Short Items of Interest—U.S. Economy
Where Has Populism Come From
This is a subject that will warrant a lot more investigation and consideration, but for now we will just broach the subject. It has been assumed that the lurch towards populism and nationalism that has figured in the U.S. and Europe has its roots in the financial crisis of the last decade. There was economic uncertainty leading to political radicalism. Some have been looking at this connection closely and concluding there isn't the causal relationship one would assume. The supposition is there are more deep-seated and emotional issues at work. Economics is clearly secondary. The rise of populism has been called a culture war; perhaps a better way to think about the divide. The populists have a variety of issues around the world, but some are common to all of the movements—distrust of globalization, opposition to immigration and loss of cultural norms of behavior.
Why the Deficit?
Most people will look at a deficit as a combination of factors. Whether it is a government or a business or an individual, a deficit between money coming in and money going out is a factor of both revenue and spending. If one takes in too little income, there will be a deficit. If one spends too much, there will be a deficit. It would seem logical enough to address both sides of that equation, but most in politics take sides to assert that one is more important than the other as different policies are required. To cut spending means doing without the programs and projects eliminated. Addressing revenue means raising taxes. Few have the desire to tackle both. Instead, they assert solutions can be found with one or the other.
Will Florence Hurt Trump Administration?
It can be argued that Hurricane Katrina did major damage to the Bush administration as it was clear that the government response was weak and uncoordinated. Hurricane Maria damaged the Trump reputation a little, but he was new to the job and Puerto Rico seemed very distant to most in the U.S. Florence will be a bigger test as the death toll mounts and the damage estimates rise from the flooding. By most accounts, the states and FEMA have worked very well together and have remained coordinated. The big issue now is whether more should have been done earlier. There will be renewed debates on where people should build and what control the government should have over development. That may or may not end up in the president's lap.
Short Items of Interest—Global Economy
Speaking of Storms
It has largely gone unremarked in the U.S., but as Florence has been hammering the U.S. there has been a storm lashing the Philippines, and hard. The super typhoon named Manghut caused billions in damage and killed 64 in that nation. It has now moved into mainland China where it is flooding major coastal cities such as Hong Kong. This could be an issue for the U.S. if the Philippine government requests a great deal of aid based on the supposed friendship between Trump and the populist President Rodrigo Duterte of the Philippines.
One Area Untouched by Tariffs
The threats against Chinese imports have not extended to the supply of rare earth minerals. They will not be as the U.S. relies on China for the majority of these materials. They are crucial for much of the high tech industry. The threat could come from the other direction, however, as China might elect to make these more costly or unavailable. There is no alternative to Chinese supply in the short term and exploiting resources domestically would be very expensive.
Putin Aids Hungary
The government of Viktor Orbán in Hungry has been challenging the EU. It has been hit with sanctions as a result. These might have been enough to force him to rethink his positions, but his country has been getting help from Vladimir Putin's Russia that has blunted the effectiveness of the effort.
Trade and Tariff War Between U.S. and China Escalates
There was some doubt as to what this latest escalation of the trade war would look like in the end. There has been some frantic give and take between the two nations, while it has been increasingly difficult to figure out the strategy employed by either the U.S. or China. It is quite obvious there are multiple audiences in play for both and more is at stake for both countries than just economics. At the moment, it is hard to see either Trump or Xi backing down significantly. It is abundantly clear neither will admit to giving ground publicly. This certainly doesn't mean that a compromise can't be reached with room to spin it as a victory, but at the moment, it doesn't appear either leader thinks the trade battle has hurt them or their country enough to shift positions. In fact, the majority of economists have concluded that very little damage has been done to either country thus far. It may have affected perhaps 3% of Chinese exports and 2% of U.S. imports, although the latest round of tariffs will likely hike these percentages.
Analysis: The parable of the mice and the elephants comes to mind at this point. The assertion is that when two elephants fight it will be the mice that will get hurt. The Chinese ship around $500 billion worth of goods to the U.S. every year and they buy around $130 billion worth from the U.S. That leaves a trade deficit of around $350 billion. Even as the U.S. imposes tariffs, they are not imposed on about half what the U.S. buys from China. China's retaliatory tariffs affect about a third of what China buys. It is also useful to remember that many Chinese operations export to the U.S. from the other nations where they have a presence. The Chinese multinational is not quite as global as those from the U.S. are, but the U.S. gets a significant amount of "Chinese" product that is made in places as far flung as Malaysia, Indonesia, Nigeria and Brazil.
If these tariffs are not going to immediately cripple the Chinese or American economies what or who will pay the price of this war? The short answer is the U.S. consumer, select U.S. industries as well as the Chinese consumer and select Chinese industries. The pain will not be evenly distributed in either nation. The latest round of tariffs from the U.S. is a little less aggressive than was originally asserted. Instead of a 25% tariff, there will be a 10% tariff imposed with the threat of an escalation later if there is no retreat on the part of the Chinese. This set of tariffs has been aimed squarely at the consumer goods the U.S. has been buying from China for years. The immediate impact will be felt by the consumer who will be paying higher prices for these goods. Past experience has demonstrated that the prices will not go up by just 10%—the average rise will be closer to 30%. The prime reason for the high price will be the disruption of supply chains and the subsequent need to develop a new set of them. The consumer goods that China sells to the U.S. appeal because they are cheap, but there are many countries in the world that can also produce these same products at a low price. What these other nations lack is a good infrastructure. That adds cost to the supply chain—a cost where consumers will bear the brunt.
The fact that some $200 billion worth of consumer goods will now be more expensive will have an impact on the spending habits of consumers, but it is not clear how much at this time. Best-case scenario is that consumers are in a good mood and ready to spend on the holidays and will take the price hikes in stride, or they will find substitute goods that do not rise as much. The reality is that all producers will take advantage of the tariff policy as they can raise their prices and still be less than the Chinese imports. The worst-case scenario is the tariffs land on the U.S. consumer like a tax—which, of course, it is. The consumer got a nice boost from the tax cut at the start of the year. It may have added between $2,000 and $3,000 to the annual paycheck. These tariffs may well add $2,000 to $3,000 to the annual budget of a consumer and thus wipe out the benefits of that tax cut.
The other vulnerable sector of the U.S. economy will be that which is affected by the Chinese trade retaliations. This has become a chest bumping exercise between two leaders attempting to establish their positions—both internally and externally. President Trump sees this issue as a winner with his base and will ignore entreaties from the business community as well as his own party. Xi has a plan based on creating a powerful domestic consumer base and is just as determined to impose that change on China. The Chinese will strike where it will do the most political damage to the U.S.—the farm sector. Many of the new tariffs will be aimed straight at the food the U.S. farmer counts on selling to China.
Does Anybody Know What Anybody Wants?
The Chinese desire is pretty simply stated. They would like things to continue on as they have in the past. They have enjoyed a relatively open market in the U.S., which has been a major factor in their growth of the last few decades. They want that to continue. What the U.S. wants is a little more complex.
Analysis: For all the thundering about the arrival of Chinese imports and the trade deficit, the U.S. basically likes getting what it gets from China. This is what has permitted the U.S. consumer to shrug off inflation and adopt a lifestyle beyond which they might have without these cheap goods. What the U.S. really wants to do is expand the level of its own exports to China. There is a $345 billion deficit with China because they buy only about $135 billion from the U.S. That is what the U.S. wants changed. If China was agreeable to doubling that amount of commerce, the U.S. would be likely to drop all these punishments and restrictions, but that would mean shutting Chinese firms down due to U.S. competitive pressure. That is a step China seems unwilling to take right now.
Some Shifts in the World of Energy
There are very few sectors as volatile as energy and few that tend to reflect the changes taking place in the overall system as effectively. It is, after all, the fuel business. Everything requires fuel in one way or the other. There have been some reactions to the trade and tariff wars that will likely have far longer impacts than these restrictions alone. One of the major shifts is taking place in China. It has set off a cascade of reactions that will only accelerate over time.
Analysis: Starting with the fact that tariffs imposed by the U.S. on Chinese exports will make these goods more expensive to the U.S. consumer, there are some decisions that Chinese producers will have to make and soon. They can react to the higher prices in several ways. They can just swallow the tax and keep on selling the goods cheaply to the U.S., but that is not a sustainable plan for long. They can go ahead and pass the increase on to the consumer in the U.S., but that will erode their market share, and perhaps dramatically. If the belief is these tariffs and trade wars are temporary, these may be acceptable short-term reactions, but not if these are seen as semi-permanent in one sense or another. This would call for a very different strategy—one designed to lower production costs and push efficiency.
There is evidence that many Chinese entities are exploring exactly this approach. One way this has been attempted is to introduce a great many more robots and more technology to streamline the production process. While it is true China has a great deal of cheap labor, there is a labor shortage situation facing the nation when it comes to the skills needed for modern manufacturing. To compete in the production of high-end goods, the Chinese have to adopt the same systems used by their rivals in Japan, the U.S. and Europe. It is an irony that attempts to blunt the Chinese import market in the U.S. is fueling the Chinese drive to compete with the high-end companies the U.S. relies on for its export market. It is not really possible to charge a lot more for low cost goods. China knows it will continue losing that market to countries that are even more low-cost oriented than it is right now. Add in the tariffs and that process accelerates.
Here is where it gets interesting for global energy. China is now the No. 1 nation in the world in terms of buying and installing robots and technology. They have not yet quite caught up with the U.S. in terms of total usage, but that day is not far away. As China shifts away from labor-intensive production to capital and machine-intensive production, there is a major increase in the amount of energy needed. China has been building power plants at an accelerated rate. This is slated to continue for years to come. The investment in solar and other renewables has been significant, but the vast majority of China's power will still come from coal, and for decades to come. The problem is that coal produced in China is high-sulphur brown coal. It contributes heavily to the air pollution issues that increasingly irritate the emerging middle class in the cities. This leads the Chinese to import the cleaner burning coal it can obtain from the Australians and elsewhere. This all leads to an interesting possibility as far as breaking the trade impasse between the U.S. and China.
The Trump administration promised to rescue the coal industry in the U.S., but that is going to be nearly impossible if there is as much reliance on domestic usage as exists now. The U.S. utilities want to shift to natural gas; they are not promoting coal use. If the Chinese want coal and the U.S. agreed to sell more of what it produces to China, there would be a rather rapid improvement as far as the trade deficit numbers are concerned.
Ramaphosa Strikes Back
The removal of Jacob Zuma as the head of the African National Congress was about as nasty a political fight as has been witnessed in South Africa. Zuma tried every trick in the book to avoid seeing the end of his corrupt rule, but in the end, his transgressions were too much for the majority of the ANC and he was deposed. His replacement is Cyril Ramaphosa, a long-time critic. This defeat has not stopped Zuma from trying to undermine his successor. Now Ramaphosa is essentially calling Zuma out and demanding that his acts be seen as treason.
Analysis: Zuma has worked with some very unsavory elements to unseat his rival—extremist groups in the U.S. included. Rumors that South African troops were killing white farmers and seizing their land circulated in U.S. social media and led President Trump to condemn the practice in a tweet despite the fact that it was not happening. That story was traced to Zuma. There have been many other rumors promulgated within the country and all have been false. That doesn't always affect their efficacy however.
Life Can Be Hard
I really do try to remember this. I know full well that I live a charmed existence and try to not forget to be grateful for this and to understand that many do not. My wife is my best friend and has been for over 40 years. She has quite literally made my life possible. I have a business partner I have been with for 20 plus years and consider him a close and trusted friend. Our "right-hand" woman is Karen Sanchez. There is no more loyal and dedicated person. I have great friends, stepsons I love and grandkids that make me proud every day. I do what I like to do for a living and so on—you get the idea. Even my recent health issues were very minor—basically temporary annoyances.
Then, I see people who are engaged in a major struggle every day of their lives and nobody really seems to care or even notice. I was waiting for an appointment with my eye surgeon yesterday. An older man with a walker made his way slowly to the desk. He was late for his appointment, which obviously perturbed the receptionist. This place is a whirlwind of activity and doctors squeeze people in every 15 to 20 minutes, so I get why late arrivals are a problem, but he was soon reduced to near tears as he was told that he would have to reschedule for another day. He started to explain to nobody in particular that he no longer drives and has to rely on others. He has no family left and can only plead with his neighbors to help out. They do, but apparently not enthusiastically as they have responsibilities of their own. Just as I thought he would break down, a young man walked up and said "he can have my slot if that is OK. I don't have anything urgent and I can run over here anytime—my office is just down the street." The old man didn't know what to say, but the young guy pointed to the man's arm and then rolled up his own sleeve to reveal a similar tattoo. "Semper Fi" was all he said and he walked away.