Strategic Global Intelligence Brief for October 17, 2018
Short Items of Interest—U.S. Economy
More Job Openings than Applicants
This is record territory as far as the job market is concerned. There are reported to be seven million job openings and roughly six million people looking for work. If every unemployed person was subsequently employed, the business community would still be short by a million. Given that a large share of those seeking a job right now are unskilled or lack the appropriate education, there is good reason for the chronic labor shortage. Under normal circumstances, this imbalance would have caused severe wage inflation as the business community frantically competes for those workers. The problem is that business doesn't want to pay the unskilled and ill-trained that kind of money until and unless they show an aptitude that justifies the pay.
Manufacturers and Trade/Tariffs
The news from the manufacturing community has been very good for the last several years. Most of the factors that have led to this growth are intact. The one worry is that tariffs and trade restrictions will take the wind out of the sails of this manufacturing renaissance. These restrictions and taxes are affecting manufacturing in two negative ways. The most obvious is that prices for needed commodities have risen on average 40% since the 25% tariff was imposed. The second impact stems from the retaliation that has been meted out by China and the restrictions on U.S. exports. The materials that had been coming from China can and will be replaced by products from other nations, but that will take time.
U.S.—U.K. Trade Talks
From the start of the Brexit process, there was an assumption the U.S. would ride in as kind of a white knight for the British. The Trump position was in favor of the break from Europe and he has continued to lambaste the Europeans over a myriad of issues. The fact is nothing much developed when it came to U.S. relations with Britain, and for two reasons. The first is that nobody really had a sense of how the Brexit plan would play out and most thought the agreement would have been simpler. Then, there was the fact that President Trump doesn't get along that well with Prime Minister Theresa May and other Tory party leaders. Now that the U.K. is looking at a no-deal break up with the EU, the U.S. is very much back in the picture. Documents to that affect are making the rounds.
Short Items of Interest—Global Economy
Me Too in India
Prime Minister Narendra Modi has claimed a leadership position as far as women's rights in India. In many respects, he has made good on his promises, but he is now facing a very awkward moment. One of his key allies in the Cabinet is MJ Akbar—the minister of state for external affairs. He was once a very prominent newspaper editor and, in that position, he has been accused of a pattern of sexual harassment and bullying by over 45 women. The demand is that he steps down or be replaced, but Modi is wary of making him an enemy and losing that base of support. On the other hand, the women of Modi's party are watching very carefully.
Hungary's Orban Retaliates
The increasingly autocratic regime under President Viktor Orban in Hungary has run afoul of the EU. There are now sanctions in place. The Hungarians have been clamping down on the media and harassing the opposition while Orban's government has been violating most parts of the EU constitution. His reaction to the sanctions has been to promise like retaliation. He has also reopened the whole migrant issue as he may elect to stop cooperating with the EU at all on migration—sending these refugees into western Europe as fast as possible.
Bolsanaro May Leave Paris Accords
The presumed next president in Brazil is bound and determined to fully exploit the Amazon and has no interest in preserving the forest for the sake of the world's climate. He has been an ardent critic of global warming warnings. This makes the environmental community very nervous given the role of the Brazilian rain forest.
Defending Allies
The challenge of global diplomacy is it tends to be murkier than people would prefer. Henry Kissinger was a master at it and reinforced the notion that nations have no permanent friends—only permanent interests. This is called "realpolitik." It has been the system under which most nations operate. The need to focus on national interest above all else creates some very awkward moments and strange bedfellows. For many years, the U.S. was allied with dictators and thugs all over the world—people who oppressed their citizens and murdered their opposition. The U.S. was not exactly supportive of this behavior, but the important thing was these nations and their leaders were anti-communist and took the U.S. side in the contest with the USSR. This pattern exists today as the U.S. still has close relationships with some very unsavory governments because that nation serves a purpose.
Analysis: There are generally three rationales for getting close to leaders and governments that would seem to represent all the U.S. opposes. The first has to do with resources. The U.S. is not completely self-sufficient when it comes to the commodities, goods and services it requires. The nations with this needed resource attract the attention of the U.S. If their leaders are not exactly paragons of democracy, the U.S. will find a way to overlook it. This has been the rationale for many of the U.S. relationships in the Middle East as well as Africa. It is clearly playing a role now as the Saudi government tries to dig its way out of this latest hole. It is clear that Jamal Khashoggi was killed when he went to the Saudi consulate in Turkey to get papers he needed to marry a Turkish woman. That he was murdered is not in doubt as Turkey has proof and the Saudi government has admitted it. The current excuse is that rogue elements killed him during an interrogation, but that opens up even more questions. President Trump has jumped to the defense of Crown Prince Mohammad bin Salman. That is really no surprise given the role that Saudi Arabia plays in the U.S. economy and their position in the region.
A second reason nations become close to unpleasant leaders is geopolitical. It was very common for the U.S. to tolerate vicious tyrants in Central and Latin America, Africa and parts of Asia during the Cold War—the sole criteria for obtaining U.S. support was an agreement to oppose the USSR and back the U.S. position when it came to anti-communism. Today, geopolitics can be more complex but playing the same role. The U.S. wants Saudi support against terrorism and against the influence of Iran. This has led the U.S. to essentially look the other way as Saudi forces attack rebels in Yemen, a nation that is now in the grips of a horrendous famine.
The third reason governments back less than reputable leaders is competition. The U.S. doesn't want nations to side with its enemies—China or Iran or Russia for that matter. Therefore, the U.S. will cozy up to leaders it might otherwise find reprehensible just to keep them away from a rival.
The strategy is used often enough, but it can backfire badly for a nation like the U.S. We are ostensibly a nation that advocates human rights and basic freedoms. When we find ourselves allied with a nation that violates these norms, it can create dissension and weakens the moral authority of the U.S. In past years, the U.S. has been forced to back away from an ally when their actions are too much for the U.S. to countenance. It is unlikely the U.S. will back away from Saudi Arabia, but much will depend on what the Saudi government does from here.
Future of European-Asian Cooperation
Many assertions have strained relations between the U.S. and some of its traditional allies. This may drive a new set of alliances. President Trump has been exceedingly hard on European states that once were considered key partners to the U.S. There have been wedges driven between the U.S. and Japan as well. It was then assumed these nations would turn to one another to make up what they may be losing as their relations with the U.S. deteriorate. It turns out this kind of shift is not as easy as it would appear.
Analysis: There are two barriers to this closer connection between Europe and Asia. The first is that China is very engaged in Europe and has been a major investor in many of the countries struggling to pull out of the recession. They are very unwilling to attack China over issues such as human rights or cyber security or even the Chinese advances in the Pacific. The Chinese have leverage and they are using it. The second issue is economic rivalry. Japan and South Korea are effective competitors to the Germans, French and Scandinavians. That limits the desire for greater cooperation. The bottom line is Europe and Asia both want to protect their access to the U.S. market and see one another as more rival than friend.
The Slow and Steady Rise of Manufacturing
For the last 16 months there has been a steady rise in manufacturing capacity. This has brought a variety of sectors back to life. Manufacturing is a highly diverse part of the U.S. economy and hardly moves in lockstep, but since 2015, it has been growing at a respectable pace. Within the bigger category, there have been sub-sectors that have really accelerated. The fastest growing have included the energy sector as well as medical manufacturing. The automotive sector is also hugely important to the U.S. It had been expected to start fading by this point, but it hasn't really slowed down by much. The aerospace sector has been typically volatile, but has been growing overall. The sectors that have been the weakest thus far include agriculture and those associated with construction. But even within these categories, there have been brighter spots depending on the part of the country and the specific market. Analysts have been busy trying to determine what is creating this extra boost of activity. There are more than a few theories. The manufacturing sector is now the second-largest GDP category behind only health care. It accounts for more than twice the GDP it did just 15 or 20 years ago.
Analysis: There are those who point to the changes that have occurred this year—the tax cuts at the start of 2018 and the various trade and tariff restrictions designed to reduce the imports coming into the U.S. While these have certainly played a role recently, neither was in place at the time this boom began. The recovery in manufacturing dates back to 2015—before the Trump team came into office. It has also been asserted manufacturing started to turn a corner back in 2011 after suffering a steep decline. This recovery period stalled in 2014, but resumed its growth pattern in 2015.
One of the most important sectors has been energy. Its pattern has matched that of manufacturing. When the oil boom was in full swing, the manufacturers felt the surge. When the sector stumbled a little, the manufacturer felt that as well. Now that the energy sector is growing again, the manufacturer is as well. The reason for this is simple enough—few sectors use as much machinery as oil and gas and few sectors wear that equipment out as fast. Then, there are all the related industries connecting to the core business. Pipelines must be laid, rail carriers get busy, refineries ramp up and there are even increases in ship building as demand for oil tankers increase. The oil sectors are often remote. That means new infrastructure has to be built in these areas—everything from roads to housing and shopping and public utilities. The emergence of the U.S. as dominant global oil producer has altered our core relationship with oil. Even as recently as 10 years ago, a hike in the price per barrel would be seen as a very bad thing for the U.S. economy. This was when the oil needed was imported. Today, a price hike is as welcome in the U.S. oil producing regions as it would be in any oil state. There are those who anticipate oil per barrel reaching $100 before very long. This no longer fills the U.S. with dread—although the consumer is not going to be wild about it.
Another important sector has been automotive—as it has always been. For the last several years, there has been an expectation of slowdown in that area as it seemed the consumer was facing some serious headwinds. The price of the vehicles had been going up and there was evidence people were hanging on to their cars and trucks far longer than in the past—a U.S. fleet age of over 11 years. Despite all the negatives, the auto sector has continued to grow. At various times, it has been close to booming. The rush to buy small cars faded and was replaced with demand for SUVs and trucks to the point that Ford was no longer interested in making traditional sedans. The changes in how the auto sector is treated in the new USMCA (replacing NAFTA) will accelerate some of the trends that have emphasized U.S. production and will likely mean more investment in manufacturing machinery.
If there is one common thread in all of this expansion, it is the expanded use of technology. Every sector of the manufacturing community has embraced robotics and automation as the key to their future. There is no sense labor shortages will be addressed any time soon (it was just reported that there are seven million job openings and six million potential applicants). This will push more and more companies to make that investment. That drives a number of manufacturing sectors—not the least of which is the sector that makes these machines and robots.
President Trump and the Fed
The attacks on the Federal Reserve by President Trump are more than a little perplexing. This is a Board of Governors that has been chosen by Trump—he named Jerome Powell to the chair position and nominated Vice Chair Dick Clarida as well as Randy Quarles. His other nominees are still waiting for Senate approval—Marvin Goodfriend, Michelle Bowman and Nellie Liang. The only holdover from the past is Lael Brainard. Every one of these nominees made it clear they favored slowly hiking rates and none have deviated from that opinion. Now President Trump calls the Fed his "biggest threat."
Analysis: It is not unusual for a politician to rail against the Fed when it starts to hike rates—they do not want to see the party come to an end after all. The main reason every central bank in the developed world is independent is because politicians never want to apply the brakes, but somebody has to. The Fed knows inflation will manifest sooner than later—it is already here as far as the headline rate is concerned. It has to be addressed. Furthermore, the Fed knows holding rates at record lows for any longer destroys the ability to save and encourages highly risky market strategies that rely on cheap money. They will most likely ignore President Trump, but what is perplexing is why he has chosen to attack in the first place.
Traveler Woes
It is really too bad that writing this newsletter is not something that generates a lot of noise. I suppose I could loudly narrate as I write or maybe I could try to create a hip-hop version of the story on interest rates. I would do anything to make my neighbors in the hotel as peeved as they made me. I am in the Big Easy and smack dab in the middle of the New Orleans (NOLA) action. My room is adjacent to an outdoor patio area that was the preferred locale for a group of revelers. They looked like they were settled in for a night of fun and my chances for sleep looked dim. Fortunately, it began to rain and they were chased inside. I could still hear through the walls, but it was possible to ignore. I would be able to get my revenge this morning as I start writing at 4:30, but even with my clumsy mitts, I don't make that much keyboard noise.
This is really not the fault of the hotel—this is not a town one visits to work. The location of the hotel is clear warning that partying is the lifeblood. On more than a few occasions, I have elected not to stay at the designated hotels in places like Vegas or NOLA and park myself at some business hotel near the airport or in the suburbs. My wants are simple—a bed of some kind, running water, a decent desk chair and enough quiet to get some sleep. From here, I go a nice little Marriott in a St. Louis business park. I love this place!!! The main thing lacking in any of these hotels is their tragic lack of cats. It is hard to write without feline supervision, so I just have to guess what Scoot would prefer.
