Business Intelligence Brief: Septmeber 24, 2021

Brief Notes on the US Economy

•           Fed Position on Inflation Shifts – Indeed the Fed meeting resulted in some new statements regarding their inflation plans but the new information is not all that different from what was being asserted before. The inflation question hangs on three factors and these will determine what the Fed does in 2022 or 2023. The first is whether the inflation surge we have seen this year is really as transitory as assumed. It has been driven by commodity price hikes and these will ease as producers catch up. The second factor is wages and these are starting to become a worry. The shortage of skilled labor has driven the cost of that labor up and these hikes will not diminish in the future. The third factor is money supply. There is still too much money in the system and that is allowing inflation to build. The prime weapon the Fed has to deal with inflation is throttling the money supply and that is why they are backing away from the bond market. If that works, they will not have to mess with interest rates as soon as some fear.

•           Taxing the Wealthy – There seems nothing more popular than taxing the people that have loads of money. The assertion is that they have plenty so why not take some and give it to others. The issue that is most often missed as far as tax policy is concerned is that taxing changes behavior. If you want people to stop doing something – tax it (cigarette taxes for example). If you want people to engage in some behavior, give them a tax break (put solar panels on your roof). The idea now is to tax capital gains even whether they are sold or not. The asset gets taxed annually regardless. The question to ask is what people will do with that asset if they can no longer hold it until death or the time they choose to sell it. The short answer is that people will not allow asset values to build much as there will be little incentive to hold them. Is that a good thing?

•           The Haitian Disaster – To a significant degree the mess in Afghanistan chased Haiti to the back pages – at least until the migrant explosion near Del Rio in Texas. The US faces a major crisis here as the situation in Haiti has created the very definition of a failed state. Unlike the Afghan debacle the US was not responsible for an earthquake and hurricane but can be assigned some blame for the decades of miserable rule. The decision to take the migrants along the Texas border and send them home has caused the US envoy to resign in anger. Haiti is in no position to handle these migrants but the US is not prepared either.

Brief Notes on the Global Economy

•           Asian Lockdowns Threaten the Economy – In the early days of the pandemic and the breakdown of the Chinese supply chain, there were a number of Asian states that benefited – Vietnam at the top of that heap. The expansion of US and global interest was overwhelming (a 65% gain) and strained the ability of the country to produce enough power. Now the threat to this growth is coming from the government itself as it tries to cope with the resurgence of the virus. There have been strict lockdown orders issued again despite the fact that these tactics ruined the economy in 2020. That lockdown is going to have the same impact this time and businesspeople in Vietnam as well as foreign investors are alarmed.

•           Iranian Matchmaking – Iran’s leaders have been concerned about the sharp decline in the nation’s birth rate. It seems that nobody understood that keeping women and men strictly segregated for most of their lives would inhibit opportunities for childbirth. The solution has been to create a national matchmaking system that pairs up men and women without the pesky annoyance of actually having to meet one another until the wedding day. The online system looks a great deal like those in many other nations as people list the characteristics they seek. The difference is that these exchanges do not lead to dates and getting to know one another. On the basis of the information provided, the marriage is arranged and the two meet one another for the first time at the time of their wedding.

Carrot and Stick

     Nothing is harder than this kind of balancing act. How does a nation build prosperous relationships with another nation whose policies provoke hostility and opposition? This has been a challenge for the US when it comes to working with China and over the last few years that challenge has become more and more difficult. The US and China are very clear rivals across the board – diplomatically, economically and militarily. The list of contentious issues is very long – everything from unfair trade practices to support for North Korea and intervention in the South China Sea. The US has been angry at the threats issued against Taiwan, the human rights violations visited on the Uighurs (and many others) and the crackdown on Hong Kong. At the same time the Chinese economy is the second largest in the world and engages with the US in millions of transactions every day. The US imports close to $460 billion of goods from China every year and exports around $160 billion to China. That creates a trade deficit of about $300 billion. The US consumer is the most important economic driver for the Chinese economy in many ways.

 Analysis: The US Commerce Secretary – Gina Raimondo – has been tasked with developing better relations with the Chinese business community and encouraging more trade activity at the same time the US is creating overtly anti-Chinese alliances and calling on China to cease and desist on a host of geopolitical issues. In the last several months the Biden administration has made China the number one priority and it has not been a friendly overture. The decision to form an alliance with the UK and Australia to counter China was made at the expense of the US relationship with France (and the EU in general). The US has been teaming with Japan and South Korea to send sharp messages to China on issues of territorial grabbing. China has created a military capability that is a direct challenge to the US in the Pacific and there are incidents taking place almost daily. US military strategists place conflict with China as a near certainty.

     Given this situation, what is the expectation as far as the Commerce Secretary is concerned. Will Raimondo simply reiterate the objections the US has had to Chinese business and economic practices as Trump’s Commerce Secretary (Wilbur Ross) did? That does not appear to be her strategy at this point. She has been trying to create separation between the business interactions with China and the geopolitical realities. There are both short and long term rationales for this approach. The most immediate motivation for working with Chinese business is that nearly $7 billion worth of trade between the two nations. The US consumer is very dependent on the waves of goods that come from China. The supply chain crisis that has gripped the US over the last year is a crisis that focuses on cargo ships from China carrying goods to the US. There are millions of people working in the US who depend on trade with China in one way or another. The agricultural community is well aware of the Chinese appetite for US farm output. Cutting off trade with China or even limiting it would do as much or more damage to the US as it would China.

     There is a longer term strategy to consider as well. The vast majority of the businesspeople in China are working with the US and the rest of the world for the most basic of reasons – to make money. They have no desire to see politics ruin their opportunity to earn revenue and make profits. The business community essentially becomes a counter to the politicians in China. If the Chinese government elects to push an agenda that ramps up hostility and confrontation with the western nation, that is simply not good for business. This sentiment is the same in the US as businesspeople here do not want to see geopolitical confrontation ruin their opportunity to engage with China. The long and the short of it is that businesses and consumers have far different priorities than does the government of either nation. The US shopper isn’t staying awake at night worrying about the South China Sea or the state of the Uighurs. The Chinese businessperson is likewise uninterested in the grand plans of the CCP when they are trying to sell toys to the US in time for Christmas. Can commerce be a strong enough motivation to calm political tension? Perhaps.

While on the Subject of China

    The last week has been China-centered – that is obvious. Two developments that have had major impact on the global economic community include the fate of Evergrande and the Chinese policy on cryptocurrency. The latter is probably the most far reaching. The Chinese government has outlawed all transactions in crypto, has forbidden the financial sector to engage and will be cracking down on mining. There has been a pattern of trying to control cryptocurrency but this is the most aggressive yet and the impact globally was instant. At the same time there is the financial collapse of the massive real estate investment conglomerate called Evergrande. They were to have paid bondholders over $83 million yesterday but none of the investors have seen a dime. The Chinese central bank is propping the company up but nobody knows how long this will last.

Analysis: These issues illustrate two challenges facing China at the same time. The first is the need to maintain the tight control favored by the CCP. The attack on crypto is an attack on a financial system that would be out of Beijing’s control. This comes as the government has accelerated attacks on social media personalities and businesspeople who have been perceived as being too independent. The Evergrande collapse is a symptom of an economy that has grown too fast. The massive investments made in housing have turned out to be disasters and many of the other ventures have been failures as well.  The company developed six different models of an electric car and has not sold a single one. The excess exposed at Evergrande is not unique and analysts have long asserted that China is awash with “zombie” companies – organizations that have no hope of being able to make the revenue needed to pay off their debt. Remember that the US has a debt that is 110% of its GDP while China has one that is 280% of its GDP.

What Do Germans Want?

     The elections in Germany are this Sunday and the world as a whole are watching them as intently as those in the US. The leadership in Germany has always mattered nearly as much as the leadership in the US but for the last decade there was not a lot of suspense as the Chancellor’s position was firmly in the hands of Angela Merkel. The US leadership had careened out of control as far as most Europeans (and many Americans) were concerned and the UK sunk into its own version of turmoil over Brexit. France has had its own issues and Japan works under a very convoluted system of factions. Germany is the clear leader of Europe but plays a bigger global role now than ever. It is not clear whether the candidates that have been put before the public are up to the task at hand. More importantly it is hard to discern what the German public even believes that task should be. The divisions are as deep as they have been in years and the political parties seem not to have kept pace. The most recent polls suggest that Germans are becoming more like US voters – going to vote against someone as opposed to voting for someone.

Analysis: The race has tightened and the most likely outcome now appears to be a cobbled together coalition of parties that do not share all that much with one another. There are three options. The most likely is the “traffic light coalition” (so-called after the three party colors of red, green and yellow). This would be a combination of the Social Democrats (25% support), Greens (17%) and Free Democrats (12%). The second coalition possibility is the “Jamaica coalition (again with the colors). This would be the CDU/CSU (22%) combining with the Greens and Free Democrats. The third and least likely combo would be the Social Democrats, Greens and the hard left Die Linke. This last combination is not popular with either the moderate SDP or moderate Greens.

     The last-minute rallies by the parties were overshadowed by massive student led rallies that focused on climate change issues. The fact that climate change has become such a driving concern for the young voter has propelled the Greens into the position of kingmaker but that is also what frightens the moderate voter who is not prepared for the more radical ideas that have been floated in these rallies. There is one more factor that will manifest before the weekend is up. Nobody wants to form a coalition with the Alternative fur Deutschland as they are seen by the other parties as right-wing populists but they have a strong following among Germans that rank immigration as the highest priority and have rankled at the climate change policies as well as the effort to deal with the pandemic. They have a great deal in common with the other right-wing populist parties in Europe and elsewhere (National Front, Sweden Democrats, True Finn and the Trump loyalists in the US). They will not be invited into a coalition but will be a major player in many regions of Germany.

     The Germans face a number of major issues that have not driven the campaigns but will have to be dealt with soon. The education system has become stiff and incapable of getting the population ready for the world’s demands. The nation is very far behind in terms of digitalization and government has become more and more bureaucratic and ossified. There are few national plans to deal with the issues of climate change or the pandemic or immigration. These have been largely left to the regions and that creates a piecemeal and haphazard response. Germany has navigated several major crisis situations under Merkel but now people seem to want more stability as far as the future is concerned.

IMF Head Under Pressure

     There is a scandal brewing at the IMF as a group of staffers at the World Bank have accused Kristalina Georgieva of manipulating data to favor China when she was the head of the World Bank. She was subsequently selected to replace Cristine LaGarde as the head of the IMF when LaGarde took over as the head of the European Central Bank. The allegation is that Georgieva pressured economists and other staffers to make China look good and to move them up in “Doing Business In” rankings. These rankings place a huge role as far as determining where companies do business and where they invest.

Analysis: One of the persistent challenges presented by China is lack of reliable data. There have been assertions for years that data is inaccurate and presents a far better picture of the system than is the case. China is certainly not alone in manipulating (Argentina once arrested any economist who asserted there was inflation in that nation). The problem is a far bigger one when dealing with the second largest economy in the world. The lack of transparency and honesty has been a major issue as far as the pandemic is concerned as China still refuses to allow outside analysis of the outbreak.

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 challenges of working with China are epic but the chart above shows that millions of dollars will remain engaged. This is largely a story of a Chinese business community that grows and succeeds in spite of the government.

What We Are Watching – From the Black Owl Report

Vaccine Mandate and Trucking – Watch the vaccine mandate issued by the White House and industries like the trucking sector where shortages of workers are creating historic price increases for services. According to industry analysts, about 50% of the truck drivers in the country are vaccinated. The largest companies (those with 100 or more workers) account for the majority of LTL revenue, much of the TL revenue, and all of rail, barge, and air cargo revenues. Legal challenges are currently in place and many of those companies are just holding off on any official announcement to employees. If the Biden Administration does not create waivers for many industries (which then defeats the purpose of the vaccine mandate), many sectors will see significant increases in worker shortages. There is a huge industry out there for CDL drivers that would allow them to work for construction firms or as independents, and your trucking costs will skyrocket further than they have if this holds.

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

The Road Trip

   Last week was an adventure in several ways. For once I was not at the mercy of the airlines as I had meetings in Goodland, Kansas and Tulsa, Oklahoma. That involved a six-hour drive from KC to Goodland followed by a seven-hour drive from Goodland to Tulsa and a four hour drive back to KC. The conferences were quite well attended and there was a lot to learn from the participants but the most intriguing stuff was acquired in the more casual conversations. Three things stood out.

     The first was the commitment that people have to their homes and businesses. I realize the attendees are by definition the most engaged but the love that people have for their hometowns and regions was palpable. Those streaking their way to the Colorado Rockies may see Goodland, Colby, Hays etc. as blips on the highway but the people living there do not. There was intense pride in what they accomplish and build and it is justifiable. The second observation is the intense desire to find ways to keep their kids. The export that these towns do not want is the export of their children and they are working very hard to find ways to get people to stay and that led to observation number three. Many of those that left at one time are coming back. The kid that went away to college eventually decides to start a family and suddenly that hometown beckons like never before. The factor that pulls all these together is the feeling of belonging and having a place. These places really are communities in every sense of the word and it would seem we need as much of this as we can get.

The Return of the Travel Schedule

September 28 – Landmark Bank – Manhattan

September 30 – Association of Women in the Metals Industry – Milwaukee

October 4 – Mize Hauser – Napa

October 5 – Houstec – Houston

October 6 – Petroleum Equipment Institute – Chicago

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