The Flagship: An ‘Officer of the Watch’ Briefing
Briefing: Friday 7, January 2022
Domestic Quick Items of Interest
· Food Shortages Due to Omicron. Later in the brief, we have an article about global food prices (they are higher as you might expect). But there are countries facing global food shortages because workers can’t physically get products on the shelves. Just a walk through a local grocery store in the United States bears this out. Omicron infections are surging and although vaccinated people are not getting very sick with it, millions are being knocked out of commission while they quarantine for a period of time in the days following their infection. As a result, store shelves are showing the stress and are emptying, even though products are available – they just can’t make it to the shelves.
· Oil Prices Touch $80/Barrel. West Texas Intermediate touched $80 a barrel today briefly, it was trading at about $79 at the time of writing today’s brief. Brent North Sea crude had inched up to $82 on the Kazakh situation as Chris has written about later in today’s brief. There was also an incident in Libya that further strained the outlook for global oil production. The US dollar has also dipped just a bit, and that will always help boost oil prices slightly. Global reductions in travel and mobility because of the fast-spreading Omicron variant has hit the demand side of the equation, otherwise a combination of geopolitical disruptions and other factors would likely have oil prices higher than they are.
· US Services Sector Drops in December. COVID did a number on the US services sector in December. Both Markit and ISM PMI readings for the services sector in December showed them dropping (Markit fell from 58.0 to 57.6 in December. That was marginal, but the ISM data showed if falling by more than 7 points. One of the important items that we watch is the inventory sentiment figures. Companies generally are still “feeling” like they were sitting light at the end of December. That’s critical when it comes to forecasting growth in Q1, especially across the manufacturing sector where demand will remain strong. Inflationary pressures remained historically high across both studies as we would expect. One bit of good news is that supplier deliveries appear to have slightly improved over the month, suggesting that some of the supply chain congestion is starting to improve a bit.
· Stanford Study Says Flexibility Key to Retention. A Stanford study says that the US worker and employers are headed for a conflict. Workers want job flexibility and the ability to work from home and employers are more and more realizing that they need to get people back around them and work on culture. The Stanford data showed that workers valued flexible work schedules to the degree that they would take that over a 10% hike in wages. The current national commercial office occupancy rate averaged just 30% in December, the return to the office is very slow in recovering back to pre-pandemic levels.
Global Quick Items of Interest
· German Government Promises Aid – The natural gas stand-off continues and the German government is now promising aid to those that have been hammered by the 471% hike in the price of gas. There are millions of Germans that are now being forced to choose between heating their homes and buying food or other necessities. The plan calls for both direct payments as well as money to the utilities so they can extend service. Energy prices are 18.3% higher than they were a year ago and the expenditure is expected to be significant. The inflation issue has not been limited to fuel as prices in Germany have soared for the same reason they have increased in the US and elsewhere. The Bundesbank still wants to cope with inflation through higher interest rates but that conflicts with the need to bail people and businesses out of this energy jam.
· Russian Troops Enter Kazakhstan – Add another layer of oil sector uncertainty as the embattled President of Kazakhstan has requested assistance from Russia in putting down protests. There have already been several people killed by police and military as the troops have moved in, to squash demonstrations. The protests started under the old regime and led to the resignation of Nursultan Nazerbayev but have intensified under his successor. The oil markets are worried about this development as Kazakhstan is a significant oil producer feeding into the larger Russian system. The expectation is that the protests will be ended violently but actions by workers may continue, and the oil sector is expected to be one where strikes and shutdowns will occur.
· UK Faces “Cost of Living” Catastrophe – This has been the warning from critics of the UK government in the last few weeks. The assertion is that consumers will be facing a whole series of significant price hikes in the coming months and there is very little that can be done to soften the blow in the short term. The most significant factor has been the 50% increase in heating bills and that is expected to rise even further as colder weather arrives. This comes on top of higher taxes and higher prices for national insurance. The topper is general inflation that has been triggered by everything from supply chain disruption to jumps in a host of commodity categories. The threat is that millions of Britons will be facing dire financial stress and thus far there has not been a plan developed that would ease the situation anytime soon.
· Eurozone Inflation Hits Record – The December numbers for inflation were worse than had been expected. At 5.0% the rate is as high as has been seen since the development of the euro. The prediction had been that rates would hit 4.7% but the huge spike in energy costs drove the levels higher. The other inflation factors are familiar – everything from the supply chain chaos to wage hikes. As with the US there is confidence that these rates will start to fall in the coming weeks, but much depends on the energy situation and as long as natural gas shipments from Russia are limited there is little chance of relief in the price of fuel. The fact that inflation is spiking will propel the ECB to shift towards inflation control even as the Eurozone economy is once again affected by the viral impact. Many of the European states have been adopting another round of strict measures that are supposed to limit the spread bur which negatively affect the overall economy.
· Europe Opts for More Coercive Approach – Many nations have reached what amounts to a breaking point on the issue of vaccines. Several Asian states have shifted to a more coercive approach and are demanding people be vaccinated if they want to interact in public at all. Several European nations are now following with Italy and France putting a form of “vaccine pass” into effect. Without proof of vaccination people will not be allowed to do much of anything in public – including traveling and work. The surge in Omicron infections have overwhelmed medical facilities and control measures threaten to shove countries back into recession.
|US Domestic Economic Items|
· Economy Creates 199,000 Jobs in December, Below Expectations – Expectations were off the chart going into today’s jobs report – some were looking for nearly a million new jobs to be created. The economy created 199,000 jobs and the unemployment rate fell to 3.9% (the modern low was 3.5% hit in September of 2019).
There are still 6.3 million unemployed people in the US and job openings of 10.6 million, so there is still a dramatic mismatch between job requirements and available talent. That being said, right before the pandemic when the unemployment rate was slightly lower than today’s, we still had 5.7 million unemployed (chronic unemployed) and job openings were about 6.7 million. So, this is a systemic mismatch problem that isn’t going to get magically fixed. It will only get fixed (primarily) by more advanced training and education, relocation programs, better immigration policy, or automation.
Approximately 3 million workers were unable to work because their place of employment was impacted by COVID, this was down from 3.6 million in November. Approximately 1.1 million reported that they were not in the labor force because of the pandemic (for various reasons and unchanged from November).
Among job growth by sector, here is how jobs were added in December:
· Leisure and hospitality +53,000 (-1.2 million from 2019 levels)
· Professional and business services +43,000 (-35,000 from 2019 levels)
· Manufacturing +26,000 (-219,000 from pre-pandemic levels)
· Construction +22,000 (-88,000 from 2019 levels)
· Transportation and Warehousing +19,000 (+218,000 from 2019 levels)
· Wholesale Trade +14,000 (-129,000 from pre-pandemic)
· Mining + 7,000 (-81,000 from January 2019 peak)
Wages have increased by 4.7% over the past 12 months. Remember that wage inflation is one of those areas that typically do not experience a “normalization” after a period of time like commodities and other measures. It is difficult for wages to retreat, barring a recessionary reset. With chronic labor shortages, expect these wage hikes to “stick”. – KP
· Trade Deficit Widens Considerably – The trade deficit numbers are showing a wider gap than had been expected but to be honest a huge gap was anticipated given what had been observed in the recent holiday season. The deficit reached $99 billion as consumers bought imports as aggressively as has been the case in several years.
There has been a decline in the export of manufactured goods at the same time although there was an increase in service-related exports as foreign tourism started to recover and more was being sold to these visitors. Unfortunately, the recent viral outbreak has resulted in another round of travel restrictions that will affect these export numbers again. As is always the case there must be something of a cautionary note sounded when it comes to the trade deficit. It is automatically assumed that such a massive deficit is an altogether bad thing and of course it is not that simple. There is an important part of the US economy that relies on exports, and it is not helpful to see the level of overseas sales decline but there is also a huge part of the US economy that relies on imports. If it were not for the high level of imports the consumer in the US would be more deeply affected by the inflation threats currently experienced.
In the simplest of terms, the trade deficit widened because the US is not generally in the business of producing consumer goods and as demand for these goods grows the trade deficit worsens. One of the somewhat surprising aspects of the deficit is the fact consumers bought so much in the way of imports despite the supply chain issues that have become so common. That tells analysts a lot about the origins of that supply chain crisis. Many assume the whole mess can be attributed to factors such as pandemic protocols and labor shortages, but the import data tells an important story as well. Consumer demand has been increasing despite delays and problems and that strongly suggests that much of the chaos stems from demand. The US consumer has resumed the bulk of its old pattern when it comes to consumption and that has continued to overwhelm the ability of the supply chain to keep pace.
The vast majority of consumer goods purchased in the US are imported for two simple and related reasons. The consumer seeks maximum value for their money and cares very little where the product comes from. For the most part the consumer is utterly unaware of the country of origin. Years ago, when I was still a professor, I would assign students the task of determining where their stuff came from. They would report back with a wide variety of nations – everything from Guatemala to China to India and Mexico. Over the years the dominance of China became more and more obvious but the point is that they had no idea so much of what they bought was imported. As the consumer continued to opt for that cheaper import (with similar quality to what they had been buying) the number of domestic producers of consumer goods declined.
What would happen if an effort were made to reduce that dependence on imported goods? It would mean finding ways to limit access to the imports so that US consumers would have little choice but to buy domestically produced alternatives. This would certainly benefit those US producers but it would come at the expense of the consumer as prices would rise sharply. It is estimated that access to imported (and cheaper) goods will save the average family of four between $8,000 and $10,000 a year. Restricting imports would essentially be imposing a significant tax on the US consumer. – CK
· Another Potential Blow to Workplace Normalcy – The Chicago Teachers Union has taken a stand against reopening schools and this has resulted in another closure of public schools for an indefinite period of time. There are similar efforts underway in a variety of cities throughout the country. The teachers want a return to remote learning as long as the virus remains a threat. There are many reasons to exercise caution when dealing with schools and kids but there are enormous implications.
The labor shortage that has profoundly affected the US economy over the last few years has been exacerbated by the pandemic. It is estimated that over 7 million women have been forced out of the workforce by the fact their children are not in school. They have been unable to resume their normal schedules as they have had no choice but to remain at home to care for and educate their children.
The cost of childcare has escalated due to the pandemic and that further complicates the situation. Many look at what they would be earning and what they would have to pay for childcare and determine that it makes little sense to hold that job. Employers are increasingly reluctant to employ women (and men) with childcare responsibility as they do not know when and if they can work.
Then there is the whole discussion around the effectiveness of remote learning. The data is still developing but the initial findings are not encouraging. There are students that do fine in a remote environment, but many do not. Those that have performed well are generally described as self-starters and are in a very supportive home environment with engaged parents. They also have access to the needed technology.
There are millions of kids who lack all three of these advantages. According to the taxonomy of learning styles there are millions of people who will get very little from the remote platform. This technique will fail the kinetic learner (25% of the population). These are people that learn with their hands – learn by doing. The remote technique also fails the social learner (20% of the population) as they learn in a collective and interactive environment. Those who learn from reading or listening will function in a remote setting, but these learners are in the minority.
It is a classic rock and hard place dilemma. Sending kids home disrupts the entire family dynamic and shoves millions of people out of the workforce. It reduces the effectiveness of teaching for millions of kids. On the other hand, it is not acceptable to expose kids and their teachers to a disease that can make them very sick and can even be fatal. A different solution needs to develop but at this stage there has been no movement in any other direction. – CK
|Global Economic Items|
· Kazakh Uprising Upsets Putin’s Plans – A few weeks ago it appeared that Vladimir Putin’s tactics were working like a charm. His overt threat to invade and conquer Ukraine succeeded in driving the US and NATO to engage in negotiations over issues that were assumed to have been settled back in the 1980s.
When the USSR broke up and became Russia there were several “regions” that suddenly became independent states (Lithuania, Latvia, Estonia, Belarus, Moldova, Azerbaijan, Armenia, Georgia, Ukraine, Kazakhstan, Uzbekistan, Tadzhikistan, Kyrgyzstan and Turkmenistan). Several immediately allied with the European Union and NATO and others stayed in the Russian orbit. Ukraine was a major issue for Russia given its location and its role as a breadbasket. The leaders of Ukraine have waffled back and forth as far as their allegiance – a pro-European was often replaced by a pro-Russian. There have been many attempts to formally unite with Europe and NATO but these were always thwarted by opposition from the pro-Russian factions (the eastern half of Ukraine is ethnically Russian and the western half is Ukrainian). Today the pro-Russian militias control the eastern half.
The threats to invade were Putin’s way of ending all talk of Ukraine siding with the western nations. The talks between Russia, the US and NATO explicitly excluded Europe and the demands have been simple and brutal – absolutely no economic or military engagement between Ukraine and the western alliances. This essentially turns Ukraine into a vassal state. Putin has used the availability of gas as a weapon to force European compliance. It has appeared that everything was falling into place as far as Putin was concerned but then comes Kazakhstan.
This is the largest of the Central Asian state and by far the most important to Russia economically. It has extensive reserves of oil and gas as well as dozens of minerals. It is a huge supplier of food as well. A quarter of the population (19.6%) is ethnically Russian (another 10% are Ukrainian and other Slavic groups). The dominant ethnicity is Kazakh (67%).
The protests have involved all groups, but most are Russian and they have become frustrated with the autocracy that runs the country. The decisions made seem capricious and favorable to the ruling elite. These are the same complaints that led to protests in Belarus. Putin backed the brutal crackdown by Lukashenka in Belarus and is now backing a similar attack in Kazakhstan. The reality is that frustration with corrupt autocrats has led to widespread discontent and these protests keep exploding. Russian control is starting to slip.
The Ukraine issue was supposed to demonstrate Putin’s strength but the outbreaks of protest in Belarus, Kazakhstan, the Caucasus and in Russia itself expose the underlying weakness in Putin’s government. It is impossible for the Russian military to take control of Ukraine and Kazakhstan and others at the same time although they will try, and it will be a brutal attempt. – CK
· Food Prices Remain High in Latest FAO Food Price Index. Although there was some slight softening in December, food prices on a global basis continue to be above ten-year highs (depending on which metric you look at). If you look at inflation-adjusted food prices, these are the highest food prices since the 1970’s.
The composite global food index slipped 0.9% in December month-over-month to 133.7 points, but it was still 23.1% higher than it was a year ago at this time. Throughout 2021, food prices averaged 28% higher than the year prior.
Based on commodities, vegetable oils recorded the biggest monthly drop, which helped pull the overall index down a bit. But dairy continued to surge, rising 1.8% M/M and 17.4% Y/Y. Meat prices were unchanged M/M but remained 17.4% higher Y/Y as well.
One of the reasons why we watch this particular global metric closely is that it is one of the triggers that can lead to street protests in many developing and third-world countries. Some of the pressures that we see in places like Kazakhstan starts as a reaction to inflationary pressures on lower and middle income families and then spills over into a political dispute. – KP
|Consider This: Personal Thoughts and Insights from Chris and Keith|
· De-Christmasing – I am not sure that is a word but it gets the point across. This is the week that all that holiday frivolity goes into storage for another year. It is amazing what a few days of transformation can mean. A week ago the house looked festive and all the stuff enjoyable – today it all looks overdone and inappropriate and therefore must be retired for another time. We have a habit of overdoing the decorations regardless of holiday. The Halloween effort draws kids from all over the county but stays up for one day only. There is a time and place for everything. Once the house is stripped of the holiday décor it is amazing how clean and fresh it looks again.
It takes at least a week to set all that stuff in place and a week to take it all down and my friends and relatives question our sanity when we undertake this. Why?
We claim it is for the benefit of family and there is some truth to that but honestly I do this mostly for myself. I like the look and feel for the holidays and it wouldn’t be the same without it. I do admit that I look at all the chaos this creates and wish that I too had all those Hallmark movie elves that festoon everything in sight but alas the only elves at this house are me and my lovely spouse.
She is the one that manages to keep all this tasteful although she also tolerates my ChrisMoose nativity scene and the lighted Gecko that sits in my office window. – CK
· Flagship, Still Testing Things Out. You may have noticed that I tried out some yellow highlighting in Wednesday’s brief. Well, that didn’t work out – it was too obnoxious and what I thought would help folks scan the document more easily just made it more confusing.
Just please bear with us for a few more weeks as we test little things here and there. It’s all in trying to bring you a balanced, value-added brief. We are compiling feedback on it. If you want to weigh-in on the content or layout, just send Chris or I a note. Thank you! – KP