Business Intelligence Brief: December 22, 2021

Brief Notes on the US Economy

•           What Does Normal Look Like in 2022? – Once again, we are back to figuring out how to deal with yet another viral surge. This time there are two factors playing a bigger role than in the past. The first is that everybody now knows what kind of damage was sustained in the economy when lockdowns and shutdowns were mandated. The assumption in 2020 was that these measures would be temporary and when that was not the case the economic catastrophe was immense. The second factor is a realization that viral threats will never cease, there will new strain after new strain. This forces business and government and the average person to develop a “new normal”. There is no desire to shut society down again but neither is there a desire to overwhelm hospitals and consign millions to illness and death. At this juncture the normal for 2022 means emphasis on vaccines, emphasis on personal protection, emphasis on accommodating remote work but otherwise resuming as much of what was once considered “normal”. This will be a challenging balance to achieve – especially in the face of outright resistance by millions of people from both sides of the divide.

•           Pace of Home Sales Accelerates – The pace of existing home sales was up by 1.9% last month, the fastest pace since January of this year. The motivation for the increase in sales is simple enough but there are suggestions that this may be the calm before the storm. The prime motivation for the housing market for the last several years has been obvious – historically low mortgage rates. There have been other factors at work – everything from millennial interest in home buying to the desire to escape urban congestion but there have been factors that should have been reducing interest as well – namely the increased cost of homes. The latest surge is in some ways related to an assumption that this low mortgage rate environment is coming to an end sooner than later. If Fed rates start to rise, the mortgage rates will not be far behind.

•           The Flip Side of the Supply Chain Crisis – The focus for the last several months has been on the bottlenecks and the inability to get the products that have been in demand. The next challenge will come when all these backed up deliveries get made. The retailers ordered on the assumption they would have product to sell during the holiday season and now that has ended. The products they ordered are still on their way and will be flooding them with inventory they will struggle to sell. Already there are reports of retailers engaged in frantic discounts and sales so that they are not stuck with inventory for months. Those products that are seasonal in nature will be nearly impossible to unload and it is estimated that almost 30% of what had been ordered for the holidays will be showing up in January or February.

Brief Notes on the Global Economy

•           Are the Olympics Worth It? – The most expensive Olympic Games were those held by London as the final bill was over $15 billion. The cost of the just completed Tokyo Olympics comes in at $12.7 billion (so far). These were the Games held with no spectators and one of the lowest TV audiences in decades. The Games have been out of financial reach for most of the nations in the world for years and now even the richest countries are balking at a spectacle that seems to garner less and less interest and costs more and more to put on. The cost is in the venues and preparations – building things that will never be used again. There has been talk for years regarding the construction of a permanent Olympic home where the Games will always be staged and the time for this to become a serious consideration is here.

•           Two Out of Three on Omicron is Not Good – This virus is still largely mysterious although some aspects have become a little clearer. The bad news is that it spreads more easily and faster than even the delta variant and it seems to be able to thwart vaccines better than delta (although those that have had the booster still have significant protection). The only good news is that it seems to have less virulence so those that get it have milder symptoms – especially if they have any vaccine protection at all.

What is at the Root of Our Ills? Growth!

     The hand wringing has been near constant and nearly every assessment of the economy seems to compete with the last one to paint a dire picture. Inflation at a 40-year high, supply chains in collapse, nobody to take millions of jobs, the litany of woes seems endless and the coverage gives one the impression we are all doomed to economic crisis. Not to take away from the seriousness of these issues in any way but they all have something important in common and that something is growth. The US economy has made a stunning comeback from the 2020 recession – an unprecedented comeback. In this quarter alone economic output is expected to be up by over 7.0% as compared to an increase of 2.0% in the third quarter. To put that in some perspective this is twice as fast as growth in China and Europe is still limping along at 2.0%.

 Analysis: Economic growth is a good thing – we can all agree on that. It is not an unqualified good, it brings stresses and issues of its own and we have been experiencing these for months. As serious as these challenges have been, the fact is that dealing with them beats the alternative. A lack of growth brings lost jobs, failed businesses, loss of economic value for the average consumer, reduced revenue for government and so on. Not a good thing. There is one more consideration. Correcting the problems that stem from rapid growth is far easier that recovering from economic reversal. The majority of the issues that are facing the country at the end of 2021 will start to recede in 2022. Not that all of these challenges will go away and not that they will go away swiftly but there will be noticeable improvements as far as inflation, supply chain chaos and even employment.

     The major ports in the US are reporting one fifth more container volume than in 2019. Think about that for a minute. This is not a vast improvement in volume over 2020 – that would be expected (and in fact the numbers are much greater as far as that comparison is concerned). This is improvement over a year that most agree was a high growth year. The ports in Europe lag 2019 by a considerable margin and US ports are now by far the busiest in the world. There is only one reason for this. The US consumer has been demanding product from everywhere in the world and at a record pace. Consider the burgeoning trade deficit. The gap between exports and imports has been growing with every passing month despite the fact the US has been increasing export volume steadily. The fact is that American consumers have been spending that multi-trillion dollar surplus accumulated during the stimulus period. This is the origin of the supply chain crisis – too much demand for producers to keep pace with and too much demand for the transportation sector to contend with. The fact this is demand driven indicates how the issue will be resolved. In the months to come the demand will slacken as the consumer has blown through those savings and the holiday rush is ending. Producers will catch up and transportation providers will as well.

     Take inflation as another example. Prices have risen sharply for a variety of reasons but all of them are likely to be temporary to one degree or another. Demand has overwhelmed supply and there are only two responses to a situation like this – shortages or higher prices and at the moment we are getting both. When supply catches up the pressure of competition and the search for greater market share drives prices back down – for commodities like oil and steel and lumber as well as for consumer goods. Granted, prices are stickier coming back down than when they are going up but they do retreat. All of that excess savings in the system cushioned the consumer from the full impact of inflation but that buffer is now gone and people will react more to these higher prices, setting an effective limit on the price hike. It may be assumed that producers can just hike prices at will but the reality is that at some point consumers stop buying if the price hike is too high.

     Job growth is yet another example. There are 11 million jobs on offer because companies are expanding and growing and need people. The vast majority of these positions require skills and education and experience. These are good jobs and jobs that suggest the employers are expecting more growth. Unfortunately, there are still many barriers for those that still remain unemployed – mostly lack of skills but there are also issues of childcare, health, location and simply a reluctance to enter the formal workforce. The point is that growth has created the demand for 11 million jobs.

The Wage-Price Spiral

    The most worrisome kind of inflationary threat is the wage-price spiral. It is simple enough – higher inflation stresses the average consumer as their income fails to keep pace with the hikes. If they can, that consumer will demand higher wages so they can keep pace. Given the fact there is an acute labor shortage there are millions of workers that have leverage they have not had in years. Unions are getting far more active and even without them the workers have been able to demand wage hikes as employers struggle to retain their existing staffs while finding new employees.

Analysis: The fear is that higher wages will provoke even higher prices as companies try to offset these higher labor costs and the chase begins. There is, of course, a silver lining to the wage hikes as workers are also consumers and as they make more money, they are in a position to spend more. In the short term this added income will only make some of the current issues worse – higher inflation and more stress on the supply chain. Longer term impacts will be a bit more benign as higher wages will sustain a consumer boom. The real pain will be felt by those that are not in a position to hike wages. The fixed income population is large and many are retired. They fall behind very quickly and start having to make very difficult decisions regarding what they can spend on.

European Gas Crisis Worsens and that is Bad News for Everybody

     The price of gas in Europe has surged yet again. The latest jump was more than 20% and this is yet another new record. The situation in Europe is going to be brutal and soon. Millions of people will be unable to pay for heating their homes, businesses are already being forced to shut down as energy costs have become unsustainable. We already know the impact this has had on global energy prices as Europe has been desperately buying what LNG it can lay its hands on. This has jumped the price of gas in the US and utilities are switching to oil as an alternative – driving the price of oil higher.

Analysis: The gas crisis is political – purely and completely political. Russia has essentially declared war on Europe and to an extent on the US, NATO and the world in general. Russia is blackmailing Europe and by extension the US by withholding gas. The delivery through Nordstream 1 had been truncated but has now essentially ceased completely. There has been no gas coming from the southern pipeline as the Druzhba runs through Ukraine and the Russians are obligated to pay a transit fee if that system is used. For rather obvious reasons they have no desire to pay Ukraine anything. At one point this Russian manipulation was focused on the European authorization of the Nordstream 2 pipeline. The Russians want the Europeans to stop dragging their feet. Over the last few weeks, the demands from Putin have expanded and the pressure from Russia has accelerated. Putin has made demands on NATO, the US and Europe over Ukraine that essentially require the western nations to utterly abandon Ukraine. Any attempt to aid Ukraine or provide it the ability to defend itself against a Russian invasion will provoke Russian opposition and at the moment that opposition involves starving Europe of gas.

     As long as this stand-off continues, the Europeans face a very dire situation – the potential now exists for people to freeze to death or face a choice between food and heat. Very few people can handle a 700% increase in their heating bills. If Europe does capitulate to Russian demands there are brutal consequences as well. Ukraine will not survive as an independent nation and Russia will turn its attention to other nations it wants to control (Baltic States, Caucasus, Central Asia). If the tactic works once, it can work over and over again.

     The energy producers in the world face a very tough decision. If they elect to significantly increase production of oil and gas to meet this emergency need, they have to wonder how long the confrontation lasts. If Russia backs away from these strong-arm tactics or the Europeans fold and give in to the demands, the gas starts flowing immediately and the emergency is over. That would leave the sector with more output than needed. The oil sector has yet to see the real demand factors improve in the US or Europe. The most important consumption sector for them is the daily commute by millions of workers. As long as over 60% are still working from home that commute has not resumed and neither has the fuel consumption that comes with it.

What Responsibility Does World Have in Afghanistan?

     The collapse of Afghanistan was certain from the moment the western world elected to leave this decade- long conflict. The entire budget for the government came from the US and the few other nations that remained engaged and that money evaporated as the troops were withdrawn. The Taliban had no financial backing of any consequence and no capacity to run an economy. The country exports nothing other than heroin and none of that cash makes it into government coffers. The nation is utterly bankrupt and the population is facing massive famine. The death toll is already extremely high and rising. The question is what anybody can do about this.

Analysis: The leaders of the Taliban government have done exactly what they were expected to do. They have reneged on virtually every promise made as regards treatment of women, religious tolerance and treatment of those who opposed them over the years. The policies and positions are back to what they were twenty or thirty years ago. There is even evidence they are once again harboring terrorist groups and for the simple reason that the Taliban is getting paid by groups affiliated with IS, al-Qaeda and other offshoots. To provide assistance to this government would be supporting a truly reprehensible and hostile entity but without help there will be a humanitarian disaster. At the moment there are very few non-governmental agencies allowed to operate in the country so support would have to come through the Taliban and there is serious doubt as to whether any of that support would really go to the people. The tragedy is real but the Taliban has left most of the world with no options. They have broken every promise made and have returned to the pure oppression of the past. There is no desire to provide these fanatics any support. The people of Afghanistan continue to suffer and die as a result.

Armada Strategic Intelligence System Starts to Show Some Weaker Numbers

    The most recent data from the Strategic Intelligence System is showing some signs of weakness as the pandemic threat reignites around the world. This is consistent with many of the global economic assessments released lately. The projections are still showing progress but it is not as robust. Check this out for yourself, the latest issue has been released. Your two-month trial is absolutely free – no obligations at all. Simply go to  and engage with us. We continue to tweak the report with every issue – adding the content that readers have requested.

     The European natural gas crisis is quite simply a conflict between the Russians and the Germans. To end the standoff will require a capitulation by one or the other simply due to the route the pipeline takes.

What We Are Watching – From the Black Owl Report

Near shoring Evidence – Reporters in Ciudad Juarez, Mexico have noticed a wave of construction activity in the state of Chihuahua. As they reported, waves of bulldozers and earth moving equipment are creating massive foundations for factories and warehouses. According to local officials there, many multinational companies from around the world have inquired about property availability and have made initial trips to the region. This is something that we have been talking about for quite some time. Surveys have suggested that this trend was coming, but COVID waves have prevented many companies from executing on a diversification strategy that moves at least a portion of their global sourcing closer to the US. Juarez has more than 300,000 factory workers and is now the largest factory-based region in Mexico. And as mentioned, it is getting larger by the quarter. Juarez is centrally located along the US border just 10 miles from El Paso, Texas. Supply and distribution infrastructure is suitable and is likely to get better in the future.

Why Aren’t People Nicer to Each Other?

   There is a question for the ages. This is the time of year when we are supposed to be filled with the spirit of the season but I have not seen much evidence of it this year. To be honest I rarely do. Beyond that I wonder why we are only expected to have these feelings of goodwill for a few weeks every year. What would be so wrong about treating one another with respect and kindness in April or August? Why are people not inclined to be nice most of the time? I am not suggesting that we run around giving each other hugs but we should be able to interact with civility.

     Those that analyze this issue point to a variety of factors. We tend to shun those who are different from us and for some that shunning goes as far as outright hatred and hostility. We are basically tribal and stick to those who share our beliefs and values. Those that don’t are considered threats in some way. There is also the argument that we get busy with our own lives and have no interest in the lives of others. Regardless of the rationale it is my opinion that nice is better than the alternative. My wife reminds me on many occasions that nobody knows what is happening in other people’s lives. I take offense at people that treat me rudely and too often respond in kind. She stops me short by pointing out that we don’t know if that person is in pain or in distress. They might have lost a loved one or their job. There are a million things that could be affecting them today that has made them insensitive and rude. There is no reason for me to add to the burden. When she is confronted by an unfriendly person she smiles that much more broadly and demonstrates that much more sensitivity and usually shocks the heck out of the person who was not being very nice! It is amazing how fast their attitude shifts towards her.

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