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Strategic Global Intelligence Brief for September 27, 2018

Short Items of Interest—U.S. Economy

Technology at Heart of Trade Dispute With China
There are many trade issues that separate the U.S. from China, but one festering away for many years is the tendency on the part of the Chinese to steal technology from U.S. companies in any way they can. Sometimes, this is espionage and outright subterfuge. In other cases, the Chinese will employ strong-arm tactics such as surprise inspections that result in big fines and even criminal accusations. The government actively assists in this quest to steal tech and other privileged pieces of information. This practice is at the top of the list as far as what the U.S. wants to see changed. Unfortunately, the Chinese still deny this ever happens, so they do not intend to do anything about it.

New Homes Sales Rebound a Little
For the last two months, the sales of new homes have been on the decline. This has been attributed to a variety of factors ranging from higher home prices to higher-cost mortgages, a shortage of labor in construction and consumer temerity. These are all still issues, but this month there was a modest rebound in the number of new homes being built. There was a rise of 3.8%. This is not earthshaking as the new home market is far smaller than the existing home sector and drives the economy far less. There continues to be a decline in the existing home sector that new home buying will not come close to altering.

More Canadian Tensions
The talks between the U.S. and Canada have not been going well. For the moment, they seem to have been called off—at least as far as a meeting between President Trump and Canadian Prime Minister Trudeau. The U.S. is now threatening to place tariffs on cars from Canada. That has the automotive sector in the U.S. in a dead panic given how integrated the sector is. The U.S. wants Canada to open up its farm sector, but this is a very sensitive area for Trudeau. Canada used to have a lot of leverage with the U.S. due to oil exports, but the U.S. no longer needs that resource as much so Canada's bargaining position has been weakened.

Short Items of Interest—Global Economy

India Moves to Hike Tariffs on Imports
It is not just the U.S. that has been turning towards protectionism. As a matter of fact, the majority of nations opt for some form of protection to insulate their markets or their currency. India has moved to hike import tariffs as a means by which to bolster the sagging rupee and to extend more protection to some of the important "infant" industries. India is watching the emerging trade war between the U.S. and China as the best opportunity they have seen in years for rapid growth—no nation is better suited to replace China as an exporter of consumer goods to the U.S. They do not have the efficiency the Chinese have nor do they have the infrastructure, but they can produce at even cheaper prices.

Reversal in France and Spain
Just a few months ago, there were very high rates of consumer confidence in both of these nations as the population expected some big changes from their new political leaders. Now, that enthusiasm has faded as cold reality sinks in. Neither nation was in this situation due to the actions of its own government alone. The issues that still dominate Europe still affect the activity in Spain and France. It is not clear what can be done to spark renewed enthusiasm from business and consumers, but internal squabbling is probably not it.

Social Media Wars
It is not just the U.S. and Europe that have been contending with the political clout of social media. The elections in Brazil have brought out extremes from both sides of the spectrum. Both are flinging blatantly false stories and outright lies. The traditional news outlets operate under the burden of having to prove what they assert with fact, but social media has no such limitation. It has been spewing utter nonsense for weeks—feeding the extremist positions.

Is Iran Winning the War in the Middle East?
It would likely be more accurate to describe several wars in this part of the world as opposed to just one. Furthermore, the whole idea of winning can seem a pretty distant goal. It is not even feasible to describe what a "win" would actually look like. The layers of animosity and rivalry run very deep and cross over one another routinely so as to make allies of a former enemy today and enemies of former allies the next day. The U.S. has been engaged in this region for decades and has little to show even with everything from direct confrontation to a hands-off approach working through supposed proxies. It has been challenging to figure out exactly what the U.S. wants from one minute to the next. There have been a few constants such as support for Israel and protection of U.S. access to oil from the area, but beyond that there have been very fluid and rapid changes in terms of U.S. priority. That has not been the case for Iran. The policy they pursue today is the same as articulated decades ago when the Shah of Iran was overthrown and the current regime came to power under the control of the Islamic theocracy. Looking at the region today, it is easy to conclude that Iran is much further along the path to success than the U.S. or the other nations in the region.

Analysis: The focus of President Trump's speech before the UN yesterday was Iran and the Middle East in general. That came as something of a surprise to the assembled delegates and even to Trump's staff. The remarks were off the cuff for the most part and wandered into a number of areas apparently on his mind at the time. The expectation had been that he would concentrate his comments on China, trade issues and the general pattern of tariffs that have either been imposed or threatened. These topics got short shrift as he leveled his ire at Iran, Saudi Arabia, Turkey and the Middle East. Iran was apparently expected to be put on the defensive by all this, but emerged as a beleaguered state bullied by a duplicitous U.S. That was the takeaway as far as other states in the region were concerned. Some of that assessment seemed to be shared by nations in places as far-flung as Latin America, South Asia and Africa.

Since 1979, the goal of the Iranian government has been development of what amounts to a sphere of influence that stretches through the whole of the Levant. It has been described over the years as everything from a "land bridge" to a "corridor or crescent" that would stretch from the Mediterranean to the Zagros Mountains of the southern regions. Today, Iran nearly has this in place. The Hezbollah militia Iran backs in Lebanon has effective control over the whole country. It now wins reasonably open and fair elections that have placed the Sunni parties and the Maronite Christians in a distinct minority. The elections in Iraq have brought powerful Shia parties to power. Today, they are dominant in the Iraqi parliament as the Kurds have retreated to focus on their own territory and the Sunni fade from power due to fractures within the political coalition. Syria is still nominally in the hands of a Sunni leader, but Bashar al-Assad has had to rely on extensive help from Hezbollah fighters and from Iran itself.

The state in the best position to contest Iran is Saudi Arabia, but Iran has rather skillfully weakened them as well. The war in Yemen has been an expensive disgrace for the Saudi government. The richest state in the area with one of the largest militaries has not been able to defeat an insurgency in the poorest nation. Iran has funneled money and some fighters, but their engagement has been far less expensive than that of the Saudi government, and Iran's allies are winning.

Iran signaled it was content with the expansion of its regional power and with the discussion of limiting its nuclear capability. The agreement hammered out by the U.S., Europe, Russia and Iran was considered a major step forward for the region, but this treaty was torn up by President Trump as he was insistent Iran also stop playing the role it developed in the region. This was not part of the original deal and is not something Iran is remotely prepared to do. They concluded nuclear capability was costing more than it was worth now that they had removed threats such as Iraq, Syria and Lebanon. The only state locally that can challenge them is Saudi Arabia. Iran is convinced they can be handled by more conventional means.

Then, there is Israel. There is open animosity between the government of Benjamin Netanyahu and Iran. A hot war could break out at any moment, but for the present the war has been confined to words and threats. The Palestinian issue is further from resolution than it has ever been as Israel is ruled by the hard liners and President Trump has explicitly supported their aims over those of the Palestinians or the other Arab states. Iran is anti-Israel, but not all that pro-Palestinian. After all, the majority of the Palestinians are Sunni and they are Arabic as compared to the Shiite in Persian Iran. At the moment, the Iranian leaders are satisfied that Israel is preoccupied with Palestinian issues and less engaged in what happens in Iran.

Beginning of the End of Merkel's Dominance?
For almost a decade and a half, Chancellor Angela Merkel was clearly the dominant figure in Europe and certainly in Germany. She extended this influence to the world in general on many occasions and was assumed to be on a par with any of the major leaders of the developed world. That position is now in some serious doubt as she has been losing significant control over the German government and has been unable to forge the alliances globally that boosted her influence both at home and abroad. There has not been one single event or development that has affected her, but rather a series of developments that have undercut her authority. She might well have fallen further by this time, but there is no real rival emerging in Germany or in Europe. Even as essentially a lame duck, she has more clout than her would-be challengers.

Analysis: Analysts tend to point to four factors that have weakened her hold. The most important and likely reason for the slide to start when it did is the immigration debacle. What started out as a simple humanitarian gesture designed to help stabilize the crisis in Syria and the Middle East cascaded out of control and saddled Germany with millions of refugees and economic migrants from all over the world. Most were forced from their homes by violence and economic deprivation and thus have little desire to assimilate into the new countries where they now reside. The antagonism towards this wave of migrants has divided Germany like few other issues. It has sparked the creation of a right-wing populist party called Alternative for Germany (AfD). It has been gaining enough seats in the Bundestag to complicate Merkel's legislative agenda. This has also emboldened her critics within the traditional center right. That is now her second biggest challenge.

Just this week, one of her closest aides was bounced from his position in the Bundestag. Volker Kauder had been the head of the CDU/CSU parliamentary group since 2005 and was Merkel's most trusted aide. His removal has many thinking she could be next if the opposition is able to coalesce on a candidate. The junior partner in this coalition is the CSU based in Bavaria. They are the more conservative and have already tangled with Merkel over the status of the spy chief who has been accused by the Social Democrats of being too easy on the far right. If all this chaos results in bad election outcomes in two key regions next month, the blame will fall on Merkel. That could trigger a demand that she resign along with the rest of the government.

A third factor is that Merkel doesn't have the international allies she once had. Prime Minister Theresa May of the U.K. is fighting for her political life due to Brexit. The person who has thrown up the most aggressive of barriers to the U.K. has been Merkel. There was some warming between France and Germany with the election of President Emmanuel Macron, but his popularity is waning and his focus has become more domestic. President Trump hates Merkel and the feeling is mutual. There will be no resumption of good relations between these states until one or the other of them is gone.

The fourth factor is not specific to Merkel—it is simply that she is now a lame duck as everybody knows this is her last term as chancellor. The race would be on to develop her replacement even if she was at the height of her power and popularity. Her major challenge will be trying to ensure that whoever replaces her will not try to undo what she has implemented over the last 15 years.

Are Chinese Consumers Drowning in Debt?
The levels of household debt in China have been accelerating for several years. The numbers now are as bad as they have ever been. The ratio of household debt to GDP has reached an all-time high of 49.1, a 20% increase over the last five years. The fear in China is this will create a real burden on the consumer population sooner than later as all that debt service will gobble up the disposable income needed to keep driving the domestic economy. There are already wide swaths of the consumer sector slowing down as they struggle with debt they can't adequately catch up on. This issue is made the harder by the fact it is very hard to leave a current job to seek out a better paying one.

Analysis: Before anyone gets too smug about the issue as it has impacted China, it is worth considering this same ratio in the U.S. is 105% and growing. The key difference has been it is easier for workers to seek out better paying jobs to deal with that debt overhang, but of late, that has not really been the case and the U.S. consumer is struggling more than used to be the case.

Trucking—A Unique Retirement Option
There are times when it just all seems to come together. What do you get when there is a major shortage of long-haul truck drivers, a population of Baby Boomers that are at retirement age and a group of those retirees who wanted to travel but couldn't afford it? You get husband and wife driving teams that combine their sense of wanderlust with the desire to keep making an income. There have always been teams of spouses, but there are more now than ever. Many are independent so they can pick when they work and where they will be driving.

Analysis: This will not solve the driver shortage problem nor will it be the primary way retired Boomers spend the latter third of their lives, but it is an option for more people than was once the case.

My IHOP Experience
Lately, I have been sharing a story from a guy I met who runs a small manufacturing operation in Missouri. Like many in his position, he had been struggling for years to hire the people he needed. The work was there and he was willing to pay a decent salary for the right person, but that person never seemed to walk through the door. Nobody had the training and skills he needed. Those who might have were not coming with much enthusiasm. Candidates were routinely failing the drug tests and many had very bad sets of recommendations. Then he tells me he had just hired two welders. He thought they might work out although neither had a bit of experience. "Where did you find them?," I asked. "IHOP," he answered. Turns out they were two very bright and energetic waitresses who impressed him with their work ethic. He told them he would hire and train them so they could make considerably more than at a pancake restaurant.

My IHOP story is not quite as life changing, but it makes me wonder if there is something unique to these places. I had a very bright-eyed and enthusiastic server who started right off with asking if I was just getting off work (as I was wearing a suit at 5:30 in the afternoon). That led to where do I work and what does an economist do? What is it like to travel so much and how do people know so much about all that stuff? She was carrying on these conversations with everybody and never missed a beat as far as getting food to the table. She was just brimming with curiosity and a desire to see the world. I have no doubt she will do just that.

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