Business Intelligence Brief: December 27, 2021

Brief Notes on the US Economy

•           Food Price Inflation – The price of food has risen along with everything else in the last several months and for the same reason that other items have risen. The reality is that food is one of the most heavily freight and commodity dependent sectors. Almost everything consumed in the US is transported vast distances and that is what allows the shopper to obtain whatever they want at whatever time of year. The process of producing food is equally dependent on transportation of everything from fuel to fertilizer etc. Millions of tons of food will be imported every year and processing that food is expensive in its own right. The estimate is that food prices will rise by at least 5% in the coming year but there will be items that will see far sharper hikes and there will be parts of the country with higher prices. If there is a serious and ill-timed cold snap at some point or extended drought conditions that compromise planting the situation will be that much worse.

•           Consumers and the Virus – There has been little talk of lockdown or shutdown – at least formally. The impact of another lockdown would be devastating and the political will is simply not there to even suggest it in the US. That has not been the case in other parts of the world as there have been quarantine and shutdown orders in China as well as other parts of Asia and parts of Europe. In the US, the reaction has been more personal but is having an impact. Consumers are shying away from everything from shopping to restaurant attendance, travel, events and so on. It is also the time of year that much of this slows down anyway. The holidays are winding down but the New Year’s festivities remain and the expectation is that these will be subdued and will sport much less attendance than expected. The consumer caution may be short lived as it was when the delta variant attacked in mid-summer.

•           Shoplifting Epidemic – Retailers have long had to deal with shoplifters but the situation has changed drastically in the last few years. The shoplifter in the past was generally stealing for themselves or to try to sell to pawn shops. They were generally crimes of desperation or opportunity – rarely organized. Today stores are hit with waves of thieves that strip the shelves and overwhelm any attempt to halt the theft. They no longer have to rely on a pawn shop or fence, these items get plastered all over the Internet. There are cities that have elected to make this kind of theft a lesser crime and that has encouraged more of this mob theft. Retailers either have to spend aggressively on security or simply close shop and many are choosing the latter course as legitimate customers fear the thieves and stick to the online option.

Brief Notes on the Global Economy

•           Future of Mexico’s Central Bank in Question – Andres Manuel Lopez Obrador is no fan of the Mexican central bank. He wants the policies pursued by the bank to match his own priorities and has taken a number of steps to reduce the independence of the institution. He has tried to force the bank to buy dollars and to use IMF money to pay off debt. Basically, it is the same set of moves deployed by various governments all over the world – demanding actions by the central bank that are aimed at bolstering the short-term political aims of the current leader at the expense of long-term financial stability and monetary policy. There have been many times when the Mexican economy has been saved from political disaster imposed by reckless leaders and few have been as reckless as AMLO. The current head of the bank is a sycophant chosen by AMLO and will do nothing to protect the bank.

•           Chinese Lockdown Tightens – China is still asserting that it is following a zero-tolerance policy as regards the virus but the fact there has been a series of outbreaks makes that claim a little ludicrous. The virus has not been controllable and efforts to isolate and quarantine have been less than effective. The Chinese lockdown has certainly had economic implications and there is significant concern regarding the Olympics. It looks more and more like a version of the Tokyo Games and this cost the Japanese government close to $11 billion.

End of the Year Numbers

     Not that economic data really pays much attention to the calendar and the changing of the year – the statistics elves just keep working away as they always do. That said it is something of a tradition to look back at the year gone by and anticipate the year to come. The reality is that all of the problems and challenges of 2021 will be with us in 2022 but there will be changes as well – new issues yet unforeseen as well as some improvements. As in most years there will be events that alter expectations drastically – hopefully nothing as traumatic as the emergence of a pandemic as in 2020. As we close out the year there are some releases that point towards what we might expect in the coming months.

 Analysis: One aspect of the economy that has been watched like a hawk for the last few years has been the housing sector. In many ways it has defied logic as one would have expected the relentless rise in prices to have curtailed some of the enthusiasm for buying but it hasn’t. Even the super-hot markets where home prices have nearly doubled have not seen declines in demand. The pull of low mortgage rates has been sufficient to overcome the hesitation created by higher prices. Add in some other factors such as millennial interest in moving out of lofts and apartments as well as the desire to leave urban congestion behind and the market has outperformed expectations for the last few years. Tomorrow the latest Case-Shiller index will be released and it is expected to show some reduction in the home prices acceleration. This will likely be a very minor reduction as last month the annual rate was 19.1% and this month that may fall to 18.6%. That remains a blistering pace and there is no reason to think this pattern will change in 2022 as many potential buyers are going to make their decisions sooner than later as there is an expectation that interest rates will rise and with them will come the hikes in the mortgage rates.

     On the other hand, there will likely be some less robust news coming from the existing home market. The National Association of Realtors will release the latest pending home sales numbers and they are expected to be down from what they were last month. The rate in the previous month showed an increase of 7.5% and this latest reading is expected to be down by 8.0%. This will be seen as a blip in an otherwise very robust year. There pace of sales this year has been the strongest in over 15 years. These numbers have been coming in all year but they deserve a closer look. There have been many factors that should have pushed these numbers the other way – everything from lingering aftereffects from the recession to the rapid hike in the price of homes. The reality is that positive factors have overwhelmed the negative – everything from the historically low mortgage rates to the performance of the stock market. There is also the timing factor. At the very same time that millions of Boomers are hitting retirement age and seeking an opportunity to downsize there are millions of millennials looking for that single family home. The market for these homes has rarely been as hot as it is right now.

     On Thursday there will be another look at the labor market through the rate of jobless claims and they will once again be very low. Employers are struggling to find the workers they want to hire and that makes them more committed to keeping the people they have now. This is often the time of year when there are layoffs from the retail and transportation sector. These companies beef up their workforce as the holidays approach but once the season has ended, they start to reduce the size of that workforce. This year there was not all that much additional hiring as far as retail was concerned and the transportation sector doesn’t really expect much of a decline in business. The reality is that shipping will continue to expand as all those bottled-up goods finally start to make their way to the destinations intended – albeit too late to do much good for retailers.

Wage Hikes Spreading

    The wage/price spiral is becoming more of a reality with every passing day and that is the inflation threat that proves the most worrisome. There have been many assumptions regarding the pace of inflation in the coming year and most have asserted that prices will start to decline. The commodity price threat has already started to fade as producers strive to keep pace with demand and the money supply threat has eased as the consumer managed to spend almost all of the accumulated savings from the 2020 stimulus. The prat of inflation that is very hard to control is wage driven. At first the momentum was coming from the hike in minimum wages but that was a minor push. Then came the pay hikes for skilled workers and from sectors that have been facing acute labor shortages for years. Now the evidence shows a sharp hike in white collar and professional salaries and these can push wage inflation very quickly.

Analysis: There has been a great deal of noise over the potential inflation impact from government spending on various interpretations of an infrastructure effort. The reality is that this kind of spending is relatively unimportant as far as inflation rates are concerned. Not that government action is not important – it was the stimulus effort that pumped the equivalent of the Japanese annual GDP into the US economy and triggered the massive savings overhang that only dissipated in the last few months. The infrastructure plans are designed to be carried out over a several year period and will have a limited impact on the issue. The real motivator is employee leverage. As prices have risen due to shortages, bottlenecks and other pandemic responses the consumer falls into two broad categories – those that have the leverage to demand higher wages so they can keep up with the price hikes and those that lack that leverage. Given the tight labor market there are far more with leverage than without it. As they demand higher wages the producers raise their prices to cover the labor costs and the chase begins.

China-Taiwan Rivalry Intensifies

     The tension between the People’s Republic of China and the Republic of China has been intensifying for months and has been figuring into a whole host of geopolitical issues as well as domestic politics in nations that have been caught up in the rivalry. Both the leaders in Beijing and Taipei assert that they are the legitimate rulers of all China and that the others are interlopers or renegade provinces. Never mind the fact these two entities have clearly operated as independent nations for over 70 years. In the last several months the PRC has been increasingly aggressive towards Taiwan with a whole series of implied threats. There have been military flyovers that regularly penetrate Taiwanese air space, military maneuvers simulating an invasion of the island, missiles shot over Taiwanese territory and endless diplomatic threats. The US has attempted to emphasize its support of Taiwan but the reality is that there is nothing the US could do to thwart an actual attack unless there was a willingness to go to war with China.

Analysis: The Chinese have also been very active on the diplomatic front as they have been putting intense pressure on nations that still insist on formal relations with Taiwan. The vast majority of the countries in the world have complied with the demands from the PRC that they recognize the Beijing government as the “official” China. Only a handful of countries have stood their ground and maintained their relationship with Taiwan. This list has been shrinking of late. Those that recognized the ROC in 2021 included Guatemala, Honduras, Haiti, Paraguay, Nicaragua, Eswatini, Tuvalu, Nauru, Saint Vincent and the Grenadines, Saint Kitts and Nevis, Saint Lucia, Belize, Marshall Islands, Palau, and the Vatican City. This year Nicaragua shifted to accommodate Beijing; and the Solomon Islands did the same earlier in the year. In every case of shifting allegiance the Chinese have offered money in exchange for this recognition. Taiwan has been offering much the same to maintain these recognitions.

     As these recognition battles have taken place, they have become domestic issues as well. The decision by the leaders in the Solomon Islands to recognize China set off a near civil war as the decision rapidly became part of a set of local grievances between ethnic groups and at one point Australian troops were dispatched to help restore order. The decision by the government in Nicaragua has also fueled opposition and galvanized those seeking to depose the Ortega government. The choice of which China to recognize is more than a matter of money. The Chinese tendency is to support the existing ruling party regardless of their track record and the Chinese business community swoops in quickly. This infuriates the opposition and makes it harder for the domestic business operations to compete. Alliance with the PRC can be beneficial in some ways but the Chinese government is not referred to as the “new colonialists” for nothing. They tend to treat other nations as a place to extract resources and exploit economic potential.

Yet Another Round

     As many had predicted, the virus is far from done with the world. To anyone who has studied the behavior of viral infections this is not coming as a surprise. Viruses are devoted to one mission – survival. The virus adapts and changes constantly as it seeks ways to thwart the body’s defenses. The coronavirus is a massively adaptable virus with literally millions of permutations. It is the same family as the flu and the common cold. It has manifested in far deadlier forms (SARS. MERS etc.) as well as almost benign versions. The latest wave has triggered a similar response to previous waves – closure of performance venues, cancellations of business activity due to staff shortages, supply chain restrictions. The airlines were thrown into total chaos by lack of staff and many other businesses either shuttered or moved their staff back to remote status. If global experience with viral attacks is any indication, this pattern will be repeated over and over again and for years.

Analysis: There is simply no simple solution to the problem and never will be. We realize that this has been a broken record and that everybody has grown extremely weary of the subject. It is not just the threat of the illness; it is the intense politicization of the issue. Violent opposition to mandates and vaccines have become common as have violent attacks on those who don’t follow the mandates. There is no ultimate defeat possible – only management. Vaccines will play a major role in terms of limiting exposure and severity but are not perfect. The fact that only 60% are fully vaccinated make it all the more ineffective. Protocols such as mask wearing provide minimal protection from those with the virus – assuming these infected people bother to wear them. There are now drugs that reduce the severity for some but higher risk people will die. In the end we will have to collectively decide what risks are acceptable and there will be no agreement on that.

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 world has been fighting viral infections for centuries. Many of the maladies the world has been afflicted by have been far deadlier than Covid 19 except for the fact that Covid spreads so easily and thus affects a far larger number of people. The odds are that most people survive and even experience little more than a mild version but that spread means that many vulnerable people will contract the disease and that ratchets up the mortality numbers.

What We Are Watching – From the Black Owl Report

Feeder Services” Suspended in China. China will cease “feeder services” between rivers and smaller ports and larger ports like Hong Kong, Yantian, and Shekou. These services ferry cargo between smaller ports and larger ports, keeping congestion and prices lower for inland shippers trying to get cargo to major trans ocean carriers for export to the US, Europe and elsewhere. The issue, as we have written about prior, stems from mandatory quarantines during the Lunar New Year celebration in which feeder service lines will be short crews to move merchandise. Crews will be required to take a mandatory 10-day quarantine after a nearly two-week holiday in January. The problem is starting now; major shipping lines have already warned customers that they won’t accept shipments from areas that will be impacted by this problem.

Weird but Ultimately Nice Christmas

   It was supposed to be the most relaxed and laid back of holidays. We have a small family to begin with but it got temporarily smaller this year in preparation for it becoming larger. The large animal vet grandson’s wife will be delivering their second son any day now and it was thought this was not a great time to drive three hours. That left my stepson and his wife as the only visitors. Nice quiet holiday expected! It was not to be.

     As he arrived and prepared to enter the driveway something went awry with the new truck he had purchased four days prior. No steering whatsoever. Upon inspection it was discovered that the steering mechanism had not been attached properly and had become disconnected. We all looked at each other and tried not to think about what would have happened had this fallen off on the highway!!! We spent the next two hours hunting down a tow truck on Christmas Eve. As it turned out he and I had a nice conversation while leaning on the crippled truck while my wife chatted with the daughter-in-law. We still had the dinner and gift exchange but it was punctuated with messages back and forth with roadside assistance.

    It is an old and hackneyed phrase but merits repeating – “life is what happens when one is making other plans.” I am guilty of trying to exert far too much control over the uncontrollable. I was more than impressed with the aplomb demonstrated by Sean. He quietly went about the process and barely seemed distressed. Granted, he will express some frustration when he finally connects with the dealer but in truth, he will not be able to confront the idiot who put the car together and forgot to attach the steering. I rarely demonstrate that kind of patience and am impressed with those who do.

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