapse. Venezuela may be right there. The police station riot and fire that killed some 70 people showed a system that is utterly unable to respond to crisis. The prisons are brutally overcrowded with as many as 25 people in a cell designed for two. The police ran out of bullets and tear gas in the first 30 minutes and nearby military units refused to assist. The station was overrun and many of the police simply bolted from the scene.

What Changed in Pyongyang

By almost any measure one chooses, the situation in North Korea has altered drastically in a little less than a year. The Hermit Kingdom has suddenly been embarked on what can only be called a "charm offensive" directed at nations as diverse as the U.S., China and South Korea. From the bellicose wild man waving his nuclear weapons, Kim has transformed into a swaggering player on a global stage. Most of the old assumptions about him and his country are now in some doubt. What happened and what is the goal now?

Analysis: Longtime analysts have always asserted that Kim has one overarching motivation and goal—his own survival. He has made repeated references to the longtime dictators of the Middle East and made it clear he wanted to avoid the fate of those like Saddam Hussein and Muammar Gaddafi. It has been his calculation that having nuclear weapons would be the only real insurance he would have. Given the U.S. attitude towards "regime change" over the last few years, he was likely correct. His alliance with the Chinese was also seen as an important deterrent, but he would never be naïve enough to assume China would do anything that was not in their best interest. There was also a reason to fear internal threats from his own military. His father was careful never to have established a favorite to replace him upon his death as he wanted to play his sons and followers against one another. Kim Jong-un was not the favored candidate to replace Kim Jong-il. There were more than a few rivals that had their eye on his position.

In the last few years, Kim Jong-un has become a ruthlessly efficient dictator who has taken advantage of the geopolitics around him and has pursued a three-pronged strategy designed to maintain his power. The first was the implementation of a savage program of high-level intimidation. He purged the military of anyone who might challenge him. Many other people and their families simply vanished. The second aspect of his plan has not received the attention the other two have. He has actually done a far better job of feeding his population than he gets credit for. There have been food crises from time to time, but by and large, he has been able to feed the people and their restiveness has ebbed—especially as he continues to use food as a weapon. Those who resist him don't get the food. Finally, there is the nuclear weapons program and the missiles. These are still extremely defensive in nature. By no means could the North Koreans sustain an attack, but they can make other nations very reluctant to attack.

Now he is exploiting a new set of opportunities as he has created far more security for himself than has been the case before. His ability to twist diplomacy to his ends stems from the position that other leaders are now in. The hard-line South Korean leader (Park Geun-hye) was defeated in her re-election bid and impeached as she was caught up in all manner of scandals. The daughter of former military commander and President Park Chun-hee was not interested in working with the North in any capacity. Her replacement, Moon Jae-in, is from the left. He has been far more conciliatory. Trump wants nothing more than a grandstand moment and has largely ignored the advice of those around him that have stated that trusting Kim is a huge mistake. The Chinese have other things to worry about and want the situation in the North to simply calm down. Kim has what he has wanted in the past—recognition and a modicum of security.

Diplomatic Expulsions

The U.S., Europe and Russia are all busily throwing people out of each other's countries as the issue of the Russian attack on a former spy continues to roil relations. Although this is the spark that has triggered this round of tit-for-tat expulsion, the real reason for the enmity between Russia and the western nations is more deep-seated and complex. Russia has been caught meddling in a number of elections in the U.S., Britain, France, Italy and anywhere else they can. There remains anger at the incursions into the Ukraine and other bordering states. Also, the U.S. and Europe have not been pleased with Russia's role in Syria.

Analysis: What does it really mean to expel diplomats and close consular offices? It is not like the world will cease communicating with Russia. There will still be plenty of high-level meetings for Putin. The issue is really about day-to-day activity. These are the people who process visa applications and make all manner of travel arrangements. There will be far fewer business people coming and going and fewer students and tourists and cultural exchanges. The idea has always been to promote better understanding through familiarity, but these goals are now clearly secondary.

More Insight on Consumer Sentiment

This is a measure that we have assailed more than a few times. It is not that we don't like consumers. After all, it is the consumer that drives some 80% of the U.S. economy. We like surveys well enough, but most have their weaknesses as this is at its root the science of gathering opinion. There are many factors that can and do influence the opinions of those being surveyed. The consumer is fickle and changeable and reacts to a host of inputs that are not always related to the economy directly. We have observed over the years that the price of gas can evoke significant response with a small increase prompting feelings of doom among consumers and a small drop giving them feelings of euphoria. Even the arrival of spring after a long and cold winter can make the consumer downright ebullient. With all that said, this remains a very important tool as far as gauging the attitude of the collective public, but it behooves the analysts to dig into the specifics as much as possible.

Analysis: The latest consumer surveys from the likes of the University of Michigan and the Conference Board are telling the same basic story—the consumer is as robust as it has been since before the recession started. It would be simple enough to assume that the same motivations are holding sway now as they did then. But that is not really what the data is saying. There have been some important differences between the enthusiasms. These could come sharply into play as the year progresses.

In the boom years prior to the economic meltdown of 2008-2009, the surveys noted three prime motivators for the enthusiasm of the consumer—the price of gas, the housing market and the performance of the job market. Today, only one of these figures into the consumer's attitude. As the boom years started, the price per barrel of oil was skyrocketing to some of the highest levels ever seen. Every analyst of note was predicting even higher prices—confidently asserting there would soon cost $200 a barrel for oil and the price at the pump would be in excess of $7. This would have been a crushing blow to a majority of the population and had many people in a dead panic. That high price for oil contained its own demise as this was what jump started the great oil shale revolution and the transformation of the U.S. from a nation that imported some 65% of the crude it needed to a nation that exports crude today. It also dropped the price of gas like a rock, thrilling the public no end. Now, the price of oil is far less threatening, but there is no more talk of super cheap crude at $30 or $40, or even $50 a barrel. It isn't that oil prices are scaring people at the moment, but they aren't causing enthusiasm either.

The housing sector is certainly not moribund, but it is nothing like the frenzy that existed in the boom when everybody and their brother asserted they would make it rich by flipping houses. The consumer simply sat back and watched the value of their home surge. That allowed them to do all kinds of things. They would be able to buy a new and bigger house at any point they wished and they could drag equity out of the home to pursue any number of big purchases. Today, there is a solid seller's market, but that doesn't make it easy for existing homeowners to get into a new one. The frantic nature of that boom market caused a drastic rethink as regards rules and regulations. This all but eliminated speculative buying and selling. The consumer, during that boom, had dreams of financial windfalls dancing in their heads. This drove a level of enthusiasm that certainly contributed to the bust that followed that boom. The housing sector is not depressing people by any means, but it is not being seen as the means to financial independence. The house flipping shows have been replaced by those that focus on remodeling.

The third area is more consistent and has to do with jobs. There is nothing that breeds confidence better than good job numbers, and for more reasons than just the obvious. It is good news for those that are seeking work, but even better news for those that have a job already. The fact is that most people worry a lot about keeping their employment and fear job loss more than anything else. They know they have very little control over this. Even if they do a great job, they may be working for a company that is in trouble and will go out of business no matter what they do. When the jobless rate is low, at least they have the idea they might be able to land somewhere else if they need to. The highest level of confidence in the current surveys is in the lowest-wage sectors—the most vulnerable of workers. They have been reacting to the tight labor market with greater levels of confidence. This has been a primary reason for the better confidence numbers overall. The middle-income consumer has been worrying more about inflation of late and is less upbeat.

Inflation Reaches Close to Fed Goal

This is by no means a surge in inflation, but for the first time in nearly a decade, the inflation rate is close to the goal the Fed had set for the measure—2%. There is nothing exactly magic about the 2% goal as many have asserted that the rate could go as high as 2.5% or even 3% with no ill effect, but it has been a very long time since one could even talk about being this close. There is thus far no threat of runaway inflation. Right now, a rate this high is better news than one would expect. This is the kind of inflation that starts to grease the wheels of production.

Analysis: On the other hand, this is real evidence of persistent inflation pressure. That could make the second half of the year interesting. The Fed continues to assert that rate hikes will be predictable and regular. We had the March hike and will likely see another one in mid-summer with a third at the start of fall. That leaves plenty of room for an end of year hike—maybe even an unexpected boost somewhere in there. There is also nothing saying that rate hikes have to be confined to quarter-point hikes. The view is that low unemployment and solid growth have been enough to push the traditional buttons for higher inflation. Should there be a sudden issue with commodities, the spikes would be profound.

Great Questions

I had an opportunity to speak before the local chapter of the National Association for the Remodeling Industry—NARI. This is one of my very favorite local groups as they are always full of great questions and comments. I also end up learning a lot from them. Yesterday, I had a really good one that still has me thinking. It was not an economic question, but one more suited to a person in marketing, but I took a stab at it. "What is the best way for a remodeler to get new business?"

I answered from a more personal perspective than an informed one. I have had dealings with many of these guys over the years—everything from painting my house to repairs. Selecting someone to do work on one's home is very intimate when you think about it. This is your home, your most valued possession and you really want to know it is being taken care of. It comes down to trust. Do you want that person doing work for you, do you trust them? The best way to establish this is by word of mouth when it comes right down to it. I take the recommendation of the people I know to help find the right person. That is often all I need, but when there is nobody with that kind of advice, I am at a loss.

I think that is when NARI and groups like it make the difference. They maintain high standards to begin with, but then you have the network of people that know one another and can come up with those suggestions that allow one to move forward. This works in all kinds of business arrangements, including mine. Every speaking gig I have ever gotten has come from a recommendation from some other group that had heard me and was willing to stake their reputation on my ability.

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Sunday, 15 September 2019