Business Intelligence Brief: December 20, 2021

Brief Notes on the US Economy

•           The Role of Government Spending on Inflation – The signature effort of the Biden administration is now officially in trouble as there is no support from the GOP and there have been defections from among Democrats as Joe Manchin has rejected the plan as it stands (and there are others uncomfortable with it). The assertion is that this massive plan will spark inflation. There is some truth to this but perhaps not as much as assumed. The surge in inflation that has emerged in 2021 has been rooted in three motivators. The first is commodity pricing as we have seen big jumps in everything from oil to steel and even lumber earlier this year. These prices are volatile and will come down (they always do). The second motivator has been wages. These are rising as there has been a labor shortage building for years and has now reached a critical stage. The third factor is money supply. The stimulus effort pumped as much cash into the economy to equal the entire GDP of Japan in a year. That savings overhang has now dissipated as consumers spent it all. Another surge of government spending pushes that supply up again but it will do so over a longer period of time. The bottom line is that this plan would push short term inflation up a bit but it is not the real driver of the inflation we have been seeing this year.

•           One Reason for Labor Shortage – This is a complex issue. There are literally tens of millions of reasons for people to work or not work. There are very few decisions that are more personal. The lack of workers has been attributed to everything from retiring Boomers to excessive stimulus support. One factor that has been overlooked to a degree is the trend back towards single wage earner households. There are many families that have accumulated enough in the way of savings and income to allow one of the two wage earners to quit. Most of these have been women who have been facing escalating childcare costs. They look at what they stand to earn and what they are paying for childcare and decide that it makes more sense to stay home and out of the workforce altogether.

•           Lumber Prices Surge Again – The costs of lumber have been escalating again and there are fears that this will be a repeat of the inflation seen last summer. This time the culprit is flooding in British Columbia that has affected the sawmills and supply. The prices now are nowhere near the record levels set last summer when the pandemic crisis affected sawmill output but it is a reminder of the supply chain vulnerability that exists in almost every sector. The supply and demand balance has been very tight as there has been growth that has eliminated slack in many sectors. Any sort of interruption sends shock waves through the economy. These shocks could be due to the pandemic or storms or geopolitics (among other factors) and the prices react immediately.

Brief Notes on the Global Economy

•           Germany Gets Another Hawk – When Jens Weidmann stepped down as the head of the German Bundesbank there was intense curiosity regarding the direction of the bank. He was an ardent hawk on issues such as interest rates and overall bank policy and the new center-left government under Olaf Scholz had a chance to put a more dovish personality in place. That has not happened as the new head of the Bundesbank will be Joachim Nagel – leaving his position at the Bank for International Settlements. He is expected to be every bit the hawk Weidmann has been and signals that the new government is not planning a more spending oriented set of policies.

•           Gas Situation Becomes More Urgent – The situation in Europe has become more urgent with the arrival of colder weather. The price of natural gas is climbing again and this threatens to place millions in a desperate crisis where they must choose between heat and food or other necessities. The Russians have been restricting flows again and Putin shows no signs of reducing this “gas blackmail”. The Europeans will keep buying LNG from the US and that will keep driving prices higher and forcing more utilities to burn oil and that drives up the price per barrel.

Holidays Loom but Data Keeps Coming

     This will be a short week as far as business is concerned (other than retail of course). The holidays are upon us and this will be the week that our attention turns to the opportunity to be with family after we scramble like mad to get all those last-minute gifts purchased. Then there is the onslaught of relatives and friends. We will all fantasize about having that Hallmark movie experience but in the end, there will be many of us hitting the eggnog hard as we recover. All of this frivolity is not deterring the statistician and data gatherer however.

 Analysis: Wednesday will feature the release of the latest new home sales numbers and they are expected to have risen for the third straight month. For the better part of the last year (and even before) the expectation has been that housing would experience some kind of bubble collapse. The reality is that the market has continued to surge year after year on the strength of several factors. At the top of the list has been the low mortgage rates that have prevailed for over a decade but there have been other motivators. Millennials have started families at a faster pace and that stimulates the desire to buy a home, people have also been moving out of the cities at a rapid clip and there have been cities where economic growth has resulted in high demand as more and more people relocate to these communities. The factor that has not been as conducive to this growth has been the increased cost of this housing – record prices and getting more expensive by the month. The big question is when and how this growth might end. The key will likely be the pace of mortgage rates. The current expectation is that rates will indeed start to climb as the Fed starts to hike the Federal Funds rate but the consensus is that these higher rates will be between 3.5% and 3.9% – nothing too dramatic as yet.

     Thursday brings some last-minute reports regarding jobless claims. These have been very low for the last year or so and have now reached record levels. There is not much surprise here given the chronic shortage of workers at nearly every level. Companies are very reluctant to give up on their existing workforce and that has led to more efforts to retrain and retain that existing staff. The labor shortage issue has been discussed intensely for years and the facts remain as they have been. The Boomer retirement flood has been the primary issue as 10,000 Boomers reach retirement age every day. This exit of millions of workers will continue for several more years and that creates a long-term issue. There are simply no easy solutions – this new workforce has to come from immigration but the reality is that the US is competing for the same worker that is in demand everywhere else in the world.

     Thursday will also bring data regarding consumer spending. It will undoubtedly be up but the reasons for the rise will be both positive and negative. The good motivations for the increase will include the fact wages have been rising, people still have a little bit of that accumulated savings to spend and there is still a strong desire to make up for lost time. The consumer has shifted back to spending on services again but they have not lost their appetite for goods. The not so positive reason for additional consumer spending is that inflation has driven the price of everything up so even buying exactly what one bought several months ago is now costing more.

     Most of the data that has been collected of late shows an economy that is still strong and growing and we have pointed out more than a few times that many of the issues affecting the economy are the result of that growth – everything from labor shortages to inflation to supply chain breakdowns. The issue that once again looms over all this is the pandemic.

Back on the Viral Roller Coaster

    The truth is that I am truly tired of writing about the impact of the pandemic. Remember back in 2020 when we all confidently asserted this was a crisis of a few months’ duration? It was almost a break – people spending time with family, going for walks and slowing down? Those days are long gone as we have been struggling through a very lengthy and depressing slog. Every time there seems to be progress there is another reversal and this time it is called Omicron. The hospitals are filling up again, events are getting canceled again, consumers are retreating again. Will this be as damaging as it was in 2020? That is unlikely at this point but not out of the question.

Analysis: This is made far more complicated by the fact a health issue became both a political and economic issue. The plain fact is that the virus would be under more control if the vast majority of the population was vaccinated (rather than 61.4%). From the beginning the assertion has been that control meant reaching some kind of “herd immunity” and what that means is that most people were immune and therefore not spreading the virus. To get to that point required at least 80% and preferably 90% immunity. The latest viral assault is affecting the unvaccinated in a much more serious way. These are the people filling the hospitals and these are the people dying.

    I have made my position on this issue clear on many occasions. Viruses never go away – we are still dealing with viral infections that originated centuries and even millennia ago. The only mission of a virus is to survive and they are very good at that survival. All that can be done is to manage the assault and that is what the human body does. The immune system deals with viral attacks every day and usually has the ability to handle it. New viruses put the immune system at a disadvantage and that is where vaccines come in. We have been using vaccines for decades – against the measles, smallpox, polio, tetanus, diphtheria, mumps, pertussis, meningitis and many different kinds of flu. The system is simple enough – vaccines stimulate the body’s own system to better attack the disease. As long as nearly 40% of the population elects to risk infection and then spread it to others, we will be vulnerable.

Another Lurch to the Left in Latin America

     The politics of Latin America has long been volatile – a constant shifting from radical right to radical left. The vast majority of the voters seem to have very simple demands but these are never simple when it comes to delivery. The average person wants the economic security that comes with a decent job, protection from crime and an opportunity to improve their lives. In the face of grinding and persistent poverty, political instability and economic dislocation the voter lurches from one extreme to another with the hope that this time the situation will change. In the last year the voters in several Latin nations have swung the pendulum to the left. These new governments are already facing a crisis and there have already been movements from the right that intend to exploit the failures of these governments.

Analysis: Chile has become the latest nation to see the rise of the left as former student protest leader Gabriel Boric has been elected President on a platform that calls for radically higher taxes on anyone defined as wealthy, closure of the mines that underpin the Chilean economy and a radical redistribution of income. Over the decades Chile has swung radically from one extreme to another. This is a nation that elected an ardent Marxist in Salvador Allende only to have him overthrown by General Augusto Pinochet who ushered in a regime of terror and oppression. In more recent years there have been center-left leaders such as Michele Bachelet and center-right leaders such as Sebastian Pinera. The country has been in turmoil for the past year over economic issues that have compromised the future for a nation once described as the most middle class in the region. Boric has advocated a set of policies that are very similar to those espoused by other leftist regimes in Venezuela, Ecuador, Bolivia and Peru. None of these nations have been enjoying what anyone would describe success. On the other hand, these nations suffered nearly as much damage and economic distress under the right leaning leaders.

     Brazil tilted away from the left when it elected the man who described himself as the “Latin Trump” – Jair Bolsonaro. His promises to end corruption and restore prosperity went unfulfilled and now Inazio “Lula” da Silva is poised to make a comeback as the population has laid the responsibility for the pandemic disaster on Bolsonaro. Peru elected Pedro Castillo who made the usual promises that come with the left and the economy has fallen into such disarray in just three months that his popularity has plummeted to lows not seen by any President in years. This is the same nation who once elected the ultra-conservative Alberto Fujimora. This pattern has been seen almost everywhere in the region and there is very little expectation it will change.

     What is the answer if there is one? Poverty grips as much as 60% of the population region wide and in some nations, it is even higher. There is virtually no middle class – just a small wealthy elite and a large population of poor. The foundation of most of these nations is export of either commodities or farm output, the manufacturing sector is small and there are few nations with a domestic market that can support the population. Most of the investment from outside is devoted to extraction and little of that investment creates opportunities for local development. Changing that pattern will be extremely difficult and neither the nostrums of the left or right has been able to make much of a dent.

Europe is Blinking First

     The Russian threat to invade Ukraine is likely real enough but the reaction on the part of those in Ukraine tells a different story than that expressed by the western states. The leadership has been remarkably calm for a country facing a 500,000-troop buildup. They have taken the attitude that this is all about creating a negotiating position and not about Ukraine itself. The Putin regime issued a very strict set of “red line” demands regarding security. These are quite clearly too much for any nation to agree to but the Europeans and NATO have responded with statements suggesting that negotiations begin on some of these issues – legitimating the Russian claims that Europe and NATO are the aggressors.

Analysis: Russia is strong arming its neighbors and wants to create a zone of cooperative regimes surrounding its borders. In the days of the USSR these nations were part of the Soviet Union and the East European states were that buffer. Now the former states of the Warsaw Pact are independent and often hostile to Russia while the former Soviet states had started to drift further and further away. It is unrealistic to think the Baltic States will be brought back into Russia’s orbit as they have joined the EU and other organizations. Russia wants its neighbors to resemble Belarus and not Estonia. Ukraine needs to remain a dependent state and Russia is using economic, diplomatic and military pressure to ensure it stays that way.

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.

What We Are Watching – From the Black Owl Report

Federal Reserve Sees Inflation Cooling – Fed Chairman Powell yesterday reiterated that the Federal Reserve would more quickly reduce its purchases of securities, pulling liquidity out of certain aspects of the US economy. Many people have thought that the Fed should have tapered several quarters ago. But they reaffirmed that they will end purchases by March of next year – if economic conditions continue down this path.

None of the news yesterday really moved markets, at least not negatively, in fact it may have emboldened markets a bit. The Fed said that BlueChip estimates and their own research is still confident that inflationary pressures will start to recede more aggressively by the second half of 2022. The Fed is now calling for probably three quarter-point rate hikes in 2022, but they continue to reaffirm that they will take it slow and will adjust their policy to market conditions. Many analysts still believe that we should be moving with more haste as the Bank of England an others have already. At some point in time, there is some concern that other countries will have taken steps more quickly and they may have an easier time attracting investors to their treasuries and other types of investments, and the US could get caught trying to play catchup. That could create more economic pressure and weaken the dollar if the Fed can’t keep pace with change in other global markets

    There are a couple of factors to note in the chart above. The first and most obvious is that economists are generally getting more worried about the rate of inflation. The expectations have been rising steadily with each assessment and the dominant reason for this angst has been the stress of the supply chain breakdown. The other point to note is that even with this concern the sense is that rates will be trending down through the bulk of 2022 and may be back to what was once seen as normal by the end of the year.

The Challenge of Gift Giving

   The age-old question – what does one give to the person who really doesn’t seem to want or need anything? My charming and lovely wife fits that definition. She is not a collector and has never been one to accumulate things for no apparent reason. She buys things that last and doesn’t buy things to impress or show off. I have bestowed items that fit her passions for years – kitchen equipment, garden devices, music gear. At this stage I am looking at installing a restaurant style salamander or purchasing a Bobcat for planting season – she has everything else. I can offer undying love and admiration but she has had that for years. And so, I struggle.

     I will come up with items that express my feelings but I will always feel I should have done more. In the end the best I can do is strive to make sure she knows what she means to me this time of year and throughout the rest of the year. The house is now a riot of Christmas gear and she has once again indulged my tacky outdoor attempts. She will once again prepare a Christmas feast that rivals anything a renowned chef would conjure up. She will make this holiday delightful and I will do my best to express my gratitude. Even as my gift of a nuclear-powered food processor falls short.

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