Strategic Global Intelligence Brief for May 24 2018
Short Items of Interest—U.S. Economy
Slight Rise in Jobless Claims
For the second week in a row, the number of first-time jobless claims rose, but nobody is yet sounding the alarm as these numbers remain at historically low levels. The number this week was 234,000 and was not concentrated in any specific area. There was a slight rise in the number of teachers filing as this is the end of the term. Those on temporary contracts are back looking for the next gig. The overall sense of the job market is that it is tight and is likely to remain so for the bulk of this year and into next. One of the indications of that tight labor market is the struggle the military has been facing as far as recruitment goals are concerned.
Military Recruiting
According to the analysis that has been provided by all the armed services, recruiting numbers are as low as they have been in decades. The reason for this reduction is not hard to determine. The economy is at as close to full employment as it has been in decades with an unemployment rate of 3.9%. The military is competing with every business out there for the right people. The standards set by the military mean that 71% of the potential recruiting base of people between the ages of 18 and 30 are ineligible due to obesity, drug use, legal problems or some sort of intellectual impairment. The pool is shrinking at the same time that higher-level recruits are needed. The vast majority of those who choose to enter the military are from families that have a high level of military engagement through generations or those who live close to a military base and know people in the armed services.
Reduction in Existing Home Sales
The report from earlier in the week suggested the new home market was sagging. Now the data shows that the much bigger existing home market is experiencing the same issue. The big concerns are as with the new home sector—higher prices and higher mortgages combined with limited inventory. Some of the hottest markets are almost devoid of available buys. That doesn't appear to be an issue that will be rectified anytime soon. The slump in existing home sales can hurt more than one in new homes as the people that may want to sell their home start to struggle to sell what they have. It is the starter home that has been hardest to sell.
Short Items of Interest—Global Economy
There's the Kim We Know
It must have been hard for Kim Jong-un to keep up that façade all these months—the smiles and the handshakes and the placid assurance of peaceful intention. In just about 48 hours, we have seen the old Kim Jong-un return with tirade after tirade directed at the U.S. Most of the U.S. administration has been deemed "stupid and ignorant" although his ire has not been directed at President Trump specifically, at least not yet. Those who watch the Hermit Kingdom closely, point out that all this international diplomacy was making Kim look weak to some at home. There is conjecture that his sudden hard-line attitude was designed to thwart ferment within the ranks of his military as they fear they might see their influence wane.
U.S. Urges Europe to Crack Down on Russia
There may be elements of the Trump administration that are still trying to downplay the interference of the Russians in the 2016 U.S. election, but Trump officials are pressing Europe to come down harder on Russian cyber attacks and disinformation efforts. The Russians tried to affect many of the elections in Europe as well as the 2016 race in the U.S. France and the U.K. have been aggressive and Germany has started to move that way as well. There is now evidence that Russia played a role in the recent Italian elections too.
Will Ireland Overturn Abortion Ban?
The anti-abortion laws in Ireland are the strictest in Europe; much more powerful than in the U.S. There is currently a referendum on the issue. The forces that want repeal seem to have a very slight lead, but it will depend on turnout. The urban areas support reversing the ban, but the rural areas want it to stay. Turnout in the rural areas is often greater.
Not So Fast—Congress Balks at China Trade Deal
Watching the U.S. deal with China has been akin to watching a tennis match with endless volleying—back and forth, back and forth. One minute the U.S. is all but declaring war on China and promising to block everything China has even thought of selling to the U.S. The next minute the restrictions are off the table and China has more access than before. It has been nearly impossible to determine what the strategy is towards China. It is somewhat clearer when trying to determine what the U.S. wants from China in grand terms, but specifics are hard to come by. The top three demands that have been made on China thus far include: (1) help on controlling North Korea, (2) an increase in the amount that China buys from the U.S. as a way to address the deficit that exists between the two, and (3) protection in China for those U.S. companies that do business there. They want more enforcement of intellectual protection and counterfeiting laws and security from Chinese attempts to steal their technology.
Analysis: It is hard to determine whether there has been much progress on any of these fronts. The proposed summit between President Trump and North Korea's Kim is falling apart as almost every analyst had predicted it would. This is a tactic the North Koreans have tried many times in the past. Rarely has the Western world bit so hard on the possibility, however. Usually, the U.S. offered a meeting with perhaps the Secretary of State or some Congressional delegation as opposed to risking a snub of the president. If China was to play a role in this, it is hard to determine what it was supposed to be. Trump has attacked China and asserts they scotched the meeting, but it seems that China had been encouraging the meeting. It is not clear what the Chinese were supposed to have done to push Kim. He seems to have backed away due to statements from the U.S. that indicated more interest in a regime change than some kind of negotiated settlement.
The far bigger issue has been trade, just as it has been for the last 20 or 30 years. China has become "manufacturer to the world," and the U.S. has played a huge role in that process. It has been the American consumer that made China what it is today. If there is a culprit as far as trade deficits are concerned, it is the U.S—China is not delivering goods to the U.S. at gun point. We are not forced to buy what they make. We want to because it is far less expensive than buying from ourselves. China has low-cost production advantages that we would not want to match. We don't want people paid as poorly as those in China and we don't want the unregulated world of pollution, workplace danger and unsafe goods they can produce. We are now faced with balancing that continued consumer demand with a desire not to run massive trade deficits with China. That is why the latest trade conversation has shifted away from blocking Chinese exports towards getting China to buy more from the U.S. The stated goal of the Trump team has been to get China to buy an additional $200 billion a year from the U.S. China has balked at that amount, but has pledged to buy more food and more industrial equipment as well as more services. Right now, the U.S. has a healthy surplus when it comes to services as the Chinese buy far more of this from the U.S. than it sells.
Now comes the part that has raised the ire of Congress. The most consistent complaint registered by the U.S. companies doing business in China is that they are constantly under attack by those that would steal their technology or engage in blatant counterfeiting. This includes everything from high tech to designer handbags and bootleg movies. China has been very uncooperative on this front—Congress has not been impressed by their efforts. This has been the prime reason members of the Senate have objected to Trump's deal with the Chinese telecom company ZTE. There has been a litany of disputes over how this company handles U.S. technology. The fear is that they are getting a pass from Trump.
The overall sense is that President Trump has no real strategy other than to cut deals. Thus there is a tremendous uncertainty over the whole process. One day the tariffs are going to be imposed and the next they are off the table only to appear later again. This makes any sort of business planning next to impossible. It may be good negotiation protocol to keep the adversary guessing, but in this case, the majority of the guessing is being done by the U.S. business community and consumer.
Trump Escalates Trade Tension Over Car Imports
For those seeking some kind of consistent message on trade policy, it is not advised to spend much time puzzling through the ins and outs of current policy as practiced by the administration. The much-hyped set of steel and aluminum tariffs that were supposedly rooted in national security interests have all but been abandoned as nearly every nation exporting these metals to the U.S. has been granted exemptions (including China—the country that was the main target). The threat to impose massive tariffs on all manner of Chinese goods appears to be off the table for now as well. There has even been some conciliatory conversation regarding the NAFTA talks. Just about the time that one might assume a more nuanced trade policy might be in at least the development stage, there is another salvo launched that sets the world trading system on edge and threatens to upset allies more than enemies. As China seems to be wriggling off the hook, there is now an attack that will be directed against Europe, Japan and South Korea.
Analysis: Article 232 has been trotted out again. This is the rationale that was used to justify the imposition of the steel and aluminum tariffs. It states that executive action can be employed to impose tariffs and other trade barriers on the grounds that imports are compromising national security. The use of 232 on these metals was a bit of stretch given the U.S. only imports about a quarter of the steel and aluminum it requires, but 25% of a critical input is significant. To a degree, this was a legitimate national security issue. It is a lot harder to see the import of cars and trucks as a threat to national security. It is certainly true that imported vehicles can constitute a threat to the U.S. carmakers and perhaps therefore a threat to the jobs held by those working for Ford and GM as well as Toyota, Nissan, Volkswagen and all the other global brands that manufacture vehicles in the U.S. Remember that the most-American-made vehicle (in terms of both parts and assembly) is the Toyota Camry made in Kentucky. The least-American-made car is the Ford Focus as it is made in Mexico with almost entirely non-U.S. parts.
This latest threat has U.S. allies furious. The fact is that 14 different vehicle makers manufacture in the U.S. and produce some 12 million cars and trucks each year. Not one of them has called for this intervention. The big U.S. makers have expressed opposition as they export a great many vehicles to other nations and are quite aware they will be targets for nations upset about this latest attack. The big loser in all this will be the consumer, and on at least two fronts. They would see considerably less variety in terms of what they could buy and they will see far higher-priced vehicles as well. The fact is that automaking is perhaps the only truly global business. The carmakers are really car assemblers as they take thousands of parts from all over the world and bring them to one place to make a vehicle. This is the primary way that prices are controlled as there is a constant search for the least-costly alternative.
There is no evidence that any car company has asked for this kind of tariff protection. Even the United Autoworkers seemed to be taken by surprise as this was not one of their demands either. Those who have watched the trade policies develop assert that this looks like another negotiating ploy. The countries that export cars and parts to the U.S. will be threatened with the loss of that business unless they do something for the U.S. This is most likely going to be similar to the demands made of China. Either buy more from the U.S. or suffer a loss of import opportunity. If this goes the way of the steel tariffs, the outcome will be no real tariff on imported cars or parts as long as the U.S. seems to have gotten some value from the negotiations.
North Korean Talks Are Now Officially Off
The announcement from the White House was unusually subdued as it was revealed the U.S. would not be holding a meeting with Kim Jong-un after all. The only surprise was that Trump was the one to call it off as it had appeared the U.S. strategy was to force Kim to pull the plug. There seemed to be a fear that Kim would have the U.S. come the meeting and then he would not show up. It would make Trump look like a date that had been stood up.
Analysis: The issue now is how the U.S. and North Korea interact from this point. The Chinese report on the state of North Korea's nuclear testing facility plays an interesting role now. The report states the mountain facility has been destroyed by some kind of catastrophic accident keeping the Kim regime from testing any more weapons for a while. What happens if and when they rebuild it? Will the U.S. intervene with stiffer sanctions (for which South Korean, Japanese and Chinese cooperation would be needed) or is there to be a threat of military intervention?
Fed Strategy All but Certain Now
It is not as if the members of the Federal Reserve's Open Market Committee (FOMC) are going to make a hard and fast announcement regarding their future plans. The best that can be done is to pay attention to the comments made when the group meets. These are the most unguarded moments although they are all aware that anything they say will be captured in these reports. The FOMC will always reserve the right to change policy direction according to the data gleaned from the economy. All that said, the meetings of the FOMC provide some solid clues as to how the group is thinking.
Analysis: The long and short of it is that interest rate policy has not altered much from what was assumed at the start of the year. The rates went up in March as expected. They will very likely go up in June and September as well. It is no surprise that higher rates are on the horizon. The question has been whether the Fed would want to hike them further or faster given the very low unemployment rates and the appearance of some real inflation threats. The commentary has been cautious. Several have acknowledged that not all parts of the country have recovered and may still need some of that stimulus help. There are others who assert that just as much caution needs to be expressed as regards inflation. They are the ones that refuse to rule out another hike in December. It is a waiting game as far as inflation is concerned as all the indicators point to higher rates, but it has not yet really manifested in a way that demands immediate Fed attention.
On the Subject of Life Changing Events
Over the course of that cancer adventure at the first of the year, I made note of the way this kind of experience changes a person. I also had that same conversation with my neighbor as his wife started battling breast cancer at the same time I started with my throat cancer. Now that I am mostly back to my "normal" life and getting busier every day, it is easy to slip back into old patterns. I am trying hard not to lose the perspective I gained during this ordeal.
What it comes down to is striving to be sympathetic and empathetic. We are every day surrounded by people trying to handle some crisis or another. Every time I get into any discussion regarding cancer, I soon find out that the person I am talking to has had it or someone in their family has. However, we do not parade through life with all our problems on display. These are private matters for the most part. Many of us subscribe to the opinion expressed by Tommy Lasorda."Talking about your problems is no good. 80% of your friends don't care and the rest are glad you have problems." We simply have to assume that people are dealing with things and take the attitude that we shouldn't add to them. We ought to try to help if we can.
As I was getting off a plane recently, there was the usual jam up at the door as those who need wheelchairs were being met and moved up the ramp. One man was having problems getting situated and the pusher was also struggling. Two guys in a powerful hurry shoved them aside as they powered up the ramp. I ended up blocking the door for a minute or two so the man in the wheelchair could go on his way. One guy behind me was going ballistic with a string of insults until the pilot ordered him to sit down. Common decency is not very common anymore, but I also tried to conjure up a reason for this guy to be so belligerent—maybe he had the runs, maybe his wife just texted him that she wanted a divorce. Maybe he was trying to make a connection. Who knows—none of us do. We need to remember to be just a tad more patient.
