Brief Notes on the US Economy
• Repairing Relations with Mexico – Biden has been on something of an international rescue mission of late – trying to establish dialogue with some awkward global players. There was that phone call with China’s Xi (discussed later in this issue) and there are overtures being made to Mexico. The assumption is that relations with Mexico deteriorated due to the overt hostility of the Trump administration but the Mexican leadership bears a significant level of responsibility. The policies pursued by Andres Manuel Lopez Obrador have been incomprehensible at times. The lack of a coherent response to the pandemic has been well documented and the economy of the country has been shattered by the pandemic as well as very poor decisions by AMLO. The most pressing issue continues to be immigration and it is not clear what the path forward looks like. Mexico has not been all that interested in addressing the problem as it is more concerned with keeping the rate of remittances high. That has become the number one income earner for the country as tourism has faded and manufacturing has been affected by supply chain issues.
• Employment Disparity – There has been a significant improvement in the overall rate of unemployment since the depths of the 2020 recession. Nearly every category of the population has seen an improvement in the numbers but there has been at least one notable exception. The unemployment rate for black men and women has remained stubbornly high and has worsened rather than improved. It stands at 8.8% and that is more than twice the average for the population as a whole. The primary culprit here is that service sector jobs dominate for the black community and these are the jobs that were hardest hit last year and are suffering again. The long-term problem is that there are still too few black workers getting the training and education needed to compete. This is linked to where people live, their access to transportation and childcare and their overall financial flexibility.
• Shifts in 9-11 Narrative – The observance of the 9-11 attacks has been a regular event for the past two decades and for the most obvious of reasons. Over time the focus of these observations has changed. For the first few years the issue of terrorism and the need to defend was paramount but now the US has withdrawn from Afghanistan and the level of threat has diminished. The focus now has been on the sacrifice and heroism of those caught up in that tragic day. The vast majority of the coverage has been devoted to the first responders, the people that risked their lives for others and the impact of the loss on family and friends. There is a whole generation that was not around when this attack occurred and their perspective is far different from those that watched the attack and could say where they were at that fateful moment.
Brief Notes on the Global Economy
• Hard to Stop a Holiday – August has come and gone in Europe and the great population reset is under way. During this annual holiday period millions of Europeans relocate for a few weeks and that shift underpins a great many economies. The concern this year was the virus would wreck these plans as it did in 2020 and it was with a great sigh of relief that Europe noted the return of the summer tourist. There were still significant restrictions on the foreign visitor (especially from the US) but the beaches of the Mediterranean were full of fellow Europeans – not back to 2019 levels but far better than last year.
• Lebanon Has a Government at Last – After over a year of wrangling and bitter infighting the Lebanese finally have a government – at least for the time being. Billionaire Najib Makati has finally been able to form a government and it appears to be a very technocratic collection. The ministers that have been identified thus far are not all that closely connected to the many factions that make up this fractured nation. This is good in some ways and bad in others. They will likely be focused on real economic issues but they lack the party supporters they might need to push these agendas.
Global Easy Money Efforts Unlikely to End Soon
The message from the world’s central banks has changed quite a lot in just a few weeks but then again there have been quite a few messages that have altered of late. Just a couple of months ago the sense was that many nations in the world had turned something of a corner and would soon be able to “normalize”. The economic growth from the start of the year had been impressive and the concern had shifted from slow growth to controlling inflation. Today we are drifting back towards those old concerns as the virus has resumed its march. The Federal Reserve continues to assert that some kind of withdrawal from the bond market will take place in the relatively near future but this is not the message that was just sent by the European Central Bank. The remarks from Cristine Lagarde were clear enough – there is still a great deal of stress in the European and global economies and a real chance that another recession could emerge as the virus forces reactions from worried businesses, consumers and governments. The stimulation that has been provided by the monetary authorities has generally not been as dramatic as that provided by the fiscal authorities but for the overall business community it has been crucial. The easy money system has been in place for the majority of the last decade.
Analysis: The most important element of this policy has been the low interest rates. The majority of the world’s central banks have had rates at very near zero as a means by which to stimulate business activity. This policy has driven a great deal of economic activity in sectors such as housing (due to low mortgage rates), commercial development and capital spending, investment and so on. These low rates have also brought some of their own problems. Those that once counted on savings have been out of luck for years as there has been no return on any of these traditional tools. There has also been a very high level of risk as investors have been able to access cheap money with which to invest in the markets. The hawks at the Fed have been deeply concerned about this risk level as they fear a real crisis when rates rise and the market cools. They see a lot of bets failing and a crash following that series of failures.
The interest rate policy has not been the only tool deployed by the central banks and it is these other techniques that are being examined. There has been no serious discussion regarding a hike in rates – not even a year or two from now. The primary focus has been the banks and their engagement in the bond market as this has been the primary tool for creating liquidity. The banks purchase government bonds through a series of designated banks and this cash then becomes available for distribution into the overall economy. The Fed once had a fairly modest balance sheet of $800 billion but over the last decade that level has burgeoned to over $8 trillion and the ECB is right behind with a balance sheet of over 7 trillion euros. The Fed has also been buying mortgage-backed securities from banks so that they have more cash to disperse. This has created a major debt load for the US and Europe (and for other nations such as Japan, United Kingdom, Canada, China, India and so on). The US debt load now exceeds the national GDP of nearly $22 trillion. The Fed and the government as a whole now own over 40% of the total US debt (30% is owned by foreign investors and 30% by domestic investors). If the Fed and the ECB and the others decide to start pulling back from all this bond buying the impact on the overall economy will be clear – less money to work with.
The Fed is not discussing a wholesale withdrawal from the bond markets but even a modest taper will send a signal to investors and the overall business community. The sense will be that money will get tighter and activity in the bond markets will have an impact on mortgage rates as well. The high risk investing that has been driving the growth of the stock market will start to come to an end and if there is enough tapering there is even the possibility of a real correction in the market as some of these high-risk moves are undone or scaled back. The Fed continues to assert that a taper is in the cards by next year but the statements from the ECB have been far more cautious and their taper may not emerge until late in 2022 or even 2023.
The issue of vaccination threatens to become one of the most divisive in recent history. There had been some faint hope that people would welcome the opportunity to protect themselves against a dangerous disease but to date some 80 million in the US have not felt the need. There was also some hope and expectation that enough progress would be made to allow a return to “normal” but the last month or so showed that normal was a long way away. The division between the vaccinated and the unvaccinated is intense and angry. Those that refuse the vaccination are seen as selfish and ignorant while those that demand vaccination are seen as dictatorial and insensitive to concerns. The more aggressive approach outlined by the White House has put the business community on the front line.
Analysis: Some companies have already started to mandate vaccines and these new orders will push many others to do the same. The question is how these mandates will be enforced and by whom. Businesses do not want to be placed in that role but they also do not want to place their workforce and customers at risk. The fact is that consumers are starting to shun activities that place them at risk and that threatens businesses in the service sector. There are also many businesses that simply can’t engage the protocols that have been recommended and want a vaccinated population in their facilities. The opponents of the mandate assert that these demands are infringing on their freedom but the reality is that all the responses to the pandemic have infringed. Lockdowns destroyed tens of thousands of businesses and thrust millions out of a job. Protocols have altered every aspect of daily life. These measures have had very limited impact on a disease that has killed 4.6 million people worldwide. Vaccinating enough of a population to severely limit the spread of this virus seems a logical ambition and one that will allow the resumption of the lives we led in 2019.
Will Anything Come of These Talks
In February of this year there was a high-level meeting between US officials and Chinese officials that accomplished absolutely nothing. Even in the weeks prior to the talks there were questionable maneuvers as China tried to ban the participation of select US representatives. The meeting itself was nothing more than a series of accusations lodged one against the other. There was not even an attempt to show the meeting in a positive diplomatic light. China accused the US of creating all the problems and the US essentially accused China of the same. Tense was an understatement. Now there is to be an even higher level exchange starting with a lengthy phone call between Biden and Xi. Analysts have not been much impressed at this stage. It was essentially a repeat of the February meeting with both sides doubling down on their positions. The US is at fault according to China and China is at fault according to the US.
Analysis: The two leaders have had contact with one another in the past and their relationship has appeared to be cordial. The reality is that the distance between the two nations has been widening as both leaders have adopted a far more hawkish position than in the past. Biden has been even more hostile towards China than was Trump and that reflects the long-standing frustrations with China that dominated the Democrats. Traditionally it has been the GOP that backed Chinese relations for business purposes. China is undergoing radical transformation as far as its economy is concerned and there is a very strong desire to dominate the Asian community that comes into direct confrontation with the US.
The best that can be said about this phone call is that the leaders have been able to bluntly state their positions. The US opposes China’s threats against Taiwan and its engagement in the South China Sea. There continues to be opposition to Chinese trade policy and objections to the way that China treats its minority populations. The new issue is China’s interest in Afghanistan. There are significant mineral resources in northern parts of that nation and China wants access to them. For his part Xi wants the US to stop trying to influence Chinese policy in these areas. To China the Taiwanese situation is an internal matter – a renegade province that needs to be brought into the fold. Chinese analysts have compared Taiwan to Texas and ask how the US would feel if Texas elected to secede (again) and oppose the US government (again). The US fought a war to bring this secession to an end – why should China be different? The South China Sea is seen by Beijing as their territory. The Chinese object to any restraint on their exports and resent the limitations that are imposed for national security purposes.
At the end of the day these two leaders simply do not have much leverage over one another. In fact, the hostility towards one another plays very well domestically. Biden’s hard line on China is very popular and Xi’s hard line on the US is even more popular in a nation that has become highly nationalistic
German Election Rhetoric Centers on Economics
The latest polls suggest that the Christian Democrats will lose control of the Bundestag in the coming elections. Right now, the Social Democrats have 25% support, the CDU/CSU has 21%, Greens are at 17% and Free Democrats at 11%. A coalition of the SPD and Greens would take them to 42% and if the Free Democrats can be persuaded to jump aboard the center-left has a ruling position. As has been the case in many past elections the movement of the Free Democrats may make the difference. If they ally with the CDU/CSU they will lack the votes to control the Bundestag but could conceivably draw the Greens in and that would give them almost enough to govern.
Analysis: The crucial role of the Free Democrats explains to some degree the campaign focus for the CDU/CSU. They have been hammering on the positions staked out by Olaf Scholz. He is the Finance Minister in the current government (which is still a loose coalition of the SPD and CDU). He is accused of supporting policies that will weaken the German economy by exposing Germany to the debts of others in the EU. His policies would supposedly weaken the euro as well and that promotes more inflation fear. The Free Democrat supporter is far more attuned to economic issues than the voters for the other parties.
The expectation is that the elections will leave a confused mess and will be followed by weeks and perhaps months of coalition talks. The Greens and Free Democrats will be the kingmakers but even these parties are divided. The Greens have dual leadership with a pragmatist (Annalena Baerbock) and an idealist (Robert Habeck). They work together to some degree but their supporters do not trust those that support the other leader. A coalition with the CDU favors Baerbock and a coalition with the SPD favors Habeck. Free Democrats play their usual middle role.
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 crucial measure of progress on the virus threat is hospitalization. There will always be cases of the virus as there will always be cases of the flu and SARS and other viral assaults. The threat can be managed if the majority of people are simply getting an illness that can be considered mild. It is the population that has to be placed in emergency care that strains the system and there is a DIRECT connection between vaccination and hospitalization and fatality.
What We Are Watching – From the Black Owl Report
Biden Vaccination Order Challenged Already. We only want to focus on one element of the vaccination order offered by the President yesterday, it is the order pertaining to large corporations. Regardless of your view on the issue, you need to be cognizant of how this plays out because many of you have more than 100 employees and would be subject to elements of the new order, based on what little we know of the order this evening. What we don’t know is how the penalty would work and how impactful it would be (estimated to be $14K per violation). As an emergency order, there is a legal precedent for this to remain in force, but nearly half of the 9 prior orders like this were overturned on a legal basis. In the same day however, the US Postal Service was exempted (according to sources at the White House) because of the critical nature of the business and how damaging it would be if large percentages of the USPS didn’t show up for work. With some exemptions already in the mix, it will be interesting to see if this order will hold. If it does, it will really challenge many corporations that have resisted the mandate because of legal repercussions should an employee have a significant reaction to the vaccine. And thus far, there appears to be no protection for these companies in the executive order.
Go to www.armada-intel.com/trial for more.
On Being Chosen
As alert readers well know – I have loads of cats. Five to be precise. All are rescues of one kind or another and all have their unique stories. In each case I have been aware that they picked us as much as we picked them. The most recent arrival is Seamus who was part of a feral litter. He is quite sweet and content (although he loves to boss the other cats around) but it is also clear he was feral. He has all those instincts and lets us know that his interaction with us will ALWAYS be on his terms (as the effort to get him to the vet proved). Somehow getting his attention feels like an accomplishment and a reward. Then there is Scoot – the sole survivor of a litter found in a park. She barely made it and seems to know this. She is my constant companion and shadow – I obviously belong to her and there are many expectations as far as my daily activities. Smoky had been abused and it took years for him to trust but now he demands (and gets) attention first thing every morning – even to the point of delaying his run to the kitchen. If he spots another cat in a lap he will crowd in and get his. Sven is going on 22 and is weak now. He is very attached to Gay and requires her assistance and assurance that food will appear as required. He can’t do a lot of what he once did but keeps his patterns to the best of his abilities. Spike is the bed buddy – never missing nap time and settling in every night. He also has his select areas for attention – the cardboard box in the corner of my office is a regular haunt. Each of them has made it clear that they have routines and resent interruptions and they make it clear we have duties as assigned.