Strategic Global Intelligence Brief for May 29, 2018

Short Items of Interest—U.S. Economy

Business Investment Improves

It would not seem to be the case given the latest data on durable goods, but the pace of business investment has started to improve; however, not quite at the pace that had been anticipated when the tax cuts were implemented. The big fall noted in this month's durable goods data is connected to the volatility of the aerospace sector. There was a big drop in orders for civilian aircraft. That always drags these numbers down. It is just as likely that these numbers will recover in another month or two as the cycle of aircraft purchasing varies. When these planes are stripped out, the news is much better. There was a nice recovery as far as new orders for nondefense goods are concerned. The hope is that this activity is sustained for a few more months in reaction to those tax cuts. The majority of the businesses that saw a tax savings have been reinvesting and expanding, but these are often smaller companies dependent on demand from the larger companies they sell to.

Home Prices Still Rising

There appears to be no end in sight as far as home prices are concerned. It is apparent that higher prices and higher mortgage rates have been cutting into demand at the low end of the market, but there has not been much reaction at the upper end. The fact is that high-priced homes can both depress and enliven the overall market. Those with a home to sell are getting a better price and can then spend more on their next house. The majority of the population has seen the value of their home appreciate rapidly. The group losing ground is the new buyer as they are facing reduced inventory. That combines with the mortgage rate hike and the higher-priced home to create some real barriers to entry.

Summit Back On?

The analysis of the proposed summit between Trump and Kim Jong-un will tell one a great deal more about the analyst than the chances of the meeting taking place. There are those (like this author) who are essentially unreconstructed cold war warriors who trust the North Koreans as far as they can throw them. They point to the number of times the Kim despots have played this card. It is always seems to be the U.S. and its allies left holding the bag. The other school of thought holds that Kim really means it this time. He wants what the world has to offer in the way of financial help and security. The hope is strong in this group, but as for me—I remain extremely skeptical.

Short Items of Interest—Global Economy

Oil Prices Recover a Bit

Conversations over whether the Russians and OPEC will start producing at old, reduced levels had the markets pushing the per barrel price down by a few dollars, but that enthusiasm seems to have faded a little and prices are heading back up. The fact is that production has not actually resumed. Until it does, the markets will remain in limbo. There is also the fact that forecasts are calling for storms in the Gulf of Mexico that will disrupt the oil production there should they play out as expected.

EU Changes Focus

The new EU budget is calling for much more money to be spent on the Southern tier nations and much less on the Eastern states that had been getting the majority of the budget up to this point. Part of this has been to ward off the influence of the populists that have surged in Italy and Spain, but there has also been frustration with the attitudes of governments in Poland, Hungary and elsewhere.

Trade Tactics

There are few issues facing any given government as complex as doing business with other countries. Trade is inherently a bargaining process—a series of trade-offs if you will. Trades imply mutual agreement on value to some degree. In return for something desired, something else is given up. Every nation has much the same desire and focus—how to get access to what they want without having to give up too much to get it. This is made all the more complicated by the fact that there are many different constituencies in any nation and they will not look at these trade deals the same way. In the broadest sense, most nations want to benefit the largest portion of its population and want to favor the business and industry that will make the country the most successful in the future. This inevitably means that some sectors of the economy may be judged to be expendable and something to be sacrificed for something deemed to be of greater value. Due to the delicate nature of this kind of bargaining, most trade negotiations are handled quietly so as not to alarm people until some kind of final deal is on the table and people can see what is gained and what is lost. The Trump approach has differed substantially as it has been very public. Every twist and turn has been on full display. That leads to considerable confusion as regards the final deal. Not that there have not been such ups and downs in other trade deals over the years, but the process was not so visible.

Analysis: There have been three areas of Trump trade policy that illustrate the challenge. These include the tariffs on steel and aluminum, the relationship with China and the NAFTA talks. If one goes back to the original assertions made by Trump during the campaign of 2016 and the statements in his first year in office, one would have an impression of a fiercely nationalistic policy, almost one of isolationism. This would have been a U.S. overtly hostile to trade and deeply protectionist—even to the point of compromising growth and cutting the U.S. off from its allies. The critiques that were leveled at Trump made exactly these assertions and those who advocate for free trade were in a dead panic. It seemed that the U.S. would defend every domestic industry regardless of what this would mean to the U.S. consumer and what it would do to U.S. relations with other nations. Looking at these statements will not tell the whole story however.

The actual negotiations have taken a far different approach. The steel and aluminum tariffs were supposed to be across the board and stiff—a 25% tax on all imported steel no matter where it came from, a 10% tax on all aluminum no matter what country of origin. Within days of that bold announcement, there came a whole series of exemptions. Within weeks of the original statement, most of the nations that supply the U.S. with steel had been granted exemptions—most of them temporary and tied to some concessions of one kind or another but exemptions nonetheless. At the moment, even China has been exempted from these restrictions. This is not to say that these tariffs couldn't come back into play, but for now they appear to be negotiating chips more than a serious attempt to help out the domestic steel sector.

China has been public enemy No. 1 since the Trump campaign started. It looked as if he really wanted an all-out trade war with the world's second-largest economy. The bombast and accusations are still flying, but the reality is that China is not feeling much of that asserted animosity. The strict trade barriers have not been imposed and those threatened tariffs have not been set. The Trump strategy has even included a rescue of China's largest telecom company—ZTE—despite the fact it has violated U.S. sanctions against Iran and has engaged in what amounts to theft of U.S. technology. In return, the U.S. has a pledge from China to buy from the U.S. at a faster rate. There have been similar climb downs when it comes to NAFTA. The impasse on what constitutes domestic content in vehicles has been breached to some degree, and in favor of Mexico and Canada.

To be honest, none of this give and take is the least bit unusual when it comes to trade talks. This really is the nature of this kind of negotiation, but it is rarely so public. It exposes the process and gives people the impression that no policy has been established at all. The business community and the consumer remain confused as to what the situation will be as far as price and availability. Trade talks are not exactly secret, but there has been no desire to expose every nuance in the past.

Italy May Be Key to Survival of the Eurozone

Granted, the most durable concern of the past decade has been the imminent demise of the eurozone and perhaps of the entire EU. It was thought to be at an end when the financial crisis engulfed Europe and created the semi-permanent crisis among the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain). The imminent demise was again asserted when the Germans appeared to lose all interest in bailing out the likes of Greece, Spain and the others. There was another round of pessimism when the U.K. voted for their exit from the EU. Each time the organization survived in no small part because the largest members of the club had their reasons to keep the thing intact. Is the current crisis in Italy sufficient to tear up either the EU or the eurozone? There are some important differences that have many worried. Losing nations like Greece and Portugal would be a psychological blow, but these are small economies with very limited influence on the rest of Europe. The Brexit process has been wrenching, but the truth is that Great Britain has always had a very awkward relationship with Europe and was never a part of the eurozone. Even as distant as the U.K. has been, it remains immensely complex to remove them from the fold. What Europe fears is what happens if the third-largest economy in the EU elects to depart.

Analysis: The Italian government is now in the hands of the populists. They have a distinct aversion to the eurozone and the EU in general. Some of this is essentially misplaced nationalism, but there are some substantial reasons for the antipathy as well. The loss of control over the value of one's currency creates severe limitations as far as reacting to financial distress. In the good old days, the Italians frequently devalued the lire as a means by which to boost exports and limit imports. This was never a popular tactic among the bulk of Italian consumers as this made everything more expensive for them. It was also none too popular with the nations that competed with the Italians. It was this kind of "beggar thy neighbor" policy that created the demand for some kind of European currency. The euro has indeed provided a significant level of stability for Europe as a whole. The Italian populists assert this stability has been far better for the Germans and the French than it has been for the Italians. The assertion is that Italy would have been able to grow more jobs if they were not under the yoke of the German-dominated EU and eurozone.

The assertion by Emmanuel Macron and Angela Merkel has been that the eurozone is still not as complete as it needs to be and is in desperate need of reform. This will require a commitment from both France and Germany of time, money and personnel. At the moment, there is considerable trepidation as long as Italy is teetering on the brink of political disengagement. The country may also be facing snap elections for parliament that could expand the influence of the two insurgent parties. The polls show that they are still gaining in popularity. Even those Italians that did not vote for them are willing to see what they can do given the fact there is considerable frustration with what the traditional parties have been able to accomplish. The president of Italy has been using his somewhat limited powers to slow down the two insurgent groups by refusing to approve the selections made for posts like finance minister and even prime minister.

Strikes Have Brazil Teetering on Brink Again

The strike by truckers in Brazil is now entering its second week and the impact has been severe. The original protest was over the sharp hike in the cost of fuel, but the government attempted to offer concessions on this issue and the strike has continued. The demands now seem to include the end of the Temer government. There are many in the union calling for a military takeover of the government as a way to end corruption. Now, the oil workers are threatening to join the strike action and their demands are just as political. The Temer government is weak by any calculation, but there is no ready alternative. The left is in shambles as many of the key leaders are under investigation, while the other center-right candidates are unwilling to make a run at Temer.

Analysis: The strike has cost millions of dollars as exports have all but halted and goods are simply not moving. Millions of chickens have been destroyed as farms can't get feed. Store shelves are empty, supplies for the factory sector have been halted and there is no means by which to replenish stocks of anything. The demands of the striking truckers have become so amorphous it is unclear how they would be met. However, the Temer government is unlikely to simply resign. There is nobody to replace it in any case. The concessions made were in response to the original demands. Now there is no sense of what will keep this strike from spreading and extending.

Summer Labor

The latest word as far as summer labor is concerned is not that encouraging. The business community at greatest risk is the seasonal category—everything from the farm sector to tourism to home and lawn maintenance. The supply of labor is not there this year—estimates run from a 35% to 50% shortage.

Analysis: Summer labor comes from three sources and all three are dwindling. The first is the student out for the summer. They once looked for that summer job, but now less than 40% are applying. The second major source is the migrant workers who used to get a visa to work in the U.S. That number is way down as well. There has even been a shortage of illegal migrants. Five or six years ago, the majority of the illegal migrants were workers seeking temporary jobs. Most were from Mexico. Today, the migrants are from Central America and are fleeing drug gangs and violence. Many are children and most are wholly unskilled. The third category of summer help is the person taking a second job, but these numbers have also declined as more people are required at home to take care of elderly parents and other family members.

Patriotism

This is one of those radioactive topics I really should just stay away from, but I have never been known for my good sense or restraint. I am struck by the people who rabidly assert their patriotism, but seem to have nothing but contempt for the things that make this a country worth defending. This remains a nation of principle created to protect the rights and privileges of the common man. This is why we have a living constitution that we adhere to aggressively. Look at many other democracies—they change and shift their basic rules at will. We don't. We protect rights like free speech, assembly, free press, freedom of religion and so on. Do you see a theme? It is protecting the right of the individual against what can be the tyranny of the majority. We are not only allowed to have our own opinions and beliefs, we are actively encouraged to have them. Diversity of thought is not to be just tolerated—it is to be celebrated and encouraged. Somewhere along the way, some of those self-styled patriots forgot that.

Personally, I respect the symbols of my country. I stand for the national anthem and try to sing. I say the pledge of allegiance and fly my flag on all those patriotic holidays. I understand that these symbols mean a lot to many people and they mean a lot to me. I also understand that my patriotism is rooted in the real freedom this nation has offered and that these freedoms have to be defended. Not just by the military that fights our foes, but by every one of us. The threats to our freedom can be internal as well as external. Every time we are deprived of the rights our nation has enshrined, we lose a little of our freedom. I will defend the actions of those I disagree with in the name of defending those things far more precious than the symbols. It is our freedoms that flags, anthems and pledges represent. These are what have to be protected by us all.