Strategic Global Intelligence Brief for September 21, 2018
Short Items of Interest—U.S. Economy
Jobless Claims Fall Again
The rate of new jobless claims has fallen to a low not seen since 1969. This is an indication of a very tight job market and an indication that most companies have engaged in the kind of "right sizing" over the last few years. They have the staff they need and don't yet see the need to cut people to save money. In many ways, there has been a paradigm shift over the last decade or so. The old pattern was to hire liberally in anticipation of expansion. If the planned growth did not take place, there would be lots of pink slips. The fastest way to execute cost cutting was to fire people. Today, it is expensive to hire and train; companies are not as quick to staff up. Once the hire is made, there is a desire to keep that employee. The good news has been that companies are engaged in hiring, but they are also not engaged in firing.
Another Month of Decline in Existing Home Sales
For 11 straight months, there has been a decline in existing home sales—down by 1.5% from last year. This has been confusing to many analysts as the overall economy has been doing well. That would seem to be encouraging to the home buyer as well. There has been talk of headwinds all year. It looks as if they really are manifesting now with higher prices for homes at the same time that mortgage rates are getting higher. The other issue remains consumer demand. The Millennial buyer is a little more engaged, but not as much as has been hoped. The preference is still for the loft or apartment. Even having families has not changed these patterns much.
Looking for Oil Alternatives
The U.S. wants to put maximum pressure on Iran through sanctions, but the fact is the U.S. has very little to do with Iran after years of conflict and sanctions. The only way to ratchet up pressure on Iran is to get other nations to cut them off. This is precisely what the sanctions are designed to do. However, this puts many U.S. allies in a bind as they depend on the oil they get from Iran. So, the U.S. is now actively seeking ways to help these nations get access to oil from somewhere other than Iran. This may mean more from the U.S. itself as well as from Canada, Mexico and those states in the Middle East and Africa that side with the U.S. The nations the U.S. worries about most are Japan, South Korea and India.
Short Items of Interest—Global Economy
Inflation Eases in Canada
Last month, prices in Canada were going up sharply and inflation was at around 3%. This month that rate has fallen to 2.6% and there is slightly less concern over a major breakout of price hikes. Most of the increase last month was due to higher-priced gasoline. That cost has now dimmed a little. The biggest concern is trade and what it will mean to Canada if the NAFTA pact is dumped or altered significantly. The overall sense in Canada remains confident as there is faith these negotiations will result in a workable compromise.
Colombia Faces Massive Migration Problem
The Venezuelan government is teetering on the edge, but one would never know it from looking at its clueless president. Photos are showing up all over the world as he stopped off in Istanbul to enjoy a $100 rib-eye steak at a gourmet restaurant. It is estimated that his group of sycophants spent upwards of $2,000 for the meal. Meanwhile, thousands of Venezuelans are pouring across the border into Colombia, creating yet another refugee crisis for the world. They arrive penniless and malnourished, while Columbia is not yet getting the help they need to cope.
Bolsonaro Back on Campaign Trail
The attempt to assassinate the hard-right front runner in the Brazilian elections did not succeed. Jair Bolsonaro is back with a vengeance as he attacks the left for this and other atrocities. He is a right-wing populist with a definite fondness for the military and tough position on drugs and the left. He is in the lead with a comfortable margin.
Brexit Collapse
This is not at all what Prime Minister Theresa May expected from the Salzburg summit on Brexit. The outright rejection of the U.K. plan by the Europeans has placed the May government in real jeopardy. Even sympathetic analysts are convinced she will have to be replaced before any real progress will be made. It was described by many as an ambush as there had seemed to be reasons for the EU to consider the "Chequers" plan. In the final analysis, the European response was blunt—"it will not work." There was not even a suggestion as to what could be changed or tweaked to make it more palatable. Instead, there was a very direct statement that held if one elected to leave the European club there should be no expectation of being able to choose which benefits to give up and which to keep. The European attitude has hardened over the course of the talk and is now essentially "don't let the door hit you on the way out."
Analysis: The sense in the U.K. was that European leaders were deliberately trying to humiliate May, which was unexpected. The assumption was that Europe would try to mask their opposition to some elements of the plan so May could navigate her way through the upcoming Conservative party meeting. Now that they have jerked the rug from beneath her, the speculation has turned towards what the Europeans expect to happen in the U.K. now.
The issue that supposedly broke the desire of Europe to cooperate is Northern Ireland. Ireland is part of the EU and now Northern Ireland is not. The British want that border to stay open as it is now so people of both locations can travel as easily as they ever have. Europe wants a formal and restricted border as they anticipate the possibility of an open border being used to subvert European trade rules. They are likely correct in that assumption. It will be an odd situation, but if the formal borders are adopted, the division of Ireland threatens to reignite the anger that fueled "the Troubles." The division of the Irish had been more or less accepted by the residents as long as it didn't really mean separation. Now that this is a possibility, the political and cultural issues are very complex and fraught with danger.
It appears that Europe wants to force the issue in the U.K. They are assuming Britain now knows it made a huge mistake by electing to leave the EU. The expectation is that the country will come crawling back to Europe begging to forget the whole thing and vow to adhere to all the mandates Europe can think of. There are factions within Europe convinced there is a strong desire to reverse the decision. There is also a strong faction that thinks the British really want to be done with Europe and would like to hasten the day that is reality. Both of these factions think a leadership crisis in the Tory party will bring either a hard liner like Boris Johnson who will wash his hands of the EU or it will bring a real conciliator that will return the U.K. to the fold. Most analysts in Britain believe the hard liners would prevail if May is tossed out as there is now more anger being directed at Europe than ever before.
The Price of Austerity
The new government of Andrés Manuel López Obrador (AMLO) started with a very all-encompassing pledge of austerity as the country tries to come to grips with the massive budget overhangs it has been contending with for generations. These vows were also attacking the culture of corruption that has compromised the government at nearly every level. It has been both a symbolic and focused move that has been referred to as "lunchbox austerity." AMLO will continue to bring his lunch in a sack and drive his modest car and live in his modest home. Other members of his party are following the pattern. Bonus payments are being slashed and so are salaries of most senior officials. One can certainly argue that some or maybe many of these officials never deserved the perks they received, but there are also many competent and hard-working people now staring at a dramatic loss of income. As one would expect, they are seeking employment elsewhere.
Analysis: At the same time, AMLO is suggesting a massive investment into infrastructure and the oil industry—both sectors that have significant issues with graft and corruption. There are dozens of these white elephant projects in Mexico that have done little for development, but have made people very wealthy. The investment community is somewhat encouraged by the attack on corruption in government, but worry about these splashy projects that seem to be nothing more than money sinks.
This will be the biggest challenge for AMLO. He has a lifetime of credential as a critic and gadfly, but virtually no experience in running anything. Even as Mayor of Mexico City, his role was not the one of executive as much as it was to continue to be the voice of criticism. It will be hard to go from campaigner to administrator.
Household Wealth on the Rise Again
The level of household wealth has jumped once more and is now sitting at levels not seen in decades. This marks the 11th straight quarter of gain and an improvement from the first quarter by 2.1%. The latest number as reported by the Federal Reserve is $106.929 trillion and includes a 2.2 trillion bump in just the last quarter. There are two drivers as far as these gains are concerned: the rise of the stock market and the rise in value of people's homes. These are the ways most Americans accumulate wealth. There has been stunning growth in both sectors since the end of the recession in 2009. As always, there are caveats and some issues that will bear watching down the road.
Analysis: The most important single factor affecting both the market and the housing sector is the interest rate environment that has been established by the Federal Reserve over the last decade. The U.S. has not seen a rate this consistently low in decades. It has had an impact on the way consumers and the business community behaves. One of the most important reasons for the consistent growth of the U.S. stock market is that investors have not had many other options other than the equity market in the U.S. With rates as low as they have been for as long as they have been, there has been no demand for the traditional savings vehicles people once used. Why buy a Certificate of Deposit with a very low rate that is going to end up worth less than when it was purchased due to inflation? People who were once averse to being in the higher risk equity markets elected to get involved anyway. That propelled the market to greater and greater levels. With only minor corrections followed by sharp recoveries, there has been plenty of incentive to stay connected to a market which continues to set new records. Even with this greater participation rate by more people, the bulk of market investment has been made by those in the upper 5% of the population as measured by income. Around 85% of the market is accounted for by this group.
This means that the bulk of household wealth is still in the homes that people own. At the start of the recession, the fact that so many people were homeowners was a profound weakness for the economy as these homes cratered in value from 2008 to at least 2010. This was the period of underwater mortgages, forced sales and stunning economic reversals for people who had very little in reserve to cover this kind of event. That situation has been resolving itself for several years now as the price of homes has risen to record levels. The underwater mortgage is rare now. Many people are sitting on more household wealth than has been the case in decades. This too is related to the actions of the Fed as interest rates have been low enough to keep mortgage rates low as well. The rise in the price of homes has not really dented the demand for these homes, but higher mortgage rates will likely dampen enthusiasm.
This is where the risk comes in for the future. The Fed has been hiking rates and plans to keep doing so as the threat of inflation continues to build. The inflation issue is not the only reason the Fed wants to see rates go higher. There has been nothing to suggest the Federal Open Market Committee (FOMC) has any intention of backing away from the policy outlined. Not only is the Fed worried about inflation, there is concern regarding the ability of the Fed to react to another recession down the road. At the moment, the Fed would not see much impact from lowering already historically low rates—they need them to be closer to 5% or even 6% before they feel they have a pad. This level would arguably be too high. The Fed is in no hurry to get to that point, but it is on their agenda to one degree or another.
The third motivation for Fed action is to curtail the kind of speculative borrowing that has been made possible by the low rates. This is also where interest rate policy and a very lively stock market meet head on. For the past several years, it has been possible for people to borrow money very cheaply and then invest it all in the market. The return on that investment seemed almost guaranteed and the sums involved have been massive. If the rates go up, that play gets riskier. If there is a serious correction, there will be a lot of people without the funds to pay the banks back and a liquidity crisis ensues. The Fed wants to shut down some of this high-risk investment activity with rates that slowly start to introduce more and hopefully unacceptable risk.
Transportation Transformation
The state of the national infrastructure is obviously not interesting or controversial enough to merit much discussion during campaigns. It is far more politically lucrative to bellow about immigration or cultural norms. This is unfortunate as there are few subjects that matter more to the way people live their lives. So, little has been done to adjust to the deterioration of our transportation infrastructure which has changed our lives in a negative way.
Analysis: The average commute time for Americans has been going up steadily for years. That commute just added another 18 seconds a day—two and half more hours on the road a year. The average length of a commute is now over 26 minutes. In denser and more congested cities, that time increases to 37 minutes. This is one way
One factor that has added to this commute time has been ride shares such as Uber and Lyft. These are now cars in constant motion—picking up and dropping off as opposed to the previous norm where people drove their car and then parked it all day. The system is creaking and still can't seem to get the attention it needs. Highways are in disrepair and many are no longer where they need to be. New highways are rare and existing systems are facing breakdown that would compromise safety in many respects.
Simple Gestures and the Lack of Them
Today, I am in Cheyenne, Wyoming. As of 10:00 this morning, I will have spoken to some group in every one of the fifty states. It is not that I had never set foot in Wyoming, but had not had an audience before today. Already I have some lasting memories. This started as I went to get my rental car in Denver. The shuttle was packed so I gave my seat to a woman traveling with her husband. The startled looks of the passengers gave me pause. They stared as if they had never seen such a thing and several made comments. I thought this was just normal behavior, but apparently I was wrong. The second memory was not so good. I was still driving in Colorado in what would be described as bumper-to-bumper traffic but at high speed. Some lout pushed his way between me and the truck behind me and started flicking his lights as if we were on the autobahn. I counted 26 cars in front of me and an equal number in the lane next to me. Where was I expected to go? And what did he expect to gain? He then forced his way in back of a large truck towing a horse trailer. That was a mistake. As he did that light flicking thing, this truck slammed on the brakes and our impatient driver was forced off the road.
Later that evening, I visited a local Mexican place and enjoyed an enormous plate of fajitas—I couldn't eat more than a third of it. The wait staff was friendly and pegged me as "not local" pretty quickly. What gave me away? Maybe it was a guy in a suit sitting alone in a Tex-Mex place? They were chatty but not intrusive so I could engage in my favorite pastime—people watching and eavesdropping! I listened to an excited young man who appeared to be an instructor at a Native American school. It had finished building an observatory and the telescope had been installed. He spoke in very excited tones about the kids getting to see things like Saturn's rings, Jupiter's moons and the great red spot.
