15 minutes reading time (2966 words)

Strategic Global Intelligence Brief for May 22, 2018

Short Items of Interest—U.S. Economy

Kashkari Adds Voice to the Cautious Camp

It's not that the other 11 regional Fed presidents are not men and women who bear the mantle of interesting in their own right, but the Minneapolis Fed head has a more varied background than most. Neel Kashkari was the "uber bureaucrat" charged with making the Troubled Asset Relief Program (TARP) work—an impossible task at its heart. TARP did contribute to rebuilding the broken banking system, but it was on the backs of the taxpayer, which never sat very well with many in Congress. Kashkari eventually became one of the chief critics of that program. He also made a respectable run for governor of California as a Republican. Now, he has the reputation as a swing vote between hawkish and dovish Fed policies and added his voice to those who are suggesting the Fed move slowly as they raise rates. This is essentially asserting that the tight labor market is not quite as tight as it looks and inflation is not yet the threat that some believe.

Housing Pushed by Input Costs

There are many factors that are starting to threaten the growth of the housing market and we have already seen some of this manifest as a slowdown in the new home sector. There are higher mortgage rates and more costly homes that are keeping some of the potential new buyers out, but the new issue, and perhaps the most serious one, is the increased costs of inputs, like labor and raw materials. The labor issue has been around for a while but keeps getting worse. The other costs are new challenges—everything from steel prices to the costs of lumber and textiles. There has been an across-the-board hike, with energy prices heading up as well. There is already some evidence that multifamily construction has been affected with high and prohibitive prices.

Giving Up on North Korea

To the shock of nobody, it looks like the vaunted summit between Donald Trump and Kim Jong-un is not going to happen and everybody seems to be going into damage control. Trump is blowing it off and Kim is blaming the U.S. for the failure. It was never going to happen as Kim has already gained what he wanted: global recognition. The only remaining question is what happens from this point. Does the U.S. impose sanctions again? Does Kim start up that weapons program again? Does the U.S. attack if they should elect to do so?

Short Items of Interest—Global Economy


Fallout from U.S.-China Deal?

The Europeans are more than a little unhinged when it comes to the deal making style of Trump. It was just a few weeks ago when Europe assumed that there would be a trade war between the U.S. and China, so there was a lot of planning around how that would alter relations between the Europeans and the two giants. Now, there is a deal in the offing and that worries the Europeans. Will either the U.S. or China take actions that affect them? Lately, Europe feels more like an enemy than ally and wonders if there is more.

What Happened in Brazil?

The "Lula" story matters now more than ever with Mexico about to embark on its own version of that experiment. Inacio "Lula" da Silva was a firebrand leftist and head of the left-wing Workers Party before he decided he had a real shot at the presidency, therefore, tempering his left-wing appeal to garner center votes. Andres Manuel Lopez Obrador is doing the same thing in Mexico and appears to be the frontrunner. Lula was crushed by rampant corruption and the deepest recession Brazil had experienced in decades. Does the same fate await Mexico?

More Pressure on Venezuela

The Maduro government is selling everything it can think of in order to buy time and the U.S. just made purchasing these assets a crime. The market for this Venezuelan debt was the U.S. and this comes as a major blow. Nobody can figure out how this shattered state has managed to stay together except due to fear of the army and police given their enthusiasm for shooting anyone publicly opposing Maduro.

Taking the Global Temperature

This will be a good week for identifying trends or at least the start of them. Most economists agree that the U.S. and global economy has started to enter a new phase and the next several months will be best described as "transitional." The debate is not over where the economy has been or even where it is heading, but it is a debate over the pace of that change. The U.S. and the world as a whole has been stuck in a very long period of slow recovery from a major recession. The usual quick rebound never took place and, instead, the major economies have bumped along with mediocre growth. This has not been very satisfying, but it has been consistent enough to lower rates of unemployment to record lows in the U.S. as well as Japan and parts of Europe. The benefit from this slow pace of growth has been the general absence of inflation threats, which creates the added benefit of allowing the central banks to continue with their efforts to engage in some form of stimulation. At the very least, there has not been an effort to clamp down on economic growth as a reaction to inflation. Now, that seems a distinct possibility and this constitutes the transition away from stimulation and toward control of inflation. All eyes have been focused on those indicators that would signal that inflation threats are mounting. This presumably will spur the central banks to engage with the policies they are best suited for and were designed to carry out.

Analysis: On May 23, the eurozone version of the Markit Purchasing Managers' Index (PMI) will be released and examined carefully for clues as to what has been happening to growth in Europe. Last year was fairly robust and many thought the eurozone might be ready for a real breakout this year. That was before the unexpected slump at the start of the year. The question is whether this slip was an anomaly related to bad weather or some other factor. The fear is that the growth of last year was the anomaly and the slowdown at the start of this year is the norm. The PMI last month was not as bad as it had been and seemed to steady a little, but the expectation is that the reading this month will be down a little. If that is the case, there will be less confidence as far as an overall rebound in the eurozone economy in the second quarter. The challenge with overall eurozone data is that it covers a lot of nations and a dip in one of the big ones can impact the whole index dramatically. Germany has been holding its own and France has continued to see better numbers, but Italy has been tanking badly and Spain seems to have lost a little momentum. There remains a faint hope that some of the new orders data will be better than it was last month, pointing to better months, but much of that progress will depend on France continuing its growth and Germany finding a way to resume the growth it sported last year.

Another indicator due this week is in the U.K. with the release of the latest inflation numbers. In February of this year, inflation was surging along at an unexpected 2.7% pace and fell back to 2.5% in March. Both of these readings are well above the level the Bank of England (BoE) had set. They would be happy to see inflation consistently at 2% but approaching 3% is a little nerve wracking. The reduction in March was a bit of relief and there will be anticipation as far as April is concerned. If that is up to February levels, then BoE is going to feel pressure to hike rates, but if it stays down as it was in March, the anti-inflation measures will be less draconian.

There will be some additional data on the U.S. housing market on May 24 as the National Association of Realtors will release the latest data on existing home sales. This is by far the largest segment of the housing market and there will be a great deal of interest in whether the slowdown in the new home data is matched by a decline in the existing home sector. The indicators have not been all that positive in the housing sector because prices keep going up and mortgages are getting more expensive. It is already apparent that new home buyers are struggling, making it harder for existing homeowners to sell their homes.

Two important releases will come out on May 25 in the U.S. The Commerce Department will release the durable goods numbers and the University of Michigan will release its latest consumer confidence survey. The durable goods numbers have been good most of the year and that was to be expected with the motivation of the tax cuts. But now, there is a slowing of that pace showing up and the question will be whether that appears this month as well. The consumer confidence numbers have been weakening a little since people are still pretty upbeat about the future, but they are getting somewhat more uneasy about current conditions .Gas prices have affected this mood.

Immigration is the Future

The U.S. has a demographic crisis on its hands and it has been one that has been building for a long time. The fertility rate is as low as it has been in decades, there is a chronic shortage of skilled workers in manufacturing, construction and transportation, and even the professions are struggling to keep their staffing current. Fixing any of this organically is a long and complicated process. Women are not simply going to decide to have four or five kids and schools are not suddenly going to start training for the workforce of today. Even if there was movement here, it will take a long time.

Analysis: The short-term—and perhaps long-term—solution is based on immigration. The country finds the people it needs in other parts of the world and brings their skills to the U.S. That is controversial in the best of times and is especially overwrought now. A distinction has to be made between illegal and legal migration, but even the legal version can upset those who think foreign labor chases Americans out of that job or serves to keep wages down. The U.S. has long been more willing to take people as migrants—an advantage for generations. It is not clear the U.S. respects or remembers its origins and that of most of its citizens. The nation of immigrants now seems willing to shut the door on those coming today, despite the growing need for these foreign workers as the U.S. workforce ages.

What Does the U.S. Really Want from Iran?

Perhaps a more important question is what the rest of the world thinks of this. The U.S. has elected to pull out of the nuclear deal that had been struck with Iran, despite the fact there had been full compliance with the provisions of that deal on the part of the Iranian government. The Europeans have vowed to stay committed to the deal and have been urging Iran to stay true to the plan as well, but if the U.S. goes ahead with the threatened sanctions against European companies that do business in Iran, the issue will get very complex and quickly. There are any number of questions swirling around at this point. What does the U.S. want in Iran and what do the Europeans want? What did Iran expect in return for agreeing to abandon this plan?

Analysis: The U.S. has asserted that its additional demands are reasonable and designed to promote a more peaceful region. Critics assert the U.S. is really trying to provoke regime change in Iran and will not be content until the Iranian theocracy has been overturned. The three points the U.S. has made are 1) a cessation of support for insurgent and terrorist groups in the region and elsewhere, 2) a cessation of the ballistic missile program and 3) changes in Iranian support for Yemeni fighters contesting with the forces aided by Saudi Arabia. There are several other specific issues that make up the list of U.S. demands, but these are the main points. To agree to these demands would be next to impossible for any sovereign state and certainly not easy for Iran to swallow.

Iran is committed to a foreign policy that backs Shiite against Sunni Islam, bringing it into conflict with Saudi Arabia as well as Syria and Iraq and others. Iran has supplied Hezbollah in Lebanon, rebels in Yemen and the Hamas organization and has played a role with Iraq by backing the Shiite candidate in recent elections. Muqtada al-Sadr is now in a position to form some sort of coalition government. This is a crucial part of the Iranian foreign policy and they will not deviate from this without a wrenching process. It may well be the one area that is the deal breaker. On the other hand, the issue is just as crucial to the U.S. given the commitment the U.S. has made to attacking these terrorist groups. The U.S. is a close ally to Israel, Saudi Arabia and other oil states and these are the very states the Iranians are fighting. It is understandable that this issue means as much to the U.S. as the nuclear weapons. It is an impasse that is not likely to end, even with some kind of regime change in Iran. The reform elements in Iran are hardly supportive of either the Israeli or Saudi governments. This is an age-old confrontation.

The major question is what the U.S. would be prepared to do to pursue that strategy further. The regime change in Iraq and Syria didn't go as planned and dragged the U.S. into a long and costly war without the outcome desired. Iraq has hardly been a peaceful country and Muqtada al-Sadr is set to come to additional political prominence. Libya is a catastrophe and Afghanistan remains largely out of U.S. control. What chance would the U.S. have in forcing change in Iran through military means? The hope is that the pressure on Iran will force the population to rise up and demand change, but it is more likely the population will blame the U.S. for their travails and will back their own leaders all the more aggressively.

China Details Emerge

As it turns out, the fire and brimstone that has been cascading from the Trump team was as it was asserted to be: a negotiating tactic of sorts. The last few weeks have seen a whole series of exchanges between the two nations as they seek advantages in one area or another and both have been employing their best tactics. China is a master of the quiet and stubborn refusal. The U.S. has altered between trying to be agreeable and threatening dire consequences. Now, there is some evidence of a breakthrough.

Analysis: China has agreed to lower tariffs on imported U.S. cars from 25% to 15% and has agreed to buy more U.S. farm goods. There has been no guarantee that China will buy $200 billion from the U.S., but there will clearly be more imports from the U.S. under this deal. In return, the U.S. is easing up on the threats that have been pouring in as of late. The significant gesture was the decision to do something to help rescue the market position of ZTE. There will not be a swift end to the bombast that has poured from both the U.S. and China, as it serves their domestic interests to keep this drama alive. However, it is also clear that compromise is both possible and a preferred alternative to the clash that has characterized the relationship at this point.

Guiding Youth

One must always remember that such a venture is fraught with danger! It is common for members of an audience to ask me a very personal question. "What should my kid do for a living?" These are parents who have searched their kids for some glimmer of inspiration that would allow the parent to know where to put their money and their influence. Most throw their hands up in despair and argue that nobody is going to pay their progeny for their skills at Angry Birds nor do they have great faith in majors like film appreciation. I usually mumble something about following one's passion or finding a tolerable job that pays well.

The challenge is that kids can dream at this age. If one is going to fantasize about being a famous skateboarder or rap artist, now is a better time than later in the midst of a midlife crisis at age 45. It is hard to know when it is time for harsh reality and the message that one makes a living any way that one can. It can be soul-destroying and is very often resented. Better to indulge that 18-year-old's vision of life, but patience will run thin when that kid turns 30 and still lives in the basement.

I once had the responsibility of talking to my students as they asked these same questions and my answer then is still my best advice. The notion is that one needs to work to live as opposed to live to work. Maybe there is no job or avocation that inspires the passion of one's family or desire to ski or to paint. Fine—find a job that allows you the time and money to pursue that passion. It may not be the most interesting or inspiring job ever, but it gives one the ability to pursue what really matters with a roof over one's head and food on the table. 

Strategic Global Intelligence Brief for May 23, 20...
Agile Businesses See Benefits From Tech Adoption
 

Comments

No comments made yet. Be the first to submit a comment
Already Registered? Login Here
Guest
Friday, 29 March 2024

Captcha Image