Strategic Global Intelligence Brief for September 4, 2018
Short Items of Interest—U.S. Economy
Playing Hardball with Canada
The U.S. has taken a very hard-line approach to China when it comes to tariffs and trade. Much of this attitude is understandable given the fact that China has flouted almost every trade rule there is and maintains a very hostile position towards the U.S. on many political and military matters. It is far harder to figure out why Canada has become such a target. This has been the closest of relationships for over a century as Canada has backed the U.S. in almost every foreign policy initiative in which the U.S. has engaged. There are certainly some trade issues between the two states, but there always are between nations. The two have always worked these out quietly, but now Canada is referred to in language that was once reserved for real enemies. President Trump has taken a personal dislike to Justin Trudeau, and it is not clear why.
Fallout From Rise of Uber
The rise of the ride-sharing app has certainly altered the landscape for taxi drivers. This industry has been shattered by the emergence of this travel alternative, but this is not the only sector affected. There are a number of lending institutions that once specialized in the practice of lending would-be cab drivers the money they needed to buy the medallion that permitted them to work as cab drivers. That demand has all but vanished as the cabs can't compete with the ride-share options unless they are protected by the city or community where they operate. Even the cab companies are getting a break on these medallions as the city understands they can't compete if they have this added expense.
Rethinking Wage Cuts
President Trump stunned some of the groups that had been supporting his trade policies with the announcement that he planned to rescind the wage increase promised to federal employees next year. The argument was this would save money and help address the debt and deficit, but critics point out that damage done to the debt load was rooted in the tax cuts at the first of the year. Now he asserts he is "studying" the issue as the labor unions backing his trade plans are criticizing this move in the most strident of ways.
Short Items of Interest—Global Economy
Supply Chains Alter
The threats to launch a trade war have been running hot and cold. The U.S. approach has been based in constant negotiation. Every time a deal seems imminent, it is back to the drawing board. This is not the way that most business works. All this uncertainty is damaging to long-term and even short-term planning. As a result, the majority of companies sourcing from China have started to look elsewhere as either a backup to China or as an outright replacement. This has been a boost for nations such as India, Vietnam, and Malaysia. Others in Asia and South Asia will be right behind as they seek more business.
South Africa Sinks Back Into Recession
The latest data on the second quarter shows that the South African economy is as weak as it was in 2009 and has once again slipped into recession. The rand has been falling for days and most expect that to continue. The demise of Jacob Zuma's leadership has not been enough to lure investment back. There are continued signs of distress in terms of the commodity prices the South African economy relies on.
Argentina Faces Emergency
The government of Mauricio Macri is facing a massive crisis and has announced there will be an austerity program put in place to deal with the crisis that emerged when the nation made an unexpected demand for more International Monetary Fund (IMF) funds. The investment community is very cautious when it comes to Argentina given their past behaviors and they have fled. The country has been hit hard by low commodity prices already. This was the final straw for the weak system.
Russia's Relations With Europe Shifting Again?
There are few relationships in the world with more at stake than that between Europe and Russia. This has been the case for a very long time—perhaps as far back as the two entities existed. They are rivals to be sure. That rivalry seemed to be ebbing after the collapse of the USSR, however. There were plenty of optimists that held all would be well now that Russia seemed ready to embrace the western model for both their economy and the political system. It was not to be and over the last few years the tension has steadily ratcheted up. It would be inaccurate to describe the relationship as overtly hostile as it was during the Cold War, but it certainly can't be termed warm. After several years of being buffeted by European sanctions, the Russian economy has been feeling the impact. Europe has been distressed over the interventions in Ukraine and Georgia, while there has also been anger at Russian interference in the domestic politics of the European states. European angst over Russia has been far higher than it has been in the U.S., but even within Europe, there have been considerable differences between national reactions. There is an organization called Kremlin Watch that divides these nations into categories. Nine have been defined as "collaborators" or "in denial" with only six clearly opposed to the Russian efforts (U.K., Baltic States and Sweden). The nine are defined as the "awakened." They have started to move more aggressively towards controlling Russia. These include Germany, Spain, France, the Netherlands, Poland, Romania, Finland, Czech Republic and Denmark.
Analysis: This developing animosity has prompted Putin to go on a charm tour of the western European states. The aim is to try to loosen the economic restrictions chewing away at the Russian economy. This has been a bad year for Russia anyway as the major sectors supporting the economy have been struggling even without the sanctions. This is an oil-dependent state and oil prices have not been as high as Russia would prefer. It has also been a tough farm sector year, which is about all the Russians have. Manufacturing is not world beating, the consumer sector is weak and there is not all that much to offer the global market.
There was obviously something Russia had in mind as far as the U.S. was concerned. It has essentially escaped notice with all the controversy over what the Trump campaign knew and what the Russians knew, but if one looks back at the 2016 campaign and what Russia wanted from the U.S. or from the western nations as a whole, it is apparent that nothing quite worked out. Russia seemed to be counting on the U.S. having a more positive attitude towards the Russian regime. That would justify an attempt to keep the presidency out of the hands of Clinton—someone they knew to be an enemy. Russia rather hoped that Trump would try with Putin what was tried with North Korea's Kim Jong-un. By opening up to Russia in the name of a "new" relationship, there would be a good chance sanctions would be dropped and U.S. policy would look more favorably on Russian goals in the Middle East and in Central Asia. It was a shot worth taking, but now Putin has to resort to Plan B, and that involves Germany.
The most powerful actor in Europe is still Angela Merkel. She has led the effort to oppose Russian aims. She has been an opponent, but by necessity a practical one. She knows there is a great deal of German investment in Russia and she know that Germany buys a lot of oil and gas from Russia. It is in her interest to see a better relationship so long as she does not have to overlook Russian transgressions and gets assurances they will not continue.
Looking at the Week Ahead
In some ways, this is just another first of the month set of data releases—not all that different from those that took place earlier in the year. But there is something different about September. It is the first month back from the routines of the summer. School is back in session. That has an impact on employment as those part-time summer jobs come to an end at the same time that thousands of teachers take up their posts. Summer vacations have come to an end and business starts to get focused again. European tradition has most of the workforce on break for the entire month of August. The holiday season starts to grow closer and that means a more stimulated consumer. It simply feels like the start of an economic reboot. This year, that feeling is complicated by the impending elections in the U.S.
Analysis: Today, there will be a report from the Reserve Bank of Australia. This is not a major central bank and doesn't have the global clout of the U.S. Federal Reserve or the central banks in Europe, Britain, Japan or even India or Canada. What makes the Aussie bank important is the behavior of the Aussie economy as a whole. This is a country that has sported 28 straight years of growth and has maintained a policy of fiscal rectitude throughout. The country has a debt to GDP ratio that is the envy of the developed world with a reading of only 40%. Over the years, they have taken advantage of good years to put back cash for the not-so-good years. The Reserve Bank has kept rates right where they are for the last two years. They will very likely leave them alone today as well. There has been very slow wage growth and thus very weak inflation pressure—leading analysts to assume that rates will remain at around 1.5% through next year and possibly into 2020.
On Wednesday, there will be a statement issued by the Bank of Canada (BoC). It will be as much a response to politics as to the economic situation facing the country. The fact is that most of the economic data has been pretty solid. That led the BoC to push rates by a quarter-point last month. Their rate now stands at 1.5%. The strength of the economy would suggest another rate increase would be appropriate but for all the uncertainty that now surrounds the relationship with the U.S. Not only is there uncertainty regarding the future of a trade pact between the U.S. and Canada, but there is more overt hostility towards the U.S. than has been noted at any time since the War of 1812. Canadians feel utterly betrayed by the U.S. The Canadian government is questioning every area of cooperation between the two nations.
On Thursday, the Commerce Department releases the latest trade data. It is expected to show a widening trade deficit despite all the attention devoted to trying to lower it. The simple fact is that a strong U.S. economy makes it almost impossible to lower the deficit. The last time the trade deficit was falling significantly was during the recession years. As long as consumers have money to spend and the business community has plans to expand and grow, there will be heightened demand for goods from other nations. These will range from the consumer goods sold at the nation's retailers to machinery and technology needed by the business community. The growing U.S. economy will also mean greater demand for commodities such as oil, industrial metals and the like. The fact is that a trade deficit frequently indicates a healthy economy. It is nearly impossible to reduce a deficit by artificial means as long as the economy is humming along.
The final big release this week will be from the Labor Department as it looks once again at employment numbers. They will be about as they have been all year—gains in several sectors and an overall unemployment rate that is around 4%. This is certainly good overall news, but there will be the usual caveats. Too many of these jobs will be lower-paid positions in the service economy and there will still be acute issues of labor shortage in a wide variety of industries. As impressive as the low rate of unemployment may seem, there are some important clues to understanding this level in that labor shortage situation. Much of the reason for low levels of joblessness is the fact that some 10,000 Baby Boomers reach retirement age every day. As they stream out of the economy, there is a need to replace them.
Solid Expectations for the PMI
This month's version of the Purchasing Managers' Index (PMI) is expected to be much like last month—steady growth and no real surprises. There has been an expectation that manufacturing would start to take a real dip in response to the tariffs on steel and aluminum, but thus far this has not been the case. The fact is this process has been dragging out so long it gave most in the industrial community time to react. Many purchased the materials needed as far in advance as they could. This will essentially delay any reaction to the tariffs and trade barriers.
Analysis: Last month saw a slight decline in the pace of manufacturing growth, but the overall index remains solidly in the expansion zone. Even a little dip this month will not cause undue alarm. The bigger issue is whether the headwinds identified will kick in later this year. Most analysts expect them to. The growth surge at the moment may be as much as half artificial. The combination of front-loaded trade and the tax cuts provided a nice boost to the manufacturing sector. However, the tax boost is short term and the trade-related activity is front loaded and unlikely to be a positive factor at the end of the year. Some of that higher-priced commodity activity is already starting and will accelerate as the year progresses.
Rethinking Retirement
The developed world is going to face this crisis sooner than later. Some nations are clearly already there and have no more time to lose. Somewhere along the way in the last century, the notion of retirement took hold as a national right rather than a privilege. The pattern before state-run pension systems was that only the rich and the determined would be able to retire as they would have accumulated enough wealth to be able to put some aside. Everybody else essentially worked until they died. The decision to create national systems was greeted with wild enthusiasm and became a key part of government. The challenge now is that assumptions made then do not work now.
Analysis: Setting the age of retirement at between 60 and 67 in most nations dated back to the origins of these plans. The timing was based on expected lifespan. The pension systems were designed to provide for people to retire and live for perhaps another five to 10 years. Today, the person that retires at 65 can expect to live 20 to 25 years longer. This is more than these systems can handle with current funding so a push is on to slowly raise the age at which people can retire. If the same demographic guidance was used today as was used decades ago, the stated age of retirement would be between 80 and 85.
Personal Observations
Please forgive my continuing to harp on topics related to my illness earlier this year, but it has proven to be more than a little instructive. I seem to learn new things at a rapid rate. I should really have known these things by this time, but it seems experience is the only instructor one can really have in many cases. I have mentioned before that I think I have more empathy with people who have endured some kind of health crisis than once was the case. I had never been sick with anything other than the flu or a cold and figured all one had to do was get past the few days of discomfort and all would be well. It has been nine months since the cancer and I still have a lot to deal with. I tire very quickly and it takes far longer than it used to as far as bouncing back from anything strenuous. The aftereffects of chemo and radiation linger for a long time. I am just starting to understand that many of these changes are permanent.
The bigger story here is that I am certainly not alone. In fact, I have experienced far less trauma than many. As I start to engage in a bout of frustration over these limitations, I am now acutely aware of how many other people are fighting something. Most of them are dealing with much worse than I have been facing. We are people in a hurry and we have our complex lives to attend to. It is not always easy to take time to react to others, but we really should—if only because one day we will need that same patience.
I watched an elderly man trying to get off the plane the other day. He required a wheelchair and the flight crew was working on it, but he had luggage as well and his wife was just as weak. It was taking a long time and the grumbling started right away. I was close to him and decided to toss my bags back into a seat, so I could grab his and get them on their way. People crashed past us like they were on fire. As he thanked everybody for their help, he confessed how humiliating all this was. He was on his way to a WWII memorial event. He had been a Marine and served during battles at Iwo Jima and Guadalcanal and elsewhere. "I used to be a heavy machine gunner. After the war, I ran a ranch and was a rodeo clown. I never thought I would see the day when I couldn't get out of my chair." I am now reminded of the transitions of life every time I try to do something that was once effortless and try to understand that others are in that same boat.
