Short Items of Interest—U.S. Economy
Avoiding Tariffs 101
It turns out that setting tariffs on imported goods can be a very tricky proposition. The way to do this is to impose these taxes on select goods as defined in the HTS [Harmonized Tariff Schedule] code. This system has 18,927 different entries that attempt to catalog and define every single thing that comes into the U.S. This has become a convoluted mess over the years as there have been numerous requests to alter or establish codes that were too cumbersome. Today, the Chinese exporters are using these codes to bring product into the U.S. legally—simply because the code for that product is not the same as the ones used in the past. There has already been a lot sent under these circumstances and there will be more to come.
More Fed Support for Gradual Rate Hike
As one would expect, the politicians continue to express their general opposition to the notion of higher interest rates. They generally do not care about such arcane subjects as inflation or the value of the currency; they just don't want that growth party to ever end. The statements from President Trump are not much different from the statements made by previous presidents. The reaction of the Fed has been typical. Not one member of the Board of Governors has taken a position opposing the hikes and has instead supported them. These voices have been added to those of the regional Fed heads who have all come out in support of the proposed plan.
Separation in Housing Market
Much of the economic data looks really good right now, but it must be pointed out that most of what has been noted of late is concurrent data—the kind of information that tells you right where you are at this point. The leading indicators that describe the future are far murkier. Housing looks solid at first glance, but a closer look shows there are some deep divisions splitting the market in two. The top-10 housing markets are seeing growth of between 25% and 50%, but the bottom 10 of the 25 largest markets are all shrinking fast. Not surprisingly, the growth has been fastest where the jobs are, but even with that employment growth, the wages are not keeping pace with higher home prices.
Short Items of Interest—Global Economy
Bolsonaro and the Runoff
Jair Bolsonaro came within a few seats of winning the election in the first round of voting, but will now need to head to the second round against his Worker's Party opponent. All that Bolsonaro needs to do is attract a few additional supporters from among the other 11 parties that ran in the first round, while his opponent would need to drag his 26% support past 50%. The markets have been generally kind to Bolsonaro as he has advocated adherence to the traditional economic policies in place.
More Scandal Rocks South Africa
The latest issue in South Africa is the fate of the finance minister who failed to disclose he had been meeting with some of Jacob Zuma's cronies. The deposed leader has continued to desperately attack the current PM. The news that Finance Minister Nhlanhla Nene had been meeting with the Gupta family led to his sacking. The rand has tumbled to the lowest level seen in a month. It has been hard for Prime Minister Cyril Ramaphosa to get his government on track as he continues to fight a rear-guard action against the very bitter loser—Zuma.
Where is Jamal Khashoggi?
The mystery of Jamal Khashoggi's whereabouts has embroiled the governments of Turkey and Saudi Arabia and even Europe. Khashoggi has been a sharp critic of the Saudi government and specifically of the Crown Prince. This led to his exile in the U.S. where he writes for the Washington Post as well as other publications. Last week, he entered the Saudi embassy in Istanbul to get papers he needed to marry a Turkish citizen and vanished. The Turks insist the Saudi government arranged to have him killed. The Saudi position is that he left the embassy and it has no knowledge of him. This is getting nasty.
What Would Making China a Real Enemy Cost?
It has become obvious the issue with China goes far beyond trade and deficits. At the start of the Trump term, it seemed that all trade relations with every nation were under the same level of scrutiny. The U.S. mantra seemed to be that every nation in the world had been taking advantage of the U.S. and all had to stop. It was a blanket condemnation as the "America First" policy emerged. Today, that situation has altered quite a bit with deals on the table for a rework of NAFTA that leaves much of it intact, deals with Brazil, South Korea and Argentina that exempted them from steel tariffs, serious progress on talks with Europe and so on. It is now just China that has become the focus of U.S. ire and the confrontation goes far beyond just issues of trade. The list of confrontations has been growing over the last few years. It is now a question of how far this animosity goes. Is the U.S. determined to make a real enemy of China? Is China willing to be placed in that position or will it work to reduce the animosity? What happens to the U.S., China and the world if there is another full-on Cold War developing between two of the most powerful nations on the planet? Is there a scenario where this Cold War becomes a hot war? There is not enough space in this short piece to really answer all of these questions. Today, we can try to detail the issues that lead analysts to conclude the U.S.-China confrontation is over much more than trade.
Analysis: It is useful to review the development of the trading relationship that has grown between the U.S. and China and between China and the rest of the world. When Mao Zedong died and Deng Xiaoping took control, there was a sense that China was on the edge of major change—it could be shaped by the reaction of the western world. The acceptance of major elements of capitalism (to get rich is glorious) seemed to suggest other elements of the western system would follow. An engaged China meant a more democratic China, a nation taking its place in the global community. It was thought doing business with China would open it up to western norms and ideas; the world would be the richer for it. That China would evolve a whole different form of capitalism with an autocratic leadership was not considered. The U.S. (and many other countries) welcomed the ability to import from China as it would be cheaper and more efficient than the system in place. The vast majority of the goods the U.S. imported from China had always been imported but from a wide variety of nations with vastly different infrastructure capabilities, differing currencies, rules and regulations. It was so much simpler to buy all this stuff from one nation. The U.S. did indeed lose some of its manufacturing to China, but this was manufacturing that would be lost to other foreign exporters in any case. The big losers from the emergence of China were the many other nations that once supplied the U.S. consumer sector.
The trade issue with China is not all that complicated. That leads many to assume there is more to the current levels of anger and tension. In the simplest of terms, the Chinese supply relatively cheap consumer goods and parts for other manufactured goods while buying farm products and some high-level manufactured goods. The U.S. has been happy with this arrangement for quite a while, but over the last few years, the U.S. has watched China start to manufacture its own version of the goods the U.S. once exported to them. Also, China has been buying less of the U.S. agricultural output. The U.S. is actually far more interested in getting China to buy more from the U.S. than it is getting China to sell less in the U.S.
Beyond trade, there are other issues and the question is how important they are. The Chinese are attempting to aggressively expand their military influence in the Pacific with their interventions in the South China Sea, their disputes with Japan over the Senkaku/Diaoyu islands and the stepped-up threats against Taiwan. The Chinese have become more aggressive against internal ethnic communities such as the Tibetans and the Uighurs. China has backed North Korea for decades. In other foreign policy areas, the U.S. and China consistently clash as Africa has become an area both nations seek to make into a sphere of influence. China backs the leftist regimes in Latin America as well as in parts of Asia. Are these areas enough to provoke a confrontation with the U.S.? Bear in mind, the Chinese have the largest standing army in the world and nuclear weapons along with missiles and other delivery systems. They have been building a "blue water" navy and they have aircraft carriers as well as submarines. The Chinese are a credible global threat and gain more capability every day.
Chinese Cyber Warfare
The comments by Vice President Pence may have been partly motivated by a desire to take the attention off of Russian election meddling, but the reality is China has been trying to influence the U.S. system for decades by both direct and indirect means. The aboveboard techniques have focused on lobbying and investing in politically important parts of the U.S. The not so aboveboard has included outright espionage and cyber warfare.
Analysis: The majority of the cyber attacks have been designed to gain access to U.S. technology or to at least understand its capability. There is considerable industrial espionage taking place and there has been a fear of attacks on the financial system. Chinese hackers have already stolen a considerable amount of private financial data. Few really know what they intend to do with it. There have also been attacks on power grids and other infrastructure. That may be the start of a bigger strategy or simply testing the waters to see what could be done. The North Korean hacks that made the news last year seem to have originated in China and were designed to steal technology to one degree or another.
The 'New' Face of Terror
Extremism takes many forms. There have been periods of history when the left seemed to have a monopoly on this violence with groups like the Baader-Meinhof Gang in Germany, the Red Army Faction in Italy and the Symbionese Liberation Party in the U.S. There have been plenty of terrorist organizations that wave the banner of extreme nationalism—such as the Irish Republican Army, Hamas, or the ETA (Basque separatists) in Spain. For the last couple of decades, the focus has been on the extremists who assert inspiration from Islam—al-Qaeda, ISIS and the like. Today, there is yet another variety making an appearance. This is the far-right populist group that combines elements of xenophobia, nationalism and populism. Most of those who adhere to this emerging political movement are content with trying to influence the political system. There have been some significant success stories of late (AfD in Germany, Freedom Party in Austria, Sweden Democrats, the rise of Jair Bolsonaro in Brazil). In addition to those who use traditional means to express political opinion, there are those who have turned to violence. They are becoming more powerful and common.
Analysis: The European Union has been especially concerned about the development of this right-wing extremism as it has affected everything from electoral politics to the security of the population. It has now supplanted Islamic terrorism as the No. 1 concern for the region's police. The kind of terrorist attack varies with the grievance that most motivates a given group. Analysts have generally blamed three factors for the rise of the far right—some combination of populist politics driven by social media, economic uncertainty and a fundamental distrust of the old political order. It is counterintuitive to some degree, but when economic times are generally good, there is a greater degree of economic uncertainty in some quarters.
The social media-driven unrest is rooted in isolation and bigotry. The ability of people to cocoon themselves in a world of their own making makes them vulnerable. They hear only one message and come to believe this is the only truth. The message today is that immigrants are to be blamed for all of Europe's ills. This has made them a target for extreme violence along with outright discrimination. Those tied into just social media end up living in an echo chamber that reinforces whatever idea they bring to it. Then there is the economic factor. It would be assumed economics would not be playing a big role given the high rate of employment, but that would be an incorrect assumption. The problem now is that those who are not doing well economically are conspicuous. They become deeply resentful at the fact that everybody seems to be doing well but them and they seek something or someone to blame. That leads to the third level of resentment. The existing powers are not only blamed for not helping them out now, but for creating the situation in the first place.
The underlying frustration that has fueled populism around the world is based on a sense that many people are going to be left behind by the changes in the way the world now works. This has fueled deep resentment towards concepts such as globalization and has sparked attempts to halt the spread of technology that eliminates jobs. Sometimes this takes the form of a robot being brought in to do the jobs a person once did and sometimes it is broader. An example is the push to adopt new sources of energy to replace the use of coal. It may well be far better for the environment to eliminate coal as a fuel, but those that mine and process coal will not be big fans of replacing its use with renewables. The marginalized person is not sure why they have been shoved to the side, but they know their future has been compromised. They are resentful and angry. Fixing this problem is immensely complex. Leaving everything the way it is now will not be an option, but change on this scale will be wrenching and will leave many people behind.
IMF Worried About Populism as Well
The latest set of reports from the International Monetary Fund (IMF) holds that global growth is about to sag badly. The study downgrades growth estimates for nearly every part of the world—the U.S., Europe, Asia, Latin America and others. Thus far, the reductions are not huge, but the U.S. is expected to level out at around 2.5%, Europe at around 1.9% and the world as a whole will fall a bit to 3.7%. The factors that led to the growth of the last few years have been played out for the most part. The factors that will contribute to reduced momentum are taking over.
Analysis: The policies that have been singled out are familiar by now. The IMF is convinced that trade wars and tariffs will drag global numbers down by at least 1% and the U.S. will start to suffer from inflation. The tax boost will have played out and left a high deficit.
Finding Common Ground
I am not naïve enough to think we are ever going to reach anything close to unanimity on a whole range of issues—social, political and economic. What has been causing me sleepless nights is that we have reached a point where we can't even share an interest with someone whose political point of view differs from our own. Over the years of writing this newsletter, I have provoked people from the left and right to take exception to my views. The discussions have been intense and passionate. At the same time, there was a desire to find common ground in the middle of these debates. Sometimes it was a love of cats, sometimes an appreciation of Dr. Who. Whatever it was, it allowed us to have respect and appreciation for one another despite fundamental differences of opinion on a range of social, economic and political issues.
This ability to see people as whole human beings is starting to become rare. We now live in a world that is trying to impose a litmus test on every relationship. Either you are my clone or you are worthless and deserving of only my scorn and hatred. This is NOT as it should be. Holding this kind of intolerant position undermines democracy at its core. The most important aspect of living in a free country is respecting that freedom. It means we have a right to think what we think. It also means respecting that everybody else has that same right. We can (and must) argue for what we believe and are allowed to try as hard as we want to convince others of our position. What we can't abide is the notion that disagreement deserves ostracism or antagonism. We have to somehow start recognizing the complexity of our fellow citizens. We need to learn to appreciate where we have common ground and learn to tolerate when our opinions and beliefs clash.