Business Intelligence Brief: September 22, 2021

Brief Notes on the US Economy

•           The Dot Plot – The “dot plot” is a tool that has been used for some time to ferret out the possibility of a move by the Fed on interest rates. Observers parse the comments made by the Fed officials searching for clues regarding their thinking on the issue and they plot these comments and hints. The latest set of dots suggest that many of the officials are looking at the possibility of a rate hike at the same time they are considering what to do with the bond buying. It makes sense that these actions are linked in some way as they both have to do with whether the economy needs a boost. The problem is that Fed Chair Powell would like to keep these conversations separate to some degree. He has been stating that any decision on bond buying is not a decision on rates but it is clear that some of his colleagues do link the two as they consider the moves of the Fed in the coming year.

•           Takes Two to Tango – Speeches before the United Nations are traditionally more of a performance than any sort of policy outline and Biden’s oratory at the UN was certainly no exception. The call in this speech was for “relentless diplomacy” in contrast to force of arms and that is certainly a noble goal but there is always a key issue. Diplomacy requires both sides to engage and that will be hard to pull off these days. The levels of conflict and hostility are high and there are not many governments that seem willing to put aside these conflicts to talk. The US has not had much success with talking to Russia, China, North Korea, Iran, the Taliban, IS and many, many others. Not that military activity has accomplished much either. The part the US is missing in many of these diplomatic exchanges is leverage. The US is not in a position to offer much nor is it in a position to withdraw.

•           Inflation IS Something to Worry About – At least according to Nuriel Roubini and Larry Summers. Both have argued that inflation concerns are very real and that assertions regarding the transitory nature of the inflation issue today has been overstated. The sense is that the long period of very low interest rates and slow growth creates a potential for stagflation – slow growth, high inflation and high rates of joblessness. Granted, both men are notorious for their dismal outlooks (Roubini has been dubbed “Dr. No”) but it is also important to note that both have been right on many occasions. Their statements can also be interpreted as warnings. If policies are not adjusted soon the inflation scourge will be hard to avoid.

Brief Notes on the Global Economy

•           OECD and ECB Warn of Inflation -There is a growing consensus that inflation will be the major challenge in 2022 and beyond. The fuel for this inflationary pressure has been fairly obvious – everything from broken supply chains and bottlenecks to excess demand combined with caution among producers. If this was the only driver the threat might start to fade as the supply issues were solved but the expectation is that other factors are looming. The money supply is still a factor with almost $5 trillion in excess savings still swirling in the global economy but the bigger concern is wage inflation. The labor shortage has given the worker more leverage than ever and as they face higher prices, they are demanding wages that allow them to keep pace. The expectation is that inflation rates will rise in the coming year and will stay high.

•           Virus Stunts Growth in Asia – The pace of growth in Southeast Asia has been slowing and the culprit has been the spread of the virus. These states had been making progress early in the pandemic as they had been aggressive in terms of protocols. The shutdowns were complete and people adopted the masking and distancing requirements. The problem now is these nations have not been able to get the vaccines needed. The estimate is that less than 10% of the population in this region has been vaccinated as compared to 70% in Europe and 60% in the US. To make matters worse the vaccine they have access to is the Chinese version which is no more than 50% effective. The challenge of the global supply chain breakdown has been rooted in the problems these nations have experienced.

Pandemic Not Likely to Derail Global Growth This Time

     The latest assessment from the OECD is not exactly rosy but it is far less depressing than many had expected. The estimate downgraded the numbers for the US, Europe and the world for this year but not by as much as had been expected and there has been an upgrade on the data for next year. The overall growth rate for the US had been as high as 6.9% in May of this year and is now down to 6.0% but that remains a very respectable number for an economy the size of the US (normal growth rates have been around 2.5%). The global rate had been 5.8% and has been lowered slightly to 5.7%. China’s rate stayed where it was and Europe saw a slight increase for this year – up to around 5.5%. This has all been taking place in the shadow of the pandemic and the delta variant. There had been many who assumed that the return of the pandemic threat would have a bigger impact on economic growth for the year but there are at least three important differences between the situation now and the one that existed at the start of this scourge in 2020.

 Analysis: The most important difference is that governments have not elected to shut down their economies in response to the disease. It has become increasingly obvious that this strategy was extremely damaging and accomplished far less than was expected. To be fair the threat was unlike anything seen before. It was not that viral infections were unknown – these have been present for years (SARS, MERS, Avian flu, Swine flu and so on). The problem was that Covid 19 spread as fast as any infection seen in decades – even faster than measles. The initial response was to try mass isolation and quarantine for a few weeks to allow the virus to burn itself out. The shutdowns were expected to last a few weeks at most and there would then be a May (2020) rebound. Obviously, this didn’t occur. The shutdown dragged on for more than a year and ruined economies all over the world. There was a loss of over 70 million jobs worldwide, hundreds of thousands of businesses shuttered and governments compelled to spend trillions to offset some of the damage. It was a catastrophe heaped on top of the medical catastrophe. As the delta variant has spread there has been little talk of such a shutdown reaction as the damage inflicted is not worth the narrow gains. The shutdown was porous in 2020 and was rendered ineffective and the expectation is there would be even more resistance this time.

     The second major difference between now and 2020 is the availability of a vaccine. The very plain fact is that vaccines offer considerable protection against the disease. The effectiveness is far greater than the majority of the seasonal flu vaccines that have been distributed over the years. There are those that contracted the disease even with the vaccine but very few and even they experienced far less damage than those who were not vaccinated. The hospitals are filling with patients as the delta variant spreads but 96% of them are unvaccinated. The connection is impossible to ignore. Unlike in 2020 there is something that people can do to protect themselves and millions have.

     The third major difference is that consumers and businesses have learned to adapt as they have had time to work out strategies to accommodate the new patterns. There was nothing but shock and confusion at the start of the pandemic and no time to develop a response. There has been more than a year and a half to adapt and many have. Some industries are thriving and some are still in deep trouble but even the consumer has found a way to react and respond. The caution expressed lately is real and has slowed recovery to some degree but it is has not completely shuttered that progress.

     This is not to say that the delta variant (and any other variants that come along) will not have an impact on global growth. The numbers are clear enough but this time around there is an opportunity for a more measured response. The reaction in 2020 was rooted in panic and ignorance. Nobody knew what they were dealing with and almost every assumption made was incorrect. The reality is that it takes time to determine what is going on with health issues as well as economic issues. Simple responses rarely prove effective. The hope is that lessons were learned from this. A hasty and ill-conceived reaction based on incomplete knowledge will not result in a desired outcome and will most likely make a bad situation even worse. The economic collapse of 2020 was not due to the impact of the virus, it was due to the reaction to the virus on the part of government, business and the consumer.

Tapering on the Agenda

    There are no fireworks expected at the Fed meeting today – no discussion of raising rates or starting some new stimulus effort. The conversation will focus on the Fed’s bond buying activity. This has been the primary weapon used by the Fed to bolster the economy over the last two recessions. Prior to the 2008 meltdown the Fed had a balance sheet of perhaps $800 billion but after a decade of buying bonds that has ballooned to $8 trillion. Buying treasuries through select banks surges more money into the system as this provides these banks with more to lend. The Fed also buys mortgage-backed securities from banks and that frees them to loan more. The banks have indeed been willing to make these loans and the bond intervention has helped keep mortgage rates as low as they have been. The Fed now asserts that the economy no longer needs that assistance and the time is right to reduce their involvement.

Analysis: The question is by how much and how. This is the topic of debate within the Fed today and it is expected that a decision of some kind will be forthcoming. The expectation is that the Fed will suggest its plans to reduce its bond buying in stages and that each reduction will be watched to ensure that there is no adverse reaction in the economy as a whole. There is some trepidation by Fed members as they worry about the impact of the pandemic but it now seems that the economy is handling the renewed outbreak reasonably well.

Another Set of Political Miscalculations

   The voter is harder than ever to understand and that has been the case in nation after nation. Pundits are working overtime to determine what has changed as far as the electorate is concerned. There is no evidence that people want to be led by anyone. There is palpable anger and frustration with almost every stripe of politics and the reaction from voters has been to reject the norms in favor of either radical positions or by simply checking out altogether. The latest examples of this are on display in Canada, Germany and Japan. The struggles are also in evidence elsewhere (the US, UK, France and so on).

Analysis: A few weeks ago, the Canadians were asked to head to the polls two years sooner than required as Justin Trudeau decided to try to capitalize on what looked like a surge in his popularity. The voters seemed to be happy with the way that Canada had been handling the virus and he thought the time was right to bolster his position in parliament. That assumption proved inaccurate. The voters were angry at the snap election and its cost and in the end the Liberal Party ended up weaker than it was before. Rather than having a stronger position from which to institute reforms Trudeau has to court minority parties more aggressively to form a coalition. His plan exposed the fact that he did not have the popularity he thought he did. People may have been happy with some of the policies but that was as far as it went.

     In Germany the end of the Merkel period has not played out as expected. Armin Laschet has been the standard bearer for the Christian Democrats but his campaign has not been catching fire. Even members of his own party keep expressing support for Markus Soder (from the sister party in Bavaria). Angela Merkel has been frantically trying to boost him as the polls suggest the CDU might fall short and be unable to cobble together a coalition. Suddenly the Greens are in the position of kingmaker but the bigger issue for the CDU is that they have lost so many voters to the far-right Alternative for Germany. The voter in Germany has become frustrated and angry over everything from immigration to climate change to the financial demands made on Germany by other states in Europe. They lash out at politicians rather than following them.

     Japanese politics is still a faction fight within the Liberal Democratic Party and the voter counts for less than in other nations but even with this kind of “back room” selection process there is a bigger role for public support than was the case. The four people that seem to be in the running for the Prime Minister’s post reflect the old and new. There is a maverick who is seen as blunt and nationalistic and works social media very well vs. a consummate insider who has many LDP supporters. There is a Japanese version of Trump who had been a TV presenter and lacks any faction support at all and there is a very liberal contender that has captured the attention of women and the young.

     The bottom line is that there are very few (if any) real leaders in the sense that they can get the public to follow their ambitions. The definition of leading today is trying to stay ahead of the mob so that they are not trampled. It is not clear the public is even capable of being led and that creates a real crisis for democracy in general.

Another Shortage Crisis

     For the last several weeks, the UK has been suffering from a widespread shortage of carbon dioxide gas and other industrial gas products and now that shortage has started to affect Europe as a whole. This shortage affects everything from the production of fertilizer to the carbonation in drinks. The majority of the impact has been felt in the industrial community and there is no expectation of a simple or timely solution as the producers are warning that the shortage will be get worse before it gets better. The culprit in all of this has been the soaring cost of natural gas. Production of ammonia is no longer profitable as the costs of gas have risen – $900 per ton of ammonia made and this results in a loss of $300 a ton. To even come close to breaking even the cost of the gas will have to come down by over 20%.

Analysis: The hike in natural gas prices has been attributed to increased demand to some degree but the bigger issue is that regulations imposed on the fossil fuel industry have been driving costs ever higher. There is a concerted effort to push away from oil and gas production and that has had the predicted impact. There are no substitutes for the natural gas used in these operations and the soaring price of the gas creates a serious ripple. Thus far the US has not seen a similar crisis but the price of gas has been going up in the US market as well.

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 chart above provides some insight into how economists are reacting to the potential for a rate hike. The consensus is still that rates will hold steady until 2023 but there are more suggesting that 2022 is now a possibility.

What We Are Watching – From the Black Owl Report

Hints of Automakers Adding Shifts. Some automakers are giving us hints that some light might be at the end of the tunnel on microchip shortages. Some automakers have notified employees on furlough to expect to start to see some increases in shift work and resuming some model production in the coming weeks. We got a little bit of grief from a few people because I had reported an item from Taiwan Semiconductor that they expected the automotive supply chain to be getting back underway by the end of Q3. Several analysts came out shortly after that and said that it would be 2023 before we see some recovery. Well, maybe the truth is somewhere in between. I don’t believe that automotive production will be as strong as TSC thought it would be by the end of the third quarter, but it is rebounding much stronger than those that thought this was the new normal for the next 36 months.

Record 73 Ships Offshore at Anchor. As of Sunday, there were 73 ships sitting at anchor off the coast of LA/Long Beach, a record. With hundreds of thousands of containers sitting offshore, the logjam is unprecedented. And, just as we highlight throughout the document today, it is causing some unprecedented disruptions and ripple effects back throughout the economy. Inland distribution is going to continue to suffer as a result, and things like gasoline shipments are going to continue to compete for truck driver and rail capacity against intermodal shippers that are willing to pay a premium.

Go to www.armada-intel.com/trial for more.

YIKES – Road Trip

   It is a very long drive from Kansas City to Goodland. That town is so far to the west of the state that it is in another time zone. The orientation of western Kansas is to Colorado and Wyoming rather than the eastern half of their own state. Many jokes have circulated about how flat Kansas is and indeed tests have shown that pancakes are not as flat as is Kansas. It has even been suggested that Kansas exists to keep people in Missouri from learning to ski. To be honest I kind of like driving trips – at least they are not so onerous as flying can be these days. There are things to observe along the way – mostly the road signs that beckon one to experience unique attractions (Garden of Eden, Oz Winery, Castle Rock etc.). Today the trek resumes as I make my way to Tulsa (a 500-mile journey). By the time I get home on Thursday I might even figure out the “media system” on the rental car. Yesterday I just gave up and listened to my phone like I used to listen to my transistor radio as a kid.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.