Business Intelligence Brief: November 12, 2021

Brief Notes on the US Economy

•           Inflation Hits Midwest Harder – For the most part inflation is a universal phenomenon – it hits everybody. This is the main reason that economists dislike an inflationary outburst more than recessions. The recession often misses whole sectors of the economy – the so-called recession proof industries – while the inflation surges will affect everyone who buys anything. That said, the rise of inflation will have an impact on some parts of the country at a faster pace or with more intensity. The major driver for inflation right now is energy related and the part of the country that is feeling this surge is the Midwest. It is a bit ironic that food inflation and fuel inflation has been highest in the parts of the country that produces both food and fuel. The fact is that these prices were a little lower than the national norm prior to the outbreaks in pricing and as the costs caught up with the rest of the country the inflation rate was greater. The good news (sort of) is that this kind of inflation does and will recede as demand cools and production increases.

•           Not So Easy to Come Back Home – As the pandemic emerged as the critical issue in 2020 there were many who assumed this would mean a permanent lifestyle change. The remote workplace would be here to stay and that would allow people to abandon the city and relocate to the sylvan fields. Now the system is starting to revert and the office is making a slow comeback. The remote location has not been all that it was assumed to be and people want to come back to their lofts and city streets. The problem is that there are not enough vacancies. Many of these multi-family units shuttered when there was no demand and the market has not yet responded. Prices have risen along with that shortage; rents have surged more than the price of housing and we all know how fast that housing market has climbed.

•           Here Comes La Nina – The global weather pattern that comes with the development of a La Nina is upon us and will be affecting the US and the rest of the world this winter and into the spring. In general, the shift creates a dip in the jet stream that brings cool and wet weather to the Pacific Northwest and warmer and dryer weather to the south and southwest. This would tend to alleviate the water issues in the Northwest but worsen the situation in much of the west. The warmer temps will likely affect the Midwest as well and then Northeast may see more rain and snow. The world also sees shifts in patterns that make Asia cooler and wetter. Latin America will also see cooler and wetter patterns. Even southern parts of Africa will see colder and wetter weather patterns.

Brief Notes on the Global Economy

•           More Bad Fuel News for Europe – As if the blackmail by the Russians were not enough the Belarus government is getting in on the act as well. Petr Lukashenko has vowed to halt gas shipments through his country if the EU continues to impose sanctions over the migrant crisis. The Russians may not allow him to inhibit their shipments but for the moment this reinforces Putin’s position. The EU is over a real barrel at this juncture. If they stick to their positions on the migrant crisis and their position on building the Nordstream 2 pipeline the region is in for a very long and cold winter. If they knuckle under, they will be giving in to outright political blackmail.

•           Vaccine Resistance in Europe – There is considerable resistance to the Covid vaccine in Europe as well as in the US and elsewhere in the world and there are many reasons for the reluctance – everything from suspicion of the science to belief that an individual doesn’t really need it. The number one motivation is political, however. The vast majority of those that are resisting the vaccine in Europe (over 85%) are associated with anti-government and populist movements. They do not trust the government and even if they think the vaccine is safe and effective, they do not want to be told to do anything at all by the government. The resistance is highest in nations with the strongest populist sympathies,

Seeds of Its Own Destruction

     The latest assessment of oil demand from the Organization of Petroleum Exporting Nations (OPEC) holds that demand for oil will fall next year and perhaps dramatically due to the current crunch and the higher prices that have developed as a result. It is a pretty simple equation as higher prices always have an impact on demand. There will be parts of the world that simply can’t afford the higher costs and many businesses and consumers will react to the inflation by reducing their consumption. The OPEC report cited several specific reasons for this expectation. There is the situation in Europe which has been well covered by now. The natural gas shortage is primarily manufactured – a result of the Russians putting pressure on Europe to build a second northern pipeline but there is also the fact that power from the wind farms has been far less than expected. That 600% hike in the cost of natural gas not only contributes to the higher prices for energy but it has forced power plants all over the world to switch from gas to oil. The report cited the slowdown in Chinese manufacturing as they continue to be affected by the virus and that has dragged their productivity down again. The government has ordered manufacturers and others to reduce their output so as to take some pressure off the grid.

 Analysis: What does all this mean as far as future oil production? Thus far the OPEC nations and other oil producers have refused to bolster their production as one would expect if there really were excess demand and a shortage of oil. There are three reasons the decision to boost output has not been made – at least at this point.

     The first and most important is that the current energy crisis could be very short lived – even without a boost in production. The natural gas crisis in Europe could end tomorrow if the Russians decide to live up to their promises. Vladimir Putin has assured the world that he will come riding to the rescue but this has not happened. The point is that it could if the Europeans yield to the pressure and all of a sudden gas prices would start to fall. The wind could start to blow and power production from the wind farms would resume. The point is that oil producers do not really trust demand at this stage. They want to see the daily commute resume in the US and as long as 70% of workers are still functioning in a remote environment, they don’t see that consistent demand resuming.

     The second factor is that long term investment in fossil fuel development has been stalled over the last few years. The sense is that governments will push very hard to develop alternatives and along with this encouragement there will be efforts to reduce the use of fossil fuels. Some of the ideas that have been floated are draconian – high taxes, strict regulation and penalties. That has kept investors away from expanding use of fossil fuels but the Energy Information Agency has stated repeatedly the world will remain 75% dependent on fossil fuels such as gas, oil and coal for the next 50 to 75 years. The result is a continued dependence on fuels that are likely to be in shorter supply. This would seem to push people to adopt the alternatives but as Europe has seen this year, the alternatives are not really ready to be the reliable source of power they need to be.

     The third factor is simply the desire to maximize profit. Oil is the ultimate example of an inelastic good. When the price changes there is very little change in demand – at least in the short term. People and businesses use what they need to use. They do not suddenly decide to drive more because the price of gas falls and they don’t really have the option to drive less when the price goes up. The business doesn’t start running machines longer because power is cheaper and they don’t shut them down when the price goes up. If the hikes last long enough there will be adjustments – buying smaller cars, emphasizing conservation and the like but in the short run nothing much changes. This allows the producers to maximize their profits at time and that makes up for the periods when they can’t (as in 2020)

Low Unemployment and Chronic Labor Shortages

    The labor shortage is not a new issue – not by any stretch of the imagination. The lack of qualified applicants in manufacturing or construction or transportation or medical has been an issue for a long time and there are very few sectors of the economy that have not been affected by the shortage. The current situation has introduced even more complex issues. At the top of the list is the status of women in the workforce. In just a year the progress that women made has been significantly set back. The prime reason is that women remain the primary child care provider.

Analysis: Throughout 2020 the issue was the lockdown. Millions of kids were suddenly remaining at home all day as opposed to attending school or going to some sort of day care. The women were faced with an impossible choice. They could not return to work as long as they had kids at home and even remote work was challenging as they were now tasked with becoming the primary educator rather than the teachers. The schools started to resume some semblance of normal behavior in the last few months but that progress has been halting. An outbreak of the virus forces quarantines and women are once again faced with the need to stay at home with their families.

     The lack of affordable child care has always been an issue but is more of one now than ever. The shortage of facilities has added to the cost and women face a situation where child care costs more than they are making at their jobs. They essentially can’t afford to work. There has been much talk over the years regarding the need for shared child rearing responsibility but there has been very little progress. There are over 16 million single mothers (up from 14 million in 2019). The number of men who assert they are equal caregivers is less than 9.0%.

Debate Over Pandemic Lockdown Still Rages

     It is really hard to look back at 2020 with any kind of objectivity. The pandemic has been vexing in the extreme since it emerged and there are still huge questions that need to be addressed. In the beginning the pandemic was barely understood and most of the assumptions were grossly inaccurate. It was expected to be a short-lived phenomenon – as many other similar outbreaks had been. After all the world had seen many such viral attacks in the past – Avian flu, swine flu, SARS, MERS and numerous seasonal outbreaks. They all followed a similar pattern and it was assumed the Covid virus would act the same way. It would fade as the weather warmed and the vulnerable were exposed and then recovered. The decision to engage in a mass lockdown and quarantine was a reaction to how fast it was spreading but it was also assumed to be a very short-term strategy. The talk was all about a May or June rebound. People were not really getting laid off, they were just being furloughed. This was certainly not the case. One of the burning questions was whether the lockdown did more harm than good.

Analysis: The country that chose to deviate from the norm from the start was Sweden. The state’s epidemiologist – Anders Tegnell – refused to order the lockdown that most of the other European states issued. He asserted that this cessation of business would do very little to contain the spread and would put the economy in jeopardy. The evidence of economic collapse around the world is overwhelming. Tens of millions of jobs lost, business forced into closure by the millions, growth rates plummeting to levels not seen since the 1930s. The damage done by the shutdown was immense and there is very little to support the notion that this had a marked impact on the spread of the virus. None of the efforts to contain the spread worked very well – not the shutdown, not testing, not isolation and distancing or masking. The virus only began to wane in influence with the arrival of effective vaccines and treatment for those battling the disease.

     It is important to assess the effectiveness of these strategies as this will not be the last time the world has to face a pandemic. If there is another such viral outbreak or a reemergence of the current one there has to be a more measured response. Tegnell is facing severe criticism for the decision not to lockdown but today Sweden has the same rate of infection as any other state in Europe and in hindsight the nation never did experience the virus much differently than nations that did lock down. The critics have been from the political parties of the left and that illustrates one of the real issues. The pandemic became political almost instantly as health officials were sidelined by political opportunists from both then left and right. The most effective weapon against this scourge is the vaccine and yet this has been wrapped in politics from the start. There will be another pandemic and maybe many more. What has to be avoided is doing the kind of damage done in 2020 and there has to be an effort to pull the political hysterics out of the conversation.

Progress?

     There was a different feel evident at the tail end of the G-20 meeting as the comments by the US and China regarding climate change seemed to soften. The representatives at the meeting hailed these comments as proof of progress but critics point out that no commitments were made and no concrete action was even mentioned. One observer likened it to a divorce proceeding where the two sides acknowledge that the other participant is indeed a human but stops short of agreeing on the kids, money, or anything else. The bottom line is that China and the US agreed there is something called “climate change,” that it is probably a serious issue and that somebody ought to think about maybe doing something about it perhaps.

Analysis: The reality is that China is going full speed on developing coal fired power plants as they are facing a severe shortage of power. The major energy policy of late has focused on bringing more Russian gas output into China. The US has made some gestures but the will to do much in Congress is not there as the US needs that energy as well. The timing of the global energy crunch could not have come at a more inopportune moment as energy supply has been inadequate and prices are soaring. The effort to replace fossil fuels with alternatives will be expensive in the short term and reliability remains an issue. The fact that European investment in wind power failed to deliver this year makes people suspicious of the entire process. As mentioned above the assertion by various energy organizations is that fossil fuels will make up 75% of global energy production for decades to come and that forces changes in climate policy.

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.

    Any questions regarding why there is now a shortage of oil on the market? Just look at what happened with output in 2020.

What We Are Watching – From the Black Owl Report

West Coast Labor Contract Negotiations on the Horizon. In multiple talks over the past two weeks, I have been getting asked about the 2022 cadence of events that are coming and how that might impact the West Coast of the US and ports there. Even ports in other parts of the country are already starting to advertise that they are “open to business” hoping to get shippers to change their inbound ports of entry. The current contract for about 15,000 West Coast union workers expires on July 1, 2022. Just working through the scenario, let’s think through the timeline.

  1. Current backlogs of inbound freight are expected to continue until at least the end of the year.
  2. Supply chain managers are currently reordering products from Asian markets to try and get ahead of the Chinese New Year and the Winter Olympics which take place in Q1.
  3. Those delays in production and output (coupled with energy shortages and raw material challenges, COVID outbreaks, etc.) will back up Chinese output and production in the early part of 2022.
  4. Just like we saw in this year’s set of scenarios, we could get the backlogs from the first three to six months of the year coupled with normal peak season shipping heading into the summer and back-to school inbound shipments all hitting at the same time next summer.

Some Additional Announcements that Would be Helpful

   If one flies a lot (or even a little), the usual array of announcements from the flight crew are pretty familiar (and verge on the annoying). Every ten seconds we are reminded to wear a mask unless we want to be put before a firing squad. We are to cinch that seat belt to the point we rupture our spleen and if we dare to question the authority of the crew, we will discover our seats have an ejection feature that will hurl us from the plane at 36,000 feet. But we could use a few more.

    Number one would be “stop rearranging other people’s luggage.” Every flight I see someone pushing somebody’s bag aside to the point the compartment will no longer close or they move the bag 17 seats further back. Number two is “do not juggle an open cup of hot coffee as you stumble down the aisle.” I watched an elderly man get drenched by a MegaGigantoNormous cup of coffee that made him scream in pain. Number three would be “if you sit in the front row and have to put your steamer trunk sized bag twenty rows back, do NOT fight to get back to it when the plane lands and then fight your way back to the front” I watched some idiot claw and fight their way through the aisles and they knocked a dozen people in the head on both trips. The final announcement should be “do not even THINK about opening that meal of sardines and limburger cheese you brought from home.” My suit smelled like that vile concoction for days!

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