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Strategic Global Intelligence Brief for October 19, 2018

Short Items of Interest—U.S. Economy

Recession and Employment
It is a safe bet that at some point the U.S. will be contending with another recession—although there is a lot of disagreement as to when that might take place and how bad it will get. The arrival of even a mild recession will have an almost immediate impact on jobs as there will be companies that simply have no alternative other than to reduce labor costs if they are to ride out the storm. What has been evident over the last several downturns is that men will lose more ground than women when this occurs. This is partly due to the kind of work that men do and it is partly due to the fact that women make less than men. Therefore, firing them doesn't have the same impact. This changes a lot of family dynamics and affects the kind of internal migration an economy can expect.

Interest Rates Unlikely to Become Restrictive
Despite the fulminations of President Trump, there are no signs the Fed plans to back away from its desire to hike rates for the next year or so. The Fed has now raised rates eight times since 2015, but even with this activity, the rates remain historically low. The rate hikes have been precautionary thus far. That beats having to react to a present issue. There is no inflation to speak of at the core rate and headline inflation is not out of control either. The rate hikes are there to inhibit overheating. Most assume the Fed will raise rates a few more times this year and next, but will stop way short of stalling the economy. President Trump's opposition is falling on deaf ears at this point, but given the fact he has appointed almost the entire Board of Governors, it is hard to determine how big an issue this is for the White House.

Appears That Khashoggi Is Dead
It is not a particularly forceful statement from President Trump, but it is definitive enough. Now the question is how the U.S. (and the rest of the world) reacts. The murder has been laid squarely in the lap of the Saudi government. They have been changing stories the way most people change their socks. Such a high-profile killing begs the question—why. There are endless rumors circulating, but one getting more attention is Khashoggi had unearthed some very damaging information and was planning to release it. That info was supposedly connecting the Crown Prince to very corrupt people and factions.

Short Items of Interest—Global Economy

Honduran Caravan
For the last few years, the immigrants who have been flocking to the U.S. have not been Mexican—at least the majority of them. This has been because the Mexican economy has grown enough to provide jobs for the domestic population. Meanwhile, there has been intense turmoil in Central America due to violent drug gangs and insurgencies. This has prompted many thousands of people to set off across Mexico in order to reach the U.S. The latest "caravan" had intended to reach the U.S. this week, but Mexican authorities have halted the group and will work to expel them back to Honduras. The U.S. wants Mexico to do this consistently, but it is an expensive process. Mexico is requesting U.S. aid to make this feasible.

Business Interests Pull Back From Saudi Arabia
The political leaders of the world are struggling to develop a response to the Saudi involvement in the death of Jamal Khashoggi, but the business community is moving fast to distance itself from the kingdom. This makes the killing even more idiotic as it has undone almost everything the Crown Prince had been working toward.

China Expands Military Exercises
China has been engaging nations that have long been U.S. allies in the Pacific, but now is getting them involved in Chinese naval exercises. This is designed to weaken the U.S. influence to some degree in countries like the Philippines, Malaysia and Singapore.

Which Approach Will Dominate U.S. Foreign Policy—Russophobia or Sinophobia
One of the most vexing issues for U.S. foreign policy is the status of Russia and China. Both nations can be seen as rivals and partners in an American context. However, this is not yet a renewal of the Cold War mentality that identified a clear national enemy around which the U.S. rallied. Russia is seen as enemy No. 1 by the Democrats, while China is still looked at as a potential partner in global affairs. The GOP condemns every move China makes and offers consistent support for the Russians regardless of whether their aims clash with the U.S. or not. President Trump's attitude towards Xi Jinping and Vladimir Putin exemplify this difference of opinion. Putin continues to gain praise from the Trump team. Russia's transgressions are routinely excused and overlooked. Meanwhile, every move by China is seen as sinister and directed at destroying the U.S. To see the flip side, one only has to look at the Democrats who excuse and overlook Chinese corporate espionage and their routine flouting of global trade rules. Democrats have not even been able to bring themselves to criticize the Chinese for the concentration camps that have been created for the Uighurs. This extremely partisan myopia is exceedingly dangerous in a foreign policy context as neither China nor Russia can be counted as a friend in any real sense. Both political parties are engaged in actions that damage U.S. interests and are motivated by domestic political animus rather than anything remotely to do with foreign policy.

Analysis: The Democrats have been the most antagonistic towards Russia as they assert that Russian interference in the 2016 elections led to the defeat of Hilary Clinton and other candidates from the Democratic Party. There has also been opposition to the policies promulgated under Putin—most notably the intervention in Ukraine. Some Republicans have objected to the Russian support for the insurgents in that nation, but most of the criticism has come from within the Democrats. The odd thing about this positioning is that it was not always skewed this way. It was the Democrats who wanted to open up relations with Russia and the USSR before the collapse in 1989. The more left-leaning elements of the Democratic Party were against the hard-line positions taken by the GOP during the Cold War. The animosity today seems rooted more in the fact that President Trump and Putin had been trying to establish some kind of framework for cooperation. The real problem has been Russia has done very little to reassure anyone of their intentions. Putin has taken very hostile positions towards the U.S. and U.S. interests. Even President Trump has had to shift towards more overt criticism over everything from Russian support for Syria to poisoning of dissidents to electoral manipulation in the U.S. and in many European nations.

The Republicans have made China the No. 1 enemy and are heading towards igniting a real Cold War. The issue has ostensibly been trade, but the criticism has gone far beyond these economic issues. Lately, there have been assertions China has been engaged in electoral manipulation as well and its efforts have been more aggressive than Russia's. There has been no proof offered, however, to back up this accusation. China is most definitely involved in cyber warfare against the U.S., but it has been directed at industrial espionage and attempts to penetrate the U.S. military and other defense-related activity. This is not to say China has left politics alone as they have been engaged in all manner of overt political lobbying, but the cyber strategy and manipulation of social media has been the Russian's tactical approach.

Countries go through phases as far as how they interact with the rest of the world. The U.S. is no exception. In the years when foreign policy was governed by people such as Henry Kissinger and Zbigniew Brzezinski, the strategy was "realpolitik." That meant everything was looked at through the lens of whether it was good for the national interest. This was the period of "a country has no permanent friends, just permanent national interests." In the Bush years, there emerged a style that was described as neo-conservative. It was based on the assertion the U.S. should make other nations behave like the U.S.—democratic and rooted in capitalism. This would be done by force if necessary. Now, we have new policies that seem unrelated to the foreign policy realties, but instead rooted in the deep animosity between the two warring political camps in the U.S.

Chinese Economic Slowdown
China is facing the slowest growth period it has seen since the depths of the financial crisis and subsequent recession in 2008-2009. The growth this quarter was a truly anemic 6.5%. On the surface, this would not seem to be such a big deal as other nations in the world would be more than satisfied with that kind of growth. The U.S. has been downright giddy over hitting 4.2% in the second quarter of this year and Europe gets excited about anything over 2%. The fact is 6% growth is recessionary in China. This is still a developing country from an economic point of view and its growth comes from a generally low base as compared to the developed nations like the U.S., Europe or Japan. Beyond that, recession is a somewhat arbitrary construct that is not actually rooted in just numbers alone. Recession is when the economy can't produce enough jobs or enough tax revenue or enough in the way of profits to boost business. The U.S., for example, needs to generate about 250,000 jobs a month to keep pace with economic growth and 300,000 in order to grow substantially. China needs to add 1,300,000 jobs a month to keep pace. That can't be done with growth rates less than 6%.

Analysis: Chinese leaders are on a full charm offensive as they try to reassure investors this growth decline is only temporary. The fear is overseas investment in the Chinese economy will falter; this kind of money is still badly needed. Most analysts assert China has the ability to reverse this decline, but there is disagreement as to how much can be done and how fast.

There are essentially three reasons for the slowdown in China. The first and most important has been the government effort to sharply reduce the level of financial risk incurred over the last few years. The growth in past years stimulated a great deal of speculative investment. There was a trend towards profligate lending by banks. There are extremely tight relations between the banks and many levels of government so it has always been easy for large projects to get financing regardless of how much sense that project made. The central government has been deeply concerned this financial risk was out of control and would lead to all manner of financial bubbles. The clampdown on lending was aggressive. It has had the desired effect, but it has also served as a major brake on the growth rate of the country. This is a policy that could be reversed. That would likely goose growth again, but thus far there seems to be no desire to risk opening up the economy to that financial risk again.

The second issue is the impact of the burgeoning trade war with the U.S. and other nations. Thus far, there has been more threat than reality, but most expect a reaction sooner than later. There has been a negative response already. The investment community is the most concerned at this stage, which has inhibited them. There is not the expansion that had been taking place before all these threats. Most have adopted a "wait and see" approach. It would be inaccurate to point at the trade issue as primarily responsible for the current slowdown, but it has definitely been a factor as far as future planning.

The third issue is perhaps the most complicated. Since the elevation of Xi Jinping, there has been a declared policy intent as far as the economy is concerned. He wants the country to be far less dependent on its export sector and to become a more consumer-centered state. This has meant less support for the export sector and more attention to the consumer and their often-intangible needs and wants. It seems there is a strong connection between having leisure time and consuming. In order for Chinese consumers to emerge, they need to be working fewer hours.

The slowdown does not seem to have motivated any significant change in policy as yet. Although there is an expectation it will if this slow growth period extends much longer. Some expect China to be more willing to work with the U.S. on trade, but this is not the most important reason for this slowdown. Thus far, China does not seem to have panicked.

Trade Policy? Which One?
The U.S. has vexed both friend and enemy when it comes to foreign policy and trade policy. It has become very hard to identify an overall strategy as there are near constant changes. This has not shocked those who have been watching President Trump for years. He is essentially a transactional actor. That is to be expected from somebody who has spent his life in real estate. There is rarely a strategic goal other than to get the best end of a given deal. This has carried over to the way that trade policy is pursued by the U.S.

Analysis: A deal was made to protect the steel sector in the U.S. by imposing 25% tariffs on imported steel no matter where it came from. Then almost immediately, there were exemptions given to every importer save China and Russia. A few weeks later the tariffs were back on. A few weeks after that, they were lifted on the second- and third-largest exporters to the U.S.

Very Few Layoffs
The number of new claims for unemployment ratcheted down again last week. That continues a trend that has been in evidence for the last few years. The majority of the business community has become very reluctant to let workers go, and for a variety of reasons. The most important is the inability to find a replacement worker that will contribute as much as the current employee. This has altered a pattern of hiring and firing that had been in place for decades. Companies felt able to expand and shrink their workforce according to demand and need. They could let people go during slow periods because they were confident they could hire the people they needed when business picked up again.

Analysis: Today, few can make that assumption as there are far fewer people available to hire. Most of those who are still looking for a job lack relevant skills and education. The pattern now is to protect the existing workforce even if it means carrying more employees than needed for periods of time. This is certainly good news for the employees who otherwise might have lost their jobs, but it also means companies are carrying costs they may not be able to sustain for long. The businesses that are highly seasonal face the biggest challenge as they find it harder to adjust the staff up and down.

The Dance of the Oblivious
I can't help but observe my fellow travelers. I spend too much time in the airport and airplane not to notice the activity around me. Beyond all that, I am nosy and curious. There are many types of people on the planes these days—ranging from the weary business person slogging to their next assignment to the excited gaggle of kids heading to some entertainment place. One of the more interesting points of separation is between those who are acutely aware of their surroundings and those who have tried to create some kind of impenetrable barrier between themselves and the world.

I truly enjoy moving through an airport as if I was returning a punt—dodging and weaving the louts who are head down into their cell phone as they blunder through the crowds. It is a rare day that I do not see a full-on collision. In more than a few cases, it is with an inanimate object. They rank right up there with the backpack wearing person who seems unaware the bag is extending far beyond the limits of their actual body. They are a true delight on the plane when one favors the aisle seat as I do. The list of oblivious activity is long and frustrating.

Then, there are those who are trying to buck the trend. They are the ones helping people get their bags squared away and who are poised to assist when needed. There do not seem to be as many of them, but they make a big impression. A guy last night dove in and helped several older passengers get their bags down. It was not until the crowd cleared a little that one noticed he was on crutches and had only one leg.

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Wednesday, 22 May 2019