Brief Notes on the US Economy
• What Slows Consumer Activity Now? – Over the last year there have been any number of issues as far as the consumer is concerned. Last year the consumer was essentially barred from doing what they do best by the lockdowns and the economy suffered a major blow. As the lockdowns eased, the consumer roared back to life. But with the emergence of the delta variant, there was trepidation as far as engaging in the usual service-based activity. Now there is yet another interference in consumer activity – businesses do not have enough people to operate the business. Hotels are short of staff, restaurants lack cooks, servers and others, events have too few people to operate, retailers have no staff and so on. It goes beyond the front-line workers – airline delays have been created by a lack of baggage handlers and the wait time to open the airplane door has increased more than ten times as there are too few skybridge operators.
• Powell’s Speech – By the time most of you read this, Jerome Powell will have given his speech at the Jackson Hole meeting. He either will have made the Fed’s intentions known as regards the pace of tapering or he didn’t. The expectation of a few weeks ago was that this was the appropriate moment for the Fed to start planning for the wind down but that was before the emergence of a renewed viral threat. That has thrown all the expectations off and may have affected the confidence levels of the Fed. The remarks made today will be examined closely for clues.
• Why Supply Chain is a Mess – The reality is that we have never paid a lot of attention to the intricate dance that is the supply chain. The average manufacturer is required to bring together thousands of components on an hourly basis and these parts and assemblies come from sources all over the world. It is a complex dance involving ships, trains, planes and trucks and it is actually pretty remarkable that these goods get where they need to be at all. It was not that many years ago that delivering was slow – waiting weeks and months was the norm. Today we have the attitude that instant gratification isn’t quick enough and interruptions are barely tolerated. The disruptions in the supply chain were not expected and have been unprecedented. In time these will be dealt with but that moment is still many months into the future.
Brief Notes on the Global Economy
• Hong Kong Threatened with Business Exodus – The role of Hong Kong as a business hub is in real danger. Over the last few years, it has appeared that China is committed to a course of action that reduces the influence of the city and the latest move may be the proverbial straw. There have been very strict travel requirements imposed due to the pandemic – requirements for over three weeks of strict quarantine and a host of others. This has made functioning in the city all but impossible for the majority of foreign operations and many are now leaving permanently as they shift their operations to cities such as Singapore or Kuala Lumpur. Many more have simply opted to go entirely remote and are operating from their offices in the US or Europe or Japan.
• Bombast and Tragedy in Afghanistan – Every intelligence report that has been prepared regarding the situation in Afghanistan asserted that a debacle was likely. The lack of preparation has been inexcusable and now there has been the inevitable attack that kills more soldiers and civilians. The response has been pitiful with promises to “hunt down” those responsible – as if the US has not been “hunting down” these insurgents for over twenty years. The chaos was never something that could be avoided as this has never been a country – just an assortment of fiefdoms and regional warlords. What could have been dealt with was the process of extrication given this collection of factions. The Taliban is no more in control than any of the previous governments – they have little or no influence over elements of the Islamic State or what is left of al-Qaeda. The US assumed the Taliban could deliver on promises and that has not been the case.
Is The Recovery Already Over?
It was only a few weeks ago that most assessments still talked confidently about the resumption of normal – or at least the 2021 version of what normal might look like. Today there is considerable confusion and most of that upbeat mood has vanished. The progress that was made in the summer has been replaced by a resumption of retrenching strategies and reduced expectations. The warnings have been sounding all year but have been falling on deaf ears. The assumption behind those confident expectations centered on controlling the virus. It was assumed that some level of “herd immunity” would have manifested by now and that this would limit the spread of the Delta variant but with half the country refusing the vaccine and the variant surging, the situation now is nearly as serious as it was in 2020. The hospitals are overwhelmed again, protocols are returning, consumers are spooked again and there have already been signs of deterioration in sensitive sectors such as travel, entertainment, restaurant business and so on.
Analysis: There are at least three important differences between the situation now and that which existed in 2020. Two of them could be construed as positive and one would be more on the negative side. The first of the positives is that there is a vaccine available in 2021 and roughly half the population now has some degree of protection. The efficacy of the vaccine against the Delta variant is less than it was originally assumed – somewhere between 65% and 75% effective but those remain good odds and even those that contract the virus suffer far less damage than those who are not vaccinated. The bottom line is that we are not as helpless as we were in 2020.
The second positive difference is that reactions to the virus will not be as scattershot as was the case in 2020 when very little was known about the disease. The lockdown of 2020 was assumed to be a very short term reaction – a matter of a few weeks. Remember the comments in March and April – there would be a May rebound or maybe April at the latest. People were not really losing their jobs; these were just temporary furloughs and everybody would soon be back to their old routines. Lockdowns stretched for months and months and those “furloughs” became lay-offs – over 20 million of them in the US and 114 million worldwide. There were 90,000 restaurants closed in the US alone. At this stage there is very limited appetite for such a lockdown. The damage caused would be worse than that which took place in 2020 and the US (and the world) is not in a position to deal with another recession of that magnitude. The emphasis this time has been on personal responsibility – urging people to get the vaccine and to engage in the protocols that will limit the spread of the virus. Eradicating a virus is absolutely impossible so all that can be done is to limit and control through tools such as vaccines, isolation, masking and the like. Unfortunately, half the population has no desire to cooperate and that provides the opportunity to spread. The next step has been for many businesses and institutions to demand vaccination as a condition of participation.
The negative difference is that there will be little or no assistance from the government in terms of blunting the impact of the downturn. The coffers are empty and that means no checks in the mail, no extended unemployment, no PPP loans or even indirect assistance from the Fed. In fact, most of the programs that were established to deal with this crisis in 2020 have expired or will be ending soon. The mood in Congress is not supportive and the attention of the politicians has shifted to other issues. The decisions that governments and businesses and individuals made last year will be harder this year. The decision to impose a lockdown that throws people out of work will have to take into consideration the lack of support for that unemployed person and the lack of support for the business that was forced to close. Without support, these businesses and jobs are gone for good. The individual that elected to remove themselves from the threat because they had aid will now have to realize that checking out due to the pandemic will be very financially destructive.
The reality is that COVID 19 can be managed to a degree but this will take determination on the part of the individual. If people refuse the vaccines and the protocols, the scourge will remain – it is really as simple as that.
Just a few months ago the expectation was that 62% of workers would be able to return to their offices in Manhattan – today this estimate has fallen to 41%. The indicators that have been used to determine where people will be working have universally stalled at about a third returning to the office. This is the case even in cities and states that have been far looser in terms of restrictions. The work at home trend was starting to decelerate and now has been picking up speed again.
Analysis: From the start of the workplace shift there have been major differences in terms of enthusiasm for the new system. There are those whose jobs are generally not very collaborative under normal circumstances. They basically show up, start working on their assigned task and interact with others on occasion. These workers have been generally satisfied with the ability to work remotely although they have expressed concern over their lack of contact with others. The employees who have been put at a distinct disadvantage are those that do work collaboratively or need to interact. Those in sales and marketing are unable to function normally and neither are those that have to develop projects in teams. In general terms it has been harder to orient new employees. These are just the office jobs. There has never been a way for those in manufacturing or construction or transportation or the medical community to work from home. With the resurgence of the virus, the decisions to work remotely have resumed but whether this pattern continues once there is some progress on the pandemic remains to be seen.
Fallout from Afghanistan
This has not exactly been a banner month as far as news of the world is concerned – not the way anyone hoped the end of the summer would look like. The virus is now front-page news again and the catastrophic end to the twenty-year engagement of the US in Afghanistan will reverberate for many years to come. Having focused on the virus we can continue down the depressing road with an examination of what happens next as regards Afghanistan. The current situation is utter chaos and all that can be done at this stage is to try to rescue as many people as possible but it is also apparent that many will not make it out.
Analysis: There are at least three major areas of concern going forward. What happens to the refugees that have been extricated and those that might escape later? What nations or groups will influence the Taliban going forward and will they have any more success in organizing the country than any of their predecessors? What will happen to the underpinnings of the Afghan economy now and in the future – namely the heroin trade and the potential for mineral extraction?
There are now tens of thousands of refugees that need a place to stay and at this point there is no nation that wants them. The US has not agreed to resettle and neither have any of the European states. Turkey’s Reccip Tayyip Erdogan has flatly declared that he will not tolerate becoming a “dumping ground” for Afghans. None of the Central Asian states have indicated support except for those of the same ethnic background (Tajiks, Uzbeks etc.). China has refused and so has Russia and India. There is going to be an enormous stateless population and we know from past experience that this breeds extremism and terrorism. The vast majority of these refugees are going to be angry, frustrated and will feel that they have been betrayed by the US and Europe.
The nation that stands to have the most influence now will be Pakistan. The military and intelligence community in Pakistan has been supporting the Taliban and similar offshoots for decades and they will be trying to exploit that connection. Pakistan wants to keep ferment in Afghanistan from spilling over into its own nation and they continue to see the Afghans as a buffer between Pakistan and India. The mineral resources are also of great interest and there has been considerable investment already. China has a long relationship with Pakistan as well and will use that connection to become engaged in what takes place in Afghan territory. China is also hostile towards India and shares the desire to keep ferment from affecting its own domestic issues – namely the status and treatment of the Uighurs.
The second area of concern has to do with the dominant outputs from this country. Namely, heroin, lithium (and other minerals) and terrorism. It has been well documented that 90% of the world’s heroin originates in these poppy fields and this has been the cash that has fueled the warlords (and Taliban) for decades. This will not stop and most expect a surge in production as attempts to eradicate the crop ends. The fear among law enforcement offices is that heroin will become even cheaper and more prevalent than it is now and at prices as low as $5 to $20 per baggy now, that is a very low price. The northern part of the country is where the minerals are found and this has been the area dominated by Tajiks and Uzbeks – weaker region for the Taliban. This sets up ongoing conflicts between these ethnic groups but it is also a draw for the Chinese and the Russians.
Finally, there is the concern regarding continued support of terror groups such as al-Qaeda or Islamic State. In fact, the Afghans have generally been preoccupied with their own battles and have not been all that engaged with global terror – the role played by Osama bin-Laden was the exception as he brought a considerable amount of money with him. His supporters engaged when the Soviets were in the country. The Taliban will not be a major supporter for the terror groups – that role will still be handled by Iran. They could well provide a sanctuary and a place to train but the focus of terror activity has shifted to North Africa and there are plenty of places to hide and train there.
German Election Turmoil
The path seemed clear just a few weeks ago. The Christian Democrats under Armin Laschet held a lead in the polls and the main question was whether they would form a coalition with the Greens and the Free Democrats. The sense was that the Greens would need to tone down their positions in order to work with the CDU. Suddenly all that has changed as the Social Democrats have surged ahead of the CDU or more accurately the CDU has suddenly lost support.
Analysis: The thinking is that the new coalition would be made up of Social Democrats, Greens and the Free Democrats and such a combination would be much further to the left than Germans have seen in over a decade. The CDU has wrongfooted issues such as the pandemic, climate change and even refugees.
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 www.asisintelligence.com and engage with us. We continue to tweak the report with every issue – adding the content that readers have requested.
The map above explains 90% of the interest that China has in Afghanistan. It is worth noting that the majority of these resources are in the north where the Taliban and the Pushtun are weakest. It is also the area closest to China and to Pakistan.
What We Are Watching – From the Black Owl Report
Flash Manufacturing Reports. Several early manufacturing reports are coming in for August and the general theme is that month-over-month sequential performance is decelerating (some slight contraction MoM). But, when we compare it to levels of activity that we’ve seen over the past 5-10 years, manufacturing demand and activity is generally near the top of the historic range. You are likely getting sick of hearing it, but
shortages of materials and labor along with supply chain bottlenecks are still chronic and holding back potential output. We keep looking for hints that some of that trend is turning, and there could be some of the earliest signs showing up in lumber and iron ore prices, some slight
softening of copper prices (although they remain high), etc. Even petroleum prices are bouncing more on demand-side impacts, less on supply side abundance.
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Observations from the Road
Now that I am back on the travel circuit (at least for the time being) I have an opportunity to watch people, make snarky remarks and generally behave like a voyeur. One of the perks I suppose. On this last trip there were a few items of curiosity and interest. The hotel in Denver was the Brown Palace. I love these old places and have stayed at several over the years (Drake in Chicago, Peabody in Memphis, Pfister in Milwaukee etc.). One of the interesting things about these is that rooms are very nice but very small. The cavernous rooms of today have always seemed somewhat over the top – lots of wasted space. These old places just seem to assume a person can function just fine in a compact space.
Observation number two stems from conversations with four Uber drivers. They have been seeing something of a return to normal business levels but they also note that there are fewer drivers. They were universally supportive of the efforts to control the virus and three of them were considering whether they would be able to ask if people were vaccinated. All four had horror stories regarding friends and family who had been sick.
Observation number three was that common courtesy has all but vanished in the airports and on the planes. It seems that all that road rage we see on the roads these days has followed us as we fly. Tempers are very short, most of the personnel encountered are surly and people seem unwilling to lift a finger for anyone. I used to see passengers helping the elderly with their bags or engaging in polite conversation but these acts are now very rare.