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Strategic Global Intelligence Brief for May 18, 2018

Short Items of Interest—U.S. Economy

Job Mobility

It has long been the case that workers in the U.S. have been willing to move to where the employment opportunities are. This was how many recessions have been dealt with in the past. Opportunities sprang up somewhere and people relocated. Today, that pattern is rare. There are many reasons people can't move—the spouse needs to stay where they are and they have the better job, there are elderly parents to take care of, selling the house is not possible without losing money and so on. Add to that list an unrealistic assessment of the job environment among those in the Millennial generation. They want to take that cool tech job in San Francisco, Boston or Miami and have no desire at all to take a position in Omaha or Fargo. This has left a lot of people in an underemployed position—willing to work as a barista at Starbucks in Seattle rather than take a better position in Akron.

Mortgage Rates at Seven-Year High

The era of the low mortgage rate is dead—at least for the foreseeable future. The factors that led to those low rates have faded and there is little chance they will be coming back. The banks are far more worried about inflation than deflation. That goes for the Fed as well. The federal funds rate will certainly be over 2.25% by the end of the year. There is no desire to trade up these days as that would mean losing that lower-interest mortgage and handling the much-higher alternatives. This will slow the existing home market and will even affect the new home sector. The patterns of the last 10 years will be shifting very quickly and will reverberate throughout the housing market.

U.S. Farmers Surviving on Debt

The number of U.S. farmers facing bankruptcy has rarely been higher. In many states, the numbers are setting records. Wisconsin lost more dairy farms last year than at any time since the recession started. The only thing keeping the farmers afloat is the increased value of their land as they are using it as collateral to borrow more and more money. This is a disaster waiting to happen if commodity prices do not go up. The farmers will not be able to service that debt if they can't make money. If the land prices go down, they will have nothing on which to borrow.

Short Items of Interest—Global Economy

Italy Gets a Government for Now Anyway

The leaders of the insurgent parties that finished strong in the last elections have cobbled together a "marriage of convenience" and will be given a shot at forming a government. The compromise that has attracted the most attention is that some of the anti-European rhetoric has been toned down in order to keep Silvio Berlusconi in a supporting role. His party is not part of the coalition, but his votes will be needed to get much of anything done. In return, the policies on migration are expected to be even tougher than they have been. That has been a crucial issue for the Northern League as well as the Five Star supporters.

Progress in China but Not for NAFTA

It is a little unexpected given the position these negotiations were in just a few months ago. Many had confidence that an agreement would be worked out between the U.S., Canada and Mexico by this time as the key issues seemed to have been settled. Since that point, the issues have been anything but worked out. It now looks like the talks will drag into 2019. Meanwhile, the talks with China seemed fruitless and frustrating—nobody expected much at all. Suddenly, there seems to be more flexibility over these issues than ever with the U.S. and China making gestures with some real import.

China Makes Another Concession

In part, as a reaction to the Trump decision to take some heat off the major Chinese telecom company (ZTE), the Chinese have lifted their tariff decision on the importation of sorghum from the U.S. This has been a crucial issue for the farm sector as China is by far the largest consumer of sorghum as animal feed and the U.S. farmer has very few options as far as global sales. They need this market.

NAFTA Deal Unlikely This Year

Despite all the fire and fury that has been directed against the North American Free Trade Agreement (NAFTA) by the White House, it is not all that simple to alter or abandon the pact. It requires legislation from Congress as this was a trade agreement that was instituted by the legislature. President Trump has certainly made his feelings known. The executive branch has some power as far as how parts of the pact are handled, but changing it drastically is an involved process. Congress gave the president and the negotiators from Canada and Mexico a deadline if they wanted to see something altered this year. The stated date by which this needed to be done was ostensibly yesterday. It has been suggested there may be a little flexibility if a deal was to be struck within the next week or so, but the sides are so very far apart on key elements of the agreement this seems highly unlikely. Practically speaking, it is now assumed the talks will carry over into 2019, which introduces a whole new set of issues and complications.

Analysis: There have been very few agreements established thus far. None of the really sticky points have been addressed. The biggest stumbling blocks include content regulation on cars made in Mexico and shipped to the U.S., and access to the Mexican agricultural market, which affects the deficit in goods the U.S. runs with Mexico. There are also issues as far as exports of Canadian oil, manufactured goods and lumber. Those are just for starters as there are issues that affect everything from the protection of intellectual property to how to handle fisheries. The U.S. has been pushing Mexico to raise wages in those industries that compete with the U.S. industrial community so that they do not have an advantage. Of the 32 sections of the agreement only 9 have been successfully negotiated.

Pushing this discussion into 2019 will mean dealing with some fundamental changes in both the U.S. and Mexico. These changes are likely to make the talks even less productive than they have been. The business community has been aggressive as far as lobbying for a deal and maintaining the bulk of the current system. They have adapted to the NAFTA rules over the last 30-plus years. Losing that trade agreement would devastate many companies currently engaged in the north-south supply chain. The impact on Mexico would be severe guaranteeing even greater pressure on the southern border. Contrary to the shrill voices that are attacking illegal immigration, the majority of those seeking to cross the border into the U.S. are not Mexican. The migrants today are generally from Central America—fleeing everything from drug violence to extreme poverty. The flow from Mexico has been much reduced as the Mexican economy has grown and provided opportunity to its own citizens. A collapse of NAFTA will hurt the Mexican economy and stimulate even more illegal migration into the U.S.

By 2019, there may well be new governments in both the U.S. and Mexico. The polls in Mexico show that Andrés Manuel López Obrador (AMLO) has a commanding lead over the second place candidate—Ricardo Anaya. AMLO, as he is commonly known, has been a perennial contender for the position but has always lost despite having early support. He has been seen as the "protest" candidate that people back at the beginning, but in the end the Mexican voter opts for the practical candidate. This time, AMLO has taken inspiration from Brazil's "Lula" and has campaigned as less of a leftist. Unless something changes dramatically, he will be the next president of Mexico. He is currently no friend to the Trump administration. It has been the steady stream of invective and insults from Trump that has galvanized support for AMLO, the former mayor of Mexico City. It will be nearly impossible for him to adopt anything less than a hostile stance towards the U.S.

At the same time, it is likely the U.S. Congress will shift in the next election. It is not clear just how much, but it is not out of the realm of possibility that Republicans lose control of either the House or Senate, or perhaps both. Given the current polls, it is more likely the GOP hangs on, but with much-reduced majorities. There will be an even bigger need to find ways to work with Democrats. There are those in the Democratic camp even more hostile to NAFTA than some Republicans as their constituencies are heavily unionized and essentially anti-trade.

Tiny Carrot and Really Big Stick

It appears the proposed summit between the U.S. and North Korea is on the skids. There are many longtime observers of the Pyongyang regime that asserted there would never be a summit in the first place. Kim and his predecessors (father and grandfather) initiated talks just like these in the past, but each time found a reason to flounce off in high dudgeon, blaming the evil U.S. for scuttling the deal. There was little reason to think this time would be any different, but hope springs eternal in the diplomatic corps. Now it appears the much-discussed meeting may never take place as there has been some jockeying for position—basically how to spin this failure as the fault of the other side.

Analysis: The U.S. has elected to try a kind of carrot and stick approach, but the incentives are not all that impressive, while the threats are significant. The Kim regime is being offered more economic concessions and promises of aid, but it is not clear how much this matters to the dictator who has been content to watch his people starve to death for years. Little of this offered aid would be going to line his pockets—that has always been his main interest. Meanwhile, the comments by John Bolton have upset the North Koreans greatly. Bolton is the new National Security Advisor and a hardliner among hardliners. His suggestion was that the "Libyan Model" be used.

Kim Jong-un can be forgiven for not finding that appealing. Libya was convinced to unilaterally abandon its plans to develop nuclear weapons without any real guarantee of reciprocity. A few years later, the U.S. actively supported the effort to overthrow Muammar Gaddafi. He was eventually gunned down. Most of his family was likewise executed along with his leading generals and supporters. The "Libyan Model" is not high on the agenda of the North Korean leadership especially given the fact Bolton has been calling for a regime change in North Korea for many years. Essentially, Kim senses a trap and doubts he can trust the Trump administration to honor any of its promises. It has not escaped Kim's notice that Trump pulled the U.S. out of the nuclear deal with Iran despite the fact the Iranians had been in complete compliance throughout. The U.S. has indicated that the Iran deal was a bad one because Iran was continuing to develop missiles and continued to support insurgent groups. Kim also develops missiles and has long supported terrorist groups and rogue regimes. These issues, however, are not currently on the table for this supposed summit. What is to stop the U.S. from doing to North Korea what was just done to Iran?

One more awkward wrinkle concerns the engagement of the Chinese. For many years, the U.S. counted on China to use its considerable influence to control Pyongyang. This has not always developed to the satisfaction of the U.S.—to say the least. Either China has chosen not to intervene or their power is less than assumed. It has been in the interests of China to have North Korea irritate the U.S., but in the past China has put its foot down when the provocations have become too controversial and threatening to regional stability. Today, there is no chance at all that China will lift a finger to aid the U.S. In fact, there is growing evidence China is stirring things up to make this process that much harder for the U.S. Frankly, there is nothing the U.S. can offer in economic aid that China can't beat with far more. Once upon a time, the "Hermit Kingdom" was as isolated as a state could be, but today the isolated nation is the U.S.

Utter Collapse Imminent?

The elections in Venezuela will put Nicolas Maduro in power for another term. This is what happens when a population is given one candidate and voting is mandatory. Police and military poll watchers will ensure the outcome. The state of affairs in Venezuela is perhaps worse than any nation in the world outside of the war-ravaged states in Africa. It is certainly far worse than would be expected from a country that has oil. The litany of problems would take page upon page of analysis—inflation at %4,000, 85% of the population living in dire poverty, the highest crime rates in all of Latin America, unemployment at nearly 75%. There is nothing holding the country together other than desperation.

Analysis: It is hard to determine what would have to happen to turn the situation around. At a minimum, the country would need several billion dollars in aid and investment. None of that will take place as long as the current government is in power. The sheer incompetence of the Maduro regime would have been enough, but it has combined with idiotic policies that isolated the regime years ago. The only hope is that a massive reform effort would get underway—one sufficient to lure the large Venezuelan diaspora back home. The fact is that expatriates living in exile have more money than the government itself.

Fertility Solution

We did a short piece yesterday on the fact that fertility rates in the U.S. are as low as they have ever been. The birthrates in the U.S. have been falling for years. At some point, this compromises the ability of the economy to grow. The U.S. is not as bad off as Japan where the aging population dwarfs the younger population that the elderly are counting on to provide the economic progress needed to sustain them. Europe has had these issues as well, but there has been significant progress in improving fertility rates through the use of one simple tactic.

Analysis: It seems the majority of women want to have children and the majority of men want to raise families. The single biggest impediment to that goal is economic. The majority of couples are both working. There is no way for the mother (or the father) to quit work to care for the kids. The growing number of single parents creates a similar dilemma as they have to work to support themselves. The most important issue is child care. Those societies that offer child care are seeing their fertility rates move up. They are seeing more working women electing to have children. Those countries where child care is either hard to find or expensive are watching their birthrates decline sharply. The fact is that the traditional notion of women staying home for a decade or two to care for the kids no longer makes much sense. In too many places, women are forced to choose between their careers and the opportunity to start a family. That is a very tough choice given the average cost of raising a child to age 18 is now over $300,000.

Some Interesting Commentary

Yesterday, I wrote about the dearth of facts in our various national debates. This provoked a lot of commentary from various loyal readers. There was one theme that stuck out and that I can agree with. The organizations delivering news have changed a lot over the years and not necessarily in a good way. I hasten to point out that the media is no monolith; there are plenty of places one can turn to for good, accurate and unbiased reporting. I regularly read The Economist and Financial Times as well as publications from other nations. Also, there are a variety of industry publications. The media can be a bit more challenging, but the stuff from the BBC or NPR is generally to be trusted—at least they clearly separate opinion from reporting.

The factor that has changed the news is that it is now "infotainment" as opposed to information. To capture the casual viewer who is more closely following the Kardashians than the Supreme Court, the media has to make drama out of everything. The hysteria that surrounds every story warps our perception and creates crisis whether there is one or not. I am not sure who is at fault here. Is the media giving us what we demand? If we reject in-depth analysis of a sewer project in order to fixate on a random shooting—is that the media or us? The sewer story should be the focus given the fact it will cost taxpayers millions of dollars and concerns the health and welfare of us all, but the guy that shoots another guy in a brawl commands five times the attention. I am ever astonished at the lack of real curiosity towards the world we inhabit and the tendency to focus on the trivial. Is it any wonder that trivia takes over our media as well? 

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